Maharashtra State Board Class 12th Economics Question Paper 2023 with Solutions Answers Pdf Download.
Class 12 Economics Question Paper 2023 Maharashtra State Board with Solutions
Time : 3 Hrs.
Max. Marks: 80
Notes:
(1) All questions are compulsory.
(2) Draw neat tables/ diagrams wherever necessary.
(3) Figures to the right indicate full marks.
(4) Write answers to all main questions on new pages.
Question 1.
[A] Complete the following sentences: (5) [20]
(i) Micro Economics is also called as ………….. . (b)
(a) Income theory
(b) Price theory
(c) Growth theory
(d) Employment theory
Answer:
(b) Price theory
(ii) Money marketfacesshortageoffundsdueto ………….. . (a)
(a) Inadequate savings
(b) Growing demand for cash
(c) Unorganised sector
(d) Financial mismanagement
Answer:
(a) Inadequate savings
(iii) Marginal utility of the commodity becomes negative when Total Utility of a commodity is ………….. . (c)
(a) rising
(b) constant
(c) falling
(d) zero
Answer:
(c) falling
(iv) Public expenditure of any government shows ………….. . (b)
(a) constant trend
(b) increasing trend
(c) decreasing trend
(d) fluctuating demand
Answer:
(b) increasing trend
(v) The relationship between income and demand for inferior goods is ………….. . (b)
(a) direct
(b) inverse
(c) no effect
(d) can be direct and inverse
Answer:
(b) inverse
[B] Find the odd word out: (5)
(i) Revenue concepts:
Total Revenue, Average Revenue, Total Cost, Marginal Revenue.
Answer:
Total Cost
(ii) Quantitative Tools of credit control:
Bank rate, Open market operations, Foreign Exchange rate, Variable reserve ratio.
Answer:
Foreign Exchange rate
(iii) Scope of Micro Economics:
Theory of product pricing, Theory of factor pricing, Theory of Economic growth and Development, Theory of Economic welfare.
Answer:
Theory of Economic growth and Development
(iv) Non-tax revenue:
Fees, Penalty, Wealth tax, Special levy.
Answer:
Wealth tax
(v) Types of Simple Index Number:
Laspeyre’s Price Index Number, Price Index. Number, Quantity Index Number, Value Index Number.
Answer:
Laspeyre’s Price Index Number
[C] Give economic term: (5)
(i) The volume of commodities and services turned out during a given period counted without duplication.
Answer:
Gross Domestic Product
(ii) A desire which is backed by willingness to purchase and ability to pay.
Answer:
Demand
(iii) Degree of responsiveness of a change of quantity demanded of a good to a change in its price.
Answer:
Price Elasticity of Demand
(iv) Very realistic competition in nature.
Answer:
Monopolistic Competition
(v) Swati purchased raincoat for her father in rainy season.
Answer:
Time Utility
[D] Assertion and reasoning questions: (5)
(i) Assertion (A): In perfect competition, price is determinded by the forces of demand and supply.
Reasoning (R): The number of buyers and sellers is so large that one person can not influence prices.
Options:
(1) Assertion (A) is true, but Reasoning (R) is false.
(2) Assertion (A) is false, but Reasoning (R) is true.
(3) Both statements (A) and (R) are True and (R) is the correct explanation of (A).
(4) Both statements (A) and (R) are True and (R) is not the correct explanation of (A).
Answer:
(3) Both (A) and (R) are True and (R) is the correct explanation of (A).
(ii) Assertion (A): A change in quantity demanded of one commodity due to a change in the price of other commodity is cross elasticity.
Reasoning (R): Changes in consumers income leads to a change in the quantity demanded.
Options:
(1) Assertion (A) is true, but Reasoning (R) is false.
(2) Assertion (A) is false, but Reasoning (R) is true.
(3) Both statements (A) and (R) are True and R is the correct explanation of (A).
(4) Both statements (A) and (R) are True and (R) is not the correct explanation of (A).
Answer:
(4) Both (A) and (R) are True and (R) is not the correct explanation of (A).
(iii) Assertion (A): Production for self-consumption is not accounted for in the national * income.
Reasoning (R): The products kept for self consumption do not enter the market.
Options:
(1) Assertion (A) is true, but Reasoning (R) is false.
(2) Assertion (A) is false, but Reasoning (R) is true.
(3) Both statements (A) and (R) are True and R is the correct explanation of (A).
(4) Both statements (A) and (R) are True and (R) is not the correct explanation of (A).
Answer:
(3) Both (A) and (R) are True and (R) is the correct explanation of (A).
(iv) Assertion (A): Foreign exchange management and control is undertaken by commercial banks.
Reasoning (R): RBI has to maintain the official rate of exchange of rupee and ensure its Stability-
Options:
(1) Assertion (A) is true, but Reasoning (R) is false.
(2) Assertion (A) is false, but Reasoning (R) is true.
(3) Both statements (A) and (R) are True and R is the correct explanation of (A).
(4) Both statements (A) and (R) are True and (R) is not the correct explanation of (A).
Answer:
(2) (A) is false, but (R) is true.
(v) Assertion (A): Supply is a relative term.
Reasoning (R): Supply is always expressed in relation to price, time and quantity.
Options:
(1) Assertion (A) is true, but Reasoning (R) is false.
(2) Assertion (A) is false, but Reasoning (R) is true.
(3) Both statements (A) and (R) are True and R is the correct explanation of (A).
(4) Both statements (A) and (R) are True and (R) is not the correct explanation of (A).
Answer:
(3) Both (A) and (R) are True and (R) is the correct explanation of (A).
Question 2.
[A] Identify and explain the following concepts (Any THREE): (6)[12]
(i) A table seller sold the table for ₹2,000 per price. In this way he sold 15 tables and earned ₹30,000.
(ii) England imported cotton from India, made readymade garments from it and sold them to Malaysia.
(iii) Ashok paid the tax on his income and property.
(iv) Raju’s father invests his money in a market for long term funds both equity and debt raised within and outside the country.
(v) A poor person wants to buy a car.
Answer:
(i) Total Revenue
Explanation:
Total revenue is the total sales proceeds of a firm by selling a commodity at a given price. It is the total income of the firm.
Total revenue = Price × Quantity
= 2000 × 15 = ₹30,000.
(ii) Entrepot trader
Explanation:
Entrepot trade refers to purchase of goods and services from one country and then selling them to another country after some processing operations. For example, Japan imports raw material required to make electronic goods like, radio, washing machine, television etc. from England, Germany, France etc. and sells them to various countries in the world after processing them.
(iii) Direct Tax
Explanation:
Direct tax is paid by the taxpayer on his income and property. The burden of tax is borne by the person on whom it is levied. As he cannot transfer the burden of the tax to others, impact and incidence of direct tax falls on the same person.
(iv) Capital Market Explanation:
Capital market is a market for long term funds both equity and debt raised within and outside the country. It is also an important constituent of the financial system. Development of an effective capital market is necessary for promoting more investments as well as achieving economic growth. The demand for long term funds comes from agriculture, trade and industry.
(v) Desire
Explanation:
Desire means an urge to have something. In Economics, demand means a desire which is backed by willingness and ability to pay. For example, if a person has the desire to purchase a television set but does not have the adequate purchasing power then it will be simply a desire and not a demand.
[B] Distinguish between (Any THREE): (6)
(i) Unitary elastic demand and Relatively elastic demand.
(ii) Output method of measuring national income and Income method of mensuring national income.
(iii) Demand deposit and Time deposit.
(iv) Simple index number and Weighted index number.
(v) Stock and Supply.
Answer:
(i) Unitary elastic demand and Relatively elastic demand.
| Unitary elastic demand | Relatively elastic demand |
| 1. In this case, the change in price leads to a proportionate change in the quantity demanded. | 1. In this case, the change in price leads to a proportionately large change in the quantity demanded. |
| 2. It represents a demand curve having rectangular hyperbola slope having. | 2. It represents a demand curve having flatter slope. |
| 3. Symbolically it is represented as Ed = 1. | 3. Symbolically it is represented as Ed > 1. |
| 4. For example- 50% fall in price leads to 50% rise in quantity demanded. | 4. For example- 50% fall in price leads to 100% rise in quantity demanded. |
(ii) Output method of measuring national income and Income method of measuring national income.
| Basis of comparison | Output method | Income method |
| 1. Definition | This method measures the national income by estimating the contribution made by each of the producing units in the economy to the total production within the domestic territory during an accounting year. | This method measures the national income by aggregating all the factor incomes (in the form of wages, rent, interest and profits) paid to the owners of the factors of production (land, labour, capital and enterprise) within the domestic territory in an accounting year. |
| 2. Result | It gives the gross domestic product at market price (GDPMP). | It gives the net domestic product at factor cost (NDPFC). |
| 3. Accuracy | It is less reliabLe. | It is the more reliable. |
| 4. Users | This method is used by underdeveloped and developing countries. | This method is used by developed countries. |
(iii) Demand deposit and Time deposit.
| Basis of Comparison | Demand deposit | Time deposit |
| Time Period | There is no fixed time period involved in the case of a demand deposit. | Time deposits are deposited in the bank for a fixed period of time (usually 1 year to 5 years). |
| Example | Saving accounts and current accounts are examples of demand deposits. | Fixed or term deposit is an example of time deposits. |
| Rate of Interest | In the case of saving accounts it is lower (which is around 4 to 6 percent). | The rate of interest offered by the banks on time deposit is higher around 7 to 9 percent |
| Facilities | In case of demand deposits, one needs all the facilities like ATM, debit card, net banking as these accounts are meant for withdrawal of funds as and when required by the account holder. | In case of time deposit, one does not need facilities like ATM, debt card, Net banking as funds are tied for a specific period. |
(iv) Simple Index number and Weighted Index number.
| Simple index Numbers | Weighted index Numbers |
| 1. In this method, every commodity is given equal importance. It is the easiest method for constructing index numbers. | 1. In this method, suitable weights are assigned to various commodities. It gives relative importance to the commodity in the group. In most of the cases ‘quantities’ are used as weights. |
| 2. This method can be applied to determine the Price Index Number, Quantity Index Number, and Value Index Number. | 2. There are various methods of constructing weighted index numbers such as Laspeyre’s Price Index, Paasche’s Price Index, etc. |
(v) Stock and Supply.
| Basic of Comparison | Stock | Supply |
| Meaning | Stock refers to the number of goods available to the producer at a particular point of time. | Supply refers to the quantity of a commodity offered for sale at a given price and at a given time and place. |
| Dependence | Stock depends on production. | Supply depends on stock and price. |
| Relationship | (a) For perishable commodities the stock and the supply can be the same. (b) For durable commodities, the stock can be more than the supply. |
Supply cannot be greater than the stock. Supply is either equal or less than the stock. |
| Order of existence | Stock comes before supply. | Supply follows stock, there cannot be supply without stock. |
Question 3.
Answer the following (Any THREE): [12]
(i) Explain any four points of importance of Micro economics.
(ii) Explain the Ratio or percentage method of measuring pricjg elasticity of demand.
(iii) ExpLain any four features of national income.
(iv) ExpLain any four problems faced by the money market in India.
(v) Explain any four exceptions ofthe law of Diminishing ‘ marginal utility.
Answer:
(i) Micro means a small part of a thing. Microeconomics thus deals with a small part of the.national economy. It studies the economic actions and behaviour, of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor etc.
Importance of Micro Economics:
- Price Determination: Micro economics explains how the prices of different products and various factors of production are determined.
- Free Market Economy: Micro economics helps in understanding the working of a free market economy. A free market economy is that economy where the economic decisions regarding production of goods, such as ‘What to produce? How much to produce? How to produce? etc.’ are taken at individual levels. There is no intervention by the Government or any other agency.
- Foreign Trade: Micro economics helps in explaining various aspects of foreign trade like effects of tariff on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a particular country etc.
- Economic Model Building: Micro economics helps in understanding various complex economic situations with the help of economic models. It has made a valuable contribution to economics by developing various terms concepts, terminologies, tools of economic analysis etc.
- Business Decisions: Micro economic theories are helpful to businessmen for taking crucial business decisions. These decisions are related to the determination of cost of production, determination of prices of goods maximization of output and profit etc.
- Useful to Government: It is usefulto government in framing economic policies such as taxation policy, public expenditure policy, price policy etc. These policies help the government to attain its goals of efficient allocation of resources and promoting economics welfare of the society.
- Basis of Welfare Economics: Micro economics explain how best results can be obtained through optimum utilisation of resources and its best allocation.
(ii) According to Prof Marshall, “Elasticity of demand is great or small according to the amount derpanded which rises much or little for a given fall in price and quantity demanded falls much or Little for a given rise in price.”
(1) Ratio or Percentage Method:
Ratio method is developed by Prof Marshall According to this method, elasticity of demand is measured by dividing the percentage change in demand by the percentage change in price. Percentage method is also known as Arithmetic method. Price elasticity is measured as:
(iii) Modern economy is a money economy. Hence, national income of a country is expressed in terms of money. The total income of the nation is called national income. In real terms, national income is the flow of goods and services produced in an economy during a year.
Features of National Income:
- Macro Economic concept: National income represents income of the economy as a whole rather than that of an individual Hence it is a macro economic concept.
- Value of only final goods and services: In order to avoid double counting in national income, the value of only final goods and services produced in the economy are considered. The value of intermediate goods or raw materials is not considered. For example, while estimating the production cost of shirts, there is no need to take the value of cotton, as it is already included in the price of the shirts.
- Net aggregate value: National income includes net value of goods and services produced and does not include depreciation cost (i.e. wear and tear of capital assets).
- Net income from abroad: National income includes net income from abroad i.e. difference between export value and import value (X-M) and net difference between receipts from abroad and payments made abroad (R-P).
- Rnancial year: National income is always expressed with reference to a time period. In India, it is from 1st April to 31st March.
- Flow concept: National income is a flow concept as it shows flow of goods and services produced in the economy during a year.
- Money value: National income is always expressed in monetary terms. It represents only those goods and services which are exchanged for money.
(iv) Money market is a market for lending and borrowing of short term funds. It is a market for “near money” i.e. short term instruments such as trade bills, government securities, promissory notes etc. Such instruments are highly liquid, less risky and easily marketable with a maturity period of one year or less than one year.
Compared to advanced countries, the Indian money market is less developed in terms of volume and liquidity. Following points explain the problems of the Indian Money Market:
- Dual structure of the money market: Presence of both, the organised and unorganised sector in the money market leads to disintegration, lack of transparency and increased volatility. The unorganised markets lack co-ordination and do not come under the direct control and supervision of the RBI.
- Lack of uniformity in the rates of interest: The money market comprises of various entities such as commercial banks, co-operative banks, non-bank finance companies, development finance institutions, investment companies etc. The category of borrowers is also different.
- Shortage of funds: Money market faces shortage of funds due to inadequate savings. Low per capita income, poor banking habits among the people, indulgence in wasteful consumption, inadequate banking facilities in the rural areas etc. have also been responsible for the paucity of < funds in the money market.
- Seasonal fluctuations: Demand for funds varies as per the seasons. During the peak season, from October to June, finance is required on a large scale for various purposes such as trading in agricultural produce, investment in business activities etc. This results in wide fluctuations in the money market
- Lack of financial inclusion: Banking facilities in the country are still inadequate and inaccessible to the vulnerable groups such as the weaker sections and the low income groups. This shows lack of financial inclusion.
- Delays in technological upgradation: Use of advanced technology is a prerequisite for the development and smooth functioning of financial markets. Delays in upgradation of technology hampers the working of the money market.
(v) According to Prof Alfred Marshall, “Other things remaining constant, the additional benefit which a person derives from a given increase in his stock of a thing, diminishes with every increase in the stock that he already has.”
In other words, marginal utility that any consumer derives from successive units of a particular commodity goes on diminishing as his or her total consumption of that commodity increases. In short, the more of a thing you have, the less you want to have more of it.
- Hobbies: In certain hobbies like collection of various stamps and coins, rare paintings, music, reading etc., the law does not hold true because every additional increase in the stock gives more
pleasure. This increases marginal utility. However, this violates the assumption of homogeneijy and continuity. - Miser: In the case of a miser, every additional rupee gives him more and more satisfaction. Marginal utility of money tends to increase with an increase in his stock of money. However, this situation ignores the assumption of rationality.
- Addictions: It is observed in case of a drunkard that the level of intoxication increases with every additional unit of liquor consumed. So MU received by drunkard may increase. This violates the assumption of rationality.
- Power: This is an exception to the law because when a person acquires power, his lust for power increases. He desires to have more and more of it. However, this violates the rationality assumption.
Question 4.
State with reasons whether you agree or disagree with the following statements (Any THREE): [12]
(i) There are no exceptions to the law of supply.
(ii) Balance of Trade and Balance of Payment are two different concepts.
(iii) Index numbers are very significant / important in economics.
(iv) There are no theoretical difficulties in the measurement of National Income.
(v) Macro economics is different from Micro economics.
Answer:
(i) I disagree with the above statement. Following are the exceptions to the law of supply.
- Supply of labour: Labour supply is the total number of hours that workers is willing work at a given wage rate. It is represented graphically by a supply curve. In case of labour, as the wage rate rises the supply of labour (hours of work) would increase. So supply curve slopes upward. Supply of labour (hours of work) falls with a further rise in wage rate and supply curve of labour bends backward. This is because the worker would prefer leisure to work after receiving higher amount of wages. Thus, after a certain point when wage rate rises the supply of labour tends to fall.
- Agricultural goods: The law of supply does not apply to agricultural goods as they are produced in a specific season and their production depends on weather conditions. Due to unfavourable changes in weather, if the agricultural production is low, their supply cannot be increased even at a higher price.
- Urgent need for cash: If the seller is in urgent need for hard cash, he may sell his goods at a price which may even be below the market price.
- Perishable goods: In case of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses. For example, vegetables, eggs etc.
- Rare goods: The supply of rare goods cannot be increased or decreased according to its demand. Even if the price rises, supply remains unchanged. For example, rare paintings, old coins, antique goods etc.
(ii) I agree with the above statement.
The Balance of payments of a country is a systematic record of all international economic transactions of that country during a given period, usually a year.
Balance of trade is the difference between he value of a country’s exports and imports for a given period. Balance of trade is also referred to as the international trade balance.
(iii) I agree with the above statement.
- Framing suitable policies: Index numbers provide guidelines to policy makers in framing suitable economic policies such