Answers for January 4th
STD – XII (CBSE)
ECONOMICS
SECTION A
ONE MARKS
1. It is a study of how individual economic units, firms, household and Industries
make economic decision that is choices. .
2. This is due to other factor than price of the commodity. Change in demand,
when more of the quantities are demanded at the same price.
3. TVC starts from the origin showing that when output is zero, the variable cost
is nill. The TC curve lies above TVC curve the total cost curve is the result of
the variable and fixed cost. It is also seen that the TC and TVC curves have the
same shape. Since each increase in output increase total cost and variable cost.
4. A firm's marginal revenue is the dollar amount its total revenue changes in
response to a 1 unit change in the firm' output. If a firm in a perfectly
competitive market increases its output by 1 unit, it increases its total revenue
by P x I = P.
In a perfectly competitive market, the firm's marginal revenue is just equal to
the market price P.
5. A perfectly competitive firm is a price taker firm which take the price from
the market that is determined by forces of demand and supply.
Three Marks
6. Production Possibility Curve: Production possibility curve is that curve which
represents the maximum amount of a pair of goods or services that can both be
produced with an economy's given resources and techniques, assuming that
all resources are fully employed.
Answers for January 4th
STD – XII (CBSE)
Production Possibility Schedule
A Goods
B Goods
0
100
1
90
2
70
3
40
4
0
Reason: Production possibility curve slapes downwards from left to right. It
is because in a situation of faller utilization of thegiven resources, production of
both the goods cannot be increased. More of good can be produced only with less
of good-Y.
7. We know that there are two types of goods; normal goods and inferior goods.
Hence, the effect of changes in consumer's Income will be different fof these two
types of goods.
(i) Normal Goods : The goods whose demand increases with the rise in
consumer's income and decrease with the full in income, is termed as
normal goods.
(ii) Inferior Goods : The goods whose demand decreases with the riso in
consumer's income and increases with the fall in income, is termed as
inferior goods.
Answers for January 4th
STD – XII (CBSE)
Example of Normal goods
Price of
X
(Us.)
5
4
3
2
1
Demand for x
(when Income
= Rs. 400)
2 kg.
4 kg.
6 kg.
8 kg.
10 kg.
Demand for X
(When Income
= Rs. 500)
4 kg.
6 kg.
8 kg.
10 kg.
12 kg.
Example of Inferior, goods
Price of
X
(Rs.)
5
4
3
2
1
Demand for x
(when Income
= Rs. 300)
4 kg.
6 kg.
8 kg.
10 kg.
12 kg.
Demand for
X
(When
Income
= Rs. 400)
2 kg.
4 kg.
6 kg.
8 kg.
10 kg.
8. Three concepts of total cost in the short run must be considered: Total fixed
cost (TFC), total variable cost (TVC) and total cost (TC). Total fixed costs are the
total cost per period of time incured by the firms for fixed inputs.. The graph is
an follow:
Answers for January 4th
STD – XII (CBSE)
9.
Total cost is the sum of fixed cost and variable cost incurred at each level of
output. Total cost of production of a firm equals its fixed cost plus its.
Formula: TC = TFC + TVC
Where
TC = Total Cost
TFC = Total fixed cost.
TVC = Total variable cost.
10. Implication of "large number of sellers in the market" is that share of each
seller in total market supply is so small that no single seller can influence the
price. Hence, a firm has to sell the product at the given price by the industry. It is
because of this position that each firm is said to be price-taker in perfect
competition.
Or
Answers for January 4th
STD – XII (CBSE)
Oligopoly is that form of imperfect competition in which a few big firms produce most of total
output of the industry and are mutually dependent for taking decision about price and outputs.
There are few sellers of the commodity and each produces a substantial portion of total output of
the industry. The number of firms is so small that each seller knows that he can influence the price
by his own action and that he can provoke rival firms to react. Hence, there are only a few firms in
an oligopoly market.
Four Marks
11.Indifference Map: An Indifference map is a collection of indifference curves
corresponding to different levels of satisfaction.
A higher indifference curve indicates higher level of satisfaction as compared to
lower indifference curve. Its reason is that any point of a higher indifference
curve means more of both goods or the same quantity of one good and more
quantity of other good. Thus IC2 is superior to ICV IC3 to IC2 and IC4 is superior to
IC3. In short higher the position of a curve the better for the consumer because the
higher curve represents greater quantities of both the goods.
