TS Inter 1st Year

Telangana TSBIE TS Inter 1st Year Economics Study Material 4th Lesson Production Analysis Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 4th Lesson Production Analysis

Long Answer Questions

Question 1.
Critically examine the law of variable proportions. [Mar. ’16]
Answer:
The law of variable proportions has been developed by the 19th-century economists David Ricardo and Marshall. The law is associated with the names of these two economists. The law states that by increasing one variable factor and keeping other factors constant, how to change the level of output, total output first increases at an increasing rate, then at a diminishing rate, and later decreases. Hence, this law is also known as the “Law of Diminishing returns”.

Marshall stated it in the following words.
“An increase in capital and labour applied in the cultivation of land causes, in general, less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture”.

Assumptions :

1. The state of technology remain constant.
2. The analysis relates to short period.
3. The law assumes labour in homogeneous.
4. Input prices remain unchanged.

Explanation of the Law :
Suppose a farmer has ‘4’ acres of land he wants to increase output by increasing the number of labourers, keeping other factors constant. The changes in total production, average product and marginal product can be observed in the following table.

In the above table total product refers to the total output produced per unit of time by all the labourers employed.

Average product refers to the product per unit of labour marginal product refers to additional product obtained by employing an additional labour.

In the above table there are three stages of production.

1^st stage i.e., increasing returns at 2 units total output increases average product increases and marginal product reaches maximum.

2^nd stage i.e., diminishing returns from 3^rd unit onwards TP increases at diminishing rate and reaches maximum, MP becomes zero and AP continuously decreases.

3^rd stage i.e., negative returns from 8^th unit TP, decreases AP declines and MP becomes negative.

This can be explained in the following diagram.

In the diagram, on ‘OX’ axis shown units labourer and ‘OY axis show TP, MP, and A.P. 1^st stage TP AP increases and MP is maximum. In the 2^nd stage TP is maximum, AP decreases and MP is zero. At 3^rd stage TP declines, AP also declines, MP becomes negative.

Question 2.
Explain the law of returns to scale. [Mar. ’17]
Answer:
The law of returns to scale relate to long run production function. In the long run it is possible to alter the quantities of all the factors of production. If all factors of production are increased in given proportion the total output has to increase in the same proportion. Ex : The amounts of all the factors are doubled, the total output has to be doubled, increasing all factors in the same proportion is increasing the scale of operation. When all inputs are changed in a given proportion, then the output is changed in the same proportion. We have constant returns to scale and finally arises diminishing returns. Hence, as a result of change in the scale of production, total product increases at increasing rate, then at a constant rate and finally at a diminishing rate.

Assumptions :

1. All inputs are variable.
2. It assumes that state of technology remains the same. The returns to scale can be shown in the following table.

The above table reveals the three patterns of returns to scale. In the 1st place, when the scale is expanded upto 3 units, the returns are increasing. Later and upto 4^th units, it remains constant and finally from 5^th onwards the returns go on diminishing.

In the diagram, on ‘OX’ axis shown scale of production, on ‘OY’ axis shown total product. RR₁ represents increasing returns R₁S – Constant returns; SS₁ represents diminishing returns.

Question 3.
Describe the internal and external economies.
Answer:
Economies of large scale production can be grouped into two types.

1. Internal economies
2. External economies.

1. Internal Economies :
Internal economies are those which arise from the expansion of the plant, size or from its own growth. These are enjoyed by that firm only.

“Internal economies are those which are open to a single factory or a single firm independently of the action of other firms.” – Cairncross

i) Technological Economies :
The firm may be running many productive establishments. As the size of the productive establishments increase, some mechanical advantages may be obtained. Economies can be obtained from linking process to another process i.e., paper making and pulp making can be combined. It also uses superior techniques and increased specialization.

ii) Managerial Economies :
Managerial economies arises from specialisation of management and mechanisation of managerial functions. For a large size firm it becomes possible for the management to divide itself into specialised departments under specialised personnel. This increases efficiency of management at all levels. Large firms have the opportunity to use advanced techniques of communication, computers etc. All these things help in saving of time and improve the efficiency of the management.

iii) Marketing Economies :
The large firm can buy raw materials cheaply, because it buys in bulk. It can secure special concession rates from transport agencies. The product can be advertised better. It will be able to sell better.

iv) Financial Economies :
A large firm can arise funds more easily and cheaply than a small one. It can borrow from bankers upon better security.

v) Risk Bearing Economies :
A large firm incurs unrisk and it can also reduce risks. It can spread risks in different ways. It can undertake diversifications of output. It can buy raw materials from several firms.

vi) Labour Economies :
A big firm employs a large number of workers. Each worker is given the kind of job he is fit for.

2. External Economies :
An external economy is one which is available to all the firms in an industry. External economies are available as an industry grows in size.

i) Economies of Concentration :
When a number of firms producing an identical product are localised in one place, certain facilities become available to all. Ex : Cheap transport facility, availability of skilled labour etc.

ii) Economies of Information :
When the number of firms in an industry increases collective action and co-operative effort becomes possible. Research work can be carried on jointly. Scientific journal can be published. There is a possibility for exchange of ideas.

iii) Economies of Disintegration :
When the number of firms increases, the firm may agree to specialise. They may divide among themselves the type of products of stages of production. Ex : Cotton industry.

Question 4.
Explain short-run costs illustrations.
Answer:
Costs are divided into two categories i.e.,

1. Short run cost curves
2. Long run cost curves.

In short run by increasing only one factor i.e., (labour) and keeping other factor constant. The short run cost are again divided into two types.

1. General costs
2. Economic costs.

1. General Costs :
i) Money Costs :
Production is the outcome of the efforts of factors of production like land, labour, capital and organisation. So, rent to land, wage to labour, interest to capital and profits to entrepreneur has to be paid in the form of money is called money cost.

ii) Real Cost :
Adam Smith regarded pains and sacrifices of labour as real cost. So, it cannot be measured interms of money.

iii) Opportunity cost :
Factors of production are scarce and have alternative uses. The opportunity cost of a factor is the benefit that is foregone from the next best alternative use.

2. Economic Costs :
i) Fixed Costs :
The cost of production which remains constant even when the production may be increased or decreased is known as fixed cost. The amount spent by the cost of plant and equipment, permanent staff are treated as fixed costs.

ii) Variable Cost :
The cost of production which is changing according to changes in the production is said to be variable cost. In the long period all costs are variable costs. It includes prices of raw materials, payment of fuel, excise taxes etc. Marshall called it as “Prime cost”.

iii) Average Cost :
Average cost means cost per units of output. If we divided total cost by the number of units produced, we will get average cost.

iv) Marginal Cost :
Marginal cost is the additional cost of production producing one more unit.
MC = \(\frac{\Delta \mathrm{TC}}{\Delta \mathrm{Q}}\)

v) Total cost :
Total cost is the sum of total fixed cost and total variable cost.
TC = FC + VC

The short term cost in relation to output are explained with the help of a table.

In the above table shows that as output is increased in the 1^st column, fixed cost remains constant. Variable costs have changed as and when there are changes in output. To produce more output in the g TVC short period, more variable factors have to be employed. By adding FC & VC we get total cost at different levels of output. AC falls output increases, reaches its minimum and then rises MC also change in the total cost associated with a change in output. This can be shown in the diagram.

In the above diagram is on ‘OX’ axis taken by output and ‘OY axis is taken by costs. The shapes of different cost curves explain the relationship between output and different costs. TFC is horizontal to ‘X’ axis. It indicates that increase in output has no effect on fixed cost. TVC on the other side increases along with level of output. TC curve rises as output increases.

Question 5.
Write an essay on revenue analysis.
Answer:
The amount of money that the producer receives in exchange for the goods (sale proceeds) is called producer’s receipts or revenue. In other words, the total sale proceeds of a firm are known as revenue. We can conceive three types of revenue. They are : total revenue, average revenue and marginal revenue.

a) Total Revenue (TR) :
Total amount of money or income received by the firm from the sale of a certain quantity of output is called total revenue. It is obtained by multiplying the price of a commodity by the number of units sold, i.e., TR = PQ.

Where, P = Price of the good and Q = the quantity of the good sold.

b) Average Revenue (AR) :
Average revenue is the revenue per unit of goods sold. It is computed by dividing the total revenue by the number of the units of a good sold. Thus, AR = TR / Q = PQ / Q = P. It is clear from the above formula that the average revenue at each level of output is equal to the price per unit.

c) Marginal Revenue (MR) :
It is the net addition to the total revenue by selling additional units of the goods i.e. the revenue which would be earned by selling an additional unit of the good. Marginal revenue can be expressed as : MR = ∆TR / ∆Q, where, ∆TR = change in total revenue and ∆Q = change in quantity. In other form, MR_n = TR_n – TR_n-1.

AR and MR Curves under Perfect Competition :
Under perfect competition, there exist large number of sellers and large number of buyers. The sellers under this competition offer homogenous products and, therefore, neither sellers nor buyers have any control on the price of the product. The seller can sell any amount of the good and buyers can buy any amount of the good at the ruling market price. In this case, total revenue (TR), average revenue (AR) and marginal revenue (MR) of a perfectly competitive firm are analyzed here under using table and diagram.

Since the price of the product remains constant under perfect competition, the output sold increases and therefore, revenue also increases. Due to homogeneity, the goods are sold at single price under perfect competition therefore, additional units are also sold at the same price. Hence, under this competition, the AR equals MR all through. Because of this, P = AR= MR. The nature of AR and MR curves is shown with the help of figure.

By the diagram, output is measured on OX axis and price / AR / MR on OY axis. OP price in the diagram indicates existence of single price. Since, P = AR = MR, the AR and MR curves will be parallel to OX axis as shown in figure.

AR and MR Curves under Monopoly :
Under monopoly, there is a single seller. The commodity offered by a monoplist may be or may not be homogenous. Monopolist can control price and output of the commodity, but he can’t determine both simultaneously due to existence of left to right downward sloping demand curve in the market. He can sell more quantity at lower price and less quantity at higher price. The relationship between TR, AR and MR is shown in table.

The table reveals that as price falls, sales may improve and total revenue also increases but average revenue (AR) and marginal revenue falls continuously. Here, MR declines at faster rate than that of AR. Thus, MR curve lies below the AR as shown in the figure.

In figure, AR and MR represent average revenue and marginal revenue curves re-spectively. The monopolist can sell higher quantity at lower price and therefore, always AR is greater than MR. Thus, AR curve lies above MR curve.

Short Answer Questions

Question 1.
Describe the main features of factors of production, namely land and labour.
Answer:
Land, labour, capital and entrepreneurial ability (organisation) are called as factors of production which make it possible to produce goods and services. The basic features of these factors of production are presented in the following paragraphs.

1) Land (N) :
The term land is used in a special sense in economics. It does not mean soil or earth’s surface alone but refers to all free gifts of nature which include besides land, in common practice, natural resources, fertility of soil, water, air, natural vegetation etc.

Characteristics of Land :
We may list the following characteristics of land as a factor of production.

• Land is a free gift of nature.
• The supply of land is perfectly inelastic from the point of view of the economy.
• Land cannot be shifted from one place to another place.
• Land is said to be a specific factor of production in the sense that it does not yield any result unless human efforts are employed.
• Land provides infinite variation of degree of fertility and situation so that no two pieces of land are exactly alike.

2) Labour (L) :
The term labour means mental or physical exertion directed to produce goods or services. In economics it is used in a wider sense. Any work, whether manual or mental, which is undertaken for a monetary consideration is called labour.

Characteristics of Labour :
Let us identify the characteristics of labour :

• Labour is inseparable from the labourer himself. It implies that whereas labour is sold, the producer of labour retains the capacity to work.
• Labour is highly ‘perishable’ in the sense that a day’s loss of labour cannot be stored and so he has no reserve price for his labour.
• Labour has a very weak bargaining power.
• Labour power differes from labourer to labourer. Therefore, labour may be classified as unskilled labour, semi skilled labour and skilled labour.
• The supply curve of a labourer is backward bending.

Question 2.
What are the merits and demerits of divisions of labour?
Answer:
It is an important feature of modern industrial organization. It refers to scheme of dividing the given activity among workers in such away that each worker is supposed to do one activity or only a limited and narrow segment of an activity. Thus, division of labour increases output per worker on account of higher efficiency and specialized skill.

Advantages :

1. Increase in productivity,
2. Inventions are facilitated,
3. Saving in time,
4. Diversity of employment,
5. Mechanization is possible,
6. Increase in dexterity and skills,
7. Large scale production is possible,
8. Right man in the right place.

Disadvantages :

1. Leads to monotony,
2. Retards human development,
3. Loss of skill,
4. Possibility of unemployment,
5. Hindrance to mobility of labour.

Question 3.
Explain the Diminishing Returns.
Answer:
Diminishing Returns :
After the stage of increasing returns, stage of diminishing returns will take place. This is known as the law of diminishing returns. Diminishing returns stage starts when the average product is maximum and continues upto the level of zero marginal product and maximum total product. Table shows this stage when the workers are employed from four to seven. From Q to Q₁ on OX axis shows the diminishing returns stage. In this stage, the total product increases at a diminishing rate and the average and marginal products decline. In this stage TP > AP > MP. Production is profitable only in the stage of diminishing returns.

Question 4.
Explain the concept of returns to scale.
Answer:
The law of returns to scale is concerned with the study of production function in the long run. The law of returns to scale studies the behaviour of output in response to change in scale. A change in scale means that all inputs or factors are varied in the same proportion, keeping the factor proportions constant. When a producer increases all the inputs in a given proportions, there are three possibilities, viz., total output may increase more than proportionately, just proportionately or less than proportionately. According to returns to scale concept, these possibilities are familiarly known as a) Increasing Returns To Scale (IRTS), b) Constant Returns To Scale (CRTS) and c) Decreasing Returns To Scale (DRTS).

Assumptions :

1. All inputs except entrepreneurship are variable.
2. State of technology remains the same.
3. There is perfect competition in the market.
4. Production is measured in physical quantities.

Explanation of the Law :
A description on returns to scale is presented in table. It can be seen from this table that the total product is 9 units in the beginning with 10L + IK. As the factors of production are doubled (20L + 2K), the total output increased to 19 units, which is more than proportional change and therefore, it represents increasing returns to scale (IRTS). Marginal product (MP) increased from 9 to 10 units uder this stage.

MP is remaining the same at 11 units when the scale is 30L + 3K and 40L + 4K therefore, it denotes constant returns to scale (CRTS). A decrease in MP is observed at 50L + 5K and 60L + 6K. This situation can be called as decreasing returns to scale (DRTS). These three kinds of returns to scale are also explained by using figure. In this figure, R to R₁ shows IRTS, R₁ to S shows CRTS and S to S₁ indicates DRTS.

Question 5.
Write a note on Capital.
Answer:
Capital as that part of wealth of an individual or a community which is used for further production of wealth. Capital (stock concept) yields periodical income (flow concept). Capital is nothing but ‘produced means of production’. The term capital is generally used for capital goods, E.g. plant and machinery, tools and accessories, stocks of raw materials, goods in process and fuel.

Types of Capital: Capital can be classified into :
1) Real Capital and Human Capital :
Real capital refers to physical goods, i.e., buildings, plant, machinery etc. As against this, human capital refers to human skill and ability.

2) Individual Capital and Social Capital :
Individual capital is the personal property, and the other, social capital is what belongs to the community as a whole in the form of roads, bridge etc.

3) Fixed Capital and Variable Capital :
Expenditure incurred on machinery and building in the production process is called as fixed capital. The amount spent on purchase of raw materials, daily wages to labour, electricity charges etc., are known as variable capital.

4) Tangible Capital and Intangible Capital :
Tangible capital may be perceived by senses where as intangible capital is in the form of certain rights and benefits. Eg. goodwill, patent rights, etc.

Importance of Capital :
Let us point out the importance of capital in brief.

1. Capital plays a very vital role in the modem productive system. Production without capital is almost impossible.
2. The productivity of work force depends upon the amount of capital available per worker. The greater the capital per worker, the greater the efficiency and productivity of the worker.
3. Capital occupies a central position in the process of economic development.
4. It promotes the technological progress.
5. It helps in the creation of employment opportunities.

Question 6.
What are the internal economies of scale?
Answer:
Economies of large scale production can be grouped under two headings. They are Internal economies and external economies. Let us discuss them.

Internal Economies :
The word ‘internal’ is used here to denote the limitations of these economies to the firm itself. According to Caimcross, “Internal economies are those which are open to a single factory or a single firm independently of the action of other firms”. Internal economies results in from an increase in the scale of output of a firm and cannot be achieved unless output increases. In other words, internal economies are those economies in production which accrue to the firm itself when it expands its output or enlarges its scale of production. In short, they arise simply due to the increase in the scale of production.

Firms experience the following types of internal economies :
a) Technical Economies :
Technical factors affect the returns to scale. Large firms will have more resources at their disposal. Therefore, these firms can install the most suitable machinery. As a result, larger firms experience lower costs of production. There are four different ways in which technical economies can arise. They are :

• large size machines,
• linking process, E.g. paper making and pulp making,
• superior techniques and
• increased specialization.

b) Managerial Economies :
With the increase in the scale of production, a firm can benefit by specializing its managerial department. Each department is under the charge of an expert. A small firm cannot afford this specialization. Experts are able to reduce the costs of production under their supervision.

c) Marketing Economies :
As the scale of a firm increases, internal economies accrue to the firm due to large scale purchases and sales. Since the firm purchases on a large scale, it gets all the inputs at a cheaper rate compared to the smaller firms. Similarly, wholesalers charge less for the sale of products to a large firm.

d) Financial Economies :
A large firm will be able to reduce its costs of borrowing from the market. A bigger firm is better known to the financial institutions and the stock market. Therefore, a big firm has better access to credit and can borrow on more favourable terms.

e) Economies of Welfare :
A big firm employes a large number of workers. Each worker is given the kind of job he is fit for. Therefore, workers get skilled in their operations which save production time and encourage new ideas.

f) Risk-Bearing Economies :
Large firms will be in a position to bear risks or avoid risks. They do so by diversifying output and markets. Therefore, loss in one good or in one market can be covered by profits in other goods or markets.

g) Economies of Research and Development :
Large firms possess more resources than small firms and hence, these firms invest huge amount of money on research and development (R & D). Introduction of innovative methods in production activity due to R & D reduces cost of production and results in internal economies.

Question 7.
What is supply? Explain the determinants supply.
Answer:
The law of supply explains the functional relationship between price of a commodity and its quantity supplied. The law of supply can be stated as follows, “Other things remaining the same, as the price of a commodity rises its supply is extended and as the price falls its supply is contracted”.

The law of supply can be explained with the help of supply schedule and supply curve.

Supply Schedule :
Supply schedule explains various amounts of good that the seller offers for sale at different prices. It represents the functional relationship between price and quantities supplied. There is direct relationship between price and supply. This can be shown in the following schedule.

The above schedule high price, i.e, ₹ 5.00 per unit, 1000 units are supplied and at ₹ 1 per unit, 200 units are supplied. It means high price indicate high supply and low price indicates low supply. So, it shows the direct relationship between price and supply.

Supply curve :
A supply curve can be drawn with the help of above supply schedule to explain the direct relationship between price and supply.

In the above diagram supply is shown on ‘OX’ axis and price is shown on OY axis. SS is supply curve. It slopes upwards from left to right; The slope of supply curve is always positive. Because there is direct relationship between the price and supply.

Determinants of Supply:
1. Price of the Commodity :
The supply of the commodity depends upon the price of that commodity. When price falls, supply falls and when price rises, supply also rises. Thus, price and supply are directly related.

2. Factor Prices :
The cost of production of a commodity depends upon the prices of various factors of production.

3. Prices of Related Goods :
The supply of the commodity depends upon the prices of related goods. If the price of a substitute good goes up, the producer will be induced to divert their resources.

4. State of Technology :
Technological improvements determine supply of a commodity. Progress in technology leads to reduction in the cost of production which will increase supply.

5. Government Policy :
Imposition of heavy taxes as a commodity discourages its production. Hence, production decreases.

Question 8.
Discuss about the changes in supply.
Answer:
The supply function explains the relationship between the determinants of supply of a commodity and the supply of that commodity. Supply of a commodity depends upon its price, the prices of related goods, the prices of factors of production, the state of technology, the goals of firm and polity of the government. These can be written in the form a supply function as :
Q_x = f(P_x, P_r, P_f T, G_f, G_p)

Where, Q_x = quantity of good X supplied, P_x = price of good X, P_r = prices of related goods (substitutes, complementaries), P_f = prices of factors of production, T = technical knowhow, G_f = goal of the firm / seller, G_p = government policy, f = functional relationship.

In the above equation, supply of commodity is a dependent variable on many aspects. Change even in one variable of the determinants of supply brings a change in the supply. In determining the supply of a good, price of this good is more important among all the determinants. Hence, if we assume all other aspects will not change, then the supply function will be as :

Determinants of Supply :
Supply function explains the relationship between supply

i) Price of a Good :
In determining the supply of a good, price of this good is more important and this price determines the profit of the firm. Other things being constant, the supply of commodity increases with an increase in its price and vice versa. Thus, there exist a positive relationship between price and supply.

ii) Prices of its Related Goods :
Goods comprise substitutes and complementaries. Any change in the prices of these goods exerts influence on production of the good in consideration. For instance, if the price of a substitute good goes up, the producers may try to produce that substitute good or demand for the substitute good which has higher price may decrease and therefore, producer may increase supply of the good which he was producing initially. Similarly, producer may decide the supply of his product on the basis of the prices of complementaries and demand for them.

iii) Prices of Factors of Production :
Increase in the prices of factors of production would lead to an increase in the cost of production. As a result, supply of the commodity may decline. The reverse will happen in the case of a fall in the prices of factors of production.

iv) State of Technology :
New and improved methods of production, inventions and innovations help to save factors, costs and time and thus, technology contributes to increase the supply of goods.

v) Goals of producer and other determinants :
Goals of producer, means of transport and communication and natural factor etc., will equally influence the supply of a commodity.

vi) Government policy :
Imposition of heavy taxes on a commodity discourages the production of goods and as a result supply diminishes in goods are given, supply of goods will increase.

Question 9.
Discuss the types of costs.
Answer:
Cost analysis refers to the study of behaviour of production costs in relation to one or more production criteria, namely size of output, scale of operations, prices of factors of production and other relevant economic variable. In other words, cost analysis is concerned with financial aspects of production relations as against physical aspects considered in production analysis. A useful cost analysis needs a clear understanding of the various cost concepts which are dealt here under.

Types of Costs :
Broadly, types of costs can be classified into three types, namely, money costs, real costs and opportunity costs.

1) Money Costs :
The money spent by a firm in the process of production of its output is money cost. These costs would be in the form of wages and salaries paid to labour, expenditure on machinery, payment for materials, power, light, fuel and transportation. These costs are further divided into explicit costs and implicit costs. The amount paid to all factors of production hired from outside by the producer is called as explicit cost. And the amount of own resources and services applied by the producer in the production process is called as implicit cost.

2) Real Costs :
According to Alfred Marshall, “the pains and sacrifices made by labourers and entrepreneurs / organizers in the process of production activity are real costs”. The amount of crop (produce) sacrificed by the landlord by giving his land to tenants, the amount of leisure sacrificed by the labourer in extending labour to produce goods, the amount of consumption sacrificed by the investor by saving his money for investment are some of the examples of real costs.

3) Opportunity Costs :
It is also called as alternative cost or economic cost. Opportunity cost is next best alternative of factors of production. The alternate uses capacity of factors of production signifies opportunity costs. If a factor possesses alternative uses, the factor can be used only in one activity by forgoing other possibilities. In other words, opportunity cost is nothing but next best alternative foregone by a factor. For example, if a farmer decides to grow wheat instead of rice, the opportunity cost of the wheat would be the rice, which he might have grown rather. Thus, opportunity cost is the cost of foregone alternative.

Short-Run Cost Curve analysis :
In shortrun, the costs faced by a firm can be classified into fixed and variable costs.

4) Fixed Costs :
The fixed costs of a firm are those costs that do not vary with the size of its output. It is due to this, the value of fixed cost is always positive even if production activity does not take place or it is zero. The best way of defining fixed costs is to say that they are the costs which a firm has to bear even when it is temporarily shut down. Alfred Marshall called these costs as ‘Supplementary costs’ or ‘Overhead costs’. E.g.: costs of plant and equipment, rent on buildings, salaries to permanent employees are part of fixed costs.

5) Variable Costs :
On the other hand, Variable costs are those costs which change with changes in the volume of output. Marshall called these costs as ‘prime costs’. Daily wages to employees, payments to raw materials, fuel and power, excise taxes, interest on short-term loans etc., are examples for variable costs.

Question 10.
Explain the relationship between total cost, total variable cost and total fixed cost.
Answer:
In short-run, the costs faced by a firm can be classified into fixed and variable costs.

1) Fixed Costs and Variable Costs :
The fixed costs of a firm are those costs that do not vary with the size of its output. It is due to this, the value of fixed costs is always positive even if production activity does not take place or it is zero. The best way of defining fixed costs is to say that they are the costs which a firm has to bear even when it is temporarily shut down. Alfred Marshall called these costs as ‘Supplementary costs’ or ‘Overhead costs’. E.g.: costs of plant and equipment, rent on buildings, salaries to permanent employees are part of fixed costs. On the other hand, variable costs are those costs which change with changes in the volume of output. Marshall called these costs as ‘Prime costs’. Daily wages to employees, payment to raw materials, fuel and power, excise taxes, interest on short-term loans etc., are examples for variable costs.

2) Nature of short run Cost Curves :
As mentioned earlier, short-run is a period of time within which the firm can vary its output by varying only variable factors of production. The fixed factors such as capital equipment, top management personnel etc., cannot be varied. Therefore, short-run cost structure of a firm reveals fixed costs and variable costs, Total Cost (TC), Total Fixed Costs (TFC), Total Variable Costs (TVQ, Total Average Costs (SAC) and Marginal Costs (SMC). But in the long-run, all costs are variables. The nature of short-run costs and the curvature of these costs are explained by using table and figure.

In table, short-run costs faced by a firm are analyzed. As mentioned earlier, total fixed cost is the cost of fixed factors which remains constant irrespective of level of output. It is at ₹ 300/- Total variable cost, on the other hand, implies expenses on variable factors of production. It is zero when output is nothing or zero and goes on increasing along with the level of output. Total cost is the sum of total fixed cost and total variable cost i.e., TC = TFC + TVC. Though TFC remains constant, TVC increase along with the level of output, TC also increases if TVC increases. A description of the relationship between these three curves is presented in figure.

Question 11.
Explain the relationship between Average Cost and Marginal Cost.
Answer:
Cost analysis refers to the study of behavior of production costs in relation to one or more production criteria, namely, size of output, scale of operations, prices of factors of production and other relevant economic variables. In other words, cost analysis is concerned with financial aspects of production relations as against physical aspects considered in production analysis. A useful cost analysis needs a clear understanding of the various cost concepts which are dealt hereunder.

Relationship Between Average Cost and Marginal Cost :
Average cost (AC) is the sum of Average Variable Cost (AVC) and Average Fixed Cost (AFC). It is total cost divided by the number of units produced. In short, cost per unit is known as Average Cost (AC). AC = TC / Q = TFC / Q + TVC / Q = AFC + AVC. Marginal Cost (MC) is the addition made to the total cost by the production of additional units of output. It is the change in total cost associated with a change in output. We can therefore, write MC = Change in Total Cost / Change in Output = ∆TC / ∆Q or MC_n = TCn – TC_n-1

As per the nature of costs, both AC and MC curves gradually decrease, reach to mini-mum and gradually increase thereafter along with increase in level of output. It is to be noted that both AC and MC curves will have ‘U’ shape implying three phases i.e., decreasing, minimum (constant) and increasing. This is shown with the help of the following diagram.

By the figure, output is measured on OX axis and costs on OY axis. It can be seen from this graph that in the beginning as output increases, both AC and MC decrease but the rate of decrease in MC is more than the decrease in AC. At point A, AC = MC and after this point both AC and MC increase but rate of increase in MC is greater than the rate of increase in AC.

Properties of AC and MC :

1. Both AC and MC curves are U shaped.
2. As output increases, both AC and MC decrease in the beginning.
3. MC curve cuts AC curve from its minimum points, at which point AC = MC.
4. Both AC and MC increase after certain level of output.

Question 12.
Explain diagramatically the nature of average revenue and marginal revenue under perfect competition and monopoly.
Answer:
The amount of money that the producer receives in exchange for the goods (sale proceeds) is called producer’s receipts or revenue. In other words, the total sale proceeds of a firm are known as revenue. We can conceive three types of revenue. They are : total revenue, average revenue and marginal revenue.

a) Total Revenue (TR) :
Total amount of money or income received by the firm from the sale of a certain quantity of output is called total revenue. It is obtained by multiplying the price of a commodity by the number of units sold, i.e., TR = PQ.
Where, P = Price of the good and Q = the quantity of the good sold.

b) Average Revenue (AR) :
Average revenue is the revenue per unit of goods sold. It is computed by dividing the total revenue by the number of the units of a good sold. Thus, AR = TR / Q = PQ / Q = P. It is clear from the above formula that the average revenue at each level of output is equal to the price per unit.

c) Marginal Revenue (MR) :
It is the net addition to the total revenue by selling additional units of the goods i.e., the revenue which would be earned by selling an additional unit of the good. Marginal revenue can be expressed as : MR = ∆TR / ∆Q, where, ∆TR = change in total revenue and ∆Q = change in quantity. In other form, MR_n = TR_n – TR_n-1.

AR and MR Curves under Perfect Competition:
Under perfect competition, there exist large number of sellers and large number of buyers. The sellers under this competition offer homogenous products and, therefore, neither sellers nor buyers have any control on the price of the product. The seller can sell any amount of the good and buyers can buy any amount of the good at the ruling market price. In this case, total revenue (TR), average revenue (AR) and marginal revenue (MR) of a perfectly competitive firm are analyzed here under using table and diagram.

Since the price of the product remains constant under perfect competition, the output sold increases and therefore, revenue also increases. Due to homogeneity, the goods are sold at single price under perfect competition therefore, additional units are also sold at the same price. Hence, under this competition, the AR equals MR all through. Because of this, P = AR= MR. The nature of AR and MR curves is shown with the help of figure.

By the diagram, output is measured on OX axis and price / AR / MR on OY axis. OP price in the diagram indicates existence of single price. Since, P = AR = MR, the AR and MR curves will be parallel to OX axis as shown in figure.

AR and MR Curves under Monopoly :
Under monopoly, there is a single seller. The commodity offered by a monoplist may be or may not be homogenous. Monopolist can control price and output of the commodity, but he can’t determine both simultaneously due to existence of left to right downward sloping demand curve in the market. He can sell more quantity at lower price and less quantity at higher price. The relationship between TR, AR and MR is shown in table.

The table reveals that as price falls, sales may improve and total revenue also increases but average revenue (AR) and marginal revenue falls continuously. Here, MR declines at faster rate than that of AR. Thus, MR curve lies below the AR as shown in the figure.

In figure, AR and MR represent average revenue and marginal revenue curves respectively. The monopolist can sell higher quantity at lower price and therefore, always AR is greater than MR. Thus, curve lies above MR curve.

Very Short Answer Questions

Question 1.
Explain the Characteristics of land.
Answer:
Land means not only earth’s surface alone but also refers to all free gits of nature which include soil, water, air, natural vegetation etc.

Characteristics of Land – The following are the characteristics of land as a factor of ‘ production
a) Free gift of nature.
b) Supply of land is perfectly inelastic.
c) Cannot be shifted from one place to another place.
d) Land provides infinite variation of degree of fertility.

Question 2.
What is Division of Labour?
Answer:
It is an important feature of modern industrial organisation. It refers to scheme of dividing the given activity among workers in such a way that each worker is supposed to do one activity or only a limited and narrow segment of an activity. Thus, division of labour increases output per worker on account of higher efficiency and specialised skill.

Question 3.
Define the Production Function.
Answer:
The production function is the relationship between the physical inputs and the physical outputs of a firm. Production of a firm, production function explains the functional relationship between inputs and outputs this can be as follows Gx = f (L, K, R, N, T).

Question 4.
Explain the concepts of Average Productand Marginal product
Answer:
It is the additional product by employing an additional labour.
MP = \(\frac{\Delta \mathrm{TP}}{\Delta \mathrm{L}}\)

It refers to the product per unit of labour it is obtained by dividing total product by the number of labourers employed.
Ap = \(\frac{TP}{L}\)

Question 5.
Explain the classification of Factors of production.
Answer:
Factors that help in the production process are called factors of production.
Ex : land, labour, capital and organization.

Question 6.
Explain the Technical economies.
Answer:
It is one of the internal economies.

The large firms will have more resources at their disposal. Hence, these firms can install the most suitable machinery. As a result larger firms experience lower cost of production. There are four different ways in which technical economies can arise.
a) Large size machines.
b) Linking processes.
c) Superior techniques.
d) Increased specialization.

Question 7.
What is the Importance of capital?
Answer:
Importance of Capital: The importance of capital in brief :

1. Capital plays a very vital role in the modem productive system. Production without capital is almost impossible.
2. The productivity of workforce depends upon the amount of capital available per worker. The greater the capital per worker, the greater the efficiency and productivity of the worker.
3. Capital occupies a central position in the process of economic development.
4. It promotes the technological progress.
5. It helps in the creation of employment opportunities.

Question 8.
Explain the External Economies.
Answer:
External economies are those economies which accure to each member firm as a result of the expension of the industry as a whole as the name tells us, these economies are common in nature which benefit all the firms working in an exponding industry external economies are as follows.
a) Economies of concentration.
b) Economies of information.
c) Economies of specialisation
d) Economies of welfare.

Question 9.
What is Capital Accumlation?
Answer:
Capital accumulation typically refers to an increase in assets from investment or profits. Individuals and companies can accumulate capital through investment. Investment assets usually earn profit they contributes to a capital base.

Question 10.
Define Supply function.
Answer:
Supply of a commodity depends upon a number of factors, the important among these can be presented in the form of a supply function. It explains the functional relationship between supply of a commodity and other determinants of supply of that commodity. This can be explained as follows.
S_x = f(P_x, P_y, P_f, T G_f, G_p)
S_x = Supply of commodity x
f = Functional relationship
P_x’ = Price of good x
P_y = Price of related good
P_f = Price of factors
T = Technical progress
G_f = Goal of the producer
G_p = Government policy.

Question 11.
Define Law of supply.
Answer:
The law of supply explains the functional relationship between price of a commodity and its quantity supplied. The law of supply can be stated as follows “Other things remaining the same, as the price of a commodity rises its supply is extended and as the price falls its supply is contracted”.

Question 12.
Explain the Supply schedule and supply Curve.
Answer:
Supply Schedule and Supply Curve :
The supply schedule is a table which explains various amounts of a good that the seller offered for sale at different prices. This table can be explained by the table as price increases from ₹ 30 to ₹ 60, the supply increases from 1,000 kgs to 4,000 kgs. It is to be noted that larger quantites are offered at a higher price than at a lower price.

Supply Curve :
Supply curve can be derived based on the supply schedule. By the diagram price is shown on Y – axis supply is shown on X – axis SS is the supply curve which slopes upwards from left to right. It implies that as price increases, supply also increases and vice versa. If price increases from p – p₁, supply also increases from M to M₁ and vice Versa.

Question 13.
What are Money costs? [Mar.’17]
Answer:
The money spent by a firm in the process of production of its output is money cost. These costs would be in the form of wages and salaries paid to labour, expenditure on machinery, payment for material, power, light, fuel and transportation. These costs are further divided into explicit costs and implicit costs.

Question 14.
What is an Opportunity cost?
Answer:
Opportunity cost :
It is also called alternative cost or economic cost. Opportunity cost is next best alternative use of factors of production. If a scarce factor possesses alternative uses, the factor can be used only in one activity by foregoing other possibilities. In other words, opportunity cost is nothing but next best alternative foregone by a factor. For example, if a farmer decides to grow wheat instead of rice, the opportunity cost of the wheat would be the rice, which he might have grown rather. Thus, opportunity cost is the cost of foregone alternative.

Question 15.
Describe the Total fixed cost curve.
Answer:
The fixed costs of a firm are those costs that do not vary with the size of its output. It is due to this the value of fixed costs is always positive even if production activity does not take place or it is zero. The best way of defining fixed costs is to say that they are the costs which a firm has to bear even when it is temporarily shut down. Alfred Marshall called these costs as supplementary costs or over head costs. For examples cost of plant and equipment, rent on building, salaries to permanent employees are part of fixed costs.

Question 16.
Explain the relationship between AC and MC.
Answer:
Average cost :
Average Cost (AC) is the sum of the Average Variable Cost (AVC) and Average Fixed Cost (AFC). It is total cost divided by the number of units produced. In short, cost per unit is known as average cost (AC).
AC = TC / Q = TFC / Q + TVC / Q = AFC + AVC.

Marginal Cost :
Marginal Cost (MC) is the addition made to the total cost by the production of additional units of output. It is the change in total cost associated with a change in output. We can therefore, write

MC = Change Total Cost / Change in Output or MC_n = TC_n – TC_n-1.

Question 17.
Explain the nature of AR and MR curves in perfect competition.
Answer:

Under perfect competition, there exist large number of sel1 rs and large number of buyers. In this market neither sellers nor buyers have any control on the price of the product. The seller can sell any amout of the good and buyers can buy any amount of the good at the ruling market price. Here the goods are sold at single price under perfect competition therefore, additional units are also sold at the same price. Hence, under perfect competition the AR = MR, because of this P = AR = MR. Since P = At = MR, the AR and MR curves will be parallel to OX axis as shown in the following diagram.

Question 18.
Explain the nature of AR and MR curves in Monopoly.
Answer:
Under monopoly, there is a single seller. The commodity offered by a monoplist may be or may not be homogenous. Monopolist can control price and output of the commodity, but he can’t determine both simultaneously due to existance of left to right downward sloping demand curve in the market. He can sell more quantity at lower pric e and less quantity at higher price. The relationship between TR, AR and MR is shown in table.

The table reveals that as price falls, sales may improve and total revenue also increases but average revenue (AR) and marginal revenue falls continuously. Here, MR declines at faster rate than that of AR. Thus, MR curve lies below the AR as shown in the figure.

Telangana TSBIE TS Inter 1st Year Economics Study Material 1st Lesson Introduction to Economics Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 1st Lesson Introduction to Economics

Long Answer Questions

Question 1.
Examine the wealth and welfare definitions of Economics.
Answer:
Wealth Definition :
Adam Smith was the first person to give a precise definition of Economics and separate this study from other social sciences. Adam Smith is considered as ‘Father of Economics’. He defined it in his famous book Wealth of Nations’, as “An enquiry into the nature and causes of wealth of nations”. Most of the economists in the 19th century held this view.

J.B. Say states that “The aim of political economy is to show the way in which wealth is produced, distributed and consumed”. The other economists who supported this definition are J.B. Say, J.S. Mill, Walker and others.

The main features of Wealth definition :

1. Acquisition of wealth is considered as the main objective of human activity.
2. Wealth means material things.
3. Human beings are guided by self-interest, whose objective is to accumulate more and more wealth.
4. Economics deals with the activities of wealth production, consumption, preservation and increasing.

Criticism :
The Wealth definition was severely criticised by many writers due to its defects.

1. Economists like Carlyle and Ruskin pointed out that economics must discuss ordinary man’s activities. So they called it as a ‘Dismal Science’.
2. In Adam Smith’s definition, wealth was considered to consist of only material things and services are not included. Due to this the scope of economics is limited.
3. Marshall pointed out wealth is only a means to an end but not an end in itself.
4. This definition concentrated mainly on the production side and neglected distribution side.

Welfare definition :
Alfred Marshall tried to remedy the defects of wealth definition in 1890. He shifted emphasis from production of wealth to distribution of wealth.

According to Marshall, “Political Economy or Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being. Thus, Economics is on one side, a study of wealth and on the other and more important side, a part of study of man”.

Edwin Cannan defined it as “The aim of political economy is the explanation of the general causes on which the material welfare of human beings depends”.

In the words of Pigou, “The range of enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money”.

The main features of Welfare definition :

1. Economics as a social science is concerned with man’s ordinary business of life.
2. Economics studies only economic aspects of human life and it has no concern with the social, political and religious aspects of human life. It examines that part of individual and social action which is closely connected with acquisition and use of material wealth for promotion of human welfare.
3. According to Marshall, the activities which contribute to material welfare are considered as economic activities.
4. He gave primary importance to man and his welfare and to wealth as means for the promotion of human welfare.

Criticism :

1. Robbins criticised Marshalls economics as a ’social science’ rather than a human science, which includes the study of actions of every human being.
2. Marshalls definition mainly concentrated on the welfare derived from material things only. But non – materialistic goods which are also very important for the well being of the people. Hence, it is incomplete.
3. Critics pointed out that quantitative measurement of welfare is not possible. Welfare is a subjective concept and relative concept and changes according to time, place and persons.
4. According to Marshall, economics deals with those activities which will promote human welfare. But production of alcohol and drugs do not promote human welfare. Hence, the scope of economics is limited.
5. Another important criticism is that it is not concerned with the fundamental problem of scarcity of resources. According to Robbins the economic problem arises due to unlimited wants and limited resources. These factors are ignored in this definition.

Question 2.
Critically examine the scarcity definition of economics.
Answer:
Marshall’s Welfare definition until the publication of Lionel Robbins’ book “An Essay on the Nature and Significance of Economic Science” in 1932. Robbins’ definition brought out the logical inconsistencies and inadequacies of the earlier definitions and formulated his own definition of economics. He has given a more scientific definition of economics. In the words of Robbins, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.