Answers for January 4th
STD – XII (CBSE)
12.
Elasticity of demand is infinity. Therefore, demand curve is a straight
line parallel to x-axis.
13. Change in price of raw material and remuneration of factors (rent, wages,
interest etc.) influence the cost of production of a commodity and thereby supply.
An increase in the price of a factor of production may leads to fall in production of
a commodity shifting the supply curve to the left contrary to Pt., a producer f!. may
supply more of commodity at a given price of prices of factor fall shifting 1 the
supply.
Four Marks
14. (i) Normal goods: When rise in income of the consumer leads to rise i f in his
demand for a good, that good is called a normal good. Alternatively, it is B \ a good
whose quantity demanded increases as income increases and falls as 1 income
decreases. Thus there is direct relationship between income and demand 1 for a
normal goods. In other words, goods whose incomes effect is positive are 1
generally called normal goods. Examples of normal goods are: full cream milk, 1
superior grains like wheat and rice, silk cloth cigarette etc.
Inferior goods: When rise in income of the consumer leads to fall in this I
demand for a good, that good is called an inferior good. Alternatively, it is a good
Answers for January 4th
STD – XII (CBSE)
whose demand falls with increase in income and rises with fall in income. Thus
there is inverse relationship between income and demand for an inferior good.
Examples of inferior goods are: toned milk, coarse grain like Jowar and bajar,
Khadi Cloth, bidies etc.
In short goods the demand for which varies directly with the income are
called normal goods. As against it goods the demand for which varies inversely
with income are termed as inferior goods.
(ii) Cardial utility & ordinal utility: 1. Utility means satisfaction which a
consumer derive from commodities and services by purchasing different units of
money. Cardinal utility means satisfaction that can be measured in numbers
such as 1, 2 and 3. While ordinal utility refers to satisfaction cannot be
measurable in numbers.
2. The concept of cardinal utility was used by Marshal while ordinal utility
was used by J. R. Hicks. It is more realistic and better than cardinal utility.
15. We may classify all determinants of supply into two categories: (i) In the first
category we include only one factor namely own price of the commodity; (ii) In
the second category we include all the remaining factors i.e. all factors other than
the own price of the commodity. Briefly change in supply due to change in own
price of the commodity is known as change in quantity supplied, or expansion
and contraction of supply and the resultant supply curve. In contrast, change in
supply due to change in factor other the own price of the commodity is known as
merely change in supply, or increase and decrease in supply, or increase and
decrease in supply and the resultant supply curve is called shift in supply curve
as explained below.
Or
An individual supply schedule and indicates different quantities of a
commodity offered for sale by an individual firm at different price. As against it a
Answers for January 4th
STD – XII (CBSE)
market supply schedule reflects the total of various quantities offered for sale by
all the individual firms at different prices in the market. In other words, to get
market supply of a commodity, we aggregate the supply. In short by summing up]
individual supplies, we get aggregate or market supply as shown in the following
imaginary supply schedules of individual firms and the market. Let us assume
that there are three firms namely, A, B and C in the Wheat Market. Individual;
supply schedules and the resultant market schedule as shown below:
16. Effects of supply shift (increase and decrease in supply) (i) Demand remaining
the same when supply curve shift rightward i.e., when supply increases price falls
and quantity sold and purchased increases, (ii) When Su decrease in demand
means less quantity demanded at the same price. This leads to shift of demand
curve leftward from D] to D2 and decrease in supply curve from S., to s2.
(a) If decrease in demand is equal to decrease in supply there will be no change
in equilibrium price. In the diagram (A) the to decreases are equal to Q2 Q3 The
equilibrium price remains unchanged at op.
Answers for January 4th
STD – XII (CBSE)
(b) Equilibrium price will fall when decrease in demand is greater than decrease
in supply. In diagram (B) decrease in demand (AE) is greater than decrease in
supply (BE^ leading to fall in the equilibrium price from op] to op2.
There are three possible effects on the equilibrium price:
(iii) If
decrease in demand is equal to decrease in supply the equilibrium
price remains unchanged.
(iv) If
decrease in demand is greater than the decrease in supply,
equilibrium price will fall.
(v) If decrease in demand is less than the decrease in supply, equilibrium
price will rise.
Or
Answers for January 4th
STD – XII (CBSE)
Axis. Support price. When government fixes price of a product at a level higher
than equilibrium price, it is called support price (or floor price). Floor means the
lowest limit It is the minimum price at which a commodity can be purchased. It
leads t more supply and short demand. As a result supply becomes in excess of
demand. Support price is generally fixed for agricultural products like food
grains, sugar etc. to safeguard the interests of producers (farmers). This price is
also called floor price because it is the minimum price fixed by the government.
Suppose government fixes price is 80 tons creating again disequilibrium or
surplus of 40 (=80 - 40) tons. This is shown as surplus in Fig. In such a situation
government may purchase large amount of excess supply of sugar (or any other
product for that matter at its fixed price (called support or procurement price) to
protect the interest of producers like farmers. Support price is the minimum
guaranteed price at which producers can sell their output to government if so
desired. It is higher than equilibrium price. For instance a government agency
food corporation of India purchases. Wheat from the farmers at its fixed (support)
price and stores it in go down was buffer stock. The main consequence of support
price is that consumers have to pay higher price for the good. Moreover, income
of the farmer (producers) goes up. The aim of support price to insulate farmers
from the punctuations in their incomes caused by price variations in the free
market.
When government fixes price of a product at a level lower than equilibrium price,
the price is called control price (or ceiling price), producers cannot sell their
products above this price. It is the maximum price that can be charged for a
commodity. This is done so that necessities become available to common people t
affordable price. It leads to suppose equilibrium price of sugar in a free market s
30 per kg at which both demand and supply of sugar are equal, i.e. 60 tons. When
government fixed price at 20 per kg demand to sugar rises to 80 tons and Supply
falls to 40 tons creating disequilibria because supply falls short of demand is
Answers for January 4th
STD – XII (CBSE)
shown by the line AB in fig. The implication or consequence of price control can
be any of thefore.
SECTION 'B'
ONE MARKS
17. Flow Variables: A flow is a quantity which is measured over a period of time.
It has dimension National Income is a flow. It describes and measures flow of
goods and services which become available to accounting during a year similarly
all other economic variable which have time dimension, i.e. whose magnitude can
be measured over a period of time are called flow variables.
18. Consumption goods: Goods which are consumed by the ultimate consumers
or which meet the intermediate needs of the consumers directly are called
consumtion or consumer goods.
19.Time deposits (Fixed deposits): Fixed deposits have a fixed period to maturity
and are referred to as time deposits. There are deposits for a fixed term, i.e. period
of time ranging from a few days to a few years. These are neither payable on
demand nor they enjoy cheque facilities. They can be with drawn only after the
maturity of the specified fixed period. They carry higher rate of interest. They are
not treated as a part of money supply.
Answers for January 4th
STD – XII (CBSE)
A regular deposit of an agreed sum is made is also a variant of fixed deposit) or
Time deposits.
20. Direct Tax: When liability to pay a tax, and the burden of that tax' falls on the
same person, the tax is called a direct tax. "A direct tax is the tax which is paid by
the same person whom it has been levied, i.e. its burden cannot be shifted to
other.
21. A Fixed exchange rate: Flexible exchange rate is the rate which is determined
by forces of supply and demand of foreign exchange market. There is no official
intervention, Here the value of a currency is left completely free to be determined
by market for us of demand and supply of the currencies concerned.
THREE MARKS
22. Net Value Added at Market Price:
= 36000 - 7000 + (1000 - 800) - 3000 - 2000 = 36000 - 7000 + 200 - 3000 2000 = 36000 - 12000 + 200 = 36000 - 12000 = 24,200 `
23. Money as the standard of Deffered Payment: Debt are usually expressed in
terms of the money of account. Loans are taken and repaid in terms of money.
The use of money as the standard of deffered or delayed payment immensely
simplifies borrowing and lending operations because money maintain a constant
value through time. Thus money facilitate the formation of capital market and
the work of financial intermediaries like. Stock Exchange, Investment Trust and
Banks. Money is the link which connects. The values of today with those of the
future. It has become possible because value of money is stable and it has general
acceptability and durability.
25. National Income = ` 5,000
Autonomous Consumption = ` 1,000 MPC, = 0.80
C=c
+ bY
= 1000 + 0.80 x 5000 = 1000 + 4000 C = ` 5000
Consumption Expenditure is ` 5,000.
Answers for January 4th
STD – XII (CBSE)
26. Comparison between Revenue Expenditure and Capital Expenditure.
Revenue Expenditure
Capital Expenditure
Revenue Expenditure
neither creates any asset
nor reduces any liability.
Revenue Expenditure is
incurred on the normal
funtioning of government
departments and on the
provisions for various
services. Revenue
Expenditure is recurring
in nature i.e. an
expenditure is made by
the government on its dayto-day activities-
Capital expenditure
either creates an asset or
reduces a liability.
Capital expenditure is
incurred for acquisition
of assets, granting of
loans and advances and
repayment of borrowings.
How ever, capital
expenditure is nonrecurring in nature.
Some examples of revenue
expenditures are:
Payment of Salaries,
Pension interests,
expenditure on administrative Service, defence
services, health services,
grants to state, education
etc.
Examples of capital
expenditures
(vi) Loan to states &
Union Territories
Expenditure on
buildings roads, flyovers,
factories, purchase of
machinery etc.
(vii) Repayment of
borrowings.
(viii) Or
Reallocation of Resources : The role of government budget in allocation of
resources.
(i)
The government aims to reallocate resources according to economic and
social priorities through its budgetary policy.
(ii) Government encourages the production of certain commodities by giving
subsidies or tax reliefs. For eg. government encourages the use of 'Khadi products'
by providing subsidies.
(iii) Government can discourage the production of harmful goods like liquor or
cigarettes, by imposing heavy excise duties or taxes.
Answers for January 4th
STD – XII (CBSE)
FOUR MARKS
27. (i) Purchase of Furniture by a firm is final product because it is investment
availing services of furniture for a long period.
(ii) Expenditure on maintenance by a firm are intermediate expenditure.
28. Central Bank functions as a banker to the government both central and state
government. It carries out all banking business of the government keeps their
cash balances in the current account with the central bank. Similarly central
bank carries out exchange & remittance and other banking operations on behalf of
the government. Central bank gives loans and advances to government for
temporary periods, as and when necessary, and it also manages the public debt of
the country.
29. Fiscal deficit is defined as excess of total expenditure over total receipts
excluding borrowing during a fiscal year. In simple words, it is the amount of
borrowing the government has to resort to meet its expenses. A large deficit
means a large amount of borrowing fiscal deficit is a measure of how much the
government needs to borrow from the market to meet its expenditure when its
revenues are inadequate. In the form of an equation:
Fiscal Deficit = Total Expenditure - Total Receipt Excluding Borrowing =
Borrowing.
If we add borrowing, fiscal defiet is zero.
Clearly fiscal deficit gives borrowing requirement of the government. It be
noted safe limit of fiscal deficit is considered to be 5% of GDP. Again borrow
5
includes not only accummulated debt but also interest on debt. If we dedu interest
payment on debt from borrowing, the balance is called primary defi'
Fiscal Deficit = Total Expenditure - Revenue Receipts - Capital Receipts Excluding Borrowing
Fiscal deficit is the most important measure of deficit budget.
Answers for January 4th
STD – XII (CBSE)
SIX MARKS
30.
32. Foreign Exchange: When payments across the border give rise to new
situation of international payments currency which is used for making
international payments is called 'Foreign Exchange'. Thus, foreign exchange
refers to all currencies, other than the domestic currency of a given country. All
currencies other than Indian Rupee are foreign exchange. Now the problem arises
at what rate currencies of two countries should be exchanged. The next question
on foreign exchange rate. It is foreign exchange rate on which volume and
direction of foreign track depends.
Meaning of foreign exchange rate: The price of one currency in terms of another
is known as foreign exchange rate. It is the rate which one unit of a foreign
currency is exchanged for domestic currency. In other words it is the price in
domestic currency to obtain one unit of foreign currency.
For example: If one unit of US dollar can be get by paying? 40, then foreign
exchange rate is 1 $ = ` 40.
Foreign exchange rate is sometime called as external value of currency. Relation
between foreign exchange rate and demand for foreign exchange. There is inverse
relation between price of foreign exchange (rate of exchange) and demand for
foreign exchange. When exchange rate rises, demand for foreign exchange falls
and when exchange rate of foreign currency falls, its demand rises. That is why
demand curve for foreign exchange become down ward sloping signifying the
inverse relationship.