I. Main Features:
1) Human Wants are Unlimited :
The fulfillment of one want gives rise to a number of new wants.

2) Means are Scarce :
The means of a person by which his wants may be satisfied are limited. It leads to economic problems as all wants cannot be satisfied by these limited means.

3) Alternative Uses of Scarce Means :
Resources are not only scare but also have multiple uses. For example electricity can be used in homes and also in industries. A piece of land can be used to produce rice or wheat. If a scarce factor is used for the satisfaction of one want, less of it will be available for other wants. Hence, man has to make a decision regarding the alternative uses of resources.

4) Man has therefore to choose between wants. Problem of choice arises.

II. Superiority of Robbins’ Definition :
Robbins’ definition is superior to the earlier definitions in more than one way. The reasons are given below :

1. It is non-classificatory, as it includes all human activities whether they promote human welfare or not.
2. This is a universally accepted definition. It is applicable to all types of societies, because the scarcity of resources is felt by individuals as well as societies.
3. Robbins’ definition of economics is neutral between ends. Being a positive science it does not pass any value judgments regarding ends.

III. Criticism :
Some followers of Marshall like Durban, Fraser, Beveridge and Wootton have criticised Robbins’ definition by saying that it lacks human touch and that it is personal, neutral and devoid of any normative or ethical element. He does not seek to make economics a study of human welfare. Some of them criticized as “barren scholasticism” while others accused him of “behaviourism”.

1. Even though Robbins criticized Marshall’s welfare definition, he has introduced the welfare concept indirectly in his definition. Therefore, the criticism of welfare definition is equally applicable to it.
2. Another criticism of Robbins’ definition is that this definition does not distinguish between ‘ends’ and ‘means’.
3. Scarcity definition has been criticized by economists as to say “economics is neutral between ends”. But economics cannot be neutral between ends.
4. Robbins made economics a positive science. As per Macfie, “economics is fundamentally a normative science, not merely positive science like chemistry”.
5. Robbins’ definition is not applicable to a dynamic society where changes take place and the problem of scarcity of resources can be overcome with the passage of time.
6. Mrs. Joan Robbinson took serious objection to scarcity of resources. How best you utilize them is more important than the idle resources.
7. Robbins’ scarcity definition neglects the more important problems of growth and stability.

Question 3.
Explain the nature and scope of Economics.
Answer:
The nature of economics took a definite shape with the writings of Adam Smith, known as Father of Economics, made a beginning in defining economics and its scope with the publication of his famous book on the wealth of nations. Then a number of economists defined economics and its subject matter in different ways.

The scope of any science explains what the science is concerned with. In economics, traditional economic theory is divided into various branches like consmption, production, exchange, distribution, income, employment, planning and development; where as modem economic theory is divided into two branches viz. micro economics and macro economics.

Economics not only explains things as they are, but also elucidates with what it ought to be. For example, economics discuses the existing level of wages, prices and tax rates in the economy and also suggest how they ought to be. Economics is thus, both a positive and normative science.

Traditional economics is basically concerned with consumption, productio, exchange distribution, income, employment, planning and development.

1. Consumption :
Consumption can be defined as ‘extracting utility from goods and services’. Consumption is the act of using final goods and services to satisfy current wants. Consumption is the basis for production, exchange, distribution.

2. Production :
In the economics production is the process of conversion of raw materials into final goods by adding form, place and time utility to the raw materials. The factors which participate in production are called factors of production. They are land, labour, capital and organization.

3. Exchange :
It is concerned with exchange of a good. A good may be exchanged for another good or for money. Before the evolution of money when barter system was in practice, goods were exchanged for goods. There were many problems in barter system. With the introduction of money, value of every good is expressed in terms of money and can be exchanged for money.

4. Distribution :
Distribution is another important activity in economics. It explains how goods and services are distributed amongst the various factors of production which are responsible for the production. Each factor of production gets its reward. Various theories are there to determine the factor prices.

5. Income :
Individuals earn income by participating in various economic activities. The activities are related to production of material goods or the services. Income is a continuous flow. Various concepts of national income and the measuring methods of national income are discussed as part of macro economics for analysing economic growth and development.

6. Employment :
The level of employment in an economy depends on the demand for consumption goods and demand for investment goods. Full employment means employment of all those who are able and willing to work at.the prevailing wage rates.

7. Planning and Economic Development :
Economic planning is essential for proper and efficient utilization of the available resources. By economic planning we mean achieving the various predetermined targets systematically in a specific period of time. Economic planning is the method by which an optimum allocation of scarce resources amongst the various sectors is made in order to acheive speedy development of the economy and improve the welfare of the people.

Question 4.
Explain the concepts and scope of Micro Economics and Macro Economics.
Answer:
Modem economic theory divided it into two branches, namely (i) Micro Economics (ii) Macro Economics. Ragnar Frisch was the first economist to use the words “Micro and Macro” in economic theory in 1930.

Micro Economics :
The term “Micro Economics” is derived from the Greek word MIKROS’ which means small. Thus, micro economics is the theory of small. It was developed by classical economists like Adam Smith, J.B. Say, J.S. Mill, Ricardo, Marshall etc. It studies about individual units or behaviour of that particular units like individual income, price, demand etc. Micro Economics is also known as partial analysis. It mainly,’ concentrates on the determination of prices of commodities and factors of production. It is also known as “Price theory”. According to K.E. Boulding, “Micro Economics is the study of particular firms, particular households, individual prices, wages, incomes individual industries and particular commodities”.

Shapiro says “Micro Economics has got relation with small segments of the society.

Macro Economics :
The term Macro Economics is derived from the Greek word ‘MAKROS’ which means large. Thus, Macro Economics is the study of economic system as a whole. It was developed by J.M. Keynes. It studies aggregates in the economy like national income, total consumption, total saving and total employment etc. It is also known as Income and Employment theory.

According to Boulding “Macro Economics studies national income not individual income, general price level instead of individual prices and national output instead of individual output”. Macro Economics also studies the economic problems like poverty, unemployment, economic growth, development etc. It also deals with the theory of distribution.

The difference between Micro Economics and Macro Economics :
Micro and Macro Economics are interrelated to each other. Inspite of close relationship between the two branches of economics, fundamentally they differ from each other.

Question 5.
Explain the different types of goods.
Answer:
Goods are the articles and services which satisfy a human want like books, pens, cell phones etc. Hence, all tangible things that satisfy human wants are called goods. Goods can be divided into two types : free goods and economic goods.

1. Free Goods :
Goods which are freely supplied by the nature and without prices are known as free goods. The supply of these goods is always abundantly greater than their demand and therefore, do not have any price. Free goods possess only value in use, but no exchange value. Examples are air, water and sunshine. Now-a-days, some of these also became economic goods due to several reasons and these goods are priced.

2. Economic goods :
An economic good is any physical object, natural or man made or service rendered that can be commanded a price in a market. They always fall short of the demand for them. These economic goods have both value in use and value in exchange such as pens, books, laptops, etc. Economic goods possess three important characteristics i.e., utility, scarcity, and transferability. Economic goods are also divided into three types, i.e. consumer, product, and intermediary.

3. Consumer Goods :
A consumer good is an economic good or commodity purchased by households for final consumption. Thus, consumer goods are those goods which directly satisfy human wants. For example fruits, milk, pens, clothes, etc.

4. Producer or Capital Goods :
Goods which are used in the production of other goods are called producer or capital goods. They satisfy human wants indirectly. For example machines, buildings etc. are capital goods. A good can be classified into consumer good or capital good depending on the nature of its use. For example, when paddy is used for food it becomes a consumer good and when used as seed in cultivation, it becomes a capital good.

5. Intermediary Goods :
Goods which are under the process of production and semi finished goods are known as intermediary goods. Examples are cement, bricks and steel used as intermediary goods in construction work. The goods which are not yet finished and under different stages of production are known as intermediary goods.

Short Answer Questions

Question 1.
Examine the welfare definition of economics.
Answer:
Alfred Marshall raised economics to a dignified status by advancing a new definition in 1890. He shifted emphasis from production of wealth to distribution of wealth (welfare). In the words of Marshall, “political economy or economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well – being. Thus, it is on the one side, a study of wealth and on the other and more important side, a part of the study of man”.

I. Important Features of Welfare Definition :

1. Marshall used the term “Economics” for “Political economy” to make it similar to physics. He assumed that economics must be a science even though it deals with the ever changing forces of human nature.
2. Economics studies only economic aspects of human life and it has no concern with the political, social and religious aspects of life. It examines that part of individual and social action which is closely connected with acquisition and use of material wealth which promotes human welfare.
3. Marshall’s definitions considered those human activities which increased welfare.
4. This definition has given importance to man and his welfare and recognised wealth as a mean for the promotion of human welfare.

II. Criticism:
Marshall’s definition is not free from critics. Robbins in his “Essay on the Nature and Significance of Economic Science” finds fault with the welfare definition of economics.

1. Economics is a human science rather than a social science. The fundamental laws of economics apply to all human beings and therefore, economics should be treated as a human science and not as a social science.
2. Lionel Robbins criticized it as classificatory. It distinguishes between materialistic and non materialistic goods and not given any importance to non-materialistic goods which are also very important. Therefore, it is incomplete.
3. Another serious objection is about the quantitative measurement of welfare. Welfare is a subjective concept and changes according to time, place and persons.
4. Marshall includes only those activities which promote human welfare. But the production of alcohol and drugs do not promote human welfare. Yet economics deals with the production and consumption of those goods.
5. Robbins has taken serious objection for not considering ‘scarcity of resources’. According to Robbins’ economic problem arises due to limited resources which are to be used to satisfy unlimited wants.

Question 2.
Explain the scarcity definition of economics.
Answer:
Marshall’s welfare definition until the publication of Lionel Robbins’ book “An Essay on the Nature and Significance of Economic Science” in 1932. Robbins’ definition brought out the logical inconsistencies and inadequacies of the earlier definitions and formulated his own definition of economics. He has given a more scientific definition of economics. In the words of Robbins, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

I. Main Features :
1. Human Wants are Unlimited :
The fulfillment of one want gives rise to a number of new wants.

2. Means are Scarce :
The means of a person by which his wants may be satisfied are limited. It leads to economic problems as all wants cannot be satisfied by these limited means.

3. Alternative Uses of Scarce Means :
Resources are not only scarce but also have multiple uses. For example, electricity can be used in homes and also in industries. A piece of land can be used to produce rice or wheat. If a scarce factor is used for the satisfaction of one want, less of it will be available for other wants. Hence, man has to make a decision regarding the alternative uses of resources.

4. Man has, therefore, to choose between wants. Problem of choice arises.

II. Superiority of Robbins’ Definition :
Robbins’ definition is superior to the earlier definition in more than one way. The reasons are given below :

1. It is non-classificatory, as it includes all human activities whether they promote human welfare or not.
2. This is universally accepted definition. It is applicable to all types of societies, because the scarcity of resources is felt by individuals as well as by societies.
3. Robbins’ definition of economics is neutral between ends. Being a positive science it does not pass any value judgements regarding ends.

Question 3.
Explain the growth definition of economics.
Answer:
In the words of Samuelson, “Economics is the study how people and society choose, with or without the use of money, to employ scarce and productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in the society. It analyses the benefits of improving patterns of resource allocation”.

1. Important Points
Some of the important points in Samuelsons’ definition are :

1. His definition like Robbins agreed that resources are not only limited but also have several uses.
2. Samuelson’s definition is dynamic in nature as it considers both the present and future consumption, production and distribution.
3. Growth definition deals with the problem of choice in a dynamic society. Hence, this definition broadened the scope of economomics.
4. Samuelson’s definition is superior to that of Robbins’ because he shifted the emphasis from the scarcity of resources to income, output and employment and later to the problems of economic growth.

Samuelson’s definition appears to be the most acceptable at the moment.

Question 4.
Explain the fundamental problems of an economy.
Answer:
Fundamental Problems of an Economy

There are certain fundamental problems in any type of economy with which economists are concerned. The following are the basic economic problems. These are interrelated and interdependent.

1. What type of goods are to be produced and in what quantities?
2. How to produce these goods?
3. For whom to produce these goods and services?
4. How efficient the productive resources are in use? Whether available resources are fully utilized?
5. Is the economy growing or static over a period of time?

Question 5.
What is Micro Economics? What is its importance?
Answer:
The term ‘Micro Economics’ is derived from the Greek word ‘MIKROS’ which means ‘small’. Thus, Micro Economics deals with individual units like individual demand, price, supply etc. It was popularised by Marshall It is also called as ‘Price Theory’ because it explains pricing in product market as well as factor market.

Importance :

1. Micro Economics provides the basis for understanding the working of the economy as a whole.
2. This study is useful to the government to frame suitable policies to active economic growth and stability.
3. This study is applicable to the field of international trade in the determination of exchange rates.
4. Micro Economics provides an analytical tool for evaluating the economic policies of the government.
5. It can be used to examine the condition of economic welfare and it suggests ways and means to bring about maximum social welfare.

Question 6.
Explain the concept of Macro Economics, and its Importance.
Answer:
The term Macro Economics is derived from the Greek word ‘MAKROS’ which means large. It was developed by J.M. Keynes. Macro Economics deals with economic system as a whole like national income, aggregate demand, aggregate supply, general price level etc. It is also known as Income and Employment’ theory.

Importance :

1. Macro Economics study is more useful to the government for formulation and execution of policies for achievement of maximum social benefit.
2. It helps in understanding the problems of unemployment, poverty, inflation etc, and suggests how to solve them.
3. It gives us a picture of the working of the economy as a whole.
4. The study of Macro Economics is helpful in analysing the causes of business cycles and in providing remedies.
5. Macro Economics includes economic growth and suggests how developing countries can use their resources to maximise their growth.
6. Macro Economic study is useful for making international comparisons in terms of average national income.

Question 7.
Distinguish between Microeconomics and Macroeconomics.
Answer:
Differences between Microeconomics and Macroeconomics

Question 8.
Explain the differences between free goods and Economic goods.
Answer:
Differences between Microeconomics and Macroeconomics

Question 9.
What is utility? What are its types?
Answer:
The want satisfying capacity of a commodity at a point of time is known as utility. Types of Utility:
1) Form Utility :
Form utilities are created by changing the shape, size and colour etc., of a commodity so as to increase its want satisfying power.
Ex : Conversion of a wooden log into a chair.

2) Place Utility :
By changing the place some goods acquire utility.
Ex : Sand on the sea shore has no utility. If it is brought out and transported to market, it gains utility. This is place utility.

3) Time Utility :
Time utilities are created by storage facility.
Ex : Business men store food grains in the stock points in the off season and releases them to markets to meet high demand and obtain super normal profits.

4) Service Utility :
Services also have the capacity to satisfy human wants.
Ex: Services of Lawyer, Teacher, Doctor etc. These services directly satisfy human wants. Hence, they are called as service utilities.

Question 10.
Analyse the characteristics of wants. [Mar. 17]
Answer:
Human wants are starting point of all economic activities. They depend on social and economic conditions of individuals.
Characteristic features of wants :
1) Unlimited wants :
Human wants are unlimited. There is no end to human wants. When one want is satisfied another want takes its place. Wants differ from person to person, time to time and place to place.

2) A Particular Want is Satiable :
Although a man cannnot satisfy all his wants, a particular want can be satisfied completely in a period of time.
Ex : If a person is thirsty he can satisfy it by drinking a glass of water.

3) Competition :
Human wants are unlimited. But the means to satisfy therr are limited of scarce. Therefore, they complete with each other in priority of satisfaction.

4) Complementary :
To satisfy a particular want we need a group of commodities at the same time.
Ex : Writing need is satisfied only when we have pen, ink and paper together.

5) Substitution :
Most of our wants can be satisfied by different ways.
Ex : If we feel hungry, we can eat rice or fruits satisfy this want.

6) Recurring :
Many wants appear again and again though they are satisfied at one point of time.

7) Habits :
Wants change into habits, which cannnot be given up easily.
Ex : Smoking cigarettes for joke results into a habit if it is not controlled.

8) Wants vary with time, place and person :
Wants go on changing with the passage of time. They are changing from time to time, place to place and person to person. Human wants are divided into

1. Necessities,
2. Comforts and
3. Luxuries.

Very Short Answer Questions

Question 1.
Explain the wealth definition.
Answer:
Wealth means stock of assets held by an individual or institution that yields has the potential for yielding income in some form. Wwalth includes money, shares of companies, land etc. Wealth has three properties. 1. Utility 2. scarcity 3. Transferability.

Question 2.
What is Micro Economics?
Answer:
The word Micro’ is derived from Greek word ‘Mikros’ which means ‘small’. It was devel-oped by Marshall. It is the study of the individual units like individual demand, price, supply etc.

Question 3.
What is Macro Economics?
Answer:
The word Macro’ is derived from Greek work ‘Makros’ which means ‘Large’. It was developed by J.M. Keynes. It studies aggregates or economy as a whole like national income, employment, general price level etc. It is also called “Income and Employment” theory.

Question 4.
What is Positive Economics?
Answer:
A positive science is defined as a body of systematised knowledge concerning ‘what it is’. The classical school economists were of the opinion that economics is purely a positive science which had no right to comment upon the rightness or wrongness of economic policy. Here, economists cannot give any final judgement on any matter.

Question 5.
What is Normative Economics?
Answer:
Normative economics may be defined as a body of systematised knowledge relating to the object of “what ought to be’ and concerned with the ideal as distinguished from the actual. Historical school of Germany has introduced this in Economics.

Question 6.
What are Free goods?
Answer:
Anything which satisfy human want is known as good. Goods which are freely supplied by the nature and without prices are known as free goods. The supply of these goods is always abundantly greater thatn their demand. Hence, they do not command price. Free goods possess only value-in-use, no value-in-exchage. For example, air, water, sunshine.

Question 7.
Explain Economic goods.
nswer:
Economic goods are man made, they have cost of production and price. They are limited in supply. They have both value in use and value in exchange. Ex : Pen, Book etc.

Question 8.
Explain the Consumer Goods.
Answer:
Consumer good is an economic good or commodity purchased by households for final consumption. Thus, consumer goods are those goods which directly satisfy human wants. For Ex : Fruits, Milk, Pen, Clothes etc. Consumer goods are divided into two types.
a) Perishable goods – Which loose their value in single use, Ex : Milk, fruits etc.
b) Durable goods – Which yields service over time. Ex : TVs & Computers.

Question 9.
Explain the Capital Goods.
Answer:
Goods which are used in the production of other goods are called producer or capital goods. They satisfy human wants indirectly. Ex : Machines, tools, buildings etc.

Question 10.
What are single use and durable use goods?
Answer:
Single use capital Goods :
There goods are used only once in the production process. For Example : Raw materials coal and Electricity.

Durable use capital Goods :
These goods are used for long time in the process of production. Machines, tools etc., are the durable capital Goods.

Question 11.
What is Wealth?
Answer:
Wealth means stock of assets held by an individual or institution that has the potential for yielding income in some form. Wealth includes money, shares of companies, land etc. Wealth has three properties. 1. Utility 2. Scarcity 3. Transferability.

Question 12.
What is Income concept?
Answer:
Income is a flow of satisfaction from wealth per unit of time. In every economy income flows from households to firms and vice versa. Income can be expressd in two types.

1. Money income which is in terms of money.
2. Real income which is in terms of goods and services.

Question 13.
Explain Value in use concept.
Answer:
The value of any good or service is the power to command other article or service in exchange. Value’ in economics is classified into two concepts. They are;

Value in Use :
It refers to the capacity of the good to satisfy human wants. Free goods have value in use and they do not have any value in exchange. For example, water has a greater value in use but no value in exchange.

Question 14.
Explain value in exchange concept.
Answer:
Exchange value is the purchasing power of one commodity for another. Only economic goods have exchange value.

Question 15.
What is the Price?
Answer:
The price of anything is its value measured in terms of money
Ex: A commodity is exchanged for 50 rupees then the price of a commodity is 50 rupees.

Telangana TSBIE TS Inter 1st Year Economics Study Material 8th Lesson Theories of Employment and Public Finance Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 8th Lesson Theories of Employment and Public Finance

Long Answer Questions

Question 1.
Critically examine the classical theory of employment.
Answer:
The theory of output and employment developed by economists such as Adam Smith, David Ricardo, Malthus is known as classical theory. It is based on the famous “Law of markets” advocated by J.B. Say. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources. The classical economists ruled out any general unemployment in the long run. These views are known as the classical theory of output and employment.

The classical theory of employment can be three dimensions.

C. Equilibrium of the labour market (Pigou wage cut policy)

A) Goods market equilibrium :
The 1^st part of Say’s law of markets explains the goods market equilibrium. According to Say “supply creates its own demand”. Say’s law states that supply always equals demand. Whenever additional output is produced in the economy, the factors of production which participate in the process of production. The total income generated is equivalent to the total value of the output produced. Such income creates additional demand for the sale of the additional output. Thus there could be no deficiency in the aggregate demand in the economy for the total output. Here every thing is automatically adjusting without need of government intervention.

The classical economists believe that economy attains equilibrium in the long run at the level of full employment. Any disequilibrium between aggregate demand and aggregate supply equilibrium adjusted automatically. This changes in the general price level is known as price flexibility.

B) Money market equilibrium :
The goods market equilibrium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that total income spent the classical economists agree that part of the income may be saved. But the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed that equality between savings and investment is brought by the flexible rate of interest. This can be explained by the following diagram.

In the diagram savings and investment are measured on the ‘X’ axis and rate of interest on Y axis. Savings and investments are equal at ‘Oi’ rate of interest. So money market equilibrium can be automatically brought through the rate of interest flexibility.

C) Labour market equilibrium :
According to the classical economists, unemployment may occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions. A.C. Pigou suggests that reduction in the wages will remove unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

According to the classical theory supply of and demand for labour are determined by real wage rate. Demand for labour is the inverse function of the real wage rate. The supply of labour is the direct function of real wage rate. At a particular point real wage rate the supply of and the demand for labour in the economy become equal and thus equilibrium attained in the labour market. Thus there is full employment of labour. This can be explained with the help of diagram.

In the above diagram supply of and demand for labour is measured on the X – axis.

The real wage rate is measured on the Y axis.

If the wage rate is OWp the supply of labour more than the demand for labour. Hence the wage rate falls. If the real wage rate is 0W2, the demand for labour is more than supply of labour. Hence the wage rate rises. At OW, real wage rate the supply and demand are equal. This is equilibrium.

Assumptions :

1. There is no interference of government of the economy.
2. Perfect competition in commodity and labour market.
3. Full employment.

Question 2.
Explain the Keynesian theory of employment. [Man’17, ’16]
Answer:
Keynes theory of employment is the principle of effective demand. He called his theory, general theory because it deals with all levels of employment. Keynes explains that lack of aggregate demand is the cause of unemployment. He used the terms aggregate demand, aggregate supply. It means total. The term effective demand is used to denote that level of aggregate demand which is equal to aggregate supply.

According to Keynes where aggregate demand and aggregate supply are intersected at that point effective demand is determined. This effective demand will determine the level of employment.

Aggregate supply schedule :
The aggregate supply schedule shows the various amounts of the commodity that will be offered for sale at a series of price. As the level of output increases with the level of employment. The aggregate supply price also increases with every increase in the level of employment. The aggregate supply curve slopes upwards from left to right. But when the economy reaches the level of the full employment, the aggregate supply curve becomes vertical.

Aggregate demand schedule :
The various aggregate demand prices at different level of employment is called aggregate demand price schedule. As the level of employment rises, the total income of the community also rises and therefore the aggregate demand price also increases. The aggregate demand curve slopes upward from left to right.

Equilibrium level of income :
The two determinants of effective demand aggregate supply and aggregate demand prices combined schedule is shown in the following table.

The table shows that so long as the demand price is higher than the aggregate supply price. The level of employment 40 lakh workers aggregate demand price is equal to aggregate supply price i.e., 300 crores. So effective demand in the above table is ₹ 300 crores. This can be shown in the following diagrams.

In the diagram ‘X’ axis represents the employment and Y axis represents price. A.S is aggregate supply curve A.D is aggregate demand curve. The point of intersection between the two ‘E₁‘ point. This is effective demand where all workers are employed at this point the entrepreneurs expectation of profits are maximised. At any other points the entrepreneurs will either incur losses or Employment earn sub-normal profits.

Question 3.
Discuss the concept of public finance. Describe the sources of public revenue.
Answer:
Public finance deals with the income and expenditure of public authorities (government). The word public is used to denote state or government: central, state and local bodies. According to Prof. Hugh Dalton “it is concerned with the income and expenditure of public authorities and with the adjustment of one to another”.

Modem governments play a major role in creating economic and social infrastructure. They spend lots of money on construction of roads, railways, on creating communication systems, education and health, on providing irrigation facilities and electricity etc. Of late modem governments have been spending huge amounts on various welfare measures to ameliorate the difficulties of poor and downtrodden sections of their population.

Public Revenue:
As explained in the previous paragraphs, a modem government has many functions to perform. It needs huge revenue for the performance of all its functions efficiently. Therefore it collects revenue by imposing taxes and also receives money from the people in many other forms. Revenue received by the government from different sources is called public revenue. Public revenue is broadly classified into two kinds :

1. Tax revenue and
2. Non-Tax revenue.

1) Tax Revenue :
Revenue received through collection of taxes from the public is called tax revenue. Both the central and state governments collect taxes as per their allocation in the Constitution.

Broadly taxes are divided into two categories : a) direct taxes, b) indirect taxes.
a) Direct Taxes :
i) Taxes imposed on individuals and companies based on income and expenditure.
Ex : Personal income tax, corporate tax, interest tax and expenditure tax.

ii) Taxes imposed on property and capital assets of individuals and companies.
Ex : Wealth tax, gift tax, estate duty.

b) Indirect Taxes :
Taxes levied On goods and services. Ex : Excise duty, customs duty, service tax.

2) Non – Tax Revenue :
Government receives revenue from sources other than taxes and such revenue is called the non-tax revenue. The sources of non-tax revenues are as follows:
a) Administrative Revenue :
Government receives money for certain administrative services. Ex : License fee, Tuition fee, Penalty etc.

b) Commercial Revenue :
Modern governments establish public sector units to manufacture certain goods and offer certain services. The goods and services are exchanged for the price. So such units earn revenue by way of selling their products.

Some of the examples of the public sector units are Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals, Indian Railways, State Road Transport Corporations, Air India etc.

c) Loans and Advances :
When the revenue received by the government from taxes and from non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. Modem government can also obtain loans from foreign government and international financial institutions.

d) Grants-in-Aid :
Grants are amounts received without any condition of repayment. They are not repaid. State governments receive such grants from the central government. The central government may receive such grants from foreign governments or any international funding agency.

Grants are of two types.
1. General Grants :
When a grant is given to meet shortage of funds in general without specifying a purpose, it is called general grant.

2. Specific Grants :
When a grant is given for a specific purpose it is called a specific grant. It cannot be spent on any other purpose. Ex : education grant and family planning grant etc.

Question 4.
Explain the concept of public debt Describe the various methods of redemption of public debt
Answer:
When the government’s expenditure exceeds its revenue one option it has is to go for public debt. A government can borrow funds from sources within the country or from abroad. This creates public debt.

Types of Public Debt:
On the basis of the sources, public debt is classified into two categories :

i) Internal debt :
Internal debt is the debt raised from the sources such as banks, financial institutions and private individuals within the country.

ii) External debt :
The borrowings of the government from the sources outside the country are called external debt. A government can raise external debt from the governments of other countries, international financial institutions like World Bank and International Monetary Fund (IMF) and other funding agencies.

Redemption of public debt means repayment of public debt. All government debts should be rapid promptly. There are various methods of repayment which may be discussed under the following heads.

1) Surplus budget :
Surplus budget means having public revenue in excess of public expenditure. If the government plans for a surplus budget, the excess revenue may be utilized to repay public debt.

2) Refunding :
Refunding implies the issue of fresh bands and securities by government so that the matured loans can be used for repayment of public debt.

3) Annuities :
By this method, the government repays past of the public debt every year. Such annual payments are made regularly till the debt is completely cleared.

4) Sinking fund :
By this method, the government creates a separate fund called Sinking fund’ for the purpose of repaying public debt. This is considered as the best method of redemption.

5) Conversion :
Conversion means that the existing loans are changed into new loans before the date of their maturity.

6) Additional taxation :
Government may resort to additional taxation so as to raise necessary funds to repay public debt under this method new taxes are imposed.

7) Capital levy :
Capital levy is a heavy one time tax on the capital assets and estates.

8) Surplus Balance of payments :
This is useful to repay external debt for which foreign exchange is required surplus balance of payment implies exports in excess of imports by which reserves of foreign exchange can be created.

Question 5.
Analyse the central, state financial relations in India.
Answer:
The financial relationship between the centre (union) and the states is provided in the constitution. The constitution gives a detailed scheme of distribution of financial resources between union and the states. The constitution makes a broad distinction between the power to levy a tax and the power to appropriate the proceeds of a tax. Thus the legislature which levies a tax is not necessarily the authority which retains the proceeds of a tax levied.

The constitution grants the union parliament exclusive power to levy taxes on several items. The state legislatures enjoy similar power with regard to several other specified items. In general, the union parliament levies taxes on items mentioned in the union list while the state legislatures levy taxes on items mentioned in the state list.

1) Exclusive Powers of Union Government:
The subjects on whom the union government has the exclusive powers to levy taxes are :
a) Customs duty, b) Corporation tax, c) Capital gains, c) Surcharge on income tax and c) Railway fares etc.

2) Exclusive Powers of State Governments :
State’s exclusive powers to tax include : a) Land revenue, b) Stamp duty, c) Estate duty, d) Entry tax, e) Sales tax and f) Taxes on vehicles and Luxuries etc.

The residuary power of taxation belongs to the centre. It means that the subjects which have not been included either in the union or in the state list may be taxed only by the union government. In the matter of taxation, the constitution recognizes no concurrent jurisdiction. Hence there is no subject who may be taxed both by the union and the state governments.

Besides the exclusive power of taxation of the union and the state governments, there are 3 other categories of taxes. They are :
a) Taxes levied by the union government but collected and appropriated by the states. Stamp duties on bills of exchange, excise duties on medicinal and toilet preparations fall in this category.

b) Certain duties are levied and collected by the union but the net proceeds of such taxes are distributed among the states. Each state gets that amount of the tax as is collected with in its territory. Succession duty, estate duty on property other than agricultural land, taxes on railway fares and freights, taxes on news paper sales and advertisements etc., fall in this category.

c) Certain taxes are levied and collected by the union but the proceeds are distributed between the centre and the states. Taxes on non-agricultural income (Art. 270) and excise duties on items in the union list except medicinal and toilet preparations fall in this category.

3) Miscellaneous Powers:
i) After 73^rd and 74^th Amendment of the Constitution, a provision is made for the constitution of the consolidated fund of state from which resources are to be provided to the village panchayats and municipalities.

ii) According to Article 360, during the proclamation of financial emergency, the President can give financial directives to the states. The union government supplements the financial resources of the states by two other means besides distribution of tax revenues. There are : a) Advancement of central loans and b) Grants-in-aid given to the states.

Question 6.
Write an essay on Federal Finance.
Answer:
Federal finance means the finance of the central government as well as the state governments and the relationship between the two. In a federal system of finance, all items of revenue and expenditure are divided among the central, state and local governments. All the three forms of government are free to make expenditure on their respective heads and to get revenue from their respective sources.

Characteristics of a Federal Finance :
The following are some of the important characteristic features of federal finance :

1. In the federal finance, the sources of income and heads of expenditure are distributed between the central and state governments according to the constitution. Their jurisdiction and rights are clearly defined in the constitution.
2. In the federal system the central government provides financial aid to states.
3. Although the state government have administered autonomy, yet they remain subordinate to the centre. No state is free to fall apart from central government on its own.
4. In case of any financial dispute arising between the central and the state governments, the solution there of is sought according to the constitutional provisions. India with a federal form of government has a federal finance system.

The essence of the federal form of government is that the central and state governments should be independent of each other in their respective spheres of action. The constitution should spell distinctly and separately the functions to be performed by respective governments. Once the functions of the governments have been spelt out, it becomes equally important that each of the governments should be provided with competent sources of raising adequate revenue to discharge the functions entrusted to it. Thus, for the successful operation of the federal form of government, two important conditions are essential, viz.

1. Each government should have independent sources of revenue, and
2. Each government should have total command over its resources to meet its needs.

In short, financial independence and adequacy constitute the backbone of the federal
finance system.

Question 7.
Describe the concept, components and types of budget.
Answer:
Budget is an annual statement showing the estimated receipts (revenue) and expenditure of a government for a financial year (April – March). The governments present to the legislature an annual budget every year for its approval. The budget is presented by the finance minister. The government cannot incur any expenditure unless it has the prior approval of the legislature.

Sometimes a vote on account budget is presented by the government when it is not possible to present the full budget. It is an interim budget for a few months. This will facilitate the government to incur expenditure pending approval of the regular budget.

Objectives :
The main purpose of the budget is to obtain approval of the legislature for the tax proposals and allocation of resources to various government activities. The government utilizes the occasion to state its policies and programmes.

Budget Estimates :
In the budget, budget estimates for the ensuing financial year are shown along with the actual expenditure of the preceding financial year, and budget estimates and revised estimates for the current financial year. For a clear understanding of these estimates, budget at a glance for the year 2013-14.

Components of the Budget :
The budget consists of both receipts (income) and expenditure of the government. The budget of the Government of India consists of two main components :
1) Budget Receipts:
a) Revenue Receipts :
This consists of tax revenue and non-tax revenue and

b) Capital Receipts :
This consists of recoveries of loans, other receipts and borrowings and other liabilities.

2) Budget Expenditure :
In the Union budget of India, the budget expenditure is classified into plan expenditure and non-plan expenditure. Each category is further divided into revenue account and capital account. Let us enlist them as hereunder :
i) Plan Expenditure:
a) Plan expenditure on revenue account.
b) Plan expenditure on capital account.

ii) Non-plan Expenditure :
a) Non-Plan expenditure on revenue account.
b) Non-Plan expenditure on capital account.

Again the plan expenditure and the non-plan expenditure is summed up and shown as revenue expenditure and capital expenditure.

Types of Budget:
There are three types of budgets based on the difference between the receipts and expenditure:
1) Surplus Budget :
This refers to the budget in which the total revenue is more than the total expenditure (R>E).

2) Deficit Budget :
This refers to the budget in which the total expenditure exceeds the total revenue (R<E).

3) Balanced Budget :
This refers to the budget in which the total expenditure and the total revenue are equal (R = E).

Short Answer Questions

Question 1.
“Supply creates its own demand”. Explain the statement ofJ.B. Say.
Answer:
Classical theory of employment or the theory of output and employment developed by economists such as Adam Smith, David Ricardo, Robert Malthus etc., it is based on the J.B Say’s law of market’. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources.

According to this law the supply always equals to demand it can be expressed as S=D. Whenever additional output is produced in the economy. The factors of production which participate in the process of production. Earn income in the form of rent, wages, interest and profits.

The total income so generated is equivalent to the total value of the additional output produced. Such income creates additionl demand necessary for the sale of the additional output. Therefore the question of addition output not being sold does not arise.

Question 2.
Enumerate the assumptions and major aspects of classical theory of employment
Answer:
The classical theory of employment is based on the Say’s law of markets. The famous law of markets, propounded by the J.B Say states that “Supply creates its own demand”.

Assumptions :
The Say’s law is based on the following assumptions.

1. There is a free enterprise economy.
2. There is perfect competition in the economy.
3. There is no government interference in the functioning of the economy.
4. The equilibrium process is considered from the long term point of view.
5. All savings are automatically invested.
6. The interest rate is flexible.
7. The wage rate is flexible.
8. There are no limits to the expansion of the market.
9. Money acts as medium of exchange.

Aspects of Classical Theory :
The classical theory of employment can be discussed with three dimensions.

A) Goods Market Equilibrium :
The classical theory of employmet is based on the Say’s Law of Markets. The first part of Say’s market law explains the goods market equilibrium. The famous law of markets, propounded by the J.B. Say states that, “Supply creates its own demand”.

B) Money Market Equilibrium (Saving Investment Equilibrium) :
The goods market equilibrium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that the total income is spent. The classical economists agree that part of the income may be saved, but the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed that equality between savings and investment (S=I) is brought by the flexible rate of interest.

C) Labour Market Equilibrium :
Pigou’s Wage Cut Policy: According to the classical economists, unemployment may occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions or the interference of government. A.C. Pigou suggested that reduction in the wages will remove unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

Question 3.
Distinguish between aggregate supply price and aggregate demand price.
Answer:
Aggregate supply price: When an entrepreneur gives employment to certain amount of labour. It requires the use of other factors of production or inputs. All these inputs have to be paid remunerations. When all these are added what we get is the value of the output produced or the expenditure incurred to supply employment for a specific number of labourers. By selling the output the entrepreneurs must expect to receive atleast what they have spent. This is known as the “Aggregate supply price” of the output or level of employment. As the level of output increases with the level of employment, aggregate supply price also increases with every increase in the level of employment.

Aggregate demand price :
In Keynes theory the aggregate demand determines the level of employment. The aggregate demand price for a given output is the amount of money which the firms expect to receive from the sale of that output. Then aggregate demand will be equal to the sum of consumption (C) investment (I) and Government expenditure (G) for goods and services.
Therefore, Aggregate demand (AD) = C+ I + G.

As the level of employment rises, the total income of the community also rises and therefore the aggregate demand, price also increases.

Question 4.
Explain the criticism against the classical theory of employment
Answer:
The classical theory of employment came in for severe criticism from J.M. Keynes. The main points of criticism are as follows :

1. The assumption of full employment is unrealistic. It is rare phenomenon and not a normal features.
2. The wage cut policy is not a practical policy in modem times. The supply of labour is a function of money wage and not real wage. Trade unions would never accept any reduction in the money wage rate.
3. Equilibrium between savings and investment is not brought about by a flexible rate of interest. Infact, saving is a function of income and not interest.
4. The process of equilibrium between supply and demand is not realistic. Keynes commented the self adjusting mechanism doesn’t always operate.
5. Long run approach to the problem of unemployment is also not realistic. Keynes commented, “we are all dead in the long ran”. He considered unemployment as a short-run problem and offered immediate solution through his employment theory.
6. It is not correct to say that money is neutral. Money acts not only as a medium of exchange but also as a store of value. Money influences variables like consumption, investment and output.

Question 5.
Explain the concept of effective demand.
Answer:
Effective demand means where aggregate demand equals the aggregate supply. When aggregate demand is equal to aggregate supply the economy is in equilibrium. This can be shown in the table.

In the table when the level of employment is 14 lakh workers, aggregate demand price is equal to aggregate supply price i.e., 1700 crores. This can be shown in the following diagram.

In the above diagram aggregate demand price curve (AD) and the aggregate supply price curve (AS) interest each other at point Er It shows the equilibrium point. The equilibrium has been attained at ON₁ level of employment. It is assumed that ON₁ in the above diagram does not indicate full employment as the economy is having idle factors of production. So it is considered as under-employment equilibrium.

According to Keynes, to achieve full employment an upward shift of aggregate demand curve is required. This can be possible through government expenditure on goods and services supplied in the economy, whenever private entrepreneurs may not show interest to invest. With this the AD₁ curve (C + I) shift as AD₂ (C + I + G) at new point of effective demand E₂, where the economy reaches full employment level i.e., ONF.

Question 6.
What are the sources of public revenue? [Mar. ’16]
Answer:
Revenue received by the government from different sources is called public revenue. Public revenue is classified into two kinds.

1. Tax revenue
2. Non-Tax revenue.

1) Tax Revenue :
Revenue received through collection of taxes from the public is called tax revenue. Both the state and central government collect taxes as per their allocation in the constitution.

Taxes are two types.
a) Direct taxes:

1. Taxes on income and expenditure. Ex : Income tax, Corporate tax etc.
2. Taxes on property and capital assests. Ex: Wealth tax, Gift tax etc.

b) Indirect taxes :
Taxes levied on goods and services. Ex: Excise duty, Service tax.

2) Non – tax revenue :
Government receives revenue from sources other than taxes and such revenue is called non-tax revenue. They are :
a) Administrative revenue :
Government receives money for certain administrative services. Ex : License fee, Tuition fee etc.

b) Commercial revenue :
Modern governments establish public sector units to manufacture certain goods and offer certain services. The goods and services are exchanged for the price. So such units earn revenue by way of selling their products. Ex: Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals, Indian Railways, State Road Transport Corporations, Indian Air lines etc.

c) Loans and advances :
When the revenue received by the government from taxes and from the above non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. Modem government also taken loans from international financial institutions.

d) Grants-in-aid :
Grants are amount received without any condition of repayment. They are not repaid.
These are two types. 1. General grant, 2. Specific grant.

Question 7.
List out various items of public expenditure.
Answer:
Public expenditure is an important constituent of public finance. Modem governments spend money from various welfare activities. The expenditure incurred by the government on various economic activities is called public expenditure.

Governments incur expenditure on the following heads of accounts.

1. Defence
2. Internal security
3. Economic services
4. Social services
5. Other general services
6. Pensions
7. Subsidies
8. Grants to state governments
9. Grants to foreign governments
10. Loans to state governments
11. Loans to public enterprises
12. Loans to foreign governments
13. Repayment of loans
14. Assistance to states on natural calamities etc.

Question 8.
Point out the redemption methods of public debt. [Mar,’17]
Answer:
Repayment of debt by government is called redemption of public debt. Internal debt can be repaid in the domestic currency but foreign exchange is necessary to repay external debt.

Redemption of Public Debt:

The following are the methods of redemption of public debt.
1) Surplus Budgets :
Surplus budget means having public revenue in excess of public expenditure. If the government plans for a surplus budget, the excess revenue may be utilized to repay public debt.

2) Refunding :
Refunding implies the issue of fresh bonds and securities by the government so that the matured loans can be used for repayment of public debt.

3) Annuities :
By this method the government repays part of the public debt every year. Such annual payments are made regularly till the debt is completely cleared.

4) Sinking Fund :
By this method, the government creates a separate fund called ‘Sinking fund’ for the purpose of repaying public debt. A part of the public revenue is deposited into this fund every year so that public debt is repaid from the sinking fund. This is considered as the best method of redemption.

5) Conversion :
Conversion means that the existing loans are changed into new loans before the date of their maturity. This method is advantageous when the rate of interest charged on the new loans is less than the rate of interest to be paid on the existing loans.

Question 9.
What are the characteristics of federal finance? [Mar. ’17]
Answer:
Federal finance means the finance of the central government as well as the state governments and the relationship between the two. In a federal system of finance, all items of revenue and expenditure are divided among the central, state and local governments. All the three forms of government are free make expenditure on their respective heads and to get revenue from their respective sources.

Characteristics of a Federal Finance :
The following are some of the important characteristic features of federal finance :

1. In the federal finance, the sources of income and heads of expenditure are distributed between the central and state government according to the constitution. Their jurisdiction and rights are clearly defined in the constitution.
2. In the federal system the central government provides financial aid to states.
3. Although the state government have administered autonomy, yet they remain subordinate to the centre. No state is free to fall apart from central government on its own.
4. In case of any financial dispute arising between the central and the state governments, the solution thereof is sought according to the constitutional provisions. India with a federal form of government has a federal finance system.

Question 10.
Write a note on Finance Commission and its functions. [Mar. ’16]
Answer:
The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state. As per the Constitution, the commission is appointed for every five years and consists of a chairman, secretary and four other members. The first finance commission submitted its report in 1952.

The finance commission advises the President, what percentage of the income tax should be retained by the centre, and what principles should be adopted to distribute the divisible pool of the income tax among the states. Since the institution of the first finance commission, stark changes have occurred in the Indian economy causing changes in the macro economic scenario. This has led to major changes in the finance commission’s recommendations over the years. Till date, fourteen finance commissions have submitted their reports.

Functions of Finance Commission :
The functions of the finance commission can be explicitly stated as :

1. Distribution of net proceeds of taxes between centre and the states, to be divided as per their respective contributions to the taxes.
2. Determine factors governing grants-in aid to the states and the magnitude of the same.
3. To make recommendations to President as to the measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance commission.

Question 11.
Explain the budget deficits.
Answer:
Generally speaking, budget deficit arises when the total expenditure in the budget exceeds the total receipts (income). Technically there are four types of deficits with reference to a budget:
1) Revenue Deficit :
Revenue deficit arises when revenue expenditure exceeds revenue receipts.
Revenue deficit = revenue receipts – revenue expenditure.

2) Budget Deficit :
Budget deficit is the difference between the total receipts and the total expenditure.
Budget deficit = Total receipts – Total expenditure.

3) Fiscal Deficit :
Fiscal deficit is the difference between the total expenditure and the total revenue plus the market borrowings.
Fiscal deficit = (Total revenue – Total expenditure) + Market borrowings & Other liabilities.
(or)
Fiscal deficit = Budget deficit + Market borrowings and Other liabilities.

4) Primary Deficit :
Primary deficit is the fiscal deficit minus interest payments.
Primary deficit = Fiscal deficit – Interest payments.

Modem governments have been resorting to deficit budgets in order to meet the growing expenditure needs to finance for economic development. But it is not desirable to have large deficits, particularly fiscal deficit as it would have adverse effects on the economy.

Very Short Answer Questions

Question 1.
How do you explain the term classical economics?
Answer:
The term classical economics refers to the body of economic group which held their influence from the letter half of the 18th century to the early part of the 20th century. The most important principle of classicism are personal liberty. Private property and freedom of private enterprise.

Question 2.
What is Money Market Equilibrium?
Answer:
Money Market Equilibrium (Savings Investment Equilibrium) :
The goods market equilibrium leads to bring equilibrium in both money and labour markets. In the goods market, it is assumed that the total income is spent. The classical economists agree that part of the income may be saved, but the savings are gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed equality between savings and investment (S=I) is brought by the flexible rate of interest. This is explained in the Fig.

In diagram, savings and investment are measured on the OX axis and rate of interest is shown on the OY axis. Savings and investments are equal at Oi rate of interest where the curves intersect each other. Hence, Oi is the equilibrium rate of interest which will come to stay in the market. If any change in the demand for investment and supply of savings comes about, the curves will shift accordingly, and the equilibrium rate of interest will also change and further it brings savings and investment into equality. Thus, money market equilibrium can be automatically brought through the rate of interest flexibility.

Question 3.
What is Say’s law of markets?
Answer:
J.B Say a French economist advocated the famous ‘Law of markets’ on which the classical theory of employment is based. According to this law “supply creates its own demand”. According to this law whenever additional output is created. The factors of production which participate in that production receive incomes equal to that value of that output. This income would be spent either on consumption goods or on capital goods. Thus additional demand is created matching the additional supply.

Question 4.
Explain the functioning of market mechanism in the economy.
Answer:
Market mechanism is often interpreted as a ‘free’ market system. Productive efficiency, while allocate efficiency is only a feature of perfect competition. A mechanism is a mathematical structure that models institutions through which economic activity is guided and coordinated. They seek to do so in ways that economize on the resources needed to operate the institutions, and that provide incentives that induce the required behaviors.

1. No governmental intervention.
2. Consumer’s sovereignty : In market economy, consumers are sovereign.
3. Personal freedom and motives.
4. Personal property.
5. Perfect competition.

Question 5.
What do you mean by full employment?
Answer:
Full employment is a situation in which all those who are willing to work at the existing wage rate are engaged in work.

Question 6.
What is an Aggregate Demand Function?
Answer:
The schedule showing aggregate demand prices at different levels of employment in the economy is called as aggregate demand function.

Question 7.
What is the relationship between level of employment and Aggregate supply price?
Answer:
The schedule showing the aggregate supply price at different levels of employment is called the aggregate supply price.

Question 8.
What is Effective Demand?
Answer:
Effective demand is that aggregate demand which becomes equal to the aggregate supply. This refers to the aggregate demand at equilibrium.

Question 9.
What do you mean by Wage – cut policy? [Mar. ’17]
Answer:
Wage cut policy is one of the assumption of classical theory of employment which was started by “AC Pigou” who defended the classical theory and its full employment assumption. To Pigou and others the wage fund is given. The wage rate determined by dividing the wage fund with the number of workers. Pigou advocated a general cut in money wages in times of depression to restore full employment.

If there is a problem of unemployment in the economy. It is possible to solve this problem by reducing the money wages of the workers. This is known as “wage cut policy”.

Question 10.
Define public finance.
Answer:
It deals with the income and expenditure of the public authorities. (Central state and local government.

Question 11.
Differentiate tax revenue and non – tax revenue.
Answer:
Tax Revenues: Revenue received through collection of taxes from the public is called tax revenue. Both the central and state governments collect taxes as per their allocation in the constitution.
Broadly taxes are divided into two categories : (a) direct taxes, (b) indirect taxes.

2. Non – Tax revenue :
Government also receives revenue from sources other than taxes and such revenue is called the non – tax revenue. The sources of non – tax revenues are as follows :
a) Administrative Revenue
b) Commercial Revenue
c) Loan and advances
d) Grants – in – AID.

Question 12.
What is meant by Public expenditure?
Answer:
Public expenditure is an important constituent of public finance. Modem governments spend money perform various financiers. The expenditure incurred by the government on various economic activities is called public expenditure. For example, defence, internal security and economic services.

Question 13.
What is Public Debt?
Answer:
Public Debt :
When the government’s expanding expenditure on various activities exceeds its revenue it has one option i.e., is to go for public debt. A government can borrow funds rom various sources within the country or from abroad. This creates public debt. The instruments of public debt are in the form of various types of government bonds and securities.

Question 14.
What are the Debt Redemption methods.
Answer:
Redemption of Public Debt:
The following are the methods implemented for the redemption of public debt:

1. Surplus Budgets
2. Refunding
3. Annuities
4. Sinking Fund
5. Conversion
6. Additional taxation,
7. Capital Levey
8. Surplus in Balance of Trade.

Question 15.
What is capital levy?
Answer:
Capital Levy is a heavy one time tax on the capital assets and estates over and above a minimum limit of value. This means acquiring funds for debt redemption all at a time.

Question 16.
What is Federal Finance?
Answer:
Federal finance means the finance of all central government as well as the state governments and the relationship between the two. In a federal system of finance, all items of revenue and expenditure are divided among the central, state and local governments. All the three forms of government are free to make expenditure on their respective heads and to get revenue from their respective sources.

Question 17.
Mention the functions of Finance commission.
Answer:
The functions of the finance commission can be explicitly stated as :

1. Distribution of net proceeds of taxes between centre and the states, to be divided as per their respective contributions to the taxes.
2. Determine factors governing grants in aid to the states and the magnitude of the same.
3. To make recommendations to President as to the measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance commission.

Question 18.
What is budget?
Answer:
Budget is the annual statement showing the estimated receipts and expenditure of the government for a financial year in the budget. The budget estimates and revised estimates of the current financial year and actual expenditure of the preceding financial year are shown. .

Question 19.
What are the components of a budget?
Answer:
Components of the Budget :
The budget consists of both receipts (income) and expenditure of the government. The budget of the Government of India consists of two main components :
1. Budget Receipts :
a) Revenue Receipts :
This consists of tax revenue and non – tax revenue and

b) Capital Receipts :
This consists of recoveries of loans, other receipts and borrowings and other liabilities.

2. Budget Expenditure :
In the Union budget of India, the budget expenditure is classified into plan expenditure and non – plan expenditure. But, Central Government through its Union Budget 2017 – 18 abondoned plan and non – plan expenditure and replaced these items with Revenue Expenditure and Capital Expenditure.

Persual of the budget at a glance gives a vivid pitcture of the structure of the budget and its components as followed by the government of India in actual practice.

Question 20.
Distinguish between revenue account and capital account.
Answer:
Revenue account consists of the current transactions and includes value of transactions relating to export import travel expenses, insurance, investment, income etc. The capital account refers to the transactions of capital nature such as borrowing and lending of capital repayment of capital sale and purchase of shares and securities etc.

Question 21.
What is meant by Primary deficit?
Answer:
Primary deficit is the fiscal deficit minus the interest payments.

Question 22.
In deficit Budget desirable?
Answer:
Budget deficit is the difference between the total receipts and total expenditure.

Question 23.
What are the exclusive powers of union Government?
Answer:
Exclusive Powers of Union Government:
The subjects on whom the union government has the exclusive powers to levy taxes are : (a) customs duty, (b) corporation tax, (c) capital gains, (d) surcharge on income tax and (e) railway fares etc.

Question 24.
What is Fiscal deficit?
Answer:
Fiscal deficit is the difference between total revenue and total expenditure plus the market borrowings.

Fiscal deficit = (Total revenue – total expenditure) + Other borrowing and other liabilities.

Question 25.
What is the significance of vote on account budget?
Answer:
Vote on account is an interim budget presented for a few months pending presentation at the regular budget.

Question 26.
Write about Fourteenth Finance Commission.
Answer:
Fourteenth Finance Commission :
The First Finance Commission submitted its report in 1952. The Finance Commission advises the President about what percentage of the income tax should be retained by the centre, and what principles should be adopted to distribute the divisible pool of the income tax among the states. Since the institution of the First Finance Commission, stark changes have occurred in the Indian economy causing changes in the macroeconomic scenario. This has led to major changes in the Finance Commission’s recommendations over the years.

Hence, it has become necessary to have a glance at the Fourteenth Finance Commission’s (2015-2020) recommendations. The Committee specifically suggested the suitable measures so as to maintain a stable and sustainable fiscal environment in the country. The 14th Finance Commission was appointed on 2nd January 2013 under the Chairmanship of Y.VReddy, it has submitted its report 15th December 2014.

Question 27.
Write about Fifteenth Finance Commission.
Answer:
Fifteenth Finance Commission :
The Government of India appointed the Fifteenth Finance Commission on November 27, 2017 with N.K. Singh as Chairman. The recommendations of the Commission will cover the five year period 2020 – 25. The Commission has been asked to submit its report by October 30, 2019.

The Commission has been instructed to use the population data of 2011 census as the base for calculating the expenditure needs of various states. This is the first Commission which is required to present its recommandations in the post GST era.

Question 28.
Write in brief, about GST.
Answer:
GST :
Goods and Services Tax (GST) is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. the Act came into effect on 1st July 2017; GST is a comprehensive, multistage, destination-based tax that is levied on every value addition. In simple words, GST is an indirect tax levied on the supply of goods and services. Under this system four slabs are fixed for GST rates i.e., 5%, 12%, 18% and 28%.

Telangana TSBIE TS Inter 1st Year Economics Study Material 3rd Lesson Demand Analysis Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 3rd Lesson Demand Analysis

Long Answer Questions

Question 1.
What is a Demand Function? What are the factors that determine the demand for a good?
Answer:
The functional relationship between the demand for a commodity and its various determinants may be explained mathematically in terms of a demand function.
D_x = f(P_x, P₁ P_n, Y, T)
Where, D_x = Demand for good X;
P_x = price of X;
P₁ …. P_n = Prices of substitutes and complementaries
Y Income,
T = Taste of the consumer.

Determinants of demand:
1) Price of commodity :
The demand for any good depends on its price, more will be demanded at lower price and vice-versa.

2) Prices of substitutes and complementaries :
Demand is influenced by changes in price of related goods either substitutes or complementary goods.
Ex : Increase in the price of coffee leads an increase in the demand for tea in the case of substitutes positive relation and complementaries negative relationship between price and demand.

3) Income of the consumer :
Demand always changes with a change in the incomes of the people. When income increases the demand for several commodities increases and vice-versa.

4) Population :
A change in the size and composition of population will effect the demand for certain goods like food grains, clothes etc.

5) Taste and preferences :
A change in the taste and the fashions bring about a change in the demand for a commodity.

6) Technological changes :
Due to economic progress technological changes the quantity the quality of goods available to the consumers increase.
Ex : Demand for cell phones reduced the demand for landline phones.

7) Change in the weather :
Demand for commodity may change due to a change in climatic condition.
Ex : During summer demand for cool drinks, in winter demand for woollen clothes.

8) State of business :
During the period of prosperity, demand for commodities will expand and during depression demand will contract.

Question 2.
Explain the law of demand and examine its exceptions.
Answer:
Demand means a desire which is backed up by ability to buy and willingness to pay the price is called Demand in Economics. Thus demand will be always to a price and time. Demand has the following features.

1. Desire for the commodity.
2. Ability to buy the commodity.
3. Willing to pay the price of commodity.
4. Demand is always at a price.
5. Demand is per unit of time i.e., per day, week etc.

Therefore, the price demand may be expressed in the form of small equation.
D_x = f(P_x)

Price demand explains the relation between price and quantity demanded of a commodity. Price demand states that there is an inverse relationship between price and demand.

Law of demand :
Marshall defines the law of demand as, “The amount demanded increases with a fall in price and diminishes with a rise in price when other things remain the same”. So, the law of demand explains the inverse relationship between the price and quantity demanded of a commodity.

Demand schedule :
It means a list of the quantities demanded at various prices in a given period of time in a market. An imaginary example given below.

The table shows that as the price falls to ₹ 1/- the quantity demanded 50 units, when price ₹ 5/- he is buying 10 units. So, there is inverse relationship between price and demand. Price is low demand will be high and price is high demand will be low. We can illustrate the above schedule in a diagram.

In the above diagram on X-axis demand is shown and price is on Y-axis. DD is the demand curve. Demand curve slopes downwards from left to right.

Assumptions :

1. No change in the income of consumer.
2. The taste and preferences consumers remain same.
3. The prices of related goods remain the same.
4. New substitutes are not discovered.
5. No expectation of future price changes.

Exceptions :
In certain situations, more will be demanded at higher price and less will be demanded at a lower price. In such cases the demand curve slopes upward from left to right which is called an exceptional demand curve.

This can be shown in the following diagram.

In the diagram when price increases from OP to OP₁, demand also increases from OQ to OQ₁ This is opposite to law of demand.

1) Giffen’s Paradox :
This was stated by Sir Robert Giffen. He observed that poor people will demand more of inferior goods, if their prices rise. Inferior goods are known as Giffen goods.
Ex : Ragee, Jowar etc. He pointed out that in case of the English workers, the law of demand does not apply to bread. Giffen noticed that workers spend a major portion of their income on bread and only small portion on meat.

2) Veblen Effect (Prestigious goods) :
This exception was stated by Veblen. Costly goods like diamonds and precious stones are called prestige goods or veblen goods. Generally, rich people purchase those goods for the sake of prestige. Hence, rich people may buy more such goods when their prices rise.

3) Speculation :
When the price of a commodity rises the group of speculators expect that it will rise still further. Therefore, they buy more of that commodity. If they expect that there is a fall in price, the demand may not expand.
Ex : Shares in the stock market.

4) Illusion :
Sometimes, consumer develop to false idea that a high priced good will have a better quality instead of low priced good. If the price of such good falls, demand decreases, which is contrary to the law of demand.

Question 3.
Explain the concepts of income and cross demands with suitable diagrams.
Answer:
The concept of demand has great significance in economics. In general language, demand means a desire but in economics the desire backed up by ability to buy and willingness to pay the price.

Types of demands :
The demand may be classified into 3 types.

1. Price demand.
2. Income demand.
3. Cross demand.

1) Price demand :
Price demand explains the relationship between price and quantity demanded of a commodity it shows the inverse relationship between price and demand when the other things like consumer’s income, taste etc., remains constant. It means the price falls demand extends and price rises demand contracts. The price demand can be expressed D_x = f(P_x)

Price demand can be explained with the help of demand schedule.

As price falls to ₹ 1/- the quantity demand is 50 units, when price of apple is ₹ 5/- he is buying 10 units. So, the table shows inverse relationship between price and demand.

Price demand can be explained with the help of the demand curve.

On OX axis shows demand, OY axis shows price. We can obtain the demand curve ‘DD’ by joining all the points A, B, C, D, E which represents various quantities of demand at various prices. ‘DD’ is demand curve. It slopes downwards from left to right. It shows the inverse relationship between price and demand.

2) Income demand :
It explains the relationship between consumer’s income and various quantities of various levels of income assuming other factors like price of goods, related goods, taste etc., remain the same. It means if income increases quantity demand increases and vice-versa. This can be shown in the following form.
D_x = f(Y)

The functional relationship between income and demand may be inverse or direct depending on the nature of the commodity. This can be shown in the following table.

Superior goods :
In case of superior goods quantity demanded will increase when there is an increase in the income of consumers.

In the diagram ‘X’ axis represents demand, OY axis represents income, YD represents the income demand curve. It showing positive slope whenever income increased from OY to OY₁; the demand of superior or normal goods increases from OQ to OQ₁.

This may happen in case of Veblen goods.

Inferior goods :
On the contrary quantity demanded of inferior goods decreases with the increase in incomes of consumers.

In the diagram on ‘OX’ axis measures demand and OY axis represents income of the consumer. When the consumer income increases from OY to OY₁ the demand for a commodity decreases from OQ to OQ₁ So the YD’ curve is negative sloping.

3) Cross demand :
Cross demand refers to the relationship between any two goods which are either complementary to each other or substitute for each other. It explains the functional relationship between the price of one commodity and quantity demanded of another commodity is called cross demand.

D_x = f(P_y)
Where, D_x = demand for ‘X’ commodity
P_y = Price of ‘Y’ commodity
f = function

Substitutes :
The goods which satisfy the same want are called substitutes.
Ex: Tea and coffee; pepsi and coca-cola etc. In the case of substitutes, the demand curve has a positive slope.

In the diagram ‘OX’ axis represents demand of tea and OY axis represents price of coffee. Increase in the price of coffee from OY to OY₂ leads to increase in the demand of tea from OQ to OQ₂.

Complementaries :
In case of complementary goods, with the increase in price of one commodity, the quantity demanded of another commodity falls. Ex: Car and Petrol. Hence, the demand curve of these goods slopes downward to the right.

In the diagram, if price of car decreases from OP to OP₂ the quantity demand of petrol increases from OQ to OQ₂. So cross demand i.e., CD curve is downward sloped.

Question 4.
Define the concept of elasticity demand. Also explain income and cross elasticities of demand.
Answer:
The concept of elasticity demand was first introduced by Cournot and Mill. Later it was developed in a scientific manner by Marshall. Elasticity of demand means the degree of sensitiveness or responsiveness of demand to a change in its price.

According to Marshall, “The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price”.

The concept of elasticity of demand explains how much or to what extent a change in any one of the independent variables leads to change in the dependent variable.

There are three kinds of elasticity of demand.

1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand

1) Price Elasticity of Demand :
Alfred Marshall developed the concept of price elasticity of demand. Price elasticity of demand is generally defined as the degree of respon siveness or sensitiveness of demand for a commodity to the changes in its price. Thus, price elasticity of demand is the ratio of percentage change in quantity demanded of a good and percentage change in its price. The following formula to measure price elasticity of demand

where, q= quantity; p = price; ∆q = change in quantity demanded;
∆p = change in price.

There are five kinds of price elasticity of demand. They are :

1. Perfectly Elastic demand (Ed = ∝)
2. Perfectly Inelastic demand (Ed = 0)
3. Unitary Elastic demand (Ed = 1)
4. Relatively Elastic demand (Ed > 1)
5. Relatively Inelastic demand (Ed < 1)

2) Income Elasticity of Demand :
Income elasticity of demand shows the degree of responsiveness of quantity demanded of a commodity to a change in the income of the consumer, other things remain constant.

where, q = Quantity; y = income; ∆Q = change in quantity demanded;
∆y = change in income.

Income elasticity of demand will be positive in case of superior goods like milk and meat and negative in case of inferior goods like porridge and broken rice.

3) Cross Elasticity of Demand :
Cross elasticity of demand refers to change in the quantity demanded of one good in response to change in the price of related good, other things remaining constant. There are certain goods whose demand depend not only on their price but also on the prices of related goods.

Where, Q(x) = Quantity demanded for X; P(y) = price of commodity (Y), ∆Q(x) = change in quantity demanded of X commodity, ∆P(y) = change in price of commodity Y.

Substitute goods like tea and coffee have positive cross elasticity demand where as complementary goods like shoes and socks have negative cross elasticity of demand.

Question 5.
What is price elasticity of demand? Illustrate the various types of price elasticities of demand.
Answer:
Alfred Marshall developed the concept of price elasticity of demand. Price elasticity measures, other things remaining constant, change in the demanded of a good in response to a change in its price. Thus, price elasticity of demand is the ratio of percentage change in quantity demanded of a good and percentage change in its price. Price elasticity can be written as stated below.


Where, q = quantity; p = price; ∆q = change in demand; ∆p = change in price

Types of Price Elasticity of Demand : Based on numerical value, price elasticity of demand can be of five types.

1. Perfectly Elastic demand (Ed = ∞)
2. Perfectly Inelastic demand (Ed = 0)
3. Unitary Elastic demand (Ed = 1)
4. Relatively Elastic demand (Ed > 1)
5. Relatively Inelastic demand (Ed < 1)

1) Perfectly Elastic demand :
It is also known as “in-finite elastic demand”. A small change in price leads to an infinite change in demand is called perfectly elastic demand. It is horizontal straight line to ‘X’ axis. The numerical value of perfectly elastic demand is infinite (Ed = ∞). It can be shown in the diagram.

In the diagram, Ed = \(\frac{OQQ_1}{OQ}\) ÷ \(\frac{O}{OP}\)
\(\frac{QQ_1}{OQ}\) × \(\frac{OP}{O}\) = ∞

2) Perfectly Inelastic demand :
It is also known as “zero elastic demand”. In this case even a great rise or fall in price does not lead to any change in quantity demanded is known as perfectly inelastic demand. The demand curve will be vertical to the Y axis. The numerical value is ‘O’. This can be shown in the following diagram.

In the diagram, Ed = \(\frac{O}{OQ}\) ÷ \(\frac{PP_1}{OP}\) = 0
∴ Ed = 0

3) Unitary Elastic demand :
The percentage change in price leads to same percentage change in demand is called unitary elastic demand. In this case the elasticity of demand is equal to one. The shape of demand curve is “Rectangular Hyperbola”. This can be shown in the following.

In the diagram, Ed = OP₁Q₁ = OPQ
(or) OQ₁ = PP₁
∴ Ed = 1

4) Relatively Elastic demand :
When a percentage change in price leads to more than percentage change in quantity demand is called relatively elastic demand. In this case the numerical value of Ed is greater than one (Ed > 1)

In the diagram, Ed = OQ₁ > PP₁
∴ Ed > 1

5) Relatively Inelastic demand :
When the percentage change in price leads to a less than percentage change in quantity demand is called relatively inelastic demand. Here the numerical value is less than one (Ed < 1). This can be shown to following diagram.

In the diagram, Ed = QQ₁ < PP₁
∴ Ed < 1

Question 6.
Discuss the factors that determine price elasticity of demand.
Answer:
The term elasticity refers to the measure of extent of relationship between two related variables. The elasticity of demand is the measure of responsiveness or sensitiveness of demand for a commodity to the change in its demand.

Determinants of Elasticity of Demand :
The elasticity of demand varies from commodity to commodity.

1) Nature of Commodity :
Commodities can be grouped as necessaries, comforts and luxuries. In case of necessaries, the elasticity of demand will be inelastic.
Ex : Rice, salt etc. On the other hand in case of luxuries the demand will be more elastic.
Ex : Diamonds and gold etc.

2) Availability of Substitutes :
Prices of substitutes influence the demand for a commodity up to a certain extent. The closer the substitute, the greater the elasticity of demand for the commodity. Ex: Cool drinks, soaps etc., but in case of non-availability of substitutes the elasticity of demand will be low.

3) Complementary Goods :
Price elasticity for a good is also depends on the nature of price elasticity of jointly demand goods. If the demand for car is elastic, then the demand for petrol will also be elastic.

4) Multiple Uses of the Commodity :
The wider the range of alternative uses of a product, the higher the elasticity of demand and vice-versa.
Ex : Coal and electricity have multiple uses and will have elastic demand.

5) Proportion of Income Spent :
If proportion of income spent on commodity is very small, its demand will be less elastic and vice-versa.

6) Period of time :
In the long run, demand will be more elastic. Longer the time period considered, greater will be the possibility of substitution for a cheaper good.
Ex : If the price of petrol increases in the short run, it may not be possible to replace the petrol engines with diesel engines but in the long run it can be possible.

7) Price Level :
Goods which are in very high range or in very low range have inelastic demand but it is high at moderate price.

8) Habit :
The demand for a commodity to which the consumer is accustomed is generally inelastic.
Ex : Tobacco and alcohol.

9) Income Group :
The demand of higher income groups will be inelastic as they do not bother about price changes. On the other hand, the demand of middle and lower income groups will be elastic.

10) Postponement of Purchase :
The demand for a commodity, the consumption of which can be postponed is more elastic than that of the use of the commodity cannot be postpone the purchases of such goods like life saving medicines.

Question 7.
Describe the importance of price elasticity of demand.
Answer:
The term elasticity refers to the measure of extent of relationship between two related variables. The elasticity of demand is the measure of responsiveness or sensitiveness of demand for a commodity to the change in its demand.

Importance :
1) Useful to Monopolist :
Monopolist should study the elasticity of demand for his commodity before fixing up the price. Monopolist will fix a higher price when the commodity has inelastic demand, but he will fix a lower price when the commodity has elastic demand.

2) Useful to Joint Products :
It is useful in the price fixation of joint goods like meat and fur. In such case the producer will be guided by elasticity of demand to fix the prices of the joint goods.

3) Useful to the Government :
The concept of elasticity can be used in form using government policies relating public utility service like Railways, drug industry etc.

4) Useful to International Trade :
In calculating the terms of trade both countries have to take into account the mutual elasticities of demand for the products.

5) Useful to Finance Minister :
The concept of elasticity is useful to the Finance Minister in imposing taxes on goods. The finance minister studies the elasticity of commodities before he imposes new taxes or enhances old taxes.

6) Useful to Management :
Before asking for higher wages trade union leaders must know the elasticity of demand of the product produced by them. Trade union leaders may demand for higher wages only when the goods produced by them have inelastic demand.

7) Useful to Producers :
Volume of goods must be produced in accordance with demand for the commodity. Whenever, the demand for the commodity is inelastic, the producer will produce more commodities to take advantage of higher price. So, it helps in determining the volume of output.

Short Answer Questions

Question 1.
What are the factors that determine the demand?
Answer:
There are a number of factors that determine the demand for a good. The demand function shows the relationship between the demand and the factors that determine the demand for a good. The following are some of the important factors that determine demand :
1. Price of the Commodity :
The demand for a commodity is inversely related to its price. If the price of a commodity decreases its demand will increase and vice-versa. The demand for any good depends on its price being other things remaining constant. More quantity will be demanded at a lower price and vice-versa.

2. Prices of Substitutes and Complementaries :
Demand is also influenced by the changes in the prices of related goods i.e., either substitutes or complementaries. Prices of substitutes influence the demand for a commodity up to a certain extent. For instance, an increase in the price of coffee leads to an increase in the demand for tea. In case of substitutes, there exists a positive relationship between the price and the quantity demanded. Automobiles and fuel are complementary goods. In case of complementaries there exists a negative relationship between the price and the quantity demanded.

3. Income of the Consumer :
Income of the consumer is another important determinant. An increase in the income of a consumer leads to an increase in his purchasing power or quantity demanded. Being other things remaining constant, whenever the income of a consumer increases the demand for normal goods increases but the demand for inferior goods decreases.

4. Tastes and Preferences :
Demand for a commodity may change due to change in tastes, preferences and fashions. Tastes vary from person to person. Tastes do not remain the same forever. An increase in the use of trousers reduced the demand for dhotis due to change in fashions. Advertisements also influence the demand for a particular commodity.

5. Population :
Size of population of a country is another important determinant of demand. In other words, a change in the size of population will affect the demand for certain goods. For instance, larger the population more will be the demand for certain goods like food grains, clothes, housing etc.

6. Technological Changes :
Due to technical progress, new discoveries enter the market. As a result, old goods are substituted by new goods. For instance, increase in the demand for ‘cell phones’ reduced the demand for ‘land line’ phones.

7. Change in Weather :
Demand for a commodity may change due to a change in climatic conditions. For instance, during summer demand for cool drinks, cotton clothes and ACs increases. During winter demand for woolen clothes increases.

8. State of Business :
During the period of prosperity demand for commodities will expand and during depression demand will contract. Therefore, demand for goods depends on the state of business and economic activities.

Question 2.
Explain the Law of Demand.
Answer:
Demand means a desire which is backed up by ability to buy and willingness to pay the price is called demand in Economics. Thus, demand will be always to a price and time. Demand has the following features.

1. Desire for the commodity.
2. Ability to buy the commodity.
3. Willing to pay the price of commodity.
4. Demand is always at a price.
5. Demand is per unit of time i.e, per day, week etc.

Therefore the price demand may be expressed in the form of small equation.
D_x = f(Px)

Price demand explains the relation between price and quantity demanded of a commodity. Price demand states that there is an inverse relationship between price and demand.

Law of demand :
Marshall defines the law of demand as, “The amount demanded increases with a fall in price and diminishes with a rise in price when other things remain the same”. So, the law of demand explains the inverse relationship between the price and quantity demanded of a commodity.

Demand schedule :
It means a list of the quantities demanded at various prices in a given period of time in a market. An imaginary example is given below.

The table shows that as the price falls to ₹ 1/- the quantity demanded is 50 units, when price ₹ 5/- he is buying 10 units. So, there is inverse relationship between price and demand. Price is low demand will be high and price is high demand will be low. We can illustrate the above schedule in a diagram.

In the above diagram, on X-axis demand is shown and price is on Y-axis. DD is the demand curve. Demand curves slopes downward from left to right.

Assumptions :

1. No change in the income of consumer.
2. The taste and preferences of the consumers remain same.
3. The prices of related goods remain the same.
4. New substitutes are not discovered. ,
5. No expectation of future price changes.

Question 3.
Explain the exceptions of law of Demand.
Answer:
In Economics demand means a desire which is backed up by ability to buy and willingness to pay the price. Thus demand will be always at a price and time.

According to Marshall “The amount demanded increases with a fall in price and diminishes with rise in price when other things remain the same”.

Exceptions :
In certain situations, more will be demanded at higher price and less will be demanded at a lower price. In such cases the demand curve slopes upward from left to right which is called an exceptional demand curve. This can be shown in the following diagram.

In the diagram when price increases from OP to OP₁ demand also increases from OQ to OQ₁ This is opposite to law of demand.

1) Giffen’s Paradox :
This was stated by Sir Robert Giffen. He observed that poor people will demand more of inferior goods, if their prices rise. Inferior goods are known as Giffen goods.
Ex : Ragee, Jowar etc. He pointed out that in case of the English workers, the law of demand does not apply to bread. Giffen noticed that workers spent a major portion of their income on bread and only small portion on meat.

2) Veblen Effect (Prestigious goods) :
This exception was stated by Veblen. Costly goods like diamonds and precious stones are called prestige goods or veblen goods. Generally rich people purchase those goods for the sake of prestige. Hence, rich people may buy more such goods when their prices rise.

3) Speculation :
When the price of a commodity rises the group of speculators expect that it will rise still further. Therefore, they buy more of that commodity. If they expect that there is a fall in price, the demand may not expand.
Ex : Shares in the stock market.

4) Illusion :
Sometimes, consumer develop to false idea that a high priced good will have a better quality instead of low priced good. If the price of such good falls, demand decreases, which is contrary to the law of demand.

Question 4.
Illustrate the reasons for negative sloping demand curve.
Answer:
According to Marshall, “The amount demanded increases with a fall in price and diminishes with a rise in price when other things remain the same”.

The law of demand explains inverse relationship between the price and quantity demanded of a commodity. Therefore, the demand curve slopes downward from left to right.

There are some other reasons also responsible for downward sloping demand curve.
1) Old and New Buyers :
If the price of a good falls, the real income of the old buyers will increase. Hence, the demand for the good will increase. In the same way, the fall in price attracts new buyers and will be able to built after a fall in its price. So the demand curve slopes downwards from left to right.

2) Income Effect :
Fall in price of commodity the real income of its consumers increase. The increase in real income encourages demand for the commodity with reduced price. The increase in demand on account of increased in real income is known as income effect.

3) Substitution Effect :
When the price of commodity falls, it will become relatively cheaper than its substitutes. The increase in demand on account of increase in real income is known as income effect.

4) Law of Diminishing Marginal Utility :
According to this law, if consumer goes on consuming more units of the commodity, the additional utility goes on diminishing. Therefore, the consumer prefers to buy at a lower price. As a result the demand curve has a negative slope.

Question 5.
Discuss the concept of income demand.
Answer:
Income demand :
It explains the relationship between consumers income and various quantities of various levels of income assuming other factors like price of goods, related goods, taste etc; remain the same. It means if income increases quantity demand increases and viceversa. This can be shown in the following form.
D_x = f(Y)

The functional relationship between income and demand may be inverse or direct depending on the nature of the commodity. This can be shown in the following table.

Superior goods :
In case of superior goods quantity demanded will increase when there is an increase in the income of consumers.

In the diagram ‘X’ axis represents demand, OY axis represents income, YD represents the income demand curve. It is showing positive slope whenever income increased from OY to OYx, the demand of superior or normal goods increases from OQ to OQ₁

This may happen in case of Veblen goods.

Inferior goods :
On the contrary quantity demanded of inferior goods decreases with the increase in incomes of consumers.

In the diagram, on ’OX’ axis measures demand and OY axis represents income of the consumer. When the consumer income increases from OY to OY₁ the demand for a com-modity decreases from OQ to OQ₁ So the YD’ curve is negative sloping.

Question 6.
Explain the concept of Cross Demand.
Answer:
Cross demand :
Cross demand refers to the relationship between any two goods which are either complementary to each other or substitute for each other. It explains the functional relationship between the price of one commodity and quantity demanded of another commodity is called cross demand.
D_x = f(P_y)
Where, D_x = demand for ‘X’ commodity
P_y = Price of y commodity
f = function

Substitutes :
The goods which satisfy the same want are called substitutes.
Ex : Tea and coffee; pepsi and coca-cola etc. In the case of substitutes, the demand curve has a positive slope.

In the diagram ‘OX’ axis represents demand of tea and OY axis represents price of coffee. Increase in the price of coffee from OY to OY₂ leads to increase in the demand of tea from OQ to OQ₂.

Complementaries :
In case of complementary goods, with the increase in price of one commodity, the quantity demanded of another commodity falls.
Ex: Car and Petrol. Hence, the demand curve of these goods slopes downward to the right.

In the diagram if price of car decreases from OP to OP₂ the quantity demand of petrol increases from OQ to OQ₂. SO cross demand i.e., CD curve is downward sloping.

Question 7.
What is elasticity of demand?
Answer:
In Economic theory, the concept of elasticity of demand has a significant role. Elasticity of demand means the percentage change in quantity demanded in response to the percentage change in one of the variables on which demand depends.

Elasticity of demand changes from person to person, place to place, time to time and one commodity to another.

Accoridng to Marshall, “The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price”.

The concept of elasticity of demand explains how much or to what extent a change in any one of the independent variables leads to a change in the dependent variable.

There are three kinds of elasticity of demand.

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

Question 8.
Define Price Elasticity of demand.
Answer:
Price elasticity of demand is the responsiveness of quantity demanded of a good to a change in the price of that commodity. Alfred Marshall developed the concept of price elasticity of demand. A change in the price of a particular good will never bring uniform change in the quantity demanded.

Other things remaining constant, price elasticity measures the change in the quantity demanded of a good in response to a change in its price. Thus, price elasticity of demand is the ratio of percentage change in quantity demanded of a good and percentage change in its price.

Prof. Marshall suggested the following formula to measure price elasticity of demand.

Where, q = quantity; p = price;
∆q = change in demand; ∆p = change in price

It is to be noted that while calculating price elasticity of demand other things like income, prices of all related goods, tastes, preference etc. are assumed to be constant. It is also to be noted that price elasticity of demand is negative because of the inverse relationship between price and quantity demanded. For the sake of convenience or simplicity the minus sign is ignored and only the numerical value of the elasticity coefficient is considered.

Types of Price Elasticity of Demand :
If the price of a commodity increases, its quantity demanded will fall. The rate of change in demand is not always proportionate to the rate of change in price. For some commodities a smaller change in price leads to a greater change in quantity demanded. In such a case, the demand is elastic on the other hand, even a greater change in price may lead to only a smaller change in the quantity demanded. In such a case, we say that the demand is inelastic. The following are the types of elasticity of demand :

1. Perfectly Elastic demand (Ed = ∞)
2. Perfectly Inelastic demand (Ed = 0)
3. Unitary Elastic demand (Ed = 1)
4. Relatively Elastic demand (Ed > 1) and
5. Relatively Inelastic demand (Ed < 1).

Question 9.
What are the basic determinants of price elasticity of demand?
Answer:
It is not easy to say that the demand for a commodity is elastic or inelastic. Elasticity of demand for a commodity varies from person to person, place to place and time to time. Many factors determine the degree of elasticity. Among them, the following are some of the important factors on which elasticity of demand for a commodity depends.

1) Nature of the Commodity :
In case of necessaries, the elasticity of demand will be inelastic. For example, rice, pulses, sugar and salt. Though the prices of these necessaries change, the quantity demanded remains the same. On the other hand, in case of luxuries the demand is more elastic. Ex. demand for gold, diamonds and other costly goods are more elastic.

2) Availability of Close Substitutes :
Prices of substitutes influece the demand for a commodity up to a certain extent. For instance, an increase in the price of Colgate leads to an increase in the demand for Close Up and vice versa. In case where substitute are available the elasticity of demand will be high but in case of non-availability of substitutes the elasticity of demand will be low.

3) Complementary Goods :
Car and fuel or shoes and socks are used jointly because they are complementaries. For instance, if the price of car increases the demand for fuel decreases and if the price of car decreases the demand for fuel increases. If the demand of car is elastic, then the demand for petrol will also be elastic and viceversa.

4) Multiple Uses of the Commodity :
The more the possible uses of commodity the greater will be its price elasticity and vice versa. Let us illustrate with an example of milk which has several uses. If its price falls, it can be used for a variety of purposes like preparation of curd, cream, ghee and sweets. But if its price rises, its use will be restricted only to feed children and sick persons. Similarly, coal and electricity have multiple uses and will have elastic demand.

5) Postponement of Purchases :
One can certainly postpone the purchases of certain goods like vehicles, ornaments and AC units from present to furture as they have elastic demand. But in case of life saving medicines the demand wall be inelastic, as we cannot postpone the purchases of such goods even if the prices of medicines increase.

6) Proportion of Income Spent :
If the propotion of income spent On a particular commodity is very small, demand for it will tend to be inelastic. For instance, demand for salt, newspapers, match boxes etc. is inelastic. Others like ACs, vehicles etc. will have elastic demand because a major amount has to be allotted to purchase these goods.

7) Period of Time :
In the long run, demand will be more elastic. Longer the time period considered, greater will be the possibility of substitution for a cheaper good. For example, if the price of petrol increases in the short run, it may not be possible to replace the petrol engines with diesel engines but in the long run, it can be possible to replace petrol engines because diesel is now relatively cheaper.

8) Price Level :
If the price of a good is too high or too low, then the elasticity of demand for these goods will be inelastic. On the other hand, if the price is moderate, then the elasticity of demand of these goods will be elastic.

9) Goods Leading to Addiction :
In case of habit forming commodities like tobacco and alcohol, the demand for such goods will tend to be inelastic. Consumers who are accustomed to these goods will buy them even if the prices of these goods increase.

10) Income Group :
The economy consists of the various income groups. In general, the demand for major commodities purchased by higher income groups will be inelastic as they do not bother about price changes. On the other hand, the demand of middle and lower income groups will be elastic as they will be very sensitive to price changes.

Thus, it will be difficult to say whether a commodity has elastic or inelastic demand.

Question 10.
Point out the importance of price elasticity of demand.
Answer:
There are several uses of price elasticity of demand both for business and government particularly in decision making. The following are the some of the important areas where price elasticity of demand is useful.

1) Monopoly Market :
If the demand for a product has different elasticities in different markets, the producer can fix different prices in different markets. A monopolist will fix a higher price when the commodity has inelastic demand but he will fix a lower price when the commodity has elastic demand.

2) Joint Products :
The elasticity of demand is useful in the price fixation of joint goods like meat and fur, sugar and molasses etc. It is too difficult to ascertain separate costs of these joint goods. In such a case, the producer will be guided by elasticity of demand to fix the prices of joint goods. So, a higher price is fixed for a good with inelastic demand and lower price for a good with elastic demand.

3) Government :
The commodities of some industries have inelastic demand. Such industries are declared as ‘public utilities’. Keeping in view the welfare of the people, the government will undertake these industries which have inelastic demand. Railways is one of the best examples.

4) International Trade :
Trade between two countries is possible only by taking into consideration the mutual elasticities of demand for each other’s products. Terms of trade’ implies the rate at which one unit of domestic commodity will exchange for unit of a foreign commodity. In claculating the terms of trade, both countries have to take into account the mutual elasticities of demand for their products.

5) Ministry of Finance :
The government imposes taxes for revenue. While imposing taxes on commodities, the finance minister selects different goods based on their price elasticities. When the government is in need of more revenue it chooses those commodities which have inelastic demand for tax imposition.

6) Management :
If the demand for workers is inelastic, the demand of trade unions to rasie wages will be fruitful. If the demand for workers is elastic, the efforts of trade unions to raise wages may not be successful.

7) Prosperity in Midst of Plenty :
The concept of elasticity explains the paradox of poverty i.e., poverty in the midst of plenty. For instance, bumper crop of food grains should bring agricultural prosperity. But due to inelastic nature of food grains demand, the agricultural sector receives low prices for the produce.

8) Producers :
Volume of goods must be produced in accordance with demand for the commodity. Whenever the demand for the commodity is inelastic, the producer will produce more commodities to take advantage of higher price. Hence, elasticity of demand helps in determining the volume of output.

Question 11.
Describe the income and cross elasticities of demand.
Answer:
The income elasticity of demand and cross elasticity of demand are as follows.

Income Elasticity of Demand :
Income elasticity of demand shows the degree of re-sponsiveness of quantity demanded of a commodity to a change (increase or decrease) in the income of the consumer, other things remaining constant.

Where, q = quantity, y = income, ∆q = change in quantity demanded,
∆y = change in income.

Cross Elasticity of Demand :
Cross elasticity of demand refers to the change (increase or decrease) in the quantity demanded of a good in response to the change (increase or decrease) in the price of its related goods, other things remaining constant. There are certain goods whose demand depends not only on their price but also on the prices of related goods.

Where, Qx = quantity demanded for commodity x, Py = price of commodity Y, ∆Qx = change in quantity demanded for commodity X, and ∆Py = change in price of commodity Y.

Very Short Answer Questions

Question 1.
What is Price Demand?
Answer:
It explains the functional relationship between price of good and quantity demanded when the remaining factors are constant. It shows inverse relationship between price and demand.
D_x = f(P_x)
D_x = Demand for X commodity
P_x = Price of X

Question 2.
Prepare Individual Demand Schedule.
Answer:
It explains the relationship between various quantities purchased at various prices by a single consumer in the market.

Question 3.
Prepare Market Demand Schedule.
Answer:
It shows the total demand for a group at a particular time at different prices in the market.

Question 4.
What is Demand Function?
Answer:
Demand function shows the functional relationship between quantity demanded at various factors that determine the demand for a commodity. It can be expressed as follows.
D_x = f(P_x, P₁, …………. P_n, Y, T)
Where,
D_x = Demand for good X
P_x = price of X
Pi₁ …. P_n = Prices of substitutes and complementary
Y = Income of consumer
T = Tastes
f = functional relationship

Question 5.
Explain Giffen’s Paradox (or) Giffen Goods.
Answer:
It means necessary goods. Sir Robert Giffen in mid 19^th century observed that the low paid workers in England purchased more bread when its price increased by decreasing in the purchase of meat. The increase in demand for bread when price increased is an exception to the law of demand, it is known as Giffen’s Paradox.

Question 6.
Explain Veblen Goods (or) Prestigious Goods.
Answer:
This is associated with the name of T. Veblen. Costly goods like diamonds and cars are called Veblen goods. Generally rich people purchase those goods for the sake of prestige. Hence, rich people may buy more such goods when their prises rise.

Question 7.
What is Income Demand?
Answer:
It shows the direct relationship between the income of the consumer and quantity demanded when the other factors remain constant. There is direct relationship between income and demand for superior goods. Inverse relationship between income and demand for inferior goods.
D_x = f(Y)

Question 8.
What is Cross Demand?
Answer:
Cross demand refers to the relationship between any two goods which are either complementary to each other or substitute of each other at different prices.
D_x = f(P_y)

Question 9.
Explain Substitute goods.
Answer:
These are goods which satisfy the same want.
Ex : Tea and coffee. In this case the relationship between demand for a product and the price of its substitute is positive in its nature.

Question 10.
Explain Complementary Goods.
Answer:
These are goods which satisfy the same wants jointly.
Ex: Shoes and socks, car and petrol. The relationship between complementary goods is inverse.

Question 11.
What is Price Elasticity of Demand?
Answer:
It is the percentage change in quantity demanded of a commodity as a result of percentage change in price of a commodity.

Question 12.
What are the types of price elasticity of demand?
Answer:
If the price of a commodity increases, its quantity demanded will fall. The rate of change in demand is not always proportionate to the rate of change in price. For some commodities a smaller change in price leads to a greater change demand, here the demand is elastic. A greater change in price many lead to only a smaller change in quantity demanded, here the demand is inelastic. The following are the types of elasticity of demand.
a) Perfectly elastic demand.
b) Perfectly inelastic demand,
c) unitary elastic demand.
d) Relatively elastic demand,
e) Relatively inelastic demand.

Question 13.
Explain Income Elasticity of Demand.
Answer:
It is the percentage change in quantity demanded of a commodity as a result of percentage change in the income of the consumer.

Question 14.
Explain Cross Elasticity of Demand.
Answer:
It is the percentage change in the quantity demanded of a commodity as a result of proportional change in the price of related commodity.

Question 15.
What is Perfectly Elastic Demand?
Answer:
If a negligible change in price leads to an infinite change in demand is called perfectly elastic demand. In this case the demand curve is horizontal to ‘X’ axis.

Question 16.
What is Perfectly Inelastic Demand?
Answer:
Even a great rise or fall in price does not lead and change in quantity demanded is known as perfectly inelastic demand. The demand curve is vertical to ‘Y axis.

Question 17.
Explain Unitary Elastic Demand.
Answer:
The proportionate change in demand is equal to the proportionate change in price. In this case the demand curve will be a rectangular hyperbola.

Question 18.
Explain Relatively Elastic Demand.
Answer:
When a proportionate change in price leads to more than proportionate change in quantity demand is called relatively elastic demand.

Question 19.
Explain Relatively Inelastic Demand.
Answer:
When the proportionate change in price leads to a less than proportionate change in quantity demanded is called relatively inelastic demand.

Question 20.
Define Superior goods.
Answer:
In case of superior or normal goods, quantity demanded increases when there is an increase in the income of consumers. Income demand for superior goods exhibits a positive relationship between the income and quantity demanded. In such a case, the demand curve slopes upwards from left to right.

In figure OX-axis represents quantity demanded for superior goods and OY-axis rep-resents the income of the consumer. YD represents the income demand curve showing a positive slope. Whenever income increases from OY to OY₁ the quantity demanded of superior or normal goods increases from OQ to OQ₁ This may happen in case of Veblen goods.

Question 21.
Define Inferior Goods.
Answer:
The goods whose income elasticity of demand is negative for levels of income are termed as inferior goods. In case of inferior goods if income increases demand decreases and vice-versa. The income demand for inferior goods has a negative slope.

Telangana TSBIE TS Inter 1st Year Economics Study Material 7th Lesson National Income Analysis Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 7th Lesson National Income Analysis

Long Answer Questions

Question 1.
What are the various definitions of National Income? Describe the determining factors of National Income.
Answer:
National Income has been defined in a number of ways. National income is the total market value of all goods and services produced annually in a country. In other way, the total income accruing to a country from economic activities in a year’s time is called national income. It includes payments made to all factors of production in the form of rent, wages, interest and profits.

The definitions of national income can be divided into two classes. They are :
i) traditional definitions advocated by Marshall, Pigou and Fisher, and ii) modern definitions.

1) Marshall’s Definition :
According to Alfred Marshall, “the labour and capital of a country acting on its natural resources, produce annually a certain net aggregate of commodities, material and non-material including services of all kinds. This is the true net annual income or revenue of the country”. In this definition, the word ‘net’ refers to deduction of depreciation from the gross national income and to this income from abroad must be added.

2) Pigou’s Definition :
According to A. C.Pigou, “National Income is that part of the objective income of the community including of income derived from abroad which can be measured in money”. He has included that income which can be measured in terms of money. This definition is better than the Marshallian definition.

3) Fisher’s Definition :
Fisher adopted consumption as the criterion of national income. Marshall and Pigou regarded it as the production. According to Fisher, “the national income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Only the services rendered during this year are income”.

4) Kuznets’ Definition :
From the modem point of view, according to Kuznets, “national income is the net output of commodities and services flowing during the year from the country’s productive system into the hands of the ultimate consumers”.

Determining Factors of National income :
There are many factors that influence and determine the size of national income in a country. These factors are responsible for the differences in national income of various countries.

a) Natural Resources :
The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of national income.

b) Quality and Quantity of Factors of Production :
The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production.

c) State of Technology :
Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural resources.

d) Political Will and Stability :
Political will and stability in a country helps in planned economic development and for a faster growth of national income.

Question 2.
Define national income and explain the various concepts of National Income.
Answer:
National Income means the aggregate value of all the final goods and services produced in the economy in one year.

Concepts of National Income :
1) Gross National Product (GNP) :
It is the total value of all final goods and services produced in the economy in one year.

The main components of GNP are :

1. The goods and services purchased by consumers – C.
2. Investments made by public and private sectors -1.
3. Government expenditure on public utility services – G.
4. Income earned through International Trade (x – m).
5. Net factor income from abroad.

GNP at market prices = C + I- G + (x-m)+ Net factor income from abroad.

2) Gross Domestic Product (GDP) :
The market value of the total goods and services produced in a country in one particular period usually in a year is the GDP
GDP = C + I + G

3) Net National Product (NNP) :
Firms use continuously machines and tools for the production of goods and services. This result in a loss of value due to wear and tear of fixed capital. The loss suffered by fixed capital is called depreciation. When we substract depreciation from GNP we get NNP.
NNP = GNP – depreciation.

4) National Income at Factor Cost :
The cost of production of a good is equal to the rewards paid to the factors which participated in the production process. So the cost of production of a firm is the rent paid on land, wages paid to labour, interest paid on capital and profits of the entrepreneur.

National Income at factor cost = NNP + Subsidies – Indirect Taxes – Profits of Govt, owned firms.

5) Personal Income :
It is the total of incomes received by all persons from all sources in a specific time period. Personal income is not equal to National Income. Because social security payments. Corporate taxes, undistributed profits are deducted from national income and only the remaining is received by persons.

Personal Income = National Income at factor cost – Undistributed profits – Corporate taxes – Social security contributions + Transfer payments.

6) Disposable Income :
Personal income totally is not available for spending. Income tax is a payment which must be deducted to obtain disposable income.
Disposable Income = Personal income – Personal taxes D.I = Consumption + Savings

7) Per Capita Income :
National Income when divided by country’s population, we get per capita income.

The average standard of living of a country is indicated by per capita income.

Question 3.
What are the various methods of calculating national income? Explain them. [Mar.’17,’16]
Answer:
There are three methods of measuring National Income.

1. Output method or Product method.
2. Expenditure method.
3. Income method.

‘Carin cross’ says, National Income can be looked in any one of the three ways. As the national income measured by adding up everybody’s income by adding up everybody’s output and by adding up the value of all things that people buy and adding in their savings.

1) Output Method (Product Method) :
The market value of total goods and services produced in an economy in a year is considered for estimating National Income. In order to arrive at the value of the product services, the total goods and services produced are multiplied with their market prices.
Then, National Income = (P₁Q₁ + P₂Q₂ + …. P_nQ_n) – Depreciation – Indirect taxes + Net income from abroad.
Where P = Price
Q = Quantity
1, 2, 3 n = Commodities & Services

There is a possibility of double counting. Care must be taken to avoid this. Only final goods and services are taken to compute National Income but not the raw materials or intermediary goods. Estimation of the National Income through this method will indicate the contribution of different sectors, the growth trends in each sector and the sectors which are lagging behind.

2) Expenditure Method :
In this method, we add the personal consumption expenditure of households, expenditure of the firms, government purchase of goods and services net exports plus net income from abroad.
NI = EH + EF + EG + Net exports + Net income from abroad.
Here, National Income = Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation + Net exports + Net income from abroad
EH = Expenditure of households
EF = Expenditure of firms
EG = Expenditure of Government
Care should be taken to include spending or expenditure made on final goods and services only.

3) Income Method :
In this method, the income earned by all factors of production is aggregated to arrive at the National Income of a country. The four factors of production receives income in the form of wages, rent, interest and profits. This is also national income at factor cost.
NI = W + I + R + P + Net income from abroad
Where, NI = National income
W = Wages
I = Interest
R = Rent
P = Profits

This method gives us National Income according to distribution of shares.

Short Answer Questions

Question 1.
What are the factors that determine National Income? [Mar. ’17, ’16]
Answer:
National Income is the total market value of all goods and services produced in a country during a given period of time. There are many factors that influence and determine the size of national income of a country.

a) Natural Resources :
The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of National Income.

b) Quality and Quantity of Factors of Production :
The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production.

c) State of Technology :
Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural resources.

d) Political Will and Stability :
Political will and stability in a country helps in planned economic development and for a faster growth of National Income.

Question 2.
Explain the differences between gross national product at market prices and gross national product at factor prices.
Answer:
National income is the value of all final goods and services produced in a company in a year.

Gross National Product (GNP) :
Gross National Product is also known as the gross national product at market prices. Gross national product is the current market value of all final goods and services produced in a country during a year including net income from abroad.

The main components of GNP are :
a) The goods and services purchased by consumers (consumption – C).
b) Gross private domestic investment in capital goods (Investment -I)
c) Goods and services consumed by the government (Govt expenditure – G)
d) Net incomes earned through International trade (value of exports – value of imports, i.e., X-M).
GNP = C + I-G + (X-M).

GNP at Factor Cost :
Gross national product at factor cost is the sum of the money value produced by and accruing to the various factors of production in a year in a country. GNP at market prices includes wages, rent, interest, dividends, undistributed corporate profits, mixed incomes (profits of unincorporated business), direct taxes, indirect taxes, depreciation and net income from abroad. GNP at factor cost includes all items mentioned above in GNP at market prices less indirect taxes. GNP at market prices is always higher than GNP at factor cost. If there are any subsidies to the producers, then to get GNP at factor cost, subsidies are added to GNP at market prices.

GNP at factor cost = GNP at market prices = indirect taxes + subsidies.

Question 3.
What are National Income at market prices and National income at factor cost?
Answer:
National Income is the value of all the final goods and services produced in a year of a country.

National Product at Market Prices (NNP) :
The country’s stock of fixed capital undergoes certain amount of wear and tear in producing goods and services over a period of time. This ‘user cost’ or depreciation or charges for renewals and repairs must be substracted from the GNP at market prices to obtain net national product at market prices.

NNP at market prices = GNP at market prices – Depreciation.

National Product at Factor Cost :
It is aslo called as national income. It is the total income received by the four factors of production in the form of rent, wages, interest and profits in an economy during a year. NNP at market prices is not available for distribution among the factors of production. The amount of indirect taxes (which are included in the prices) are paid by the firms to the government and not to the factors of production. Similarly, the government gives subsidies to firms for production of certain types of goods and services and that part of the production cost is borne by the government. Hence, the goods are sold in the market at a lover price than the actual cost of production. Therefore, this volume of subsidies has to broded to the net national income at market prices. Thus,

NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies. In another way,

NNP at factor cost = GNP at market prices – Depreciation – Indirect taxes + Subsidies.

Question 4.
Discuss the three definitions of National Income.
Answer:
National Income has been defined in a number of ways. National income is the toted market value of all goods and services produced annually in a country. In other way, the total income accruing to a country from economic activities in a year’s time is called national income. It includes payments made to all factors of production in the form of rent, wages, interest and profits.

The definitions of national income can be divided into two classes. They are : i) traditional definitions advocated by Marshall Pigou and Fisher, and ii) modem definitions.

1) Marshall’s Definition :
According to Alfred Marshall, “the labour and capital of a country acting on its natural resources, produce annually a certain net aggregate of commodities, material and non-material including services of all kinds. This is the true net annual income or revenue of the country”. In this definition, the word ‘net’ refers to deduction of depreciation from the gross national income and to this income from abroad must be added.

2) Pigou’s Definition :
According to A.C.Pigou, “National Income is that part of the objective income of the community including of income derived from abroad which can be measured in money”. He has included that income which can be measured in terms of money. This definition is better than the Marshallian definition.

3) Fisher’s Definition :
Fisher adopted consumption as the criterion of national income. Marshall and Pigou regared it as the production. According to Fisher, “the national income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Only the services rendered during this year are income”.

Fisher definition is better than that of Marshall and Pigou. Because, Fisher’s definition has considered economic welfare which is depending on consumption and consumption represents standard of living.

But the definitions advocated by Marshall, pigou, and Fisher are not flawless. The Marshallian and Pigou’s definitions deal with the reasons for economic welfare. But Fisher’s definition is useful to compare economic welfare in different years.

Question 5.
How the per capita income is calculated? What is the relationship between population and per capita income.
Answer:
The per capita income is the average income of the people in a country in a particular year. It is calculated by dividing national income at current prices by population of the country in that year.

This refers to the measurement of per capita income at current prices. This concept is a good indicator of the average income and the standard of living in a country. But it is not reliable because actual income may be more or may be less when compared to the average income.

This per capita income will also be measured at constant prices and so we get real per capita income. By dividing real national income in a particular year by population of that year we will get real per capita income for that year.

Relationship Between Per Capita Income and Population :
There is a close relationship between national income and population. These two together determine the per capita income. If rate of growth of national income is 6% and rate of growth of population is 3% the rate of growth of per capita income will be 3% and it can be expressed as follows :
g_pc = g_ni – g_p
where,
g_pc = Growth rate of per capita income
g_ni = Growth rate of national income
g_p = Growth rate of population

A rise in the per capita income indicates a rise in standard of living. The rise in per capita income is possible only when the rate of growth of population is less than the rate of growth of that national income.

Relationship among National Income Concepts
NIA = Net Income from Abroad
D = Depreciation
ID = Indirect Taxes
Sub = Subsidies
UP = Undistributed Profits
CT = Corporate Taxes
TrH = Transfers received by Households
PTP = Personal Tax Payments
PTP = Gross Domestic Product
GDP = Gross National Product
In fig. we have presented the relation between the various concepts of national income.

Question 6.
Analyse any two methods of measuring National income.
Answer:
There are three methods of measuring National Income. These are :

1. Output method or Product method
2. Income method, and
3. Expenditure method

CaimCross says, “National Income can be looked in any one of the three ways, as the national income measured by adding up everybody’s output by adding up everybody’s income and by adding up the value of all things that people buy and adding in their savings.

1) Output Method or Product Method :
It is also known as inventory method or commodity service method. In this method we find the the market value of all final goods and services produced in a country in a year. The entire output of fined goods and services are multiplied by their respective market prices to find out the gross national product.

GNP = (P₁Q₁ + P₂Q₂ + …. P_nQ_n) + Net income from abroad.
Where, GNP == gross national product,
P = Price of the goods or services
Q = Quantity of goods or services produced
1,2, 3 n are the various goods and services produced.

The values of the intermediary goods and services should not be included. Only final goods and services should be taken into account. Here, we find out the value of output by the different sectors like agriculture, government, professionals, industry.

2) Income method :
In this method, the incomes earned by all factors of production are aggregated to arrive at the National Income of a country. The four factors of production receives income in the form of wages, rent, interest and profits. Incomes in the form of transfer payment is not included in it. This is also known as national income at factor cost.
NI = R + W + I + P
NI = National income
W = Wages R Rent
I = Interest
P = Profits

Very Short Answer Questions

Question 1.
What is National Income?
Answer:
National income is the market value of goods and services produced annually in a country.

Question 2.
Mention the factors that determine National Income.
Answer:
There are many factors that influence and determine the size of national income in a country. These factors are responsible for the differences in national income of various countries.

a) Natural Resources :
The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of national income.

b) Quality and Quantity of Factors of Production :
The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production. For example, the quantity of agricultural production and hence, the size of National income.

c) State of Technology :
Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural resources.

d) Political Will and Stability :
Political will and stability in a country helps for planned economic development for a faster growth of national income.

Question 3.
Explain the concept of GNP (Gross National Product).
Answer:
It is the total value of all final goods and services produced in the economy in one year.
GNP = C + I + G + (x-m) where,
C = Consumption
I = Gross National Investment
G = Government Expenditure
X = Exports
M = Imports
x – m = Net foreign trade.

Question 4.
What is Net National Product at factor cost?
Answer:
It is aslo called as national income. It is the total income received by the four factors of production in the form of rent, wages, interest and profits in an economy during a year. NNP at market prices is not available for distribution among the factors of production. The amount of indirect taxes (which are included in the prices) are paid by the firms to the government and not to the factors of production. Similarly, the government gives subsidies to firms for production of certain types of goods and services and that part of the production cost is borne by the government. Hence, the goods are sold in the market at a lower price than the actual cost of production. Therefore, this volume of subsidies has to be added to the net national income at market prices. Thus,

NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies. In another way,

NNP at factor cost = GNP at market prices – Depreciation-Indirect taxes + Subsidies.

Question 5.
What is Personal Income?
Answer:
It is the total of income received by all persons in a year before payment of all direct taxes. The whole of National Income is not availabe to them. Corporate taxes have to be paid by firms. Firms may keep a part of its profits for expansion. Salaried employees may make contributions for social security. Hence,

PI = NI(NNP at factor cost) – (Undistributed corporate profits + Corporate taxes + Social security payments) + Transfer earnings

Question 6.
What are subsidies?
Answer:
A subsidy or government incentive is a form of financial aid or support extended to an economic sector generally with the aim of promoting economic and social policy ………….. consumer/ consumption subsidies. Commonly reduce the price of goods and services to the consumer.

Question 7.
What is Real Per Capita Income ? [Mar. ’17, ’16]
Answer:
Real National Income when divided by country’s population, percapita income is obtained.

The average standard of living of country is indicated by per capita income.

Question 8.
What are the components of National Income?
Answer:
These are the four components of National Income.
a) Consumption (C) :
It is the total expenditure made by households on goods and services. It depends on the level of income.

b) Investment (I) :
It include expenditure on capital goods and machinery, roadways, bridges etc.

c) Government Expenditure (G) :
It is the expenditure made by the government on infrastructural facilities for the use of society.

d) Net Foreign Income :
It is the income earned by a country through international trade.

Question 9.
What is income method of measuring National Income?
Answer:
The value of all final goods and services produced in a country in a year is known as National Income.

Difficulties in Measurement National Income :
Following are the some of the difficulties we face while measuring national income.

1. Many of the products pass through a number of stages before these are purchased. If these are counted at every stage double counting will be there.
2. Goods and services rendered free of charge are not included in the gross national product (GNP). But all these will enhance the welfare of the consumers.
3. Income earned through illegal activities is not included in the gross national product (GNP). But this is also the cause for economic welfare.
4. Goods meant for self consumption are not included in the national income and its result is under estimation of national income.
5. Services of house wives – unpaid services – are not taken into consideration. Therefore, the national income is underestmated.
6. In order to get net national product, depreciation is deducted from gross national product. Thus, depreciation lowers the national income.

Question 10.
How National Income is estimated in India?
Answer:
After independence the Government of India appointed a National Income Estimates Committee in the year 1949, Under the chairmanship of Sri PC. Mahalanobis to claculate the national income of India. At present the Central Statistical Organization (CSO) has been entrusted with the responsibility of preparing national income estimates.

The CSO has divided the Indian economy into 13 sectors and grouped them under five heads. They are :

1. Primary Sector.
2. Secondry Sector.
3. Transport, Communication and Trade.
4. Finance and Real Estate.
5. Community and Personal Services.

Question 11.
Distinguish between Per Capita Income and National Income.
Answer:
Per Capital Income National Income
Per capita income is the average income of people in a country in a particular year. National income is the market value of goods and services produced annually in a country.

Question 12.
What are transfer payments? Give examples.
Answer:
The government may provide social security allowances like pensions, unemployment allowances, scholarships etc. These are incomes for some sections of the society even though no productive services are made by them. These are called transfer payments.

Question 13.
What is the importance of National income estimations?
Answer:
Importance of national income estimations :

1. The national income estimates or statistics are very important for preparing economic plans and for framing national economic policies.
2. The national income data are useful in research and distribution of income in the country.
3. It enables us to assess the performance of each sector in the economy and inter-relationship among the sectors.
4. It is more useful in making budgetory allocations.
5. It gives us an idea of the standard of living in the country.

Question 14.
Expand C.S.O. What is its responsibility?
Answer:
C.S.O. is the Central Statistical Organisation and Responsibility for preparing national income estimates.

Question 15.
What is Depreciation?
Answer:
Firms use continuously machines and tools for the production of goods and services. This results in a loss of value due to the wear and tear of fixed capital. This loss suffered by fixed capital is called depreciation.

Telangana TSBIE TS Inter 1st Year Political Science Study Material 12th Lesson Forms of Governments Textbook Questions and Answers.

TS Inter 1st Year Political Science Study Material 12th Lesson Forms of Governments

Long Answer Questions

Question 1.
What is Unitary form of Government? Explain its features.
Answer:
In the Unitary Government the entire power of the government is vesed with the central government only.

A.V Dicey :
‘Unitary government is one in which the central power habitually exercises the supreme Legislature authority’.

Herman Finer :
Unitary government is one in which all powers and authorities are lodged with a centre whose will and agents are legally omnipotent over the whole area’.

J.W. Gamer :
Unitary government is one in which the whole power of the government is conferred by the constitution upon a single central organ from which the local governments derive their authority7′.

Features of Unitary Government:
a) Centralization of powers :
In unitary system, all powers are centralized in the hands of the central government and only centre is the reservoir of all state powers.

b) Provincial governments :
In unitary states, local/provincial governments are created and given power by the central governments. A provincial government directs their powers always derived from the central government. Ex. England.

c) Flexible constitution :
The central government alone has the power to amend the constitution and in this sense the constitution of a unitary state is always flexible like England.

d) Simple uniform administration :
The existence of an all-powerful government exercising power over all the people and places leads to the existence of simple, state and strong administration or the whole state.

e) Single citizenship :
In a unitary government, there is only single citizenship – the citizenship of the whole country. No provincial citizenship is given to its people.

Question 2.
What is Federal Government? Examine its Characteristics.
Answer:
The term, federation is derived from Latin word ’Foedus’ meaning treaty or agreement. A federal polity comes into existence, either as a result of centripetal or centrifugal forces. The instrument by which a federation is brought about by the nature of a treaty or agreement between independent states and the new units of government, national or central which they agree to create. A new federal state is thus created to which sovereign states surrender their sovereignty and agree to become its component parts, for example, United States of America, Australia, India, Canada, etc.

Definitions of Federal Government :
Several political scholars have defined federation in different ways. Some definitions are the following.

Montesquieu :
Federation is a convention by which several parties agree to become members of larger on which they intend to establish’.

Herman Finer :
‘Federal states are one in which part of the authority and powers are vested in the local areas while another part is vested in a central institution deliberately constituted by an association of the local areas’.

A.V. Dicey :
‘A federal state is a political set-up intended to reconcile national unity and powers with the maintenance of state sights’.

J. W. Gamer :
‘Federal government is a system in which the totally of government power is divided and distributed between the centre and the states by the national constitution’.

K. C. Wheare :
A Federal government is a method of dividing power. So that the regional and central government independent’.

Features of Federal Government:
a) Written Constitution :
For a federal government the constitution must almost necessarily be a written constitution which determines the relation between the central and provincial/regional governments.

b) Rigid Constitution :
The natural corollary of the supremacy of the constitution and it being a written document, is that it should not be altered either by the central Legislatures.or by Regional Legislatures under their ordinary law-making procedure.

c) Division of powers :
In a federal political system, there is an essential feature of distribution of powers between central and regional governments under the constitution. Major sectors are vested with union/central and National and Provincial important things are vested with regional governments. For example, external affairs, exports and ports and education, agriculture health are exercised by union and state governments respectively.

d) Bicameralism :
Bicameralism is another important character of the federal government. In federal government, there should be Two-Chambers, representing people and states such as House of people and House states respectively.

e) Dual citizenship :
In a federal political system, constitution provides for dual citizenship to the citizens. Accordingly, the citizens have membership in both the centre and states simultaneously.

f) Independent Judiciary :
In a federal political system, independence of judiciary and intensity of judicial system is another important feature. Independence of judiciary will safeguard the minimum rights of people against the acts of Legislature and administrative authorities.

Question 3.
What is presidential form of Government? Discuss its features.
Answer:
Under the presidential system, the Legislature and executive are two distinct departments of the government. There is more or less a separation between the two. The head of the state, the president, is real executive both as a Matter of law and fact and such power is the result of a direct grant from the constituent authority effected through express promises of the constitution.

Features of the Presidential Government :
a) President as Head of the state and government :
In a presidential government, president serves as the head of the state and government. He enjoys all the executive powers in practice. He implements the decisions and programmes of the government with the help of secretaries.

b) Separation of Legislature from the Executive :
In this form of government executive and Legislature are separate and independent of each other and do not interfere in the jurisdiction of each other.

c) Election/Head of the state and government :
Presidential executive, is not hereditary or nominated by the Legislature, but is elected by the people.

d) Impeachment of the President :
The removal by the impeachment is provided according to constitution, in case he is held guilty of violating, the oath of office. Usually, the power of impeachment is given to the legislature.

e) Checks and balances :
In a presidential government, there is another important feature that is, the principle of ‘checks and balances’. In presidential system, every organ enjoys autonomy and exercise powers independently. At the same time, every organ acts as a check against the excessive authority of the other organ. The legislature must give its consent to all decisions of the president and president must give his approval to the all decisions of the legislature. At the same time, judiciary reviews all constitutional cases and interprets them.

Question 4.
What is Parliamentary form of government?
Answer:
In a parliamentary system a clear distinction is made between the head of the state and the head of the Government here, the head of the state King or Queen in Britain or President of India, possesses nominal or titular authority whereas real authority rests with the government of which Prime Minister is the head. Example : Australia, Canada, Japan etc.

Parliamentary form of government as a system in which the real executive, the cabinet, is immediately and legally responsible to the Legislature for its political policies and acts, ultimately responsible to the electorate.

Features of Parliamentary Governments :
a) Nominal and Real executives :
In parliamentary form of government there should be two kinds Of executive in the Political system one of them, National Executive is the Head of the state and other one is real executive, Head of the government is president and Head of the government is the Prime Ministers.

b) Co-ordination between the Legislature and executive :
Another important feature among, is that, there is a close relationship and co-ordination between legislature and executive bodies of the government. The executive members are selected from the Legislature and so executive remained as responsible for the Legislature for all its acts.

c) Significant role of the prime minister :
In parliamentary form of government, the prime minister holds the real executive authority. He holds the government as comer stone. He has the authority to from the council of ministers and also has right to reshuffle and dissolve the government.

d) Collective responsibility :
The most important feature of the parliamentary government works on the principle of collective responsibility. It means the ministers enjoy the office only as long as they have confidence of the parliament.

e) Individual responsibility :
In a parliamentary government, every minister is individually responsible to the Legislature for the efficient conduct of his department or office. In case there is any lapse in the administration, the ministers are personal answerable to parliament.

f) Dissolution of Lower House :
The head of the state can dissolve the lower house on the recommendation of the prime minister. If deadlock rises between cabinet and Legislature they can appeal to the electorate through elections.

g) Effective opposition :
In a parliamentary form of government opposition party is considered as soul of the democracy. If the ruling party loses its confidence in the Legislature, opposition party is the alternative to form a government and it works against ruling party through questioning the acts.

Short Answer Questions

Question 1.
Write a note on merits and demerits of Unitary form of Government.
Answer:
Merits of Unitary Government:
a) Powerful Administration :
In unitary government, all the powers of the government are vested in the hands of central government. It helps to take decisions fast and work timely and to maintain internal peace, laws and order.

b) Simple and less Expressive :
The unitary system of government easy and less in expressive for administration.

c) Flexible in Administration :
The administration of a unitary state is flexible and can easily adapt itself to the changing social needs and environment. Because it can amend the constitution as and when required.

d) Suitable for small states :
unitary form of government as it is simple and less expressive suitable for smalls states.

e) Quick decisions :
It can be very useful in meeting emergencies. Being a unitary governments, is provincial in nature and can take all necessary decisions quickly and implement with full force.

f) National integration :
In unitary government, there is a simple citizenship which shows no discrimination among its people and helps to national unity integrity and solidarity among its people.

Demerits of the Unitary Government:
a) Fascist Powers :
In unitary government, all powers are vested with single government and there is a scope for Fascist or dictatorial attitude.

b) Centralization of administration :
In unitary government, all powers are concen-trated with the single government and no scope for distribution of powers between union and provincial government and it leads to more burden on the central government to manage whole nation.

c) Unsuitable for Larger States :
unitary governments are suitable for smaller states whereas it is not suitable for larger state which has vast land larger population. Because such states have multi religions, racial and cultural people and unitary government cannot tackle with such society.

d) Neglect of local initiatives :
In unitary governments with centralization of powers and with sanctioning of limited powers to provincial governments, it discourages local governments from making their own policies.

e) Scope for growth of inefficiency :
In unitary government, with centralization of powers, each and every aspect of the society should be administered by the single administrative unit and it leads to inefficiency in providing provisions for its people.

Question 2.
Explain the merits and demerits of Parliamentary form of Government.
Answer:
Merits of Parliamentary Government:
a) Harmony and co-ordination between Legislature and executive :
In a parliamentary government, it secures co-operation and co-ordination from the Legislature because it was formed with the single majority party from Legislature. It enacts laws and implementing laws through taking confidence of legislators.

b) A Scrub on Autocracy :
Parliamentary government effectively checks the despotic attitude of the majority party in the lower house of the Legislature. Legislators prevent the government from the making mistakes against public interest through its questioning and a vote of no-confidence in the other motions.

c) Governmentally Able and Experienced :
In a parliamentary government, Government should be consisted with the top leaders of the majority party. Able and experienced people from the party have a hold on the party and government.

d) Responsible Government :
In a parliamentary from a government, council of ministers along with prime minister hold the offices and enjoys the powers and acts on the collective responsibility to the Legislature. In a parliamentary system, opposition party controls the ruling party through its vigilance in the outside of the Legislature.

e) Flexible Government :
Flexibility is another merit of the parliamentary from of a government, according to Bagehot, under this government; the people can choose a ruler for the occasion who may be especially qualified to successfully pilot the ship of the state through motional crisis.

f) Alternative to Government :
Parliamentary system is in the real sense a government by criticism. The majority from the government the majority continues the opposition. The opposition must criticises the government. The lapses of the government are its opportunities and ruling party lost confidence opposition party is ready to hold the office.

Demerits of the Parliamentary Government:
a) Unstable Government :
The government has no fixed life. It remains in office only so long as it can retain parliamentary majority which is sentient to the vagaries of the represent actives.

b) Violation of the theory of separation of powers :
In a parliamentary of government, there is a combination of executive and Legislature functions in the same set of individuals lead to tramp while the same men may be at one members of the Legislature and the executive, their functions in the two roles are distinct but in political experience, they worked in no distinction.

c) Executive becomes Autocratic / tyranny of majority :
When the executive is confident of support by majority members in the Legislation, at is likely to become autocratic. The opposition feels helpless in correcting the erratic behaviour of the government because all decisions taken on the basis of voting.

d) Unsuitable for emergencies :
A national crisis cannot meet with promptness in parliamentary government because much of tis time wasted in discussions. Get emergency needs prompt action, while taking decisions, be fear of the opposition and the masses at large.

e) Bureaucratic Dictatorship :
In a parliamentary government, bureaucracy becomes unduly important. The ministers being amateurs heavily rely on bureaucratise for everything.

f) National Interests ignored :
In a parliamentary government, political parties often gnore the interests of the nation for the sake of interest of the party in power. All national aspects are divided in the interest of the party only.

Despite all there defects, parliamentary government is very popular. It is considered more democratic and a true reflection of the public opinion.

Question 3.
Discuss the merits and demerits of Federal form of Government.
Answer:
a) Scope for unity in diversity :
The federal government, there is scope for achieving unity in diversity. It is very essential to the multireligions, multicultural and multilinguistic societies.

b) Against Dictatorship :
In the federal political system, there is a scope for preventing the rise of a single despotism, check the growth of bureaucratic authority and conserves the political liberties of people.

c) Less-burden on the centre :
In federal political system, there is distribution of powers between centre and state governments, according to the constitution and each discharges its duties accordingly. So, it decreases the burden upon the central govemment while executing its functions.

d) Scope for New Political experiments :
In a federal political system, regional gov-ernments will introduce new policies / and programmes and make experiments for the development of socio-economic spheres of the society.

e) Suitable for larger states :
Federation is said to be the only form of government which is suitable for vast or larger area states. Larger states can be administered with the constitutional distribution of powers between central and state governments.

f) Leads to efficient Administration :
In a federal form of governments, powers and functions are transferred to the local / state governments. As a result, with the limited subjects, centre can work efficiently and it has scope for concentrating on all important national interests.

Demerits of Federal Government:
a) Weak central government :
Federal government is a weak government due to dis-tribution of powers between the centre and state governments. Regional or provincial governments demand the centre for their regional cause.

b) Lack of uniform laws :
In a federal government, there is a chance to adopt different laws by federal and state governments. Laws passed by the various provincial governments are complex in nature. It leads to controversy between federal and state governments, or among state governments.

c) Controversies and dispute :
In federal political system, there is a distribution of subjects between centre and state governments. When it comes to the concurrent list, centre and state governments try to escape from their duties and subjects remain unimplemented or unfulfilled.

d) Expensive mechanism :
In federal political system, there are two sets of govern-ments, i.e., federal government at centre level and provincial government at regional level. It is more expensive to establish infrastructure of administrative units and re-cruitment and maintenance of bureaucracy.

e) Fear of Disintegration :
In federal political system, federal state itself is formed through treaty of federation or confederation. There is no certainity of sustainability of federation which stands upon the willingness of the provinces / states. For examples U.S.A. experienced such fear in 1882, USSR disintegrated and several states like Latin America, Balkan states faced such problems.

Question 4.
Distinguish between unitary and Federal form of Government.
Answer:
Distinction between Unitary and Federal Governments :

Question 5.
Write a Note on Presidential form of Government.
Answer:
Presidential government is one in which the Executive is not responsible to the legislature for its acts. It is also known as single Executive government. Fixed Tenure government and Non- responsible government. Under this system a single person, namely, the President exercises all executive powers. The President as well as the Legislators assume their office and continue in power for a prescribed tenure as stipulated in the constitution.

The President is directly elected by the people who form into an Electoral college. “Further the president or the legislators are not responsible to others in exercise of their Powers and Functions. This system is based on the theory of separation of powers as proposed by Montesquieu. The United States of America is a classical example of this system. We also find this system in several Latin American and African countries like Argentina, Bolivia, Chile, Congo, Mexico, Peru, Peruguay, Uganda, Zaire, etc.

Prof. Garner defined presidential government as “one in which the executive is constitutionally Independent of Legislature in respect of its duration of tenure and political policies”.

Question 6.
Examine the differences between presidential and parliamentary form of government.
Answer:

Question 7.
Explain the merits and demerits of presidential form of government.
Answer:
Merits of Presidential Government:
a) More democratic :
In a presidential form of government, it is said to be more democratic because of two principles of checks and balances. Every decision of executive and legislature checked by the judiciary and they can be interpreted by the judiciary.

b) Stable government :
In presidential system, the president is elected for a fixed tenure. He cannot be removed by ordinary process of law making. There is a special procedure of impeachment in the constitution for the removal of the president.

c) Efficient governance :
The presidential executive can take decisions with energetic promptitude. Power is concentrated in the hands of the executive so it can take decisions and works promptly.

d) Responsibility for Popular :
In a presidential government, real executive is president and he retains its representative character and president is never responsible for legislature and always president is responsible for the people.

e) Independent legislature :
Since the legislature cannot be controlled by the executive it can be more independent. The members of the legislature are not required to adopt the line of the party ideology as it is in a parliamentary system.

Demerits of the Presidential Government:
a) Dictatorial executive :
The presidential executive is likely to be authoritarian. All executive powers are concentrated in the hands of the president and as he is not accountable to legislature, he may be tempted abuse power and behave in a dictatorial manner.

b) Conflict and deadlock :
As the president and his ministers are not members of the legislature, they find it difficult to persuade the members of the latter to accept their proposals. The legislature is inclined to find fault with the president and vice versa. Conflict between the executive and the legislature leads to deadlock in the administration.

c) Absence of accountability :
The executive is not accountable to the legislature, nor it is accountable to the people. The people of the America directly elect their president, they cannot recall him even if they find incompetent or dishonest or useless.

d) No co-ordination between executive and legislature :
In a presidential government, executive and legislature are two distinct bodies and they work indecently, so it is said that, presidential government is lacking co-ordination.

e) Insignificant position of legislature :
In presidential system, legislature became secondary. Executive receives top priority. The president is treated as most capable and influential person in the government.

Question 8.
Write a note on Modem classification of Governments.
Answer:
In modern times, the Governments have been classified into various forms by different political scientists of a different point of time based on nature of exercise of power. The modem classification of governments broadly consists of two types. 1. Despotic Government, 2. Democratic Governments. Democratic governments are further divided into limited monarchical form of government and republican form of Governments. The Governments are either in the form of unitary or federal based on territorial division of powers and presidential or parliamentary form of Government based on division of powers between the organs of Government.

Despotic Government :
Despotism is a form of government in which a single entity rules with absolute power and its other connotations are : tyranny and dictatorship. The despotic ruler rules at his will and pleasure without any concern for public opinion and welfare.

Democratic Government :
Democratic government is a government in which all the people participate in the decision making and it is run as per the aspirations of all the groups. It aims and provided for equality.

Very Short Answer Questions

Question 1.
Aristotle’s classification of Governments.
Answer:
Aristotle classified governments on the basis of two elements, namely, i) Number of rulers ii) Aims of the State. He again classified Governments into normal and perverted ‘ forms. He says monarchy, aristocracy and polity as the normal form of governments. Tyranny, oligarchy and democracy are the perverted form of Governments.

Question 2.
Unitary form of Government.
Answer:
The word ‘Unitary’ consists of two words, namely, ‘Uni’ and ‘Tary’, uni means one and tary means ‘rule’. Unitary Government is a single integrated government with all executive powers. The Constitution vests all powers in the Central Government.

Definition :
A.V. Dicey “A Unitary government is the habita] exercise of supreme legislative authority by one central power”.

Question 3.
Federal Government.
Answer:
Governments are classified into Federal and Unitary on the basis of the distribution of powers between the Centre and the States. A federal system is one in which the powers of the government are distributed constitutionally between the Centre and the State Governments. Ex : America, Switzerland etc.

Meaning :
The term “Federation” is derived from a Latin word “Foedus” which means ‘Treaty of Agreement”.

Question 4.
Presidential Form of government.
Answer:
A Presidential government is one in which the Executive Powers are exercised by an elected President. His term of office does not depend on the will of the legislature. He is not only the Head of the state but also the head of the government. He is not responsible to the legislature for his actions and policies. This type of government is found in America, Brazil etc.

Question 6.
UnWritten Constitution.
Answer:
A constitution which is not in the written form is called unwritten constitution. The Rules of the governmental Organisation are in the form of customs, conventions, Traditions and usages. If is not in the form of a written document. It is the product of growth. If is the result of evolution. It is not created by any particular body at any particular period For Example Britain has an unwritten constitution.

Question 7.
Parliamentary Executive.
Answer:
Parliamentary government is one in which the executive ie.; the council of Ministers headed by the Prime Minister owes to the legislature for Its Formation, Continuation, and Survival in office. It is also known as Responsible government, cabinet government, Prime Ministerial government etc., Britain is a classical example of this form of government. Besides many states like Australia, Canada, India, Japan etc. have been following this system.

Question 8.
Separation of powers?
Answer:
Theory of separation of powers is propounded by Montesquieu in his famous book ‘The Spirit of Laws’. The powers among the three organs of the Government in presidential executive will be distributed on the basis of the theory of separation of powers. Its main feature is ‘Checks and Balance’, which means the three organs of the Government possess equal powers and each organ checks the other two organs from crossing their limits.

Question 9.
Checks and Balances.
Answer:
The Principle of checks and Balances is most important feature of presidential government. In presidential system, every organ enjoys autonomy and exercises powers independently. At the same time, every organ acts as a check against the executive authority of the other organs. The legislature must give its consent to all the appointments made by the president. Similarly, the President must give his assent on all the Bills approved by the Legislature. Judiciary reviews all the constitutional cases. It declares the Presidential warrants and Legislative enactments as ‘ultravires’ when the latter are made against the letter and spirit of the constitution.

Question 10.
Collective Responsibilities.
Answer:
Collective Responsibility is a salient feature of Parliamentary government. The Ministers are collectively Responsible to the lower house of the Legislature. They take policy decisions collectively under the Leadership of the Prime Minister. The Council of Ministers cease to hold office when loses it the confidence of the lower house of the legislature A Minister may express his dissent towards the policy during unforeseen is discussed in the cabinet meeting. But he has to defend and support the cabinet decision. He is also Individually and jointly responsible to the Legislature for Omissions and Commissions made in his department..

Question 11.
No – Confidence Motion.
Answer:
No – confidence motion is an important power of the Legislature especially in a parliamentary system of government in which the legislature exercises control over the executive for all its decisions over policies, the council of Ministers are directly responsible to the Lok sabha in India and to the House of Commons in Britain where the parliamentary system is in existence. The Lok sabha in India and the House of Commons in Britain can fail the government by passing the direct vote of No – Confidence against the prime minister and his Ministers.

Question 12.
Prime Minister.
Answer:
Parliamentary government is described as Prime Ministerial government. The Prime Minister in this system acts as the Real executive head of the government. He acts as the Leader of the Majority party or coalition Ministry in the lower house of the legislature. He remains as the main pillar to the structure of union cabinet and union council of Ministers. He is central to the formation, continuance and survival of the Ministry. He Presides over the meetings of the union cabinet and decides its agenda. He enforces the Principle of Collective Responsibility. All the Ministers take oath of office, assume powers and discharge their Public and political obligations under his stewardship.

Question 13.
President.
Answer:
Presidential government confers both the Nominal and Real executive powers in a single person namely the president. So the president is not only a nominal executive but also the Real executive. He serves as both the head of the state and government. He enjoys all executive powers both in name and in practice. He takes Independent decisions keeping in view the popular wishes and national interests. He implements the policies and programmes of the government with the help of some secretaries who owe their existence, continuance and survival to him only.

Telangana TSBIE TS Inter 1st Year Economics Study Material 2nd Lesson Theories of Consumer Behaviour Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 2nd Lesson Theories of Consumer Behaviour

Long Answer Questions

Question 1.
Describe the law of diminishing marginal utility, its limitations and importance. [Mar. ’16]
Answer:
Hermann Heinrich Gossen was the first economist to explain the law of diminishing marginal utility in 1854. It is also known as Gossen’s ‘first law’. In 1890, Marshall in his principles of economics developed and popularised this analysis. This law explains the functional relationship between the stock of commodity and the marginal utility of commodity.

According to Marshall, “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in stock that he already has”.

“As a consumer increases the consumption of any one commodity, keeping constant the consumption of all other commodities, the marginal utility of the variable commodity must eventually decline”. Kenneth E.Boulding.

The law says that as we gone consuming a commodity, satisfaction that derives from its additional units goes on diminishing.

Assumptions :
1) Rationality :
Consumer is a rational man which means he always tries to get maximum satisfaction.

2) Cardinal Measurement of Utility :
Utility is a cardinal concept i.e., utility can be measured and compared numerically.

3) Utilities are Independent :
It implies that utility of any commodity depends on its own quantity.

4) Homogeneous :
Units of the commodity are similar in quantity, size, taste and colour etc.

5) No Time Lag :
There should not be any time lag between the consumption of one unit and other unit.

6) Constant Marginal Utility Unit :
It is assumed that the marginal utility of money remains constant.

7) Total & marginal utility :
Total utility: Total satisfaction obtained by the consumer from the consumption of a given quantity of commodity.

TU_n = f(Q_n)
Where, TU_n = Total utility of n commodity,
f = functional relationship,
Q_n = Quantity of n commodity.

Marginal utility :
Marginal utility is the addition made to the total utility by consum¬ing one more unit of the commodity.

It can be explained as :
MU_n = TU_n – TU_n-1
MU_n = Marginal utility of n^th unit
TU_n = Total utility of n^th unit
TU_n-1 = Total utility of n – 1 units.
MU may also be expressed as follows.

Marginal utility is the additional utility derived from the consumption of an extra unit of commodity.
MU = \(\frac{\Delta \mathrm{TU}}{\Delta \mathrm{C}}\)
Where, ∆TU = Change in total utility
∆C = Change in no. of units consumed.

Explanation of the law :
The law of diminishing marginal utility explains the relation between the quantity of goods consumed and its marginal utility. If a person goes on increasing his stock of a thing, the marginal utility derived from an additional unit declines. We show this tendency with an imaginary table given below.

In the table, let us suppose that one is fond of apples. As he consumes one apple after another he derives less and less satisfaction. The first unit is consumed with utmost pleasure. For the second, the intensity of his desire diminishes. The third will be still less and so on. The total utility increases until the consumption of fourth unit of good but at diminishing rate. Fifth unit of apple gives him maximum total utility. But, marginal utility becomes zero. Further consumption of sixth unit TU diminishes and MU becomes negative.

The relationship between total utility and marginal utility is explained in the following three ways :

1. When total utility increases at diminishing rate, marginal utility falls.
2. When total utility is maximum, marginal utility becomes zero.
3. When total utility decreases, marginal utility becomes negative.

This can be shown in the following diagram.

In the diagram, on ‘X’ axis measures units of apples and on Y axis measures total utility and marginal utility. TU curve represents total utility and MU curve represents marginal utility. TU curve is maximum at 5^th unit where MU curve will become zero. TU curve slopes downwards from 6^th unit, while MU become negative.

Limitations or Exceptions :
1) Hobbies :
This law does not operate in the case of hobbies like collection of stamps, old paintings, coins etc. Greater the collections of a person, greater is his satisfaction. Marginal utility will not diminish.

2) Drunkers :
It is pointed out that the consumption of liquor is not subject to the law of diminishing marginal utility. The more a person drinks liquor, the more he likes it.

3) Miser :
This law does not apply to money. The more money a person has the greater is the desire to acquire still more of it.

4) Further, this law does not hold good if there is any change in income tastes and preferences of the consumer.

Importance of the Law :
The importance of the law of diminishing marginal utility is as follows :

1. The law of diminishing marginal utility is the basic law of consumption and it is the basis for the law of demand, the law of equimarginal utility etc.
2. The changes in design, pattern and packing of goods will be brought by the producers by keeping this law in view.
3. The law explains the theory of value that the price of a good falls, when supply increases. Because with the increase in the stock of a good, its marginal utility diminishes.
4. Diamond-water paradox can be explained with the help of this law. Due to relative scarcity, diamonds possess high exchange value and less use value. Similarly, water is relatively abundant and so it posseses low exchange value but more use value.
5. This law helps the government while formulating taxation policies. The principle of progressive taxation is based on the law of diminishing marginal utility. This law is more useful in the policies of redistribution of income and wealth in favour of the poor people.

Question 2.
Discuss the consumer’s equilibrium with the help of law of equimarginal utility.
Answer:
Law of equimarginal utility is an important law of consumption. It is called as “Gossen’s Second Law”, as its formulation is associated with the name of H.H. Gossen.

According to Marshall, “If a person has a thing which can be put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all uses. If it had a greater marginal utility in one use than in another, he would gain by taking away some of it from the second and applying it to the first”.

According to this law the consumer has to distribute his money income on different uses in such a manner that the last rupee spent on each commodity gives him the same marginal utility. Equalisation of marginal utility in different uses will maximise his total satisfaction. Hence, this law is known as the “Law of equimarginal utility”.

The fundamental condition for consumer’s equilibrium can be explained in the following way.

Where, MU_x, MU_y, MU_z, MU_m = Marginal utilities of commodities x, y, z, money (m), and P_x, P_y, P_z = Prices of x, y, z goods.

This law can be explained with the help of a table. Suppose the consumer is prepared to spend his money income is ₹ 26/- on two goods say X and Y. Market prices of two goods are ₹4/- & ₹ 5/- respectively. Now the marginal utilities of good X, good Y are shown below.

For explaining consumer’s maximum satisfaction and consequent equilibrium position we need to reconstruct the above table by dividing marginal utilities of X by its price ₹ 4/- and marginal utility of Y by ₹ 5/-. This is shown in the following table.

In the table it is clear that when consumer purchases 4 units of goods X & 2 units of good Y. Therefore, Consumer will be in equilibrium when he is spending (4 × 4 = 16 + 2 × 5 = 10) ₹ 26/- on them.

Assumptions of the law :
The law of equimarginal utility depends on the following assumptions.

1. This law is based on cardinal measurement of utility.
2. Consumer is a rational man always aiming at maximum satisfaction.
3. The marginal utility of money remains constant.
4. Consumer’s income is limited and he is proposed to spent the entire amount on different goods.
5. The price of goods are unchanged.
6. Utility derived from one commodity is independent of the utility of the other commodity.

Limitations of the law :
The law of equimarginal utility has been subject to certain limitations which are as given below :

1. The law assumes that consumer is a rational man and always tries to get maximum satisfaction. But, in real life, several obstacles may obstruct rational behaviour.
2. This law is not applicable when goods are indivisible.
3. The law is based on unrealistic assumptions like cardinal measurement of utility and marginal utility of money remains constant. In real world, MU of money does not remain constant.
4. This law will not be applicable to complementary goods.
5. Another limitations of this law is that there is no fixed accounting period for the consumer in which he can buy and consume goods.

Importance of the Law :
The law of equimarginal utility is of great practical importance in economics.
1) Basis of Consumer Expenditure :
The expenditure pattern of every consumer is based on this law.

2) Basis for Savings and Consumption :
A prudent consumer will try to distribute his limited means between present and future consumption so as to have equal marginal utility in each. This is how the law guides us.

3) In the Field of Production :
To the businessman and the manufacturer the law is of special importance. He works towards the most economical combination of the factors of production. For this he will substitute one factor for another till their marginal productivities are the same.

4) Its application to Exchange :
In all our exchanges, this law works. Exchange is nothing but substitution of one thing for another.

5) Price Determination :
This principle has an important bearing on the determina¬tion of value and price.

6) Public Finance :
Public expenditure of a government conforms to this law. Taxes are also levied in such a manner that the marginal sacrifice of each tax payer is equal.

Question 3.
Illustrate the consumer’s equilibrium using indifference curve analysis. [Mar. 17, 16]
Answer:
A consumer is said to be in equilibrium with given his tastes, prices of the two goods and income on the purchase of two goods in such a way so as to get the maximum satisfaction :

I. Assumptions :
The analysis of consumers equilibrium is based on the following assumptions :

1. Consumer has an indifference map showing his scale of preferences which remains the same throughout the analysis.
2. Money income is given and constant.
3. Prices of the two goods are given and constant.
4. The consumer is rational and thus maximizes his satisfaction.
5. There is no change in tastes, preferences and habits of the consumer.
6. There is a perfect competition in the goods market.

II. Conditions of Equilibrium :
There are two conditions that must be satisfied for the consumer to be in equilibrium. These are : i) At the point of equilibrium, the budget / price line must be tangent to the indifference curve at its minimum point, ii) At the point of equilibrium, the consumer’s MRS_xy and the price ratio must be equal, i.e. MRS_XY = P_x/P_y.

This can be shown in the following diagram.

In the diagram ‘AB’ is consumer’s budget or price line. IC, IC₁, IC₂ are indifference curves. In the diagram the consumer is equilibrium at OM of x and ON of y. At point E the price line touches to ‘O’ IC₁. At point ‘S’ consumer will be on lower indifference curve IC and will be an getting lesser satisfaction than at E on IC. IC₂ is beyond the capacity of consumer. So it is outside to the budget line.

Short Answer Questions

Question 1.
Explain the concept of utility analysis. What are its shortcomings?
Answer:
The concept of utility was introduced in economic thought by Jevans in 1871. In a general sense, utility is the want satisfying power’ of a commodity or service. In economic sense, utility is a psychological phenomenon. It is a feeling of satisfaction, a consumer derives from the consumption of a commodity. Utility has nothing to do with usefulness. Utility and usefulness are different. A commodity may satisfy a human want but it may not be useful. For example, wine is harmful to health but satisfies the want of a drunkard. Whether the good is useful or not, if it satisfies a human want we can say that it possesses utility.

Utility is a subjective concept. It differs from person to person, from time to time and place to place. As regards to the measurement of utility, there are two different approaches :
1. Cardinal utility and
2. Ordinal utility. Let us introduce then in brief.

Shortcomings of Utility Analysis :
The following are the main defects pointed out on utility analysis.

1. Cardinal measurement is not possible.
2. Assumption of rational consumer is not correct.
3. Wrong assumption of independent utilities. Utility of a good depends on other goods also.
4. Assumption of constant marginal utility of money is wrong.
5. One commodity model is unrealistic.
6. Income effect, price effect and substitution effect are not clearly brought out.
7. This analysis fails to explain the demand for indivisible goods.

Question 2.
Explain the concepts of Cardinal Utility, Ordinal Utility, Total Utility and Marginal Utility.
Answer:
The concept of utility was introduced in economic thought by Jevans in 1871. In a general sense, utility is the ‘want satisfying power’ of a commodity or service. In economic sense, utility is a psychological phenomenon.

1) Cardinal utility :
Utility is cardinal in the sense that utility is measurable in terms of units called utils. According to the concept of cardinal utility, the utility derived from the consumption of a good can be expressed in terms of numbers such as 1, 2, 3, 4 and so on. For example, a person can say that he derives utility equal to 10 utils from the consumption of one unit of commodity A and 5 utils from the consumption of one unit of commodity B. He can compare different commodities and express which commodity gives him more util¬ity or satisfaction and by how much. Alfred Marshall followed this approach. The law of diminishing marginal utility and the law of equi-marginal utility are based on cardinal utility approach.

2) Ordinal utility :
Utility is ordinal in the sense that utilities derived from the consumption of commodities cannot be measured quantitatively but can be compared by giving ranks. It means that the utilities obtained by the consumer from different commodities can be arranged in a serial order such as 1^st, 2nd, 3^rd, 4^th etc. These numbers tell us that the second number is more than the first number. But, it is not possible to tell how much, because they are not measurable. J.R. Hicks and R.J.D. Allen have used the ordinal approach. The indifference curve analysis is based on ordinal utility approach.

3) Total Utility and Marginal Utility :
a) Total Utility : Total utility is the total amount of satisfaction which a person gets from the consumption of all units of the commodity. Let us assume that a consumer con-sumed 3 apples and first apple gave him 20 utils of utility, second one 15 utils and the third one 10 utils of utility. By adding these utilities we get the total utility, ie., 20 + 15 + 10 = 45. When the quantity of consumption increases total utility also increases but at a diminishing rate. The total utility is a function of total quantity.
TU_n = f(Q_n)

Where TU_n = Total utility of n commodity,
f = functional relationship, and
Q_n = Quantity of n commodity.

b) Marginal Utility :
Marginal utility is the addition made to the total utility by consuming one more unit of the commodity. Let us assume that one apple gives 20 utils of utility and 2 apples gives 35 utils of utility. It means that the additional utility from the second apple is 15 utils i.e., 35 – 20 = 15. This is called marginal utility. It can be expressed

MU_n = TU_n – TU_n-1
where, MU_n = Marginal utility of n^th unit, TU_n = Total utility of n^th units, and
TU_n-1 = Total utility of n – 1 units.
In the example, marginal utility of the second unit is equal to
MU₂ = TU₂ – TU₁ = 35 – 20 = 15
Marginal utility can also be expressed in the following way :

By adding all the marginal utilities of different units of the commodity, we get total utility.

Question 3.
Define the law of diminishing Marginal Utility. State its assumptions.
Answer:
The law of diminishing marginal utility was originally explained by Hermann Heinrich Gossen in 1854. Jevans called it as Gossen’s first law. But Alfred Marshall popularised this law and analysed it in a scientific manner.

Definitions of the law :
“The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in stock that he already has” – Alfred Marshall.

Assumptions :
The law is based on the following assumptions :

1) Rationality :
The consumer is a rational human being in the sense that he seeks to maximize his satisfaction.

2) Cardinal Measurement of Utility :
Utility is a cardinal concept, i.e. utility is measurable quantitatively. It can be measured in cardinal numbers.

3) Independent Utility :
The utility of any commodity depends on its own quantity, i.e. utility of goods are independent.

4) Constant Marginal Utility of Money :
The marginal utility of money remains constant.

5) Homogeneous Goods :
Goods are homogeneous in the sense that they are alike both quantitatively and qualitatively.

6) Uniform Size of Goods :
Goods should be of suitable size, i.e. neither too big nor too small. They should be identical.

7) No Time Lag :
There is no time lag between the consumption of one unit to another unit.

8) Divisible Commodity :
Commodity is divisible.

9) No Change in Consumer Behaviour :
The income, tastes and preference of the consumer should remain constant.

10) Full Knowledge of the Market :
Consumer will have full knowledge of market.

Question 4.
Examine the limitations of the law of diminishing Marginal utility. Analyse its importance.
Answer:
The law of diminishing marginal utility was originally explained by Hermann Heinrich Gossen in 1854. Jevans called it as Gossen’s first law. But Alfred Marshall popularised this law and analysed it in a scientific manner.

Meaning :
The law says that as a consumer takes more units of good, the extra satisfaction that he derives from extra unit of a good goes on falling. The relationship between quantity consumed and utility derived from each successive unit consumed is called the law of diminishing marginal utility.

Limitations of the Law :
The following are some of the exceptions to the law of diminishing marginal utility:
1) Rational Consumer :
The consumer should be an economic human being with rational behaviour. If he is under the influence of an intoxicant, the utility of the later units will rise in the beginning but ultimately it falls and even becomes negative.

2) If goods are not independent, this law will not work. Complimentary goods can be one of the example.

3) Marginal utility of money is not constant. Our desire for money increases as we have more of it. The marginal utility of money will not be zero, but definitely it falls, when a person acquires more and more money.

4) If the goods are not homogeneous, this law will not work.

5) If the goods are too big or too small in size, problem arises. If the size is too big, consumer may not require second unit and similarly if the size is too small. Utility of the subsequent units may increase.

6) In the case of durable goods, it is not possible to calculate their utility because their use is spread over a period of time. A consumer does not buy more durable goods for personal consumption.

7) If there is any change in consumer’s income or tastes or habits, this law does not hold good.

8) If the goods are not ordinary, like diamonds or hobby goods like stamps and coins, the utility of the additional units may be greater than the earlier units. Infact law is applicable in these cases also. The collector of stamps or coins never like to have innumerable pieces. The person may not collect more than one or two of the same coin or same stamp.

Importance of the Law :

1. The law of diminishing marginal utility is the basic law of consumption and it is the basis for the law of demand, the law of equi-marginal utility etc.
2. The changes in design, pattern and packing of goods will be brought by the producers by keeping this law in view.
3. The law explains the theory of value that the price of a good falls when supply increases. Because with the increase in the stock of a good, its marginal utility diminishes.
4. Diamond water paradox can be explained with the help of this law. Due to relative scarcity, diamonds possess high exchange value and less use value. Similarly, water is relatively abundant and so it posseses low exchange value but more use value.

Question 5.
Explain the concept of law ofequi-marginal utility. Point out its assumptions.
Answer:
This is an important law of consumption and was derived from the law of diminishing marginal utility. It is known by various names such as the law of equi-marginal utility, the law of substitution, the law of maximum satisfaction etc. It is also called as Gossen’s Second Law as its formulation is associated with the name of H.H. Gossen. The law of diminishing marginal utility explains the consumer’s behaviour, consuming only one good. But in actual life, consumer buys a certain combination of goods with his limited income and maximises utility. The law of equimarginal utility explains the same.

Definition of the Law :
“If a person has a thing which can be put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. If it has a greater marginal utility in one use than in another, he would gain by taking away some of it from the second and applying it to the first.” – Alfred Marshall.

Assumptions of the Law :
The law of equimarginal utility depends on the following assumptions :

1. Cardinal measurement of utility is assumed.
2. Rationality on the part of the consumer so as to get maximum satisfaction and to attain equilibrium is also assumed.
3. Marginal utility of money remains constant.
4. The income of the consumer is given and remains constant and he spends entire amount on different goods.
5. The prices of goods are given and constant.
6. Utilities are independent.

Question 6.
Discuss the limitations and importance of law of equimarginal utility.
Answer:
Definition of the Law :
“If a person has a thing which can be put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. If it has a greater marginal utility in one use than in another, he would gain by taking away some of it from the second and applying it to the first.” -Alfred Marshall.

Limitations of the Law of EquiMarginal Utility :
The equimarginal principle is subject to certain limitations which may be set forth hereunder :

1. The law is based upon the assumption of rationality on part of the consumer. But in real life, several obstacles may obstruct rational behaviour.
2. This law works out fully only if the goods are divisible. If goods happen to be large and indivisible, it is not possible to equate the marginal utility of money spent on them.
3. Non availability of certain goods prevents the consumers from maximizing their satisfaction out of their expenditure. Therefore, the law fails to work.
4. Prices of goods often fluctuate in the market with the result that their utilities also keep changing from time to time. This prevents the working of the law.
5. The law of maximum satisfaction will not be applicable to complementary goods.
6. Another limitation of this law is that there is no fixed accounting period for the consumer in which he can buy and consume goods.
7. Cardinal measurement of utility, marginal utility of money remaining constant etc., are not realistic assumptions. They are not valid.
8. It is assumed that the consumer has a perfect knowledge. But this is not correct.

Importance of the Law :
The law of equimarginal utility is of great practical importance in economics.
1) Basis of Consumer Expenditure :
The expenditure pattern of every consumer is based on this law.

2) Basis for Savings and Consumption :
A prudent consumer will try to distribute his limited means between present and future consumption so as to have equal marginal utility in each. This is how the law guides us.

3) In the Field of Production :
To the businessman and the manufacturer the law is of special importance. He works towards the most economical combination of the factors of production. For this he will substitute one factor for another till their marginal productivities are the same.

4) Its application to Exchange :
In all our exchanges, this law works. Exchange is nothing but substitution of one thing for another.

5) Price Determination :
This principle has an important bearing on the determina¬tion of value and price.

6) Public Finance :
Public expenditure of a government conforms to this law. Taxes are also levied in such a manner that the marginal sacrifice of each tax payer is equal.

Question 7.
What is an indifference curve? What are its assumptions?
Answer:
Indifference curve :
An indifference curve represents satisfaction of a consumer from two commodities. An IC curve can be defined as the locus of points each representing a different combination of two goods yielding the same level of satisfaction.

Assumptions :
1) Rationality :
It is assumed that the consumer tries to obtain maximum satisfaction from his expenditure.

2) Scale of preference :
Consumer is able to arrange the available combinations of goods according to scale of preference.

3) Ordinal utility :
It assumes ordinal utility approach. So utility is in measurable only ordinal terms i.e., 1^st, 2^nd, 3^rd etc.

4) Diminishing marginal rate of substitution :
It is the rate at which a consumer is willing to substitute commodity to another. So that this satisfaction remains the same.

5) Consistency :
Consumer’s choices have to be consistent. It means if consumer prefers A to B and B to C his choice reflects his rationality.

6) Completeness :
The consumer’s scale of preferences is to complete that he is able to choose any one of the two combinations of commodities presented to him.

Question 8.
Explain the concept of indifference curve. Discuss its properties.
Answer:
An indifference curve can be defined as the locus of points each representing a different combination of two goods yielding the same utility or level of satisfaction. Therefore, a consumer is indifferent between any two combinations of goods when it comes to making a choice between them. It is also called iso – utility curve or equal utility curve.

Indifference Schedule :
An indifference curve is drawn on the basis of an ‘indifference schedule’. It may be defined as a schedule of various combinations of two goods which yields same level of satisfaction.

The table shows five combination of two goods, X and Y, which give the same utility. The consumer’s satisfaction from 1^st combination (1 unit of X + 15 units of Y) is the same as that of other combina- o tion i.e., 2^nd, 3^rd, 4^th and 5^th. Since all combinations yield the same level of satisfac- g tion, the consumer is indifferent among these combinations.

Indifference Curve :
Basing on the indifference schedule, we can draw an indifference curve.

In the above figure, good X is measured on the OX-axis. Good Y is measured on OY – axis. Consumer’s utility at point a on the IC with 1 unit of good X and 15 units of good Y, is equal to the utility at point b with 2 units of X and 11 units of Y or at point C with 3X and 8Y and so on. These combinations give him the same level of satisfaction. If we join the points a, b, c, d and e, we get an indifference curve (TC) and utility as all points on this curve are same. Hence, the consumer is indifferent regarding the combinations.

When the consumer moves from A to B on IC, he gives up AS of Y (∆Y) for SB of X (∆X).

Properties of Indifference Curves :
Indifference curves have the following basic properties :
1) An indifference curve is negatively sloped towards down. It implies that when the amount of one good in combination is increased, the amount of other good is reduced. This is essential if the level of satisfaction is to remain the same on an indifference curve. It is neither positively sloped towards up nor horizontal.

2) Indifference curves are always convex to the origin. The convexity rule implies diminishing marginal rate of substitution. Indifference curves cannot be concave to the origin.

3) Indifference curves can never intersect each other. If two IC curves intersect, it would imply that an indifference curve indicates two different levels of satisfaction. It is not proper.

4) A higher indifference curve represents a higher level of satisfaction than a lower indifference curve. In other words, an IC to the right represents more satisfaction. This is because of combinations lying on a higher IC contain more of either one or both goods. Similarly, an indifference curve to the left represents less satisfaction.

Question 9.
How do you define Budget line of the consumer.
Answer:

The budget line or price line shows all possible combinations of two goods that a consumer can buy with the given income and prices of the two goods.

The concept of budget / price line will be shown in the following example. Suppose that a consumer has ₹ 150 (income) to buy two goods namely X and Y. Whose prices are ₹ 15 and ₹ 30 each. With the given information now we can draw the budget or price line as shown in the diagram.In the diagram AB’ is the ‘budget or price line’.

The slope of the line AB represents the ratio of the prices of X and Y in such a manner that 10 of X will be equal to 5 of Y.

Very Short Answer Questions

Question 1.
Define Utility.
Answer:
The want satisfying power or capacity of a commodity or service is known as utility. It is the basis of consumer’s demand for a commodity.

Question 2.
Explain Cardinal utility. [Mar. 17]
Answer:
Alfred Marshall developed cardinal utility analysis. According to this analysis, the utilities derived from consumption of different commodities can be measured in terms of arbitary units called utils. 1, 2, 3, 4 are called cardinal numbers.

Question 3.
Explain Ordinal utility.
Answer:
This was developed by J.R. Hicks, Allen. Utility is subjective and measurement of utility in numerical terms is not possible. We can observe the preference for one good more than for another. Ordinal numbers such as 1^st, 2^nd, 3^rd etc. The ordinal numbers are ranked.

Question 4.
Explain Total utility.
Answer:
Total utility is the total amount of utility which a consumer derives from a given stock of a commodity.
TU_n = f(Q_n)

Question 5.
Define Marginal utility.
Answer:
Marginal utility is the additional utility obtained from the consumption of additional unit of the commodity.
MU_n = TU_n – TU_(n-1)
(or)
MU = \(\frac{\Delta \mathrm{TU}}{\Delta \mathrm{Q}}\)

Question 6.
What is Price Line / budget line?
Answer:
It shows all possible combinations of two goods that a consumer can buy, with the given income and prices of the two goods.

Question 7.
Explain law of diminishing marginal utility.
Answer:
The law of diminishing marginal utility is based on the fact that though human wants are unlimited, but any particular want is satisfiable. This law analyses consumers’ behaviour in case of a single good. If a person goes on consuming more and more units of a commodity, the additional utility he derives from the additional units of the commodity goes on diminishing. This phenomenon of human behaviour is explained by this law. The law of diminishing marginal utility explains the relationship between the quantity of goods consumed and the utility derived.

Question 8.
Explain law of equi-marginal utility.
Answer:
The law states that a consumer having a fixed income and facing given market prices of goods will achieve maximum satisfaction when the marginal utility of the last rupee spent on each good is exactly the same as the marginal utility of the last rupee spent on any other good. Equalisation of marginal utilities will maximize the consumer’s satisfaction and consumer attains equilibrium. The fundamental condition for consumer’s maximum satisfaction and equilibrium of the consumer.

Question 9.
What is scale of preference?
Answer:
Guides the consumer in his purchases.

Question 10.
Explain Marginal rate of substitution.
Answer:
The additional amount of one product required to compensate a consumer for a small decrease in the quantity of another, per unit of the decrease.

This can be explained with the help of table.

By the table, the consumer is ready to sacrifice 4 units of Y to get 1 more unit of X. The MRSX for diminishes.

Question 11.
Draw the indifference map.
Answer:
A set of indifference curves drawn for different income levels is called indifference map.

From the above diagram it is clear that an indifference map of IC₁, IC₂, IC₃. Each curve shows a certain level of satisfaction to the consumer.

Question 12.
Explain the relationship between total utility and marginal utility.
Answer:
The relationship between total utility and marginal utility is explained in three ways.
They are :

1. When total utility increases at a diminishing rate, marginal utility falls.
2. When total utility is maximum, marginal utility becomes zero.
3. When total utility decreases, marginal utility becomes negative.

Question 13.
Write in brief, about the properties of indifference curves.
Answer:
It represents the satisfaction of a consumer from two goods of various combinations. It is drawn and the assumption that for all possible combinations of the two goods on an indifference curve, the satisfaction level remains the same.

Telangana TSBIE TS Inter 1st Year Economics Study Material 6th Lesson Theories of Distribution Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 6th Lesson Theories of Distribution

Long Answer Questions

Question 1.
Explain critically the marginal productivity theory of distribution.
Answer:
This theory was developed by J.B. Clark. According to this theory, the remuneration of a factor of production will be equal to its marginal productivity. The theory assumes perfect competition in the market for factors of production. In such a market, average cost and marginal cost of each unit of factor of production are the same as they are equal to the price or cost of a factor of production.

For example, if four tailors can stitch ten shirts in a day and five tailors can stitch thirteen shirts in a day, then the marginal physical product of the 5^th tailor is 3 shirts. If stitching charge for a shirt is ₹ 100/-, then the marginal value product of three shirts is ₹ 300/-. According to this theory, the 5^th person will be remunerated ₹ 300/-. Marginal physical product is the additional output obtained by using an additional unit of the factor of production. If we multiply the additional output by market price we will get marginal value product or marginal revenue product.

At first stage when additional units of labour are employed the marginal productivity of labourer increases up to certain extent due to economies of scale. If additional units’ of labour are employed beyond that point the marginal productivity of labour decreases. This can be shown in the given figure.

In the figure, OX axis represent units of labour and OY represent price/revenue/cost. At a given price, OP the firm will employ OL units of labour where price OP = L. If it employs less than ‘OL’ i.e., OL₁ units, MRP will be E₁L₁, which is higher than the price OR If firm employs more than OL units upto OL₂, price is OP is more than E₂L₂. So the firm decreases employment until price = MRP till OL. At that point ‘E’ the additional unit of labour is remunerated equal to his marginal productivity.

Question 2.
Define rent and explain the Ricardian Theory of Rent.
Answer:
David Ricardo was a 19^th century economist of England, who propounded a systematic theory of rent. Ricardo defined rent as “that portion of the procedure of earth which is paid to the landlords for the use of the original and indestructible powers of soil”. According to Ricardo, rent arises due to differential in surplus occurring to agriculturists resulting from the differences in fertility of soil of different grades of land.

Ricardian theory of rent is based on the principle of demand and supply. It arises in both extensive and intensive cultivation of land. When land is cultivated extensively, rent on superior land equals the excess of its produce over that of the inferior land. This can be explained with the following illustration.

We can imagine that a new island is discovered. Assume a batch of settlers go to that Island. Land in this Island is differ in fertility and situation. We assume that there are three grades of land A, B, and G. With a given application of labour and capital superior lands will yield more output than others. The difference in fertility will bring about differences in the cost of production, on the different grades of land. They first settle on A’ grade land for cultivation of com. A’ grade land yields say, 20 quintals of com with the investment of ₹ 300. The cost of production per quintal is ₹ 15 (300/20). The price of com in the market has to cover the cost of cultivation. Otherwise the farmer will not produce corn. Thus, the price in the present case should be atleast ₹ 15 per quintal.

As time passes, population increases and demand for land also increases. In such a case, people have to cultivate next best land, i.e., ‘B’ grade land. The same amount of ₹ 300 is spent on B’ grade land gives only 15 quintals of com as ‘B’ grade land is less fertile. The cost of cultivation on B’ grade land risen to ₹ 20 (300/15) per quintal of com. If the price of corn per quintal in the market is then ₹ 20, the cultivator of ’B‘ grade land will be not cultivate. Therefore, the price has to be high enough to cover the cost of cultivation on ’B’ grade land. Hence, the price also rises to ₹ 20. There is no surplus on ‘B’ grade land. But on A’ grade land, the surplus is 5 quintals or ₹ 100 (5 × 20).

Further, due to growth of population demand for land and corn increased. This necessitates, the cultivation of ‘C’ grade land with ? 300 investment cost. It yields only 10 quintals of com. Therefore, the per quintal production cost rises to 30 (300/10). Then the price per quintal must be atleast ? 30 to cover the cost of production. Otherwise C’ grade land will be withdrawn from cultivation. At price ? 30 C’ grade land yield no surplus or rent. But A grade land yields still layer surplus of 10 quintals or ? 300 (10 x 30). But surplus or rent on ‘B’ grade land has 5 quintals or ? 150 (5 x 30). But there is no surplus or rent on ‘C’ grade land. It covers just the cost of cultivation. Hence, ‘C’ grade land is a marginal land which earns no rent or surplus.

This can also be explained with the following table.

The essence of Ricardian theory of rent.

1. Rent is a pure surplus.
2. Rent is differential surplus.
3. Rent does not determine or enter into price.
4. Diminishing returns applies to agricultural production.
5. Land is put to only one use, i.e., for cultivation.

Ricardian theory’ of rent can be explained with the help of the above diagram.

In the above diagram, the shaded area represents the rent or differential surplus. The least fertile land, i.e., C does not carry any rent. So it is called marginal land or no rent land.

Question 3.
What is meant by real wages? What are the factors that determine real wages?
Answer:
The amount of goods and services that can be purchased with the money wages at any particular time is called real wage. Thus, real wage is the amount of purchasing power received by worker through his money wage.

Factors Determining the Real Wage :
1. Methods of Form of Payment :
Besides money wages, normally the labourers get some additional facilities provided by their management. Ex : Free housing, free medical facilities etc. As a result, this real wage of the worker will be high.

2. Purchasing Power of Money :
An important factor which determines the real wage is the purchasing power of money which depends upon the general price level. A rise in general price level will mean a full in the purchasing power of money, causes decline in real wages.

3. Nature of Work :
The working conditions also determine the real wages of labourer. Less duration of work, ventilation, fresh air etc., result in high real wages, lack of these facilities then the real wages are low even though if money wages are high.

4. Future Prospects :
Real wage is said to be higher in those jobs where there is possibility of promotions, hike in wages and vice-versa.

5. Nature of Work :
Real wages are also determined by the risk and danger involved in the work. If work is risky wages of labourer will be low though money wages are high. Ex : Captain in a submarine.

6. Timely Payment :
If a labourer receives payment regularly and timely the real wages of the labourer is high although his money wage is pretty less and vice-versa.

7. Social Prestige :
Real wage depends on social prestige. The money wages of Bank officer and judge are equal, but the real wage of a judge is higher than bank officer.

8. Period and Expenses of Education :
Period and expenses of training also affect real wages.

Question 4.
Explain about the gross interest and net interest.
Answer:
The concept of interest are two types namely, gross interest and net interest.
Gross Interest :
The payment which the lender receives from the borrower excluding the principal is gross interest. It comprises the following payments :

Net Interest :
It is the payment for the service of capital or money only. This is the interest in economic sense.

Keynes’ Liquidity Preference Theory :
Keynes proposed a monetary explanation of the rate of interest. He said that interest is determined by both the demand for and supply of money. According to J.M. Keynes, “Interest is the reward paid for parting with liquidity for the specified period”.

A. Supply of Money :
Supply of money refers to the total quantity of money in circulation. Though the supply of money is a function of the rate of interest to a degree, supply of money is fixed or perfectly inelastic at a given point of time. It is determined by the central bank of a country.

B. Demand for Money :
Keynes coined a new term liquidity preference. People demand money for its liquidity. The desire to hold ready cash is liquidity preference. The higher the liquidity preference, the higher will be the rate of interest to be paid to induce them to part with their liquid assets. The lower the liquidity preference, the lower will be the rate of interest that will be paid to the cash holders. People demand money basically for three reasons : 1) Transactions motive 2) Precautionary motive 3) Speculative motive.

1) Transaction Motive :
People desire to keep cash for the current transactions of personal and business exchanges. The amount kept for this purpose depends upon the income and business motives.

2) Precautionary Motive :
People keep cash in reserve to meet unforeseen expenses like illness, accidents, unemployment etc. Businessmen keep cash in reserve to gain from unexpected deals in future. Therefore, both individuals and businessmen keep cash in reserve to meet unexpected needs.

3) Speculative Motive :
Speculative motive for money relates to the desire to hold cash to take advantage of future changes in the rate of interest and bond prices. The price of bonds and the rate of interest are inversely related. If the prices of bonds are expected to rise then the rate of interest is expected to fall, as businessmen will buy bonds to sell them when their prices rise and vice versa. Low bond prices are indicative of high interest rates, and high bond prices reflect low interest rates.

The demand for money is inversely related to the rate of interest.

The transaction and precautionary motives are relatively interest inelastic, but are highly income elastic. In the determination of rate of interest, these two motives do not have any role. Only the speculative motive is interest elastic and this plays very important role in determining the rate of interest with the given supply of money. When the demand for money and supply of money are equal, along with the equilibrium, rate of interest also be determined.

Question 5.
What is meant by profit? Explain briefly various theories of profit.
Answer:
Profit is the reward paid to the entrepreneur for his services as an organizer in the process of production.

Theories of Profit:
1. Dynamic theory of profit :
This theory was propounded by J.B.Clark. According to Clark, “Profit is the difference between the price and cost of production of commodity”. He viewed that profit as a reward for entrepreneurial dynamism. Dynamic changes like increase in population, new method of production etc., result in increase in profit. In a static economy due to lack of these changes entrepreneurs receive only wages but not profit. Hence, profits are the result of the dynamic changes only.

2. Innovation theory of profit :
This theory was developed by Joseph Schumpeter. According to Schumpeter, “profit is the reward paid to the entrepreneur for his inventive skills”. Because of these inventions profits arise as a difference between prices and costs of production.

According to Schumpeter, entrepreneur must break the circular flow by introducing innovations. They are :

1. Introduction of new good.
2. Introduction of new method of production.
3. Reorganisation of industry.
4. Opening up of a new market.
5. Discovery of new source of raw materials.

So these innovations, the cost of production remains below its selling price and thus, profit arises.

Thus profit is paid to entrepreneur for innovating but not for risk taking.

3. The risk theory of profit :
This theory was proposed by Prof. Hawley. Profits are the reward for an entrepreneur for risk-taking. So the residual part of income after paying all factors of production goes to the entrepreneur for risk taking. Fluctuations in future prices, demand etc., are involved in risk taking.

According to Prof. Hawley, “those who face risks in business will be able to earn an excess of payment above the actual value of risk in the form of profit”.

4. Uncertainty theory of profit :
This theory was formulated by Prof. Knight. It is a modified version of risk bearing theory of profits. According to him, profit as the reward for bearing uninsurable risks and uncertainties. He classified risks into two types.

1. Unforeseen insurable risks like fire, theft.
2. Unforeseen non insurable risks like changes in prices, demand and supply. These uninsurable risks cannot be calculated.

According to Prof. Knight, “Profit cannot be treated as the reward for risk taking only for reward for uncertainty bearing”.

5. Walker’s theory of profit :
This theory was developed by Walker. According to Walker, “Profits are a rent paid for the abilities of entrepreneur”. Walker theory states that profits arise due to the differences in efficiency and ability of entrepreneurs. Hence, efficient and able entrepreneurs are paid profits.

Short Answer Questions

Question 1.
Explain the types of distribution in income.
Answer:
Distribution refers to that branch of economies which analyses how the national income of a community is divided among the various factors of production, distribution then refer to the sharing of the wealth that is produced among factors of production. It is the pricing of factors of production. The distribution of income may be personal or functional. Economies is concerned with functional distribution. The distinction between them is briefly explained here.

1. Functional Distribution :
Functional distribution deals with the study of factor incomes. It means the theory of factor pricing. The prices of land, labour, capital and organisation are called rent, wages, interest and profit respectively. Therefore, it is the study and determination of rent, wages, interest and profit. It concerns the pattern of distribution of national income as rent, wage, interest and profits. Thus, it is not concerned with individuals and their individual income, but with the agents of production. The study of functional shares has been carried on both at the macro and micro levels.

Micro-distribution :
The theory of micro-distribution explains how the prices of factors of production are determined.
Ex : Micro-distribution studies how the wage rate of labour is determined.

Macro-distribution :
Macro distribution explains the share of a factor of production in the national income.
Ex : The share of labour in the national income.

2. Personal distribution :
It refers to the distribution of income or wealth of a country among its people. It studies how income or wealth is distributed among individuals or persons. It studies how much income is earned by an individual, but not how it is earned or in how many forms it is earned. The causes of income inequalities can be known by studying personal distribution.

Question 2.
What are the factors that determine the factor prices?
Answer:
The demand and supply of a factor of production determine its price. The demand for a factor of production depends on the following.

1. It depends on the demand for the goods produced by it.
2. Price of the factor determines its demand.
3. Prices of other factors or co-operative factors determine the demand for a factor.
4. Technological changes determine the demand for a factor.
5. The demand for a factor increases due to increase in its production.

Factors that determine the supply of a factor of production.

1. The size of the population and it’s age composition.
2. Mobility of the factor of production.
3. Efficiency of the factor of production.
4. Geographical conditions.
5. Wage also determines the supply of this factor.
6. Income.

Question 3.
Point out the assumptions and limitations of marginal productivity theory.
Answer:
Marginal Physical Product (MPP) is the additional output obtained by using an additional unit of the factor of production. If we multiply the additional output by market price we will get Marginal Value Product (MVP) or Marginal Revenue Product (MRP). MRP is the addition made to total revenue by employing one more unit of factor. The marginal revenue productivity of a factor increases initially with the increase in the units of the factor of production, then reaches to maximum and after that it diminishes and will tend to equal the price of the factor service (average factor cost = AFC). This tendency of diminishing marginal revenue productivity follows from the assumption law of variable proportion. Assumptions of the Theory :

The theory is based on the following assumptions :

1. There is perfect competition in the factor market and commodity market.
2. All the units of a factor are homogeneous.
3. The theory assumes full employment of the factors.
4. There is perfect mobility of the factors of production.
5. Substitution is possible between the factors.
6. The entrepreneurs are motivated by the profits.
7. Various units of the factors are divisible.
8. The theory is applicable in the long run.
9. It is based on the law of variable proportions.
10. Marginal production of a factor can be measured.

Criticism :
The marginal productivity theory of distribution is based on unrealistic assump¬tions. Hence, it has been criticized.

1. There is no perfect competition in the factor market and commodity market.
2. All the factor units are not homogeneous.
3. Factors are not fully employed.
4. Factors are not perfectly mobile.
5. Substitution is not always possible between the factors.
6. Profit motive is not the main motive.
7. All factors are not divisible.
8. This theory is not applicable in the short run.
9. Production is not the result of one factor alone.
10. The sum of factor payments is not equal to the value of product.

The marginal productivity theory is not an adequate explanation of the determination of the pricing of factors of production. Inspite of limitations of the theory, it explains the role of productivity in the determination of factor price.

Question 4.
What are the determining factors of real wages? [Mar. 17, 16]
Answer:
Real wages refer to the purchasing power of money wages received by the labourer. Real wages are expressed in terms of goods and services that a worker can buy with his money wages. The real wage is said to be high when a labourer obtains larger quantity of goods and services with his money income.

Factors Determining Real Wages :
Real wages depend on the following factors :
1) Price Level :
Purchasing power of money determines the real wage. Purchasing power of money depends on the price level. If price level is high, purchasing power of money will be low. On the contrary, if price level is low, purchasing power of money will be high. Similarly, given the price level, if money wage is high real wage will also increase and when money wage decreases real wage also decreases.

2) Method of Payment :
Besides money wages, labourers get certain additional facilities provided by their management. Like free housing, free medical facilities, free education facilities to children, free transport etc. If such facilities are high, the real wages of labourers will also be high.

3) Regularity of Employment :
Real wages depend on the regularity of employment. If the job is permanent, his real wage will be high even though his money wage is low. In case of temporary employment, his real wage will be low though his money wage is high. Thus, certainty of job influences real wages.

4) Nature of Work :
Real wages are also determined by the risk and danger involved in the work. If the work is risky real wages of labourer will be low though money wages are high. For instance, a captain in a submarine, miners etc., always face danger and risk.

5) Conditions of Work :
The working conditions also determine the real wage of a labourer. Less duration of work, ventilation, light, fresh air, recreation facilities etc., certainly result in the high real wages. If these facilities are lacking, real wages are low even though money wages are high.

6) Subsidiary Earnings :
If a labourer earns extra income in addition to his wage, his real wage will be higher. For instance, a government doctor may supplement his earnings by undertaking private practice.

7) Future Prospects :
Real wage is said to be higher in those jobs where there is a possibility of promotions, hike in wage and vice-versa.

8) Timely Payment :
If a labourer receives payment regularly and timely, the real wage of the labourer is high although his money wage is pretty less and vice versa.

9) Social Prestige :
Although money wages of a bank officer and Judge are equal, the real wage of a Judge is higher than the bank officer due to social status.

10) Period and Expenses of Education :
Period and expenses of education also affect real wage. For example, if one person is a graduate and the other is an undergraduate who are working as clerks, the real wage of the undergraduate is high because his period of learning and expenses on education are lower than the graduate labourer.

Question 5.
Explain the concepts of gross profits.
Answer:
Gross profit is considered as a difference between total revenue and cost of production. The following are the components of gross profit:

1. The rent payable to his own land or buildings includes gross profit.
2. The interest payable to his own business capital.
3. The wage payable to the entrepreneur for his management includes gross profit.
4. Depreciation charges or user cost of production and insurance charges are included in gross profit.

Net profits :
Net profits are reward paid for the organiser’s entrepreneurial skills.

Components :
1. Reward for Risk Bearing :
Net profit is the reward for bearing uninsurable risks and uncertainties.

2. Reward for Co-ordination :
It is the reward paid for co-ordinating the factors of production in right proportion in the process of production.

3. Reward for Marketing Services :
It is the profit paid to the entrepreneur for his ability to purchase the services of factors of production.

4. Reward for Innovations :
It is the reward paid for innovations of new products and alternative uses to natural resources.

5. Wind Fall Gains :
These gains arise as a result of natural calamities, wars and artificial scarcity are also included in net profits.

Very Short Answer Questions

Question 1.
What are the determining factors of the demand for a factor?
Answer:

1. The demand for the factors of production is derived demand. It depends on the demand for the goods produced by it.
2. Price of the factor determines its demand.
3. Prices of other factors which will help in the production also determine the demand for a factor.
4. Technology determines the demand for the factors. For instance, increase in technology reduces the demand for labourers.
5. Returns to scale will determine the demand for the factors of production. The demand for the factors increases due to increasing returns in the production.

Question 2.
What are the determining factors of the surplus of labour ?
Answer:
Supply of labour depends on :

1. Size of the population and its age composition.
2. Mobility of the factors of production.
3. Efficiency of the factors of production.
4. Geographical conditions will determine the supply of factors of production.
5. Price of the factor determines its supply.
6. The supply of a factor depends on its opportunity cost – the minimum earning which it can earn in the next best alternative use.

Question 3.
What is Contract rent?
Answer:
It is the hire charges for any durable good. Ex : Cycle rent, room rent etc. It is a periodic payment made for the use of any material good. The amount paid by the tenant cultivator to the landlord annually may be also called contract rent. Ex. : The rent that a tenant pays to the house owner monthly as per an agreement made earlier or the hiring charges of a cycle ^ 10 per hour is also contract rent.

Question 4.
What is Economic rent?
Answer:
The ordinary use of the term ‘rent’ means any periodic payment for the hire of anything such as garriages, buildings etc. Economic rent is the pure rent payable as a reward for utilising the productivity of land. It is derived by subtracting the elements like interest, wages, profits and depreciation from the gross rent or contract rent. To David Ricardo, it is surplus over costs or expenses of cultivation.

Question 5.
What are Money wages?
Answer:
Money wages are the remuneration received by the labourer in the form of money for the physical and mental service rendered by him or her in the production process.
Ex : If a labourer is paid ₹ 30/- per day. ₹ 30/- is the money wage.

Question 6.
What are Real wages?
Answer:
Real wage is the purchasing power of money wages in terms of goods and services.

Question 7.
What are Time wages?
Answer:
Time wage is the amount paid for labourers for a fixed period of work i.e., weakly, daily, monthly etc.

Question 8.
What are Piece wages?
Answer:
Piece wage is the amount paid for labourers according to volume of work, done by them.

Question 9.
What is Gross interest?
Answer:
The payment which the lender receives from the borrower excluding the principal is gross interest.
Gross interest = Net interest + [Reward for risk taking + Reward for Inconvenience + Reward for management]

Question 10.
What is Net interest?
Answer:
Net interest is the reward for the service of the capital loan.
Ex : Net interest paid on government bonds and government loans.

Question 11.
What is Gross profit?
Answer:
Gross profit is considered as a difference between total revenue and cost of production.
Gross profit = Net profit + [Implicit rent + Implicit wage + Implicit interest + Depreciation charges + Insurance premium]

Question 12.
What is Net profit ? [Mar. ’16]
Answer:
Net profit is the reward paid for the organizer’s entrepreneurial skills.
Net profit = Gross profit – [Implicit rent + Implicit wage + Implicit interest + Depreciation charges + Insurance premium]

Telangana TSBIE TS Inter 1st Year Economics Study Material 5th Lesson Market Analysis Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 5th Lesson Market Analysis

Long Answer Questions

Question 1.
Describe the classification of markets.
Answer:
Edwards defined “Market as a mechanism by which buyers and sellers are brought together”. Hence, market means where selling and buying transactions take place. The classification of markets is based on three factors.

1. On the basis of area
2. On the basis of time
3. On the basis of competition.

I. On the Basis of Area :
According to the area, markets can be of three types.

1) Local Market :
When a commodity is sold at particular locality. It is called a local market. Ex : Vegetables, flowers, fruits etc.

2) National Market :
When a commodity is demanded and supplied throughout the country is called national market. Ex : Wheat, rice etc.

3) International Market :
When a commodity is demanded and supplied all over the world is called international market. Ex : Gold, silver etc.

II. On the Basis of Time :
It can be further classified into three types.
1) Market Period or Very Short Period :
In this period where producer cannot make any changes in supply of a commodity. Here, supply remains constant. Ex: Perishable goods.

2) Short Period :
In this period supply can be changed to some extent by changing the variable factors of production.

3) Long Period :
In this period supply can be adjusted in accordance with change in demand. In long run all factors will become variable.

III. On the Basis of Competition :
This can be classified into two types.
1) Perfect Market :
A perfect market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous products without any restrictions.

2) Imperfect Market :
In this market, competition is imperfect among the buyers and sellers. These markets are divided into 1. Monopoly 2. Duopoly 3. Oligopoly 4. Monopolistic competition.

Question 2.
What are the characteristic features of perfect competition?
Answer:
Perfect competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous products without any restrictions.

The following are the features of perfect competition :
1) Large Number of Buyers and Sellers :
Under perfect competition, the number of buyers and sellers is large. The share of each seller and buyer in total supply or total demand is small. So, no buyer and seller cannot influence the price. The price is determined only by demand and supply. Thus, the firm is price taker.

2) Homogeneous Product :
The commodities produced by all the firms of an industry are homogeneous or identical. The cross elasticity of products of sellers is infinite. As a result, single price will rule in the industry.

3) Free Entry and Exit :
In this competition there is a freedom of free entry and exit. If existing firms are getting profits new firms enter into the market. But when a firm gets losses, it would leave the market.

4) Perfect Mobility of Factors of Production :
Under perfect competition the factors of production are freely mobile between the firms. This is useful for free entry and exit of firms.

5) Absence of Transport Cost :
There are no transport cost. Due to this, price of the commodity will be the same throughout the market.

6) Perfect Knowledge of the Economy :
All the buyers and sellers have full information regarding the prevailing and future prices and availability of the commodity. Information regarding market conditions is also available.

Question 3.
Explain the meaning of perfect competition. Illustrate the mechanism of price determination under perfect competition. [Mar. ’17, ’16]
Answer:
Perfect Competition :
Perfect competition is a market sructure characterized by a complete absence of rivalry among the individual firms. Thus, perfect competition in economic theory has a meaning diametrically opposite to the everyday use of this term. In practice, businessmen use the word competition as synonymous to rivalry. In the theory, perfect competition implies no rivalry among firms. Perfect competition may be defined as that market situation, in which there are large number of firms producing homogeneous product, there is free entry and free exit, perfect knowledge on the part of buyer, perfect mobility of factors of production and no transportation cost at all.

Price Determination under Perfect Competition : Under perfect competition, sellers and buyers cannot decide the price, Industry decides the price of the good.

Market brings about a balance between the commodities that come for sale and those demanded by consumers. It means, the forces of supply and demand determine the price of the good. The following schedule and diagram help us to understand changes in supply, demand and equilibrium price.

Demand and Supply Schedule

The above table shows the demand and supply schedules of a good. Changes in price always lead to change in supply and demand. As price increases, there is a fall in the quantity demanded. It means, price and quantity demanded have a negative relationship. At the sametime, if price of a commodity increases there is an increase in the quantity supplied. Therefore, the relation between price and supply of goods is positive. It can be observed from the table that when the price is ₹ 10/-, market demand is 60 kgs and supply is 20 kgs.

When the price increases to ₹ 20/-, the supply increases to 30 kgs and demand falls to 50kgs. If the price increases to ₹ 50/-, the supply increases to 60 kgs and demand is only 20 kgs. When the demand is less, price tends to decrease towards equilibrium price. When the price is ₹ 30/-, the demand and supply are equal to 40 kgs. This price is called equilibrium price which is ₹ 30, and equilibrium output and demand is 40 kgs. This process is explained with, the help of figure.

In the figure, the demand and supply of a commodity are shown on OX axis and the price of the commodity on OY axis. As per the diagram, the equilibrium price is found at a point where both demand and supply curves intersect each other at point E, i.e., OP price is the equilibrium price and OQ quantity is the equilibrium supply and demand.

Question 4.
Explain equilibrium of the firm in the shortrun and longrun under perfect competition.
Answer:
Perfect competition is a market structure characterized by a complete absence of rivalry among the individual firms. Thus, perfect competition in economic theory has a meaning diametrically opposite to the everyday use of this term. In practice, businessmen use the word competiton as synonymous to rivalry. In theory, perfect competition implies no rivalry among firms. Perfect competition may be defined as that market situation, in which there are large number of firms producing homogeneous product, there is free entry and free exit, perfect knowledge on the part of buyer, perfect mobility of factors of production and no transportation cost at all.

Equilibrium of a Firm :
We have learnt that the price of a commodity is determined by the market demand and market supply under perfect competition. An increase in price of a product acts as an incentive in increasing production. As a firm aims at maximizing profit, it chooses that output which maximizes its profits. When the firm is in equilibrium, it has no desire to change its output.

Equilibrium output is explained with the help of cost and revenue curves of a firm. In perfect competition, average and marginal cost curves are ‘U’ shaped one and average revenue and marginal revenue curves are parallel to OX axis. Since AR = MR, both these curves will merge into a single line.

1) Short Period Equilibrium :
Firms are in business to maximize profits. During short period, a firm cannot change fixed factors like machinery, buildings etc. However, it produces more output by increasing variable factors. Equilibrium output is produced in the short period where short period marginal cost (SMC) is equal to short period marginal revenue (SMR). The firm will be in equilibrium, when marginal cost curve cuts marginal revenue curve from below. During short period, a firm may get super normal, normal profits or losses. Two conditions are necessary for firm’s equilibrium. They are : i) MC = MR and ii) MC curve should cut MR curve from below. The figure shows the firm’s short period equilibrium.

In the figure quantity demanded and supplied are shown on OX axis and price of the commodity on OY axis. The diagram shows that the equilibrium price OP is determined by the industry at point E where the industry demand is equal to industry supply. The price, so, determined by the industry is passed on to the firm. This is shown by the horizontal demand curve of the firm. This line is also known as the price line. Since, competition is perfect, the AR curve (demand curve) of the firm is also the MR curve of the firm. The firm’s SAC curve and SMC curve are also shown respectively.

The profits of the firm are maximum at the output where MC = MR, that is, at output OQ, SMC = MR. At any output than OQ, MR exceeds MC, which would mean that if the production is more its profits will increase. At any output more than OQ, MR becomes less than MC, which would mean a loss to the firm. Thus, OQ is output of maximum profits. At the equilibrium point ‘E’, the price is equal to OP or AQ, while AC per unit equals QB, profit per unit is equal to B. Total supernormal profits will be equal to PABC, i.e., BA x OQ.

2) Long Period Equilibrium :
We have seen that under short period, a firm can adjust its output, within limits, by varying the factors of production. But in the long period the firm can adjust its output to any extent because it can vary all the factors of production. Thus, it is certain that the firm will not incur losses in the long period. In the long period, the free entry of the new firms into the industry will wipe out the supernormal profits of the firm. Hence, in the long period, the frim wil be at optimum size where there is no profit – no loss. Firm gets only normal profits which are included in the long period average cost. In other words, under perfect competition, the individual firm at equilibrium earns normal profits only.
Therefore, AR = MR = LAC = LMC

The figure illustrates the long period equilibrium of the firm. The quantity of a good is depicted on OX axis and price, costs and revenues are on OY axis in the diagram.

The point of equilibrium will be established at which the firm’s MR curve touches its LAC curve at its minimum point. At this point LMC = LAC. Thus, when a firm is in long period equilibrium the following conditions exist:
At point E; P = AR = MR = LMC = LAC.

Question 5.
What is monopoly? Explain how price is determined under monopoly.
Answer:
Monopoly is one of the market in the imperfect competition. The word ‘Mono’ means I ‘single’ and ‘Poly’ means ‘seller’. Thus, monopoly means single seller market.

In the words of Bilas, “Monopoly is represented by a market situation in which there is a single seller of a product for which there are no close substitutes, this single seller is unaffected by and does not affect, the prices and outputs of other products sold in the economy”. Monopoly exists under the following conditions : 1) There is a single seller of product. 2) There are no close substitutes. 3) Strong barriers to entry into the industry exist.

Features of Monopoly:

1. There is no single seller in the market.
2. No close substitutes.
3. There is no difference between firm and industry.
4. The monopolist either fix the price or output.

Price Determination :
Under monopoly, the monopolist has complete control over the supply of the product. He is price maker who can set the price to attain maximum profit. But he cannot do both things simultaneously. Either he can fix the price and leave the output to be determined by consumer demand at a particular price. Or he can fix the output to be produced and leave the price to be determined by the consumer demand for his product. This can be shown in the diagram.

In the above diagram, on ‘OX’ axis measures output and ‘OY axis measures cost. AR is Average Revenue curve, AC is Average Cost curve. In the above diagram, at point E where MC = MR at that point the monopolist determines the output. Price is determined where this output line touches the AR line. In the above diagram for producing OQ quantity cost of production is OCBQ and revenue is OPAQ.
Profit = Revenue – Cost
= PACB shaded area is profit under monopoly.

Short Answer Questions

Question 1.
Write a note on classification of markets based on time and area.
Answer:
Edwards defined, “Market as a mechanism by which buyers and sellers are brought together”. Hence, market means where selling and buying transactions take place. The classification of markets is based on three factors.

1. On the basis of area
2. On the basis of time
3. On the basis of competition.

I. On the Basis of Area :
According to the area, markets can be of three types.

1) Local Market :
When a commodity is sold at particular locality, it is called a local market. Ex : Vegetables, flowers, fruits etc.

2) National Market :
When a commodity is demanded and supplied throughout the country is called national market. Ex : Wheat, rice etc.

3) International Market :
When a commodity is demanded and supplied all over the world is cdlled international market. Ex : Gold, silver etc.

II. On the Basis of Time :
It can be further classified into three types.
1) Market Period or Very Short Period :
In this period where producer cannot make any changes in supply of a commodity. Here supply remains constant. Ex: Perishable goods.

2) Short Period :
In this period supply can be changed to some extent by changing the variable factors of production.

3) Long Period :
In this period supply can be adjusted in according to change in demand. In long run all factors will become variable.

III. On the Basis of Competition :
This can be classified into two types.
1) Perfect market :
A perfect market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous products without any restrictions.

2) Imperfect Market :
In this market, competition is imperfect among the buyers and sellers. These markets are divided into 1. Monopoly 2. Duopoly 3. Oligopoly 4. Monopolistic competition.

Question 2.
Explain the equilibrium of the firm in the Short-run under perfect competition.
Answer:
Short Period Equilibrium :
Firms are in business to maximize profits. During short period, a firm cannot change fixed factors like machinery, buildings etc. However, it produces more output by increasing variable factors. Equilibrium output is produced in the short period where short period marginal cost (SMC) is equal to short period marginal revenue (SMR). The firm will be in equilibrium, when marginal cost curve cuts marginal revenue curve from below. During short period, a firm may get super normal, normal profits or losses. Two conditions are necessary for firm’s equilibrium. They are : i) MC = MR and ii) MC curve should cut MR curve from below. The figure shows the firm’s short period equilibrium.

In the figure quantity demanded and supplied are shown on OX axis and price of the commodity on OY axis. The diagram shows that the equilibrium price OP is determined by the industry at point E where the industry demand is equal to industry supply. The price, so, determined by the industry is passed on to the firm. This is shown by the horizontal demand curve of the firm. This line is also known as the price line. Since, competition is perfect, the AR curve (demand curve) of the firm is also the MR curve of the firm.

The firm’s SAC curve and SMC curve are also shown respectively. The profits of the firm are maximum at the output where MC = MR, that is, at output OQ, SMC = MR. At any output than OQ, MR exceeds MC, which would mean that if the production is more its profits will increase. At any output more than OQ, MR becomes less than MC, which would mean a loss to the firm. Thus, OQ is output of maximum profits. At the equilibrium point ‘E’, the price is equal to OP or AQ, while AC per unit equals QB, profit per unit is equal to B. Total supernormal profits will be equal to PABC, i.e., BA x OQ.

Question 3.
Explain the equilibrium of the firm in the Longrun under perfect competition.
Answer:
Long Period Equilibrium :
We have seen that under short period, a firm can adjust its output, within limits, by varying the factors of production. But in the long period the firm can adjust its output to any extent because it can vary all the factors of production. Thus, it is certain that the firm will not incur losses in the long period. In the long period, the free entry of the new firms into the industry will wipe out the supernormal profits of the firm.

Hence, in the long period, the frim wil be at optimum size where there is no profit – no loss. Firm gets only normal profits which are included in the long period average cost. In other words, under perfect competition, the individual firm at equilibrium earns normal profits only.
Therefore, AR = MR = LAC = LMC

The figure illustrates the long period equilibrium of the firm. The quantity of a good is depicted on OX axis and price, costs and revenues are on OY axis in the diagram.

The point of equilibrium will be established at which the firm’s MR curve touches its LAC curve at its minimum point. At this point LMC = LAC. Thus, when a firm is in long period equilibrium the following conditions exist:
At point E; P = AR = MR = LMC = LAC.

Quedtion 4.
What is monopoly? What are its characteristics?
Answer:
Monopoly is totally a different market situtation compared with perfect competition. The word ‘mono‘ means single, and ‘poly’ means seller. Monopoly is said to exist when one firm is the sole producer of a product which has no close substitutes. In the words of Bilas, “Monopoly is represented by a market situation in which there is a single seller of a product for which there are no close substitutes, this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy”.

Characteritics of Monopoly:
a) A single firm produces the good in the market.
b) No close substitutes to this good.
c) Strong barriers exist for the entry of new firms into the market.
d) Industry and firm is one and same.
e) Producer can control either price or quantity of the good. But he / she cannot determine both price and quantity of the good simultaneously.

Equilibrium and Price Determination under Monopoly :
Price, output and profits under monopoly are determined by the forces of demand and supply. The monopolist will have complete control over the supply of the product. He also possesses the power to set the price to attain maximum profit. However, he cannot do both the things simultaneously, Either he can fix the price and leave the output to be determined by the consumer demand at this price or he can fix the output to be produced and leave the price to be determined by the consumer demand for his product.

Question 5.
What are the characteristics of monopolistic competition?
Answer:
It is a market with many sellers for a product but the products are different in certain respects. It is mid way of monopoly and perfect competition. Prof. E.H. Chamberlin and Mrs. Joan Robinson pioneered this market analysis.

Characteristics of Monopolistic Competition :
1) Relatively Small Number of Firms :
The number of firms in this market are less than that of perfect competition. No one can control the output in the market as a result of high competition.

2) Product Differentiation :
One of the features of monopolistic competition is product differentiation. It takes the form of brand names, trade marks etc. Its cross elasticity of demand is very high.

3) Entry and Exit :
Entry into the industry is unrestricted. New firms are able to commence production of very close substitutes for the existing brands of the product.

4) Selling Cost :
Advertisement or sales promotion technique is the important feature of Monopolistic competition. Such costs are called selling costs.

5) More Elastic Demand :
Under this competition the demand curve slopes downwards from left to the right. It is highly elastic.

Question 6.
What is oligopoly? Explain its characteristics.
Answer:
The term ‘Oligopoly’ is derived from two Greek word “Oligoi” meaning a few and “Pollein” means to sell. Oligopoly refers to a market situation in which the number of sellers dealing in a homogeneous or differentiated product is small. It is called competition among the few. The main features of oligopoly are the following.

1. Few sellers of the product.
2. There is interdependence in the determination of price.
3. Presence of monopoly power.
4. There is existence of price rigidity.
5. There is excessive selling cost or advertisement cost.

Question 7.
Explain the concept of duopoly and its characteristics.
Answer:
Duopoly (from greek duoayi (two) + polein(to sell)) is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominance over a market.

It is also called as a limited form of oligopoly. The goods produced by the producers may be homogeneous or differentiated. As there are only two producers, both are aware that the decisions of one will affect the other. Rivalry and collusion of the producers are both possible in this market situation. In the market both firms have noteworthy control. In the field of industrial organization, it is the most commonly studied form of oligopoly due to its simplicity.

The earliest duopoly model was developed in 1838 by the French economist Augustin Cournot. Cournot illustrated his model with the example of two firms. According to this model, the two sellers will have a naive behaviours and they never learn from past patterns of reaction of rivalry. As a result each firm produces one third of the output. Together they cover two-thirds of the total market. Each firm maximizes its profits but industry profit will not be maximized. This happens due to non recognition of their interdependence. Characteristics of Duopoly:
a) There will be two sellers.
b) Homogeneous product.
c) Zero production cost.
d) Sellers do not understand their interdependence.

Question 8.
Compare perfect Competition and Monopoly.
Answer:

Very Short Answer Questions

Question 1.
Define Market. [Mar. ’16]
Answer:
Market is place where commodities are brought and sold and where buyers and sellers meet. Communication facilities help us today to purchase and sell without going to the market. All the activities take place is now called as market.

Question 2.
Give a note on the Time Based Markets.
Answer:
Supply of a good can be adjusted depending on time factor. On the basis of time, markets are divided into three types, i.e., very short period, short period and long period.

a) Market Period or Very Short Period :
This is a period where producer cannot make any changes in the supply of a good. Hence, the supply is fixed. As we know supply can be changed by making changes in inputs. Inputs cannot be changed in the very short period. Supply remains constant in this period. Perishable goods will have this kind of markets.

b) Short Period :
It is a period in which supply can be changed to a little extent. It is possible by changing certain variable inputs like labour.

c) Long Period :
The market in which the supply can be changed to meet the increased demand, producer can make changes in all inputs depending upon the demand in the long period. It is possible to make adjustments in supply in long period.

Question 3.
Give a note on the Area Based Markets.
Answer:
On the basis of area, markets are classified into local, national and international. These markets tell us the size or extent of the market for a commodity. The size of the market for a good depends upon demand for the good, transportation facilities and durability of the good etc.

a) Local Market :
When a commodity is sold at its produced area it is called local market. Perishable goods like vegetables, flowers, fruits etc., maybe produced and marketed in the same area.

b) National Market :
When a commodity is demanded and supplied by people throughout the country it is called national market. Examples are wheat, rice, cotton etc.

c) International Market :
When buying and selling of commodities take place all over the world, then it is called international market. Ex. gold, silver, petrol etc.

Question 4.
Give a note on the Competition based markets.
Answer:
Based on the nature of the competition, markets are classified into two perfect competition and imperfect competition.
a) Perfect Competition :
A perfectly competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous product without any artificial restrictions. Hence, there is absence of rivalry among the individual firms in perfect competition.

b) Imperfect Competition :
It is a market situation where competition is not perfect either amongst the buyers or amongst the sellers. Hence, there will be a different price for the same product. These markets are divided into monopoly, monopolistic competition, oligopoly and duopoly.

Question 5.
What is Perfect competition?
Answer:
In this market there are large number of buyers and sellers who promote competition. In this market goods are homogeneous. There is no transport fares and publicity costs. So price is uniform of any market.

Question 6.
Define Monopoly.
Answer:
Mono means single, Poly means seller. In this market single seller and there is no close substitutes. The monopolist is a price maker.

Question 7.
What is Monopolistic competition? [Mar. ’16]
Answer:
It is a market where several firms produce same commodity with small differences is • called monopolistic competition. In this market producers to produce close substitute goods.
Ex : Soaps, cosmetics etc.

Question 8.
Define Oligopoly.
Answer:
A market with a small number of producers is called oligopoly. The product may be homogeneous or may be differences. This market exists in automobiles, electricals etc.

Question 9.
What is Duopoly?
Answer:
When there are only two sellers of a product, there exist duopoly. Each seller under duopoly must consider the other firms reactions to any changes that he makes in price or output. They make decisions either independently or together.

Question 10.
Explain Equilibrium price.
Answer:
Equilibrium price is that price where demand and supply are equal in the market.

Question 11.
What is Product differentiation? [Mar. ’17]
Answer:
One of the main features of monopolistic competition is product differentiation. This is a market situation in which there are many firms of a particular product, but the product of each firm is in some way or the other way differentiated from the product of the other firms in the market. They are heterogeneous rather than homogeneous. Product differentiation may take the form of brand names, trademarks, etc. This means that the products of the firms will have close substitutes and their cross-elasticity of demand will be very high.

Question 12.
What are the Selling costs? [Mar. ’17]
Answer:
An important feature of a monopolistic market is every firm makes expenditures to sell more output. Advertisements through newspapers, journals, electronic media etc., these methods are used to attract more consumers by each firm.

Telangana TSBIE TS Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation

Long Answer Questions

Question 1.
Discuss the evolution of money. Explain its types.
Answer:
Money occupies a unique place in any economic system. Society needs money for a variety of transactions undertaken by the people and the government in the day to day life. Now-a-days, we cannot imagine a society without a role for money.

Evolution of money:
The term ‘money’ was derived from the name of goddess Juno Moneta of Rome. Prior to the introduction of money, the barter system was in vogue. In that system one commodity was exchanged for another commodity. Money was coined in order to overcome the difficulties of the barter system. In the initial stages, animal was used in place of money. Gradually metallic money in the form of gold, silver, bronze and nickel replaced it. In the third stage coins came into use. That was followed by paper money. The latest stage is the credit money in the form of drafts, cheques, debit cards, credit cards etc. Thus, money has undergone different stages in the process of evolution.

Types of money:
1) Commodity Money and Representative Money :
Commodity money includes metallic coins whose face value and intrinsic value are same. It is also called as full-bodied money. Representative money includes coins and paper money whose intrinsic value is less than their face value.

2) Legal Tender Money and Optional Money :
On the basis of legality, money is divided into legal tender money and optional money. Legal tender money is the money which is accepted as per the law by everyone in payment for commodities and services. Credit creation by the commercial banks in the form of drafts, cheques etc., are called as optional money.

3) Metallic Money and Paper Money :
Metallic money is made up of metals such as silver, nickel, steel etc. All coins are metallic money. Paper money is money printed on paper. Currency notes in the form of ₹ 1,000, ₹500, ₹ 100, ₹ 50 and ₹ 10 are paper money

4) Standard Money and Token Money :
Standard money is the money whose face value and intrinsic value are same. Token money is money or unit of currency whose face value is higher than the intrinsic value, e.g. 50 paisa, 1 rupee coins etc.

5) Credit Money :
This is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 2.
Define money and explain the functions of money.
Answer:
Money plays a vital role in modern economy. A modem economy is rightly known as monetary economy because of the crucial position that money occupies.

1. According to ‘Robertson’ – “Anything which is widely accepted in payment for goods or it discharges of other kinds of business obligations”.
2. According to ‘Seligman’ – “One that possesses general acceptability”.
3. According to Waker’ – “Money is what money does”.

Functions of money:

1. Primary functions :
a) Medium of exchange :
Money serves as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible if only there was double coincidence of wants. But money facilitates exchange of commodities without double coincidence wants. Any commodity can be exchanged for money. People can exchange goods and services through the medium of money.

b) Measure of value :
Money serves as a measure of value of goods and services. As common measure of value it has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in the units of money We call it as price.

2. Secondary functions :
a) Store of value :
The value of commodities and services can be stored in the form of more. Certain commodities are perishable. If they are exchanged for money before they perish, their value be preserved in the form of money.

b) Standard of deferred payments :
Money serves as a standard of deferred payments. In the modern economies most of the business transactions take place on the basis of credit. An individual consumer or a business man may now purchase a commodity and pay for it in future. As this function makes it possible to express future payments in terms of money.

c) Transfer of money :
Money can be transferred from one person to another at any time at any place.

3. Contingent functions :
a) Measurement and distribution of National income : National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production by making them payment in money.

b) Money equalizes marginal utilits / productivities :
The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity. Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit :
Credit is created by banks from out of the primary deposits of money supply of credit, in an economy it is dependent on the supply of nominal money.

d) Liquidity :
Money is the most important liquid asset. Interms of liquidity, it is superior than other assets. Money is centpercent liquid.

Question 3.
Describe the functions of the commercial banks.
Answer:
Functions of commercial banks :
Primary functions :
a) Accepting deposits :
The commercial bank is just like any other money lender doing money lending business, bank receives public money in the form of deposits. The deposits mainly are of the following steps.

1) Current deposits :
These deposits have two characteristics. One, there are no restrictions with regard to the amount of withdrawal and number of withdrawals. Banks normally do not pay any interest on current account deposits.

2) Savings deposits :
The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics : 1) two or three withdrawals per week are permitted 2) banks pay 4 to 5% interest (nominal) per annum or savings deposits.

3) Recurring deposits :
People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the savings deposits.

4) Fixed deposits :
Deposits received on fixed accounts are called fixed or time deposits. They are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before the expiry of the fixed period.
2. Banks pay high rate of interest than any other deposits.

b) Advancing loans :
Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credits, overdrafts, and by discounting bills of exchange.
1) Cash credit :
In this case, the borrower is given a loan. The amount of the loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of his account as per his needs.

2) Overdraft :
It means allowing the depositor to overdraw his account upto a previous agreed limit. Banks allow overdrafts only to those persons who have their accounts in the bank. The overdraft is granted only for short period for customers.

3) Loans :
Usually a loan is granted against the securities of assets or the personal security of the borrower bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period, term loans for longer period and also grant consumer credit for buying durable goods.

4) Discounting bills of exchange :
The banks facilitate trade and commerce by discounting the bills of exchange. This is the most popular form of bank lending.

Secondary functions :
a) Agency services :
Banks act as agents, correspondents and representatives of their customer. As an agent a commercial bank collects and pay cheques, drafts, bills and pay insurance premium subscriptions, rent, income tax etc., as per the instruction of their customers. Banks also act as trusties executors and attorneys.

b) General utility services :
Banks provide some general utility services like :

1. Locker facility for safe custody and valuables.
2. Issue traveller’s cheques and drafts.
3. Transfer of funds.
4. Acting a referee to the financial standing of customers.
5. Issue letters of credit.
6. Finance foreign trade by discounts foreign bills of exchange.

Question 4.
What are the functions of Reserve Bank of India?
Answer:
The Central Bank of our country is Reserve Bank of India. It was established in April 1935, with a share capital of ₹ 5 crores. It was originally owned by private shareholders but was nationalised by the government of India in 1949. It performs all its activities under the Reserve Bank of India Act 1934.

The main aim of RBI is to achieve the monetary stability and to control the credit system of an economy. It performs the following functions.
1) Note issue :
Reserve Bank of India enjoys the monopoly of note issue in the country. It maintains a minimum ₹ 200 crores of gold and foreign exchange reserves of which gold should be ₹ 115 crores. It issue notes in the denominations of ₹ 1,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10, ₹ 5 and ₹ 2. One rupee note and coins are issued by the finance department of the Government of India. Reserve Bank of India prints all the currency notes in the security press of the Government of India.

2) Banker to Government :
Reserve Bank of India acts as the banker, agent and adviser to the Government of India. It receives money and make payments on behalf of the government and gives temporary advances to the government. It advises the government in all financial matters.

3) Banker’s Bank :
Reserve Bank serves as a banker not only to the government but also to the banks. It provides financial assistance to the commercial banks by giving loans and rediscounting the bills of exchange. It helps the banks by acting as a clearing house for settlement of inter bank transactions and controls the supply of money in the economy through cash reserve ratio.

4) Lender of last resort :
It acts as lender of last resort by granting loans and advances to the commercial banks against some securities viz., treasury bonds, treasury bills and other approved securities. It also provides financial help to banks by rediscounting the eligible bills of exchange.

5) Custodian of foreign exchange reserves :
Reserve Bank of India as a member of the International Monetary fund. It regulates all foreign exchange transactions in the country. It controls and regulates the purchase and sale of foreign exchange through restrictions on exports and imports to maintain the official rate of exchange.

6) Credit controller :
Reserve Bank of India controls the volume of credit in the country. It controls the credit through different methods by appropriate monetary or fiscal policies. It announces credit policy for every six months based on the credit needs of the country. Through this it controls the inflation and deflation.

7) Promotional and development functions :
Reserve Bank of India in order to achieve economic development performs certain promotional and developmental functions.

They are :

1. Promoting various financial institutions to provide industrial finance.
2. It takes steps for establishment of banks throughout the country and expansion of their branches.
3. Encourage the financial institution to provide financial help to agriculture and rural credit.

Question 5.
Define Inflation. Explain the types and effect of Inflation.
Answer:
In a broader sense, the term inflation refers to persistent rise in the general price level over a long period of time. Some of the important definitions are given below :

According to Pigou, “Inflation exists when money income is expanding more than in proportion to increase in earning activity”.

Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Types of Inflation:
Inflation is divided into different types based on its pace or rate of inflation and the causes of inflation. They are detailed below :
A) Based on the Rate of Inflation :
On the basis of the rate of inflation, it may be classified into four types.

1) Creeping Inflation :
When rise prices is very slow and small (from 0 to 2 percent), it is called creeping inflation. It helps the economy to grow. It is depicted through O to A in the graph.

2) Walking Inflation :
This is the second stage of inflation. The inflation rate will be between 2% and 4%. It also helps the economy to progress (A to B in the graph).

3) Running Inflation :
When the rate of inflation is in the range of 4-10 percent per annum, it is called running inflation (B to C in the graph). It needs to be controlled.

4) Galloping Inflation or Hyper Inflation :
If the inflation rate exceeds 10 percent, galloping inflation occurs. It may also be called hyper inflation (C to D). It damages the economy.

B) Based on the Cause of Inflation :
On the basis of the cause of inflation, it can be classified into two types :
1) Demand-Pull Inflation :
If inflation is caused by an increase in the aggregate demand for commodities over aggregate supply, it is called demand-pull inflation.

2) Cost-Push Inflation :
Prices of the commodities may increase due to increase in the cost of production. Inflation caused by the rise in cost of production is called cost-push inflation. It can again be viewed from two angles : i) wage push and ii) profit push.

Effect of Inflation:
Inflation refers to a persistent upward movement in the general price level rather than once for all rise in it.

The effects of inflation can be divided into two sub-heads.

1. Effects of production
2. Effects of distribution
   It will affect all economic activities in the economy.

A) On production:
a) Mild inflation stimulates production and it increases the profit margin of entrepreneurs.
b) High inflation rate hinders production.
c) Inflation discourages savings. This affects the capital formation which in turn affects production.

B) On distribution:
Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of rich and affluent classes of society. The concrete effects of inflation on various groups of society are as follows.

Effects on distribution :
Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of inflation on various groups of society are as follows.

1) Debtors and creditors :
During inflation, debtors are generally the gainers while the creditors are the losses. The reason is that the debtors had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low due to rising prices.

2) On fixed income groups :
Those who get fixed income lose from inflation. Salaried persons people living on past savings, pensioners, interest earners are the worst suffers during inflation because their income remain fixed.

3) On working class :
During inflation working class also suffers worst because wages do not rise as much as the prices of commodities. In addition there is a time lag between the rise in prices and rise in wages. If the trade unions are strong they may get equal increase in money incomes compared to rise in prices.

4) Entrepreneurs :
They experience windfall gains as the prices at their stocks suddenly go up. Inflation thus re-distributes income and wealth in such a way as to harm the interest of creditors, labours, fixed income groups and favours the businessmen, traders and debtors. By meaning the rich richer and poor poorer, inflation is socially undesirable.

C) Social impact :
Economic inequality leads to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) Political effect :
Inflation widens social and economic disparities. It leads to political movements and if government is not responsive. This movement may threaten the stability of governments.

Question 6.
What are the causes of Inflation? Suggest remedial measures to control inflation.
Answer:
Inflation means a rise in the general price level over a long period of time. It occur due to the following reasons.

1. Increase in the aggregate demand of commodities.
2. Inadequate supply of commodities.
3. Increase in the cost of production.

I. The factors that effect the increase in demand :

1. Heavy pressure of population.
2. Increase in economy’s money supply.
3. More public expenditure towards various welfare schemes.
4. Reduce in rates of direct taxes.
5. Increase in the income levels of individuals.
6. Deficit financing by government.
7. Conspicuous spending by the people having black money.
8. Production in direct tax rates.

II. Factors that increase the cost of production :

1. Increase in costs of various factors of production.
2. Increase in tax rates.
3. Increase in the prices of technology.
4. Devaluation of domestic currency.
5. Inefficient management and no control on expenditure.
6. Lack of optimum allocation of resources.
7. Devaluation of domestic currency.

III. Factors that cause inadequate supply :

1. Irregular monsoons, floods, interior seeds in agriculture.
2. Non-availability of scarcity of inputs and raw materials.
3. Under-utilisation of productive capacity.
4. Shortage of investment due to non-availability of institutional credit.
5. Artificial scarcity due to black-marketing.
6. Exports at the cost of domestic supply.
7. Long gestation period of certain industries.

Remedial Measures :
Government has to take several steps to control inflation. Some of them are enlisted hereunder:

1. Importing the goods which are in short supply in the country.
2. Introducing rationing and quota system in case of mass consumption goods whose supply in inadequate to improve their distribution among all the needy sections of the people.
3. Controlling prices and eliminating black markets.
4. Taking steps to increase production of consumer goods.
5. Reducing the supply of money and credit by way of implementing appropriate monetary and fiscal policies.

Short Answer Questions

Question 1.
What is Barter system? What are its difficulties?
Answer:
Barter system means exchange of goods. This system was followed in olden days. But the population and its requirements are increasing, the system became very complicated. The difficulties of barter system are :

1) Lack of coincidence of wants :
Under the barter system, the buyer must be willing to accept the commodity which the seller is willing to offer in exchange. The wants of both the buyer and the seller just coincide. This is called double coincidence of wants. Suppose the seller has a good and he is willing to exchange it for rice. Then the buyer must have rice and he must be willing to exchange rice for goat. If there is no such coincidence direct exchange between the buyer and the seller is not possible.

2) Lack of store value :
Some commodities are perishables. They perish within a short time. It is not possible to store the value of such commodities in their original form under the barter system. They should be exchanged before they actually perish.

3) Lack of divisibility of commodities :
Depending upon its quantity and value, it may become necessary to divide a commodity into small units and exchange one or more units for other commodity. But all commodities are not divisible.

4) Lack of common measure of value :
Under the barter system, there was no common measure value. To make exchange possible, it is necessary to determine the value of every commodity interms of every other commodity.

5) Difficulty is making deferred payments :
Under barter system future payments for present transaction was not possible, because future exchange involved some difficulties. For example suppose it is agreed to sell specific quantity of rice in exchange for a goat on a future date keeping in view the recent value of the goat. But the value of goat may decrease or increase by that date.

Question 2.
Explain the definitions of money.
Answer:
Money plays a vital role in modem economy. A modem economy is rightly known as monetary economy because at the crucial position that money occupies. In the olden days goods were exchanged for goods. Such system is called barter system. However when economics grew there was a tremendous increase in the wants of the people as well as in the number of transactions then barter system became more difficult, in order to eliminate the difficulties in the barter system money came into existence.

Definition of money :
Several economists have defined money in several ways. Some of the prominent definitions are given below.

According to ‘Waker’ – “Money is what money does”.

According to ‘Robertson’ – Money as” anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations”.

According to ‘Seligman’ – Money as “one that possesses general acceptability”.

According to “Crowther” – Money as “anything that is generally acceptable as a medium of exchange and which at the same time acts as a’ measure and store of value”.

It may be found from the above definitions that the main focus is on general acceptability. Anything that used as money should have the general acceptance of the public as medium of exchange because it is for direct exchange of commodities money is fundamentally required. It acts as a common measure of value. However its suitability as a store of value is equally important. Therefore we can consider Crowther’s definition as relatively more comprehensive. It is elaborate and covers the most important functions of money.

Question 3.
Discuss money related concepts.
Answer:
Money was invented to overcome the difficulties of the barter system. Several economists have given definitions for money. Some of them are listed hereunder :

1. Robertson defined money as ‘anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations”.
2. According to Seligman’s definition, ‘money is one that possesses general acceptability”.

Related Concepts of Money :
When we discuss about money, we come across certain terms like currency, liquidity and near-money. They have different meanings. These concepts are related to money. It is necessary to know them clearly without any conceptual ambiguity.

i) Currency :
Currency is the form in which money is circulated in the economy by the monetary authority i.e., the government and the central bank. Currency includes coins and paper notes. It is only one component of money. Money comprises of not only currency but demand deposit and time deposits also.

ii) Liquidity :
The ability of an asset to be converted into money is termed as liquidity. In other words, conversion takes place with ease. Hence, liquidity may be defined as the ability of any asset to act as a direct medium of exchange.

Money acts as a direct medium of exchange. Hence money is considered as the perfect liquid asset. Other assets are not as liquid as money because they are not accepted by the public as medium of exchange. They have to be converted into money to facilitate exchange to take place. They have liquidity but the degree of liquidity varies from asset to asset.

iii) Near Money :
The term near-money refers to those highly liquid assets which are not accepted as money, but can be easily converted into money within a short period.

Here are some examples of near money :

1. savings deposits and time deposits in the commercial banks,
2. savings deposits in the post offices, and post office bonds,
3. stock and shares of joint stock companies.
4. units of UTI.
5. savings bonds and certificates.
6. treasury bills, and
7. bills of exchange and government securities and securities guaranteed by the government.

These assets are close substitutes of money. Hence, they are called near money or quasi-money.

Question 4.
Distinguish between different types of money.
Answer:
Money can be grouped into various items based on the value, material used and the legal status. They are :
1) Commodity money and representative money :
Money is classified into commodity money and representative money on the basis of the intrinsic value it possess.

If the intrinsic value is equal to the face value of coin is called commodity money and if the value is less than the face value, it is called representative money.

2) Legal tender money and optional money :
On the basis of legality money is divided into legal tender money and optional money. If money is accepted as per law by every one is called legal tender money If the acceptance is optional and not according to law is called optional money.
Ex: Cheques.

3) Metallic money and paper money :
Based on the material used money can be divided into metallic and paper money. If money is made up of metals such as silver, nickel, steel etc., all coins are metallic money and if money is printed on papers is called paper money.

4) Standard money and token money :
If the face value and intrinsic value are same, then the money is called standard money and if the face value is higher than the intrinsic value is called token money.

5) Credit money :
It is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and can be transferred from one person to other through cheques.

Question 5.
Explain the primary and secondary functions of money. [Mar. ’17, ’16]
Answer:
Money has many important functions to perform. These functions may be classified as :
i) Primary functions, ii) Secondary functions, iii) Contingent functions, and iv) Static and dynamic functions.

1. Primary Functions of Money :
The primary functions of money are really as the technical and important functions of money. They are two types :
i) Medium of Exchange :
Money serves as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible if only there was double coincidence of wants. But money facilitates exchange of commodities without double coincidence wants. Any commodity can be exchanged for money. People can exchange goods and services through the medium of money.

ii) Measure of value :
Money serves as a measure of the value of goods and services. As common measure of value it has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in the units of money. We call it as price. In view of this function of money, the values of different commodities can be compared and the ratios between the prices of different commodities can be determined easily.

2. Secondary Functions of Money :
Money has two secondary functions which are stated hereunder :
i) Store of value :
The value of commodities and services can be stored in the form of money. Certain commodities are perishable. If they are exchanged for money before they perish, their value be preserved in the form of money. Otherwise they perish and their value is lost forever. Even in the case of durable commodities, their value may diminish over a period of time. But their value can be stored, without any decline, in the form of money by exchanging them for money.

ii) Standard of Deferred Payments :
Money serves as a standard of deferred payments. In modem economies, most of the business transactions take place on the basis of credit. An individual consumer or a business man may now purchase a commodity and pay for it, in future as this function makes it possible to express future payments in terms of money. Similarly one can borrow certain amount of money now and repay it in future.

iii) Transfer of money :
Money can be transferred from one person to another at any time at any place.

Question 6.
State the contingent, static and dynamic functions of money.
Answer:
Money plays a vital role in modem economy.

According to Waker’ – “Money is what money does”.

According to ‘Robertson’ – “Anything which is widely accepted in payment for goods discharge of other kinds of business obligations”.

Contingent functions :
a) Measurement and distribution of National income :
National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production by making payment then in money.

b) Money equalizes marginal utilises / productivities :
The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity. Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit :
Credit is created by banks from out of the primary deposits of money supply of credit, in an economy is dependent on the supply of nominal money.

d) Liquidity :
Money is the most important liquid asset. Interms of liquidity it is superior than other assets. Money is cent percent liquid.

Static and Dynamic Functions of money :
Paul Engig classified functions of money as static and dynamic functions.

i) Static Functions :
We have learnt the medium of exchange, measure of value, store of value and standard of deferred payment are the traditional or technical functions of money. Engig called them static functions. These functions facilitate emergence of price mechanism. They do not show any effect on the economic development.

ii) Dynamic Functions :
The functions of money which influence output, consumption, distribution and general price level are called dynamic functions. They make the entire economy dynamic. The functions shown as contingent functions come under dynamic functions.

Question 7.
Explain different kinds of deposits accepted by the commercial banks.
Answer:
Commercial banks pay a very important role in the economic growth of a country. Commercial banks are the most important source of institutional credit in the money market. Banks attract savings from the people and encourage investment in industry, trade and commerce. Bank is a profit seeking business firm dealing in money and credit.

The word bank is derived from the “German” word “bankco” which means joint stock or joint fund. Banking in Britain originated with the lending of money by wealthy individuals to merchants who wished to borrow.

According to ‘Richard Sydney’ sayers – “Banks are institutions whose debts usually referred to as “Bank deposits” are commonly accepted in final settlement of other people’s debts”.

Accepting deposits :
The commercial bank just like any other money lender is doing money lending business. Bank receives public money in the form of deposits. The deposits mainly are of the following types.

a) Current deposits :
These deposits have two characteristics.
1) There are no restrictions with regard to the amount of withdrawal and number of withdrawals.
2) Banks normally do not pay any interest on current account deposits.

b) Savings deposits :
The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics :

1. Two or three withdrawals per week are permitted.
2. Banks pay 4% to 5% interest per annum on savings deposits.

c) Recurring deposits :
People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the saving deposits.

d) Fixed deposits :
Deposits of fixed accounts are called fixed or time deposits they are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before expiry of fixed period.
2. Bank pay high rate of interest than any deposits.

Question 8.
Explain different types of loans and advances paid by the commercial banks.
Answer:
According to “Crowther”- “A bank is a dealer in debts his own and other people”.

Banking means the accepting for the purpose of lending or investment of deposits of money from the public repayable or demand or otherwise and withdrawable by cheque, draft or otherwise.

Advancing loans :
Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credit, overdrafts and by discounting bills of exchange.

a) Cash credit :
In this case, the borrower is given a loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of his account as per his needs.

b) Overdraft :
It means allowing the depositor to overdraft his account upto a previously agreed limit. Banks allow overdraft only to those persons who have their accounts in the bank. The overdraft is granted only for a short period for customers.

c) Loans :
Usually a loan is granted against the securities of assets or personal security of the borrowed bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period. Term loans for longer period and also grant consumer credit for buying durable goods.

d) Discounting bills of exchange :
The bank facilitates ‘trade and commerce’ by discounting the bills of exchange. This is the most popular form of bank lending.

Question 9.
Point out the agency and general utility functions of commercial banks.
Answer:
The following are agency functions and general utility functions.

Agency Function :
Commercial banks perform certain agency functions also. On certain occasions they act as agents of the customers. Some of the important agency functions are :

1. Collection of cheques, drafts, bills of exchange etc., of their customers from other banks.
2. Collection of dividends and interest from business and industrial firms.
3. Purchase and sale of securities, shares, debentures, government securities on behalf of the customers.
4. Acting as trustees and keeping their funds in safe custody.
5. Making payments such as insurance premium, income tax, subscriptions etc., on behalf of their customers as per their request.

General Utility Functions :
Besides the agency functions, commercial banks provide certain utility services to their customers. They are :

1. Provision of locker facility for the safe custody of the silver, gold ornaments and important and valuable documents for which service rent is collected.
2. Transfer of money of the customers from one bank to the other by way of demand drafts, mail transfer by collecting commission from them.
3. Provision of online transfer facility of money from one bank to the other.
4. Issue of letters of credit to enable the customers to purchase commodities on the basic of credit.
5. Endorsing and providing guarantee to the shares issued by the joint stock companies.
6. Issue of traveler’s cheques to customers to avoid the risk of carrying of cash.
7. Providing foreign exchange to the customers for exports and imports in connection with their business.
8. Conveying information on behalf of their customers to the businessmen operating in other places and also collecting information of such businessmen and provide it to the customers. Thus they act as ‘referees’.

Question 10.
State any three major (general) functions of a central bank.
Answer:
Central bank is the apex institution of the banking system of a country. It controls, regulates, and activities of the country’s banking system. Reserve Bank of India (RBI) is our central bank. It was established on 1st, April 1935 with a share capital of ₹ 5 crore. It was originally owned by private shareholders but was nationalized by the Government of India in 1949. It performs all important functions of the central bank under the Reserve Bank of India Act, 1934.

Reserve Bank of India performs the following functions:

General Functions :

a) Note issue :
Reserve Bank of India has the monopoly of note issue in the country. It maintains gold and foreign exchange reserves of a minimum ₹ 200 crores of which gold should be worth ₹ 115 crores. There is a separate issue department to issue currency notes. At present Reserve Bank of India issues currency notes of the denomination ₹ 1,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10, ₹ 5. One rupee note and coins are issued by the Finance Ministry of the Government of India but circulated by the Reserve Bank of India.

2) Banker to Government :
Reserve Bank of India acts as the banker, agent and adviser to the Government of India. It acts as an agent of the Government of India and all the state governments except the Government of Jammu and Kashmir. It receives money and makes payments on behalf of the government and keep the cash balances as deposits without any interest. It assists the government in floating new loans and the management of public debt. It gives temporary advances to the Government in all financial matters.

3) Banker’s Bank :
Reserve Bank serves as a banker not only to the government but also to the banks. According to Banking Regulation Act, 1934 all the scheduled banks are bound by the law to maintain with the Reserve Bank of India a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR).

Question 11.
Define inflation and explain its types. [Mar. 17]
Answer:
Inflation, we mean a general rise in the prices in the ordinary language it is rapid upward movement of prices in a broader sense. The term inflation refers to persistent rise in the general price level over a long period of time.

According to Prof.Hawtrey : “Issue of too much currency”

According to ‘Dalton’:
Defined inflation as Too much Money is chasing too few goods”.

According to ‘Pigou’:
“Inflation exists when money income is expanding more than in proportion to increase in earning activity”.

According to Irving Fisher :
“Inflation occurs when the volume of money increases faster than the available supply of goods”.

According to Samuelson :
“Inflation denotes a rise in the general level of prices”. Types of Inflation:

1) Creeping inflation :
When rise in the prices is very slow and small, it is called creeping inflation.

2) Walking inflation :
This is the second stage of inflation. The inflation rate will be between 2% and 4%.

3) Running inflation :
When the rate of inflation is in the range of 4-10% per annum, it is called running inflation.

4) Galloping inflation or hyper inflation :
If the inflation rate exceeds 10%, galloping inflation occurs. It may also called hyper inflation.

Question 12.
Identify the causes of Inflation.
Answer:
In a broader sense, the term inflation refers to persistent rise in the general price level! over a long period of time. Some of the important definitions are given below :

According to Pigou, “inflation exists when money income is expanding more than in j proportion to increase in earning activity”.

Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Causes of Inflation :
Broadly speaking, inflation may occur due to the following reasons. Inflation is caused either by excess demand or supply shortage or increased cost of production.

I. Factors Causing Increase in the Aggregate Demand of Commodities :

1. High rate of population growth.
2. Increase in non-plan and plan expenditure of the government.
3. Rise in the per capita income of the people due to economic development.
4. Increased spending by the government on employment programmes and welfare schemes.
5. Heavy investment on development projects with long gestation period.
6. Increase in the money supply in the economy.
7. Liberal availability of credit for unproductive economic activities.
8. Deficit financing by the government.
9. Conspicuous spending by the people having black money.
10. Reduction in direct tax rates.

II. Factors that Increase the Cost of Production :

1. Increase in costs of lands, rents, wage rates and interest rates.
2. Rise in the price of capital equipment and raw materials due to their shortage.
3. Increase in indirect tax rates.
4. Excessive wear and tear of machinery and lack of modernization.
5. Import of machinery and equipment at higher prices.
6. Lack of optimum allocation of resources.
7. Devaluation of domestic currency.
8. Inefficiency in management and lack of control over wasteful expenditure.

III. Factors Causing Inadequate Supply:

1. Failure of monsoons, floods, pests, use of spurious seeds etc., in agriculture.
2. Shortage of investment due to inadequate availability of institutional credit.
3. Non-availability or inadequate availability of inputs and raw materials.
4. Underutilization of productive capacity due to power shortage, labour unrest etc.
5. Long gestation period of certain industries.
6. Exports at the cost of domestic supply.
7. Artificial scarcity due to black-marketing.

Question 13.
Explain the effects of inflation. [Mar. 16]
Answr:
In a broader sense, the term inflation refers to persistent rise in the general price level over a long period of time. Some of the important definitions are given below :

According to Pigou, “inflation exists when money income is expanding more than in proportion to increase in earning activity”.

Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Effects of Inflation:
Inflation affects economic activities such as production, distribution, social and political relations in an economy adversely.
A) On Production:

1. Mild inflation stimulates production as it increases the profit margin entrepreneurs.
2. High inflation rate of hyper inflation hinders production.
3. Inflation discourages savings. This affects the capital formation which intum affects products.

B) On Distribution:
The impact of inflation is not uniform on all sections of people. It affects certain sections of the people adversely while certain other sections gain because of inflation. This can be elaborated as follows :

1) Fixed Income Groups :
People belonging to fixed income groups suffer due to inflation because their incomes do not increase as prices of commodities rise.

2) Working Class :
Workers and wage earners in the informal sector normally work for subsistence living. Even otherwise their wages do not rise as and when prices rise. Such people suffer because of inflation.

3) Debtors and Creditors :
Inflation results a decline in the value of money. Therefore, creditors lose as the value of money is higher when they have lent and less when they are repaid. But debtors gain because the value of money is high when they borrowed but low when they repay.

4) Consumers and Entrepreneurs :
Consumers lose but entrepreneurs gain because of inflation.

C) On Social Justice Front :
Economic inequality leads to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) On Political Front:
Inflation widens social and economic disparities which cause frustration among the sufferers. This provides opportunity for political movements and if the government is not responsive, the movements may threaten the stability of governments.

Question 14.
What are the Components of Money Supply.
Answer:
Money supply includes all money in circulation in the economy. The components of money supply may vary from country to country. Broadly speaking, money supply consists of the following:

1. Currency Issued by the Central Bank :
In any country the central bank issues currency. Currency consists of paper notes and coins. In India Reserve Bank of India, which is the central bank of the country, issues notes in the denominations of 2,000, 500, 100, 50, 20 and 10 rupees. The one rupee note (which is not in circulation in practice) and coins are issued by the Finance Ministry of the Government of India.

2. Demand Deposits Created by Commercial Banks :
Bank deposits are a prominent component of money supply. Commercial banks create credit from the primary deposits of money received from the public. Credit is created in the form deposits called derived or secondary deposits. In developed countries they constitute nearly 80 per cent of money supply.

Very Short Answer Questions

Question 1.
What is Barter System? [Mar. ’16]
Answer:
Prior to the introduction of money, the barter system was in vogue. In the system on commodity was exchanged for another commodity. Under this system, no one was able to produce all goods at their disposal. As a consequence, they used to exchange commodities among themselves. For instance, a producer for paddy used to exchange paddy for clothes from the producers of cloths. Thus, this system was beset with several difficulties.

Question 2.
What are the functions of money?
Answer:
Money has many important function to perform. These functions may be classified as
i) Primary functions, ii) Secondary functions, iii) Contingent functions and iv) Static and dynamic functions. .

Question 3.
What is paper money?
Answer:
Paper money is made of paper. Currency notes in the form of ₹ 2,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10 are printed on paper in India.

Question 4.
What do you understand by stone of value of money?
Answer:
By this functions money preserve the value of perishable commodities in the form of money if they are exchanged before they prism. It stores the value of durable commodities also.

Question 5.
What is token money?
Answer:
Token money is money or unit of currency whose face value is higher then the intrinsic value. Ex. 1, 2 and 5 rupees coins, etc.

Question 6.
What are the Monetary Aggregates of RBI?
Answer:
Monetary Aggregates :
In India money supply is measured in terms fo the following monetary aggregates by RBI at present.

M₀ = Currency in circulation + Banker’s deposits with the RBI + Other deposits with the R.B.I.
M₁ = Currency with the public + demand deposits with the banking system + Other deposits with the R.B.I.
M₂ = M₁ + time liability portion of saving deposits with banking system + Certificates of deposits issued by banks + term depostis maturing within one year. [Excludes CD’s] .
M₃ = M₂ + term deposits over one year maturity + call/term borrowings of banks.

Question 7.
Distinguish between Saving deposits and Time deposits.
Answer:
Savings deposits :
These are the deposits made into the savings account of a bank. The public with small savings fund it safe to keep their money in the savings account of the banks. They encourage savings habit among the public. They are most convenient savings habit among the public. They are most convenient to the small businessmen, salaried employees, artisans and people belonging to the low and middle income groups. The interest paid on these deposits is comparatively low and is around 4% per annum.

Time deposits :
These are also called fixed deposits because the money is deposited with the bank for a fixed period of time. The deposit can be withdrawn only after the expirty of maturity period. However, the depositor has an option to borrow against the security of these deposits. These deposits carry more interest than the savings deposits. The rate of interest varies from 6% per annum to 12% per annum, depending on the period of deposit.

Question 8.
Explain creation of Credit.
Answer:
This is also called bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 9.
What are the uses of credit cards in the modern economy?
Answer:
Credit Cards :
Now-a-days banks have devised new methods of giving loans to the customers. One such popular method is issuance of the credit card. A credit card holder can use his/her card to purchase goods on credit from specified firms and shops subject to certain regulations. The firms collect the amount of the bills from the banks which issued the credit card. The card holder pays the amount to the bank on a later date with or without interest. Each credit card has a credit limit. The card holder can draw cash also subject to the limit specified by the bank. The credit cards have become very much popular. Certain sections of the population are given specific cards like Kisan cards.

Question 10.
What is Net Banking? Explain the merits of it. [Mar. ’17, ’16]
Answer:
Net banking also called internet or online banking. It is the process of conducting banking transactions over the internet. Viewing bank statements and the status of a bank account online comes under the definitions of net banking.

Question 11.
Write about the main objectives of Central Bank.
Answer:
Central Bank is the apex institution of the banking system in a country. It controls, regulates and supervises the activities of the country’s banking system. The Reserve Bank of India works to achieve the following objectives :

1. Regulating the issue of currency notes.
2. Achieving the monetary stability in the economy.
3. Controlling the credit system.
4. Providing guidance to commercial banks.
5. Evolving and implementing uniform credit policy throughout countiy.

Question 12.
What is Clearance House.
Answer:
Businessmen and other customers issue cheques towards payment for their transactions. A businessman or customer may get a cheque issued on a bank in which he has no account. He has to deposit it in his bank and which collects the amount from the bank on which the cheque is issued. This happens on a large scale everyday and calls for inter-bank settlement of accounts. Since all the commercial banks maintain deposit accounts with the Reserve Bank of India, it all cheques to settle the inter-bank transactions by making appropriate entries in the accounts of the commercial banks. For this purpose the Reserve Bank established clearing houses at different places.

Question 13.
Explain the Types of Inflation.
Answer:
Inflation is divided into different bases on its pace or rate of inflation and the causes of inflation. They are detailed below :
1) Based on the Rate of Inflation :
On the basis of the rate of inflation, it may be classified into four types. :

1. Creeping inflation
2. Walking inflation
3. Running inflation
4. Galloping inflation

2) Based on cause of inflation :

1. Demand pull inflation
2. Cost push inflation

Question 14.
Who are affected by the inflation?
Answer:
Inflation affects economic activities such as production, distribution, social and political relation in an economy adversely.

Question 15.
What are the uses of overdrafts?
Answer:
Overdraft: This is a facility allowed by the bank to the current account holders. They are allowed to withdraw money, with or without security, in excess of the balance available in their account, up to a limit. This facility is available as a temporary measure to the borrowers to meet their short needs in case of shortage of regular funds. Interest is charged on the amount of actual withdrawal.

Question 16.
Which Bank is called as bankers bank and why?
Answer:
Banker’s Bank :
Reserve Bank serves as a banker not only to the government but also to the banks. According to Banking Regulation Act, 1934 all the scheduled banks are bound by the law to maintain with the Reserve Bank of India a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR). Reserve Bank provides financial assistance to the commercial banks in times of their financial stringency by giving loans or rediscounting the bills of exchange. It acts as clearing house for Settlement of inter bank accounts.

Question 17.
What are the dynamic functions of money?
Answer:
The function of money which influence output consumption, distribution and the given price level are known as dynamic functions. They make the entire economy into dynamic. The contingent function explained about under the perview of dynamic functions.

Question 18.
What is currency?
Answer:
Currency is the form in which money is circulated in the economy by the monetary authority. Currency includes coins and paper notes. It is only one component of money.

Question 19.
What is cash credits?
Answer:
Cash credit is a type of loan given by the commercial bank which facilitaties with drawal of loan amount in instalments as and when necessary.

Question 20.
What is meant by discounting of bills of exchange?
Answer:
Bills of exchange are undertakings written by the buyers and given to sellers when the transaction is made on credit basis. The buyer undertakes to make payment after a specified period or on a specified future date. The traders who posses such bills of exchange with them may approach the banks for discounting of the bills of exchange when they need money. The commercial banks pay advances by discounting the bills of exchange with or without security.

Telangana TSBIE TS Inter 1st Year Political Science Study Material 6th Lesson Rights and Duties Textbook Questions and Answers.

TS Inter 1st Year Political Science Study Material 6th Lesson Rights and Duties

Long Answer Questions

Question 1.
Define Rights. Describe the Civil and Political Rights.
Answer:
Introduction :
Rights are essential conditions for the development of the personality of individuals. They are upheld by the laws of the state. They are regarded as a power or privilege that the law invests in a person. They are treated as the sum total of the opportunities meant for enhancing one’s personality. Individuals can not achieve progress in the absence of rights.

Definitions of Rights :
Political scientists have defined the term ‘Right’ in several ways. Some of their definitions are explained below :
1. Earnest Barker :
“Rights are the external conditions necessary for the development of the capacities of the personality of the individual.”

2. Beni Prasad :
“Rights are nothing more and nothing less than those social conditions which are necessary for the development of personality of individuals.”

3. Bosanquet :
“A right is a claim recognised by the society and enforced by the state.”

4. T.H. Green :
“Rights are those powers claimed and recognized as contributory to the common good.”

5. H.J. Laski :
“Rights are those conditions of social life without which no man can seek in general to be himself at his best.”

Civil Rights :
Civil rights aim at providing basic conditions for individuals to lead a happy and dignified social life. These rights are considered vital for a civilized society. Social life becomes impossible in their absence.

Individuals in a civilized society enjoy the following Civil rights. These are
1) Right to life :
This is the most important civil right. T.H. Green considered it as the most fundamental civil right. This right provides security to the individual’s life. Individuals cannot lead their lives in the absence of this right. This right is based on the premise that the life of an individual is valuable not only to himself, but also to the society and the state as a whole. Hence it prescribes at large the state to extend protection to the life of individuals.

However, it empowers the state to impose some reasonable restrictions upon the individuals. The state can insist any person to sacrifice his life for the sake of the nation. This right also includes the right of self-defence.

2) Right to liberty :
This right enables individuals to have freedom in various walks of life. It makes their lives worth living. It enables them to develop their personality in various spheres. It includes various freedoms such as freedom of movement, speech, expression, thought, residence etc.

3) Right to equality :
This right implies that individuals are equal before law. It forbids discrimination on the basis of one’s caste, colour, creed, education, region, race, religion, wealth etc. It enables equal treatment to all persons. It provides scope for uniform application of laws. It enables equal opportunities to all persons in social, economic and political fields.

4) Right to property :
This right enables every individual to acquire, enjoy, donate or inherit the property. It is essential to the individual for securing higher standards of living. This right is crucial for the growth of individual’s personality.

5) Right to family :
Family is a fundamental social institution. This right enables individuals to maintain family relations in society. Consequently, individuals will -have freedom to marry persons of their choice. They will have choice to procreate children and rear their offspring. However, the state can impose certain restrictions upon this right keeping in view the national interests. For example, until recent times China imposed severe restrictions against their citizens in the size of their families. Recently it has made some amendments in this regard.

6) Right to religion :
This right allows the individuals to have freedom to practice, propagate and profess any religion of their choice. Every individual is at liberty to preach or practice the religious doctrines as they like. The secular states provide religious freedoms to their citizens.

7) Right to contract :
This right provides freedom to every individual to enter into contract or legal arrangements with others regarding his life, property and work. It regulates the two parties in carrying their contracts in letter and spirit. The state recognizes only those contracts which are helpful to the common well being of the people.

8) Right to education :
In the modem era education is regarded as vital to every individual. Uneducated and innocent individuals cannot play an active role in public affairs. Similarly, illiterate persons cannot fully make use of their abilities. Education and literacy enable the people to understand the problems of the society and policies of the government. This right guarantees a minimum level of education to every citizen in democratic states.

9) Right to‘form associations and unions :
This right enables individuals to form associations and unions for releasing some specific objectives. Individuals may join, continue or keep away from the membership of associations according to their will and pleasure. The State is empowered to impose restrictions against those associations which ignore the welfare of the nation.

10) Right to constitutional remedies :
Civil rights are jneaningless in the absence of this right. This right is essential to every individual for safeguarding his rights. This right empowers a person (who was deprived of his liberty due to the intervention or manhandling by others including the government) to seek justice and relief from the concerned judicial organizations. The aft ei ed individuals are authorised to approach an appropriate court for correcting such imbalance. In this regard the higher judicial organizations issue several writs and effectively check such tendencies. These writs are in the form of Habeas Corpus, Mandamus, Prohibition, Quo-warranto and Certiorari etc.

Political Rights :
Political rights are those rights which enable the individuals to participate in the political affairs of the state.

The following are the important political rights :
1) Right to vote :
Right to vote is the most important political right enjoyed by the citizens in modem atic states. It serves as a powerful weapon for adult citizens in choosing their representaives to various legislative bodies. It makes them as real sovereign. All the citizens are entitled to this right without any discrimination based on creed, colour, language, race, region, religion, sex etc. However, persons such as aliens and minors are deprived of this right.

2) Right to contest in elections :
This right empowers the citizens to contest as candidates to various legislative bodies in the state. Especially this right enables those, who have political sagacity, enthusiasm and dynamic nature, to actively participate in the political dynamics of the state. As a result, it increases political enthusiasm among the citizens. Such an element is con *dered as a base of democratic polity.

3) Right to hold Public offices :
This right provides opportunities to the citizens to hold various public offices for a definite period. It gives no scope for exclusion of citizens or conferring special privileges to some at the cost of others. This helps the citizens to exercise authority in a dignified manner.

4) Right to petition :
This right enables the citizens to forward petitions denoting their requirements or grievances. It is considered as a vital political right in the modem state. The citizens could be able to find solutions to their immediate or long pending issues by bringing them to the notice of the government through this right. It also helps the public authorities to know the grievances of the people and attend to them properly and promptly.

5) Right to criticism :
This right gives opportunity to the citizens to criticize the various public policies and programmes. It also enables them to highlight the omissions and commissions of the leaders, and administrative personnel at various levels. It also gives scope for the citizens to render positive and constructive criticism about the on goings in the government from time to time. Ultimately it keeps the administrative authorities and policy makers to be vigilant in discharging their obligations.

Question 2.
Identify the safeguards of Rights.
Answer:
Introduction :
Rights are the essential conditions for the development of the personality of individuals. They are upheld by the laws of the state. Individuals cannot achieve progress in the absence of the Rights.

Definition:
1) T.H. Green :
“Rights are those powers claimed and recognized as contributory to the common good.”

2) H.J. Laski :
“Rights are those conditions of social life without which no man can seek in general to be himself at his best.”

Safeguards of Rights :
Individuals enjoy their rights only when they were fully protected or safeguarded by the State. In this regard, the following elements act as the safeguards of the rights.

1) Democratic Rule :
Democratic rule safeguards the rights of the people to a great extent. People can enjoy their rights perfectly in democratic states only. This system makes constitutional and legal provisions for safeguarding the right of the people.

2) Written and Rigid Constitution :
A written constitution clearly defines the powers and functions of the government. It also explains about the various limitations of governmental authority. Besides, a rigid constitution will guarantee the rights of the people by making it difficult for the rulers and legislators to make amendments on flimsy grounds.

3) Constitutional Incorporation :
Incorporation of fundamental rights in the constitution will prevent the encroachment of individual rights by the government. Such an arrangement protects the rights of the individuals to a great extent.

4) Separation of Powers :
The powers of the government should be separated among the three organs of the government. Such as measure would act as a check against other organ. Ultimately, it serves as a safeguard of individual liberty.

5) Decentralisation of Powers :
Individuals enjoy their rights, when powers are decentralised among the governmental institutions. This involves allocation of powers at various levels – national, provisional, local either on functional or territorial basis.

6) Rule of Law :
Rule of law implies equality before law. It also denotes equal application of laws to the citizens.-It gives no scope for discrimination between citizens on the grouhds of region, religion, caste, colour, community etc.

7) Independent and Impartial Judiciary :
Independent and impartial judiciary is another safeguard of rights. Judges in higher judicial bodies will deliver judgement with impartial and independent outlook. In the process of delivering justice, they issue certain writs for immediate protection of the rights.

8) Independent Press :
Independent and honest press is another essential safeguard of rights of individuals. Such agency will be able to disseminate news and views impartially and without fear or favour to anybody. In this regard the state should not try to threaten and silence the press. Then only individuals enjoy their rights to the maximum extent.

9) Social and Economic Equalities :
Social and economic equalities are necessary for enjoying one’s rights. People will be able to utilize their rights properly and positively when there are social and economic equalities in the state. These equalities include absence of casteism, communalism, linguism, wide spread economic inequalities, exploitation etc.

10) Eternal Vigilance :
Eternal vigilance is said to be the most important safeguard of rights of individuals. Individuals must be vigilant and cautious about the policies of the government. They should oppose the despotic tendencies of the government through democratic and constitutional methods. Under no circumstances they should allow the self seeking politicians to acquire power. Besides several other elements like judicial review, recall, strong opposition etc., are considered as the safeguards of rights.

Question 3.
Write an essay on Human Rights.
Answer:
Introduction :
Human rights are the amenities required for the basic existence of human beings. They are available to all persons irrespective of caste, creed, community, religion, region, language etc. The constitutional and ordinary laws in democratic states recognize these rights. The various governments in democratic states will take appropriate steps for providing human rights to their people.

Definitions :

1. “Human Rights are freedom to all irrespective of place, sex, religion, language etc.” – United Nations Organization (U.N.O)
2. “The Rights which serve as the protective shield to the individuals whenever the state attempts to interfere with the civil liberties of individuals.”- Ronald Darwin
3. “Human Rights are the new standards of civilization.” – John Dowski

Origin and Growth of Human Rights :
1) The credit for showing interest on human rights and their application to human goes to Greek rulers. They recognised the need and importance of health and strength in the development of human personality.

2) Magna Carta sanctioned by King John of England in 1613 gave life to the Freedoms – and independence of the people.

3) The cultural renaissance which shook the various countries in Europe gave strength and succor to the Civil rights movements.

4) John Locke of England popularised the doctrine of natural rights as a part of his proposal for the spread of human rights.

5) Rousseu of Switzerland mentioned several times about the importance of human rights in his concept of social contract. He declared that “Man has born with free but every where he is in chains.”

6) John Stuart Mill, a prominent British political philosopher, propounded indivi¬dualism. He stated that every individual is sovereign over himself, his body and mind and all organizations including the state shall not interfere in the affairs of Individuals.

7) The writings of above philosophers profoundly influenced the people across the globe. Several freedom movements such as bloodless revolution in England (1688), American declaration of Independence (1776), French Revolution (1789), Russian Revolution (1917)..The Indian declaration of Independence (1947) etc., led to the creation of favourable atmosphere for the enjoyment of human rights.

8) After the establishment of United Nations Organization in 1945, the charter of U.N.O assigned priority and significance to the rights of human beings. The universal declaration of human rights came into force on December 10,1948. Since then, that day is celebrated as the universal human rights day.

As a result, several covenants like international economic, social and cultural rights, International civil and political rights (1966) came into being. The above covenants made obligatory for the international community to provide favourable conditions for enjoying the various human rights by the people of the world. All the member states of the United Nations gave assurance to have full faith in the human rights. They assured their cooperation for observing and promoting human rights.

Violation of Human Rights :
Today in almost all the countries pf the World, everywhere the violation of human rights is happening Poverty, Refugees, Separatist movements etc., are the main causes for violation of human rights.

Protection of Human Rights :
Every nation has the responsibility to protect the human rights. Governments as well as voluntary organizations play a key role in protection of human rights. Amnesty International and Asia watch are playing a prominent role in protecting the human rights.

Short Answer Questions

Question 1.
What are the features of Rights?
Answer:
Rights are the essential conditions for the development of the personality of individuals. They are upheld by the laws of the state. Individuals cannot achieve progress in the absence of rights.

Definition :
“Rights are those conditions of social life without which no man can seek in general to be himself at his best.”

Features of Rights :
Rights comprise the following features.
1) Rights are possible only in society :
Rights originate in society. They denote human social behaviour. They do not exist outside of the society.

2) Rights are social in nature :
Rights are the claims of individuals. These claims can be established only when the society or the state recognises and maintains them. So they are social in nature.

3) Rights are inherent in nature :
Rights are inherent in the social nature of men. The social contractualists stated that rights are inherent in nature. Their views are accepted to some extent in modern times.

4) Rights are enforced and protected by the state :
Rights are enforced and protected by the state. The various judicial organisations act as the custodians of the rights of individuals. In other words, rights are protected by the courts of law. Individuals enjoy several rights fully only in a democratic state.

5) Rights are not absolute :
Rights are not absolute. Society and state impose some restrictions on the enjoyment of rights by the individuals. These restrictions are meant for maintaining peace and other in the society. Further, rights are meant for contributing social welfare and security.

6) Every right has a corresponding responsibility :
Rights and responsibilities are interdependent. Every right has a corresponding responsibility. It is the responsibility of every individual to.see that his neighbours alsd-enjoy the same rights. Rights without responsibilities or responsibilities without rights cannot exist. Both are essential for leading a peaceful social life.

7) Rights are universal :
lights are universal in nature: They are applicable to all. They are given to all without’ any discrimination.

8) Rights vary :
Rights vary from time to time according to the needs of the people. They also grow with the changes in time and conditions. Some rights which were not found in the past may exist now. The socio economic, political and cultural conditions will have an influence over the rights.

9) Rights precede the state :
Rights are the products of history. Rights originated in course of time. They were prevalent even before the origin of the state. However, they were guaranteed only after the origin of the state.

10) Rights are meant for common good :
Rights always exist and flourish as long as they are meant for common good. Only those rights which promote common good of the people are recognised by the society and the state. They are essential for leading a prosperous life by the individuals.

Question 2.
Explain Political Rights.
Answer:
Political rights are those rights which enable the individuals to participate in the political affairs of the state.

The following are the important political rights :
1) Right to vote :
Right to vote is the most important political right enjoyed by the citizens in modem democratic states. It serves as a powerful weapon for adult citizens in choosing their representatives to various legislative bodies. It makes them as real sovereign. All the citizens are entitled to this right without any discrimination based on creed, colour, language, race, region, religion, sex etc. However, persons such as aliens, and minors are deprived of this right.

2) Right to contest in elections :
This right empowers the citizens to contest as candidates to various legislative bodies in the state. Especially this right enables those, who havepolitical sagacity, enthusiasm and dynamic nature, to actively participate in the political dynamics of the state. As a result, it increases political enthusiasm among the citizens. Such an element is considered as a base of democratic polity.

3) Right to hold public offices :
This right provides opportunities to the citizens to hold various public offices for a definite period. It gives no scope for exclusion of citizens or conferring special privileges to some at the cost of others. This helps the citizens to exercise authority in a dignified manner.

4) Right to petition :
This right enables the citizens to forward petitions denoting their requirements or grievances. It is considered as a vital political right in the modern state. The citizens could be able to find solutidns to their immediate or long pending issues by bringing them to the notice of the government through this right. It also helps the public authorities to know the grievances of the people and attend to them properly and promptly.

5) Right to criticism :
This right gives opportunity to the citizens to criticize the various public policies and programmes. It also enables them to highlight the omissions arid commissions of the leaders, and administrative personnel at various levels. It also gives scope for the citizens to render positive and constructive criticism about the on goings in1 the government from time to time. Ultimately it keeps the administrative authorities arid policy makers to be vigilant in discharging their obligations.

Question 3.
Explain the important Civil and Political Rights?
Answer:
Civil Rights :
Civil rights aim at providing basic conditions for individuals to lead a happy and dignified social life. These rights are considered vital for a civilized society’ Social life becomes impossible in their absence.

Individuals in a civilized society enjoy the following Civil rights. These are
1) Right to life :
This is the most important civil right. T.H. Green considered it as the most fundamental civil right. This right provides security to the individual’s life. Individuals cannot lead their lives in the absence of this right. This right is based on the premise that the life of an individual is valuable not only to himself, but also to the society and the state as a whole. Hence it prescribes at large the state to extend protection to the life of individuals. However, it empowers the state to impose some reasonable restrictions upon the individuals:’ The state can insist any person to sacrifice his life for the sake of the nation. This right also includes the right of self-defence.

2) Right to liberty :
This right enables individuals to have freedom in various walks of life. It makes their lives worth living. It enables them to develop their personality in various spheres. It includes various freedoms such as freedom of movement, speech, expression, thought, residence etc.

3) Right to equality :
This right implies that individuals are equal before law. It forbids discrimination on the basis of one’s caste, colour, creed, education, region, race, religion, wealth etc. It enables equal treatment to all persons. It provides scope for uniform application of laws. It enables equal opportunities to all persons in social, economic and political fields.

The following are the important political rights :
1) Right to vote :
Right to vote is the most important political right enjoyed by the citizens in modem democratic states. It serves as a powerful weapon for adult citizens in . choosing their representatives to various legislative bodies. It makes them as real sovereign. All the citizens are entitled to this right without any discrimination based on creed, colour, language, race, region, religion, sex etc. However, persons such as aliens and minors are deprived of this right.

2) Right to contest in elections :
This right empowers the citizens to contest as candidates to various legislative bodies in the state. Especially this right enables those, who have political sagacity, enthusiasm and dynamic nature, to actively participate in the political dynamics of the state. As a result, it increases political enthusiasm among the citizens. Such an element is considered as a base of democratic polity.

3) Right to hold public offices :
This right provides opportunities to the citizens to hold various public offices for a definite period. It gives no scope for exclusion of citizens or conferring special privileges to some at the cost of others. This helps the citizens to exercise authority in a dignified manner.

Question 4.
Write the objectives and classification of Human Rights.
Answer:
Definition of human rights :
“Human Rights are Freedom to all irrespective of place, sex, religion, language etc. -U.N.O.

Objectives of human rights :
The following are the various objectives of human rights.

1. Provision of independence to the people against discrimination.
2. Freedom from poverty.
3. Freedom for availing the latent abilities of individuals.
4. Freedom from fear.
5. Freedom of protection.
6. Freedom from injustice.
7. Freedom of speech and expression.
8. Freedom of protection.
9. Freedom of association.
10. Freedom for carrying one’s activities on dignified lines.
11. Freedom against exploitation.

The united nations general assembly declared 1995 – 2005 as the International decade of human rights. The ultimate objective of human rights relates to the provision of human rights to all people of the world.

Classification of human rights :
Human rights are broadly classified into two categories (i) Civil and Political Rights (ii) Economic, social and cultural rights. In the first category, civil rights occupy a prominent position. Civil rights include several rights like right to life, liberty and security of individuals, freedom from slavery and torture, equality before law, protection against arbitrary custody etc. They also assure the individual for a right to fair trial, right to own property, right to marriage etc. Besides they comprise several freedoms like freedom of speech, expression, association, assembly, movement, residence etc. Political rights include right to vote, right to contest as candidates in elections to .various offices, right to assume power, right to criticise, right to petition etc.

The second category of human rights include several economic, social and cultural • rights. Economic rights include right to work, right to equal payment of salaries to equal work, right to form and join in trade unions, right to adequate standard of living etc. Social rights include right to education, right to health, right to entertainment etc. Respecting the civilization, arts, culture etc., are included in the category of cultural rights.

Question 5.
Discuss the various types of Duties.
Answer:
Duty is an obligation of an individual towards other individuals residing in the society. It is regarded as an obligation or duly towards others. The term ’Duty’ denotes what one is bound to do. Every individual must abide by certain rules of behaviour in society for his own good and for the good of others. These include some do’s and don’ts. Duties are both positiVe and negative in nature. Everyone in society must perform these duties in the larger interests of society and state. Everyone must befiave in such a way that promotes common good and social welfare. Duties in turn contribute to the public good. They establish peace and order in society. Duties always procede rights.

Types of Duties :
Duties are broadly of two types : Moral and Legal.
i) Moral Duties :
Moral Duties are those which bound the individuals together on moral grounds. They may not be upheld and supported by the laws of the state. They are based on the moral beliefs of the people. They are sanctioned by the community basing on some customs, traditions and usages. Any violation of moral Duties does not lead to punishment. Helping the needy and the sick is regarded as an example of moral Duties.

ii) Legal Duties :
Legal Duties are implemented through the courts and with the support of the statutory laws. They carry statutory significance. They are very clear and precise. They are compulsory and coercive in nature. So those who violate these Duties will be punished. Obeying the laws of the state, paying taxes, assisting the administrators in the maintenance of law and order etc., are some of the important legal Duties of a citizen.

Legal Duties are further classified into positive and negative.
1) Positive Duties :
When a citizen exercises his Duties to strengthen the social progress and welfare, they are known as positive Duties. Obedience to the laws of the state, defending the country, paying taxes etc., are some of the examples for positive aspects of legal Duties. These Duties aim at extending co-operation to the government in realizing the objectives of the state. .

2) Negative Duties :
When a citizen abstains from doing an activity as prohibited by the laws, it is said to be an example of negative responsibility. Negative responsibilities keep the people from not doing certain activities. The government, on behalf of the state, makes several regulations in this regard.

Question 6.
What is the difference from Civil and Political Rights?
Answer:
Introduction :
Rights are the essential conditions for the development of the personality of individuals. They are upheld by the laws of the state. They are regarded as a power or privilege which the law invests in a person. They are treated as the sum total of the opportunities meant for enhancing one’s personality. Individuals can not achieve progress in the absence of the rights.

Definitions of Rights :
Political scientists have defined the term ‘Right’ in several ways. Some of their definitions are explained below :
1. Earnest Barker :
“Rights are the external conditions necessary for the development of the capacities of the personality of the individual.”

2. Beni Prasad :
“Rights are nothing more and nothing less than those social conditions which are necessary for the development of personality of individuals.”

3. Bosanquet :
“A right is a claim recognised by the society and enforced by the state.”

4. T.H. Green :
“Rights are those powers claimed and recognized as contributory to the common good.”

5. H.J. Laski :
“Rights are those conditions of social life without which no man can seek in general to be himself at his best.”

Civil Rights :
Civil rights aim at providing basic conditions for individuals to lead a happy and dignified social life. These rights are considered vital for a civilized society. Social life becomes impossible in their absence.

Individuals in a civilized society enjoy the following Civil rights. These are
1) Right to life :
This is the most important civil right. T.H. Green considered it as the most fundamental civil right. This right provides security to the individual’s life. Individuals cannot lead their lives in the absence of this right. This right is based on the premise that the life of an individual is valuable not only to himself, but also to the society and the state as a whole. Hence it prescribes at large the state to extend protection to the life of individuals.

However, it empowers the state to impose some reasonable restrictions upon the individuals. The state can insist any person to sacrifice his life for the sake of the nation. This right also includes the right of self-defence.

2) Right to liberty :
This right enables individuals to have freedom in various walks of life. It makes their lives worth living. It enables them to develop their personality in various spheres. It includes various freedoms such as freedom of movement, speech, expression, thought, residence etc.

3) Right to equality :
This right implies that individuals are equal before law. It forbids discrimination on the basis of one’s caste, colour, creed, education, region, race, religion, wealth etc. It enables equal treatment to all persons. It provides scope for uniform application of laws. It enables equal opportunities to all persons in social, economic and political fields.

4) Right to property :
This right enables every individual to acquire, enjoy, donate or inherit the property. It is essential to the individual for securing higher standards of living. This right is crucial for the growth of individual’s personality.

5) Right to family :
Family is a fundamental social institution. This right enables individuals to maintain family relations in society. Consequently, individuals will -have freedom to marry persons of their choice. They will have choice to procreate children and rear their offspring. However, the state can impose certain restrictions upon this right keeping in view the national interests. For example, until recent times China imposed severe restrictions against their citizens in the size of their families. Recently it has made some amendments in this regard.

6) Right to religion :
This right allows the individuals to have freedom to practice, propagate and profess any religion of their choice. Every individual is at liberty to preach or practice the religious doctrines as they like. The secular states provide religious freedoms to their citizens.

7) Right to contract :
This right provides freedom to every individual to enter into contract or legal arrangements with others regarding his life, property and work. It regulates the two parties in carrying their contracts in letter and spirit. The state recognizes only those contracts which are helpful to the common well being of the people.

8) Right to education :
In the modem era education is regarded as vital to every individual. Uneducated and innocent individuals cannot play an active role in public affairs. Similarly, illiterate persons cannot fully make use of their abilities. Education and literacy enable the people to understand the problems of the society and policies of the government. This right guarantees a minimum level of education to every citizen in democratic states.

9) Right to‘form associations and unions :
This right enables individuals to form associations and unions for releasing some specific objectives. Individuals may join, continue or keep away from the membership of associations according to their will and pleasure. The State is empowered to impose restrictions against those associations which ignore the welfare of the nation.

10) Right to constitutional remedies :
Civil rights are jneaningless in the absence of this right. This right is essential to every individual for safeguarding his rights. This right empowers a person (who was deprived of his liberty due to the intervention or manhandling by others including the government) to seek justice and relief from the concerned judicial organizations. The aft ei ed individuals are authorised to approach an appropriate court for correcting such imbalance. In this regard the higher judicial organizations issue several writs and effectively check such tendencies. These writs are in the form of Habeas Corpus, Mandamus, Prohibition, Quo-warranto and Certiorari etc.

Political Rights :
Political rights are those rights which enable the individuals to participate in the political affairs of the state.

The following are the important political rights :
1) Right to vote :
Right to vote is the most important political right enjoyed by the citizens in modem atic states. It serves as a powerful weapon for adult citizens in choosing their representaives to various legislative bodies. It makes them as real sovereign. All the citizens are entitled to this right without any discrimination based on creed, colour, language, race, region, religion, sex etc. However, persons such as aliens and minors are deprived of this right.

2) Right to contest in elections :
This right empowers the citizens to contest as candidates to various legislative bodies in the state. Especially this right enables those, who have political sagacity, enthusiasm and dynamic nature, to actively participate in the political dynamics of the state. As a result, it increases political enthusiasm among the citizens. Such an element is con *dered as a base of democratic polity.

3) Right to hold Public offices :
This right provides opportunities to the citizens to hold various public offices for a definite period. It gives no scope for exclusion of citizens or conferring special privileges to some at the cost of others. This helps the citizens to exercise authority in a dignified manner.

4) Right to petition :
This right enables the citizens to forward petitions denoting their requirements or grievances. It is considered as a vital political right in the modem state. The citizens could be able to find solutions to their immediate or long pending issues by bringing them to the notice of the government through this right. It also helps the public authorities to know the grievances of the people and attend to them properly and promptly.

5) Right to criticism :
This right gives opportunity to the citizens to criticize the various public policies and programmes. It also enables them to highlight the omissions and commissions of the leaders, and administrative personnel at various levels. It also gives scope for the citizens to render positive and constructive criticism about the on goings in the government from time to time. Ultimately it keeps the administrative authorities and policy makers to be vigilant in discharging their obligations.

Question 7.
Relationship Between Rights and Duties.
Answer:
There is a close relationship between Rights and Duties. The two are considered as the two sides of a same coin. Rights are incomplete in the absence of Duties. Rights imply Duties and Duties are entitled to rights. The two are inseparable. If the state gives the right to life to citizen it also imposes an obligation on him to not to expose his life to dangers, as well as to respect the life of others. A right is not just a law that allows individuals or governing bodies to do or say anything they wish. The primary difference between rights and duties is that right is based on privilege granted to an individual, whereas duty is based on accountability of performing that duty by an individual.

Very Short Answer Questions

Question 1.
Define Rights.
Answer:

1. “Rights are those powers claimed and recognized as contributory to the common good.” – T.H. Green
2. “Rights are those conditions of social life without which no man can seek in general to be himself at his best.” – H.J. Laski

Question 2.
Classify Rights.
Answer:
Rights are broadly classified into three categories namely, (i) Natural rights (ii) Moral rights and (iii) Legal rights.

Legal Rights in turn classified into (i) Civil rights (ii) Political rights and (iii) Economic rights.

Question 3.
What are Civil Rights?
Answer:
Civil rights aim at providing basic conditions for individuals to lead a happy and dignified social life. These rights are considered vital for a civilized society. Civil rights are described as the gift of democracy. Democracy flourishes when the citizens are provided these rights. Civil rights are those rights which provide opportunity to each person to lead a civilized social life. These fulfil basic needs of human life in society. Right to life, liberty and equality are civil rights. Civil rights are protected by the state.

Question 4.
Natural Rights.
Answer:
Natural rights are those rights which are enjoyed by men by birth. Men enjoyed these rights even before the origin of civilized society. The society and the state recognized and respected these rights. John Locke, who propounded the theory of natural rights, claimed that rights are pre-social and pre-political in nature. He cited the right to life, right to liberty and right to property as the basic natural rights. The state cannot deprive men of these rights.

Question 5.
Moral Rights.
Answer:
Moral rights denote claims based on the ‘moral’ code of the community. These rights are morally prescribed to men in the society. The ethical or moral principles in the society act as the basis of the moral rights. Customs, traditions and usages are regarded as the basic source of these rights. Men enjoy these rights in a civil society. These rights are based on the moral conscience of the people. They don’t have legal support. However, they are backed by the society. So violation of these rights is not considered as a crime. Individuals could be punished for their violation. Moral rights are indefinite and vague. But they are popular in nature. The State cannot ignore these rights for a long time.

Question 6.
What are Political Rights?
Answer:
Political rights are those rights which enable the individuals to participate in the political affairs of the state. They help the citizens to manage the political affairs including the organization of the government. They empower the citizens in the political affairs of the state. Citizens can freely participate in the administration of the country. A unique feature of these rights is that they are enjoyed by the citizens only. Aliens do not possess these rights.

Right to vote, right to contest as candidates in elections, right to hold public offices, right to petition, right to criticize the government etc., are some examples of the political rights.

Question 7.
What are the objectives of Human Rights?
Answer:
The following are the various objectives of human rights.

1. Provision of independence to the people against discrimination.
2. Freedom from poverty.
3. Freedom for availing the latent abilities of individuals.
4. Freedom from fear.
5. Freedom of protection.
6. Freedom from injustice.
7. Freedom of speech and expression.
8. Freedom of protection.
9. Freedom of association.
10. Freedom for carrying one’s activities on dignified lines.
11. Freedom against exploitation.

Question 8.
How many types of Human Rights are there ? Name them.
Answer:
There are three generations of Human Rights.
First generation : Civil and Political Rights.
Second generation : Economic, Social and Cultural Rights.
Third generation : Solidarity Rights.

Question 9.
Significance of Human Rights.
Answer:
The United Nations reaffirmed that the people and governments of every state must strive for respecting individual freedoms and human rights. The concerned authorities and agencies of the United Nations held several international conferences and invited inter¬nationally acclaimed intellectuals, jurists and heads of states for eliciting their valuable opinions on extending human rights to every section of human communities throughout the world.

Question 10.
Classification of Duties.
Answer:
Duties are broadly classified into (i) Moral Duties (ii) Legal Duties. Legal Duties are further classified into (i) Positive Duties (ii) Negative Duties.

Question 11.
Moral Duties.
Answer:
Moral Duties :
Moral Duties are those which bound the individuals together on moral grounds. They may not be upheld and supported by the laws of the state. They are based on the moral beliefs of the people. They are sanctioned by the community basing on some customs, traditions and usages. Any violation of moral Duties does not lead to punishment. Helping the needy and the sick is regarded as an example of moral Duties.

Question 12.
Write some important Economic rights?
Answer:
Economic rights enable men to have a reasonable and legal source of livelihood. They provide economic security to the individual. They got prominence in the 21st century all over the world. Without the fulfillment of these no person can really enjoy his civil and political rights. It is therefore essential, that every person must get the right to work, right to adequate wages, right to leisure and rest, and right to social security in case of illness, physical disability and old age.

Telangana TSBIE TS Inter 1st Year Political Science Study Material 5th Lesson Political Ideologies Textbook Questions and Answers.

TS Inter 1st Year Political Science Study Material 5th Lesson Political Ideologies

Long Answer Questions

Question 1.
What is Individualism? Explain it.
Answer:
Meaning :
Individualism means the state should leave the individual alone. This theory is also known as the Laissez Faire theory. Laissez Faire is a French term which means leave alone’. It regards the individual as the centre of social life. According to this theory, the individual freedom should be given maximum scope and the state interference should be reduced to the minimum.

Ethical Argument :
According to J.S.Mill, state interference goes against the development of the individual personality and character. When government interferes and takes upon its shoulders the responsibility of doing what the individual should do, the individual loses the sense of responsibility and self-reliance and his personality is destroyed. He even advocated against the tyranny of the majority over the individual.

Economic Argument :
Adam Smith put forth the economic argument in favour of individualism. Every individual tries to get the maximum and would do his work well in which he is personally interested. He spoke in terms of the enlightened self-interest of the individual. The state must not interfere in the economic activities of men like trade, commerce, and industry, etc. and with its interference, the individual loses all his incentive for economic activity. Free competition will lead to improvement in the quality of industrial output and will also result in lowering of prices.

Biological Argument :
Herbert Spencer put forth the biological argument to support individualism. According to him, just as in the animal world the fittest survives, in society also, the individual should struggle for himself and survive or perish. Survival of the fittest is the law of nature and the progress of the society depends upon the elimination of the unfit by the fit. The duty of the state is simply to allow the fullest scope in the struggle for existence. The state has no business to come forward to help the poor, the aged and the sick.

Empirical Argument :
Experience shows that wherever and whenever the state regulated and controlled industry, the result has been unnecessary delay, waste and inefficiency. It was argued that whenever the state had tried to control and regulate the social or economic life of the community, it had miserably failed in its attempts. Moreover, state management means routine, red-tapism, unnecessary delay, bad economy and corruption.

Criticism :
Individualists regarded the state as a necessary evil, but actual experience has shown that it is not. bad. The state has to interfere in the larger interest of society. It does exist for the sake of good life.

Individualists contend that laws restrict liberty. This is wrong contention. Laws do not curtail liberty, but maintain and promote it.

The argument of the survival of the fittest is misleading, cruel, in human, dangerous and unethical. According to this principle, the weak, the old and infirm have no right to live. Such view is observed. Hence, such a cruel philosophy is worth rejection.

Question 2.
What is liberalism? Explain its basic Tenets.
Answer:
Meaning and definitions :
Liberalism in its classical sense stood for the liberty of the individual, democratic institution and free enterprise. Modern Liberalism stands for positive role of the state in securing a dignified life to the individuals.

Webster’s Unified Dictionary and Encyclopedia says that liberalism is a term indicating the tendency towards extending individual rights and liberties as against rigid political, economic and bureaucratic authority. Politically, the term was formerly used to denote a movement of progressive reform in government and has been applied at various times to parties agitating for the particular kind of liberty.

Basic Tenets:
1. Man is a rational creature. He has immense potential to contribute to social progress as well as to his own good. Man is endowed with certain natural rights which cannot to be transgressed by any authority.

2. There is no basic contradiction between an individual’s self-interest and common interest. In fact the common interest denotes a point of reconciliation between the diverse interests of different’ individuals.

3. Civil society and the state are artificial institutions created by individuals to serve the common interest. They are entitled to demand obedience from individuals on the condition of fulfilling this function.

4. It believes in the primacy of procedure over the end product. It means, if the procedure for arriving at a decision is right, the decision may be accepted to be right. Liberal view of freedom, equality, Justice and democracy is a search for right procedure in different spheres of social life.

5. Liberalism promotes civil liberties of the individual, including freedom of thought and. expression, freedom of association and movement, personal freedom and strict compliance with legal and judicial procedure. Any restriction on individual freedom should be meant to ensure equal restriction of freedom for others.

6. Liberalism upholds freedom of contracts. No individual can accept any obligation without his own consent and without consideration of mutual benefit. The state would function as umpire in the enforcement of contracts. However, a contract concluded under pressure, or the one which comprises dignity of the individual, shall be void.

7. Liberalism holds that public policy should be the product of free bargainihg between groups of individuals formed to pursue their common interests.

Ultimately, Liberalism treats market society as the model of social organization where role of the state should be confined to the protection of individuals’ life and property, enforcement of contracts, maintenance of minimum common services which would not be undertaken by private entrepreneurs. In liberal view, state is a necessary evil. Liberalism treats the state as the means and individual as the end. It rules out absolute authority of the state.

Question 3.
What is Socialism? Examine its basic principles.
Answer:
Socialism is considered as the most important theory in political science. It was advocated and popularised to oppose the defects in individualism and capitalism.The term socialism is derived from the workd ’Socio’ which means society. It was used for the first time in 1833. It was first enunciated by Robert Owen and Saint Simon Later on it was developed by Reyband, Louis Blanc and Proudhon. It was explained on scientific basis by Karl Max in 1848.

Definitions :
The term socialism is defnined by many writers in many ways. Some of them are as follows.

1) Robert Bland :
“Socialism is a system which keeps all the factors of production and exchange in social control and sees that they belong to all equally”.

2) Bertrand Russel :
“Socialism is the adovcacy of common ownership of land and property”.

3) George Bernard Shah :
“Socialism means equality of incomes and nothing else”.

Main Principles :
The following are some of the main principles of socialism. ”

1) Importance to Society :
Socialism assigns greater importance to society rather than the individual. It emphasised that individuals interests are subordinate to those of society. It also gave importance to the production of those commodities which are essential for common people. It is not guided by the profit motive of a fe^wealthy persons. It considers production of luxurious commodities as waste and superfluous. Lastly, it assigns importance to cooperative services motto than profit motive in productive operations.

2) Organic unity of Society :
Socialism regards that labourers in capitalist society do not enjoy liberties and freedom. It suggests adequate opportunities to common men for encouraging them to involve in the process of production. It points out that only a few persons enjoyed more liberty in a society dominated by inequalities. It is not proper to keep the majority of the poor people without liberties and freedoms. Socialism stands for a society where there prevails no inhabitations on individuals and where every one is granted basic facilities.

3) Abolition of capitalism :
Socialism desires for the abolition of capitalism. The socialists felt that the labours are exploited in the capitalist society. The capitalists aim at acquiring more profits and more acquisition of capital. They do not favour the provision of salaries, allowances and other facilities as determined by law to the labourers. The state shows favour to the capitalist sections. This makes the position of the labourers miserable. Hence the socialists strongly believed that it is through the abolition of capitalism that the interests of labourers will be safeguarded. They pointed out that capitalist system should be dissolved for regulating the unproductive expenditure, for just distribution of the wealth and for promoting the interests of the labourers.

4) Abolition of competition :
Socialism advocates the abolition of competition in economic affairs that too especially in productive matters. It stands for co-operation in the place of competition. It states that competition leads to certain evils like corruption, monopolies, illegal acts, deterioration of values etc. It also results in excessive or under production thereby causing great sufferings to the common men. That is why the socialists felt that co-operation, instead of competition, should be encouraged at local, provincial and national levels in the economy.

5) Belief in Equality :
Socialism is based on the principle of equality. Eventhough it did not support absolute equality, it suggested for the prevalence of relative equality among individuals. It recognised the fact that certain elements like merit, outstanding efficiency, talent, skill etc. make differences among the individuals. It pointed out that the long standing excessive inequalities among men must be wiped out and a new society must be formed.

6) Opposition to private property :
Socialism opposes individual ownership and control over lands, buildings, factories and other productive means. It suggested that productive means should not be utilised for selfish personal needs and benefits. It enunciated that no person created land and other things and all are the gifts of nature and no one can change their quantity. The factors of production must be utilised for collective welfare. The socialists advocated for keeping all the factors of production under the control of the society.

7) Social ownership of material factors :
Socialism believes that all materialist factors must be kept under the control of the society. For that purpose it suggests for their nationalisation. It treats private property as the possession by thieves. In order to avoid the irregularities and flow of private property, Socialism strongly desired for social ownership of factories, industries, mines etc.,

8) Centralised Planning System :
Socialism considers that centralised planning system is essential for the progress of the nation. It suggests planning as the best means for achieving rapid economic development.

Question 4.
Write an essay on basic Ideas of Gandhism.
Answer:
Gandhism – basic ideas :
Gandhi – A breif biography :
Mohandas karamchand Gandhi was bom at Porbandar in Gujarat in 1869. He was called the Mahatma. (The great soul) by Rabindranath Tagore.

He was the father of our nation. He applied age old ancient Indian ideals like Truth, Non-violence and Satgyagraha as political weapons and won the freedom not by late but by loving the enemy. He preached only whatever he practiced.

Basic ideas of Gandhism :
1) Meta Physical idealism :
The Upanishadic concepts like “The Divine”. The universal soul, manifested in all living and non living things of the entire universe, or “The Divine light illuminating everywhere” are the basis for the Gandhian Philosophy. His meta physical idealism was a unique combination of the values based on Non-violence, ethics* vedanta, Spiritual, Meta Physical, Jain, Buddhist and Vaishnava.

2) Ethical absolutism :
Gandhi believes the superiority of moral and ethical values. The roots of his ethical absolution can be traced in the “Rita” of the vedanta. This Rita is universal, omnipresent and ethical in values is ruling the Men and the Gods.

3) Doctrine of Non-Violence :
The literal meaning of-Non-violence is “not doing, vio-lence”. In a Nutshell it means “Not to kill”. “Not to do harm” is its wider meaning.

He applied nonviolence as a means and a weapon in politics.

Truth and fearlessness are the essential conditions of Non-violence. Gandhi regarded and equated non-violence on par with self torture of the Soul, Mercy, Love, Fearlessness, innocence, Soul force, kindness, Selflessness and non-idulgance.

Gandhi used non-violence as a potent weapon not only against the British colonial¬ism but also in the movements waged against all types of deeply entrenched evils of the society.

4) Doctrine of Satyagraha :
Gandhi explained Satyagraha not as a philosophical doctrine, but as a means to fight against the foreign rule and to achieve social and economic justice.

Gandhi formulated the word satyagraha when he was in South Africa. He called satyagraha as “Love Force” and “Soul Force”. Truth cannot tolerate violence. Even the guilty should not be punished with violence. A sin for one may not be to the other. At once, the search for truth must be only on non-violent means. We have to try to remove the holds on untruth and injustice from his ways by inflicting suffering upon himself. By satyagraha means, Gandhi said that inflicting suffering not on the evil doer but upon himself.

Short Answer Questions

Question 1.
Discuss Individualism.
Answer:
Meaning :
Individualism means the state should leave the individual alone. This theory is also known as the Laissez Faire theory. Laissez Faire is a French term which means ‘leave alone’. It regards the individual as the centre of social life. According to this theory, the individual freedom should be given maximum scope and the state interference should be reduced to the minimum.

The individualists regard state as a ‘necessary evil’. It is necessary because it has to protect the individual from violence and fraud. It is an evil because its existence is a threat to individual freedom. So it is desirable to have state’s interference as little as possible. Lesser the functions performed by the state, the more is the liberty enjoyed by the individual.

The state should perform the following limited functions :

1. Protection of the individual and of the state from foreign aggression.
2. Protection of the individual against one another.
3. Protection of property from robbery and damage.
4. Protection of individual from false contracts and breach of contracts.

Question 2.
Write a note on Socialism and its defects.
Answer:
Socialism is consideredas the most important theory in political science. It was advocated and popularized to oppose the defects in Individualism and capitalism.

Defects of Socialism :
1) Socialism destroys the initiative and creative instincts of individuals. As it considers the individuals insignificant in productive matters, there is a scope for the indifferent attitude of the individuals in economic enterprises.

2) The various socialist principles cannot be implemented. Some of the socialist ideals like elimination of economic inequalities, social taboos, substitution of collective ownership over individual properties etc. are very difficult to put into practice. The above ideals can be realised only through firm political leadership, sincerity, honest personnel, educated people etc.,

3) Socialism opposes individual liberties and freedoms. It is based on the principle that society is important and individuals are insignificant. It complete the people to act in subordination to the control and directives of the state. On the other side, socialism results in the exercise of absolute powers by the government unilaterally thereby causing harm to be liberties and freedoms of individuals through several laws.

4) Socialism advocated the intervention of the state in economic affairs. If such a proposal comes into vogue, there is every possibility of government acting with indifference and inefficiency.

Question 3.
Write a brief note doctrine of Non-Violence.
Answer:
The literal meaning of Non-violence is “not doing violence”. In a Nutshell it means “Not to kill”. “Not to do harm” is its wider meaning.
He applied non-violence as a means and a weapon in politics.

Truth and fearlessness are the essential conditions of Non-violence. Gandhi regarded and equated non-violence on par with self torture of the Soul, Mercy, Love, Fearlessness, innocence, Soul force, kindness, Selflessness and non-idulgance.

Gandhi used non-violence as a potent weapon not only against the British colonialism but also in the movements waged against all types of deeply entrenched evils of the society.

In his opinion either Swaraja or Democracy can not be achieved through violence because we cannot completely defeat any one with violence. Individual freedom does not mean violence. Individual freedom is a reality only in the state of non-violence.

Gandhi observed four reasons for the existence of violence. They are :

1. Organized authority and power.
2. Civil-strife (internal conflicts).
3. Foreign invasions.
4. Family system.

Question 4.
Explain the concept of Satyagraha.
Answer:
Gandhi explained Satyagraha not as a philosophical doctrine but as a means to fight against the foreign rule and to achieve social and economic justice.

Gandhi formulated the word satyagraha when he was in South Africa. He called satyagraha as “Love Force” and “Soul Force”. Truth cannot tolerate violence. Even the guilty should not be punished with violence. A sin for one may not be to the other At once, the search for truth must be only on non-violent means. We have to try to remove the holds on untruth and injustice from his ways by inflicting suffering upon himself. By satyagraha means, Gandhi said that inflicting suffering not on the evil doer but upon himself.

Political faith of Satyagraha :
Politically, Satyagraha depends upon three principles of faith :

1. Absolute faith in non-violence.
2. The basis of any Government is the consent of the people.
3. No country can develop without self suffering, self-sacrifice, trials and tribulations. This is like the labour pains a mother suffers to deliver a child.

Principle of a satyagrahi:
A true satyagrahi has to follow the following principle alone :

1. Truth means not to lie. It is divine. The evil-laws are to be disobeyed through non-violent means.
2. Non-violence means not to kill. The dynamic factor in it is “Love”. Its essence is to love the entire life on earth.
3. A satyagrahi has to observe complete celibacy (Brahmacharya) should not look any man or women with amorous looks.
4. Should no t eat more than necessary
5. Should nor steal. It does not mean stealing the things of others.
6. One has to live on his labour (Bread Labour).
7. Should not purchase or possess foreign goods. He has to purchase and use o/ily swadesi.
8. He should tread fearlessly. To love and to search for truth fearlessness is an esseritial.
9. Should not observe untouchability is not sufficient he has to fight against it.
10. Observe religious tolerance.

Forms of Satyagraha:

1. Civil-disobedience.
2. Non-co-operation.
3. Hunger-strike.
4. Hartal.
5. Hizrat.

These methods are to be used by a safygrahi according to the necessity to fight against foreign rule and all types -of injustice.

Satyagraha has many forms in practice. Non-co-operation to the evil-doer is a mild form of satyagraha. Civil disobedience is an intensive, potent and powerful weapon of influence. Civil disobedience may be of individual or of mass public. Non-co-operation. Hartal, Hizrat are other forms of satyagraha. The methods of satyagraha are also different. Hundger strike is one form of satyagraha. One should use hundger strike (non-eating) against those who intimately associate and love us.

Question 5.
Gandhiji’s views on Religion and politics.
Answer:
The moral concepts of Gandhi can be founded in his ideas expressed very frequently. Politics without morals character create a degenerated state and Government in a human society indulged in material pleasures. All the political means are used only to gratify power. But Gandhi described the theory of authority. He says that both authority and ethics should become the focal points of politics. He mixed humanistic, political religious and- ethical values in politics. He opposed the segregation of religion from politics. In his opinion both of there are equally essential. Politics without religion is like a dead corpse, not useful to a country except to burn. He says that his search for truth pulled him into politics and his moral strength helped him to remain very firm in politics.

Even a political programme is intended for the social and ethical advancement of the people. We cannot segregate politics from life, most importantly from religion. Segregation means nurturing religious fundamentalism, bigotry and evil in politics.

Religion according Gandhi was not Rituels and blind faith but a co-ordinated moral values of all religious. A religion should not promote sectarianism. But Gandhi never supported a state religion. He wants to use the religion to oppose all types of evils in the society.

Very Short Answer Questions

Question 1.
Individualism.
Ans. Individualism is an important theory of state activity which advocates maximum individual freedom and minimum interference of the state in individual matters. This theory gained more significance during the last quarter of 18th century and the first quarter of 19* century. This theory was also known as Laissez-faire which means “Le alone”. It has been advocated by political writers like Adamsmith, Ricardo, Malthus, Herbert Spencer, J.S.Mill, Bentham and others.

Question 2.
Neo-Liberalism.
Answer:
Neo-liberalism or libertarianism stands for contemporary version of classical liberalism which seeks to restore ‘Laissez Faire’ individualism. It denounces the welfare State; oppose state intervention and control of economic activities. Champions of neo-liberalism stand for ‘rolling back’ the, state which has immensely expanded its sphere of activities. The chief exponents of neo-liberalism include F.A. Fayek (1899 – 1992), an Australian thinker, Milton Freedman (1912 – 2006), an American economist and Robert Nozick (1938 – 2002), an American, philosopher.

Question 3.
Laissez-Faire.
Answer:
Laissez Faire is a French term which means “Leave alone”. It regards the Individual as the centre of social life. According to this theory, the Individual freedom should be given maximum scope and the state interference should be reduced to the minimum.

Question 4.
J.S. Mill.
Answer:
John Stuart Mill was the most prominent political thinker of 19^th century. He was the most influential intellectual who propagated the Ideas of Liberty, Equality and Welfare State. He paved the way form the emergence and spread of individualism against the hitherto imperialist and despotic tendencies in European politics of Nineteenth century. He played a decisive role in propounding the theory of Individualism in Western political thought. He tried to disposed the misconception among the masses in regard to the validity and relevance of Bentham’s utilitarianism.

Question 5.
Meaning of Socialism.
Answer:
Hughan regarded socialism as the political movement of the working class which aims to abolish exploitation by means of collective ownership and democratic management of the instruments of production and distribution. Some writers regarded socialism as a democratic movement meant for promoting justice and liberty and for managing the society bn efficient principles. ..

Question 6.
Capitalism.
Answer:
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labour, voluntary exchange, a price system and competitive markets. In a capitalist market economy, decision making and investments are determined by every owner of wealth, property or production ability in financial and capital markets.

Question 7.
Marxism, (or) Communism (or) Scientific Socialism.
Answer:
The Marxis .is called as a ‘Scientific Socialism’ and it is also called as communism. Communism is propounded against the policy of Laissez faire. Karl Marx analysed this theory in his two books namely. ’DAS CAPITAL’ and ’COMMUNIST MANIFESTO ! V I. Lenin introduced this theory in Soviet Russia in 1917. Several countries are adopting the principles of communism in their political affairs.

Question 8.
Non-Violence.
Answer:
The literal meaning of Non-violence is “Not doing Violence”. In a Nutshell it means “Not to Kill”, “Not to do harm” is its wider meaning. Mahatma Gandhi used Non-violence as a potent weapon not only against the British colonialism but also in the movements waged against all types of deeply entrenched evils of the society. Truth and fearlessness are the essential conditions of Non-Violence Gandhi regarded and equated non-violence on par with self torture of the soul, Mercy, Love, Fearlessness, Kindness and non-indulgence.

Question 9.
Satyagraha.
Answer:
Gandhi explained Satyagraha not as a philosophical doctrine but as a means to fight against the foreign rule and to achieve social and economic justice. Gandhi formulated the word satyagraha when he was in South Africa. He called satyagraha as “Love Force” and “Soul Force”. By satyagraha means, Gandhi said that inflicting suffering not on the evil doer but upon himself.

Question 10.
Trusteeship.
Answer:
The society of Gandhian dreams was like the State of Rama (Rama Rajya) in which the welfare of all (Sarvodaya) will bloom. In such society, the individuals treat their personal property, industry. Land and business as trusteeship. They received what they need and give the rest to the deserving is the fundamental principle of the concept of trusteeship of Gandhi. Gandhi proposed trusteeship theory as an alternative to the revolutionary communism.

Question 11.
Non-co-operation – National Movement.
Answer:
This movement is a great event in the History of India’s Freedom Struggle. Gandhiji launched this movement between 1920 – 22 against the manss killing of innocent people in Jallian wallah Bagh in Punjab. This movement also supported the Indian Muslims and their Khilafat movement. The Indian National Congress presided over by Lala Lajapathi Rai extended its support to this movement. The congress has decided to undertakes !.

1. Boy cotting Foreign goods.
2. Renouncing the British titles and Honorary Offices.
3. Abstaining from the Government sponsored meetings.
4. Boy cotting British Courts.
5. Boy cotting the Elections to the Legislative councils and
6. Resigning from the membership of local bodies.

Question 12.
Civil disobedience – National Movement.
Answer:
This movement is a landmark in the constitutional history Of India. The Indian National Congress Launched this movement on March 12, 1930, under the guidance of Gandhiji. Gandhiji started the civil disobedience movement by taking salt laws for violation. Along with 78 standards supporters, Gandhiji began to march towards Dandi, a remote village about 240 miles from Sabarmati Ashram on 12th March 1930 to 6th April 1930. Gandhiji Planned to violate the salt Laws of the British government by making salt. Hence this movement is also popularly known as the salt Satyagraha Movement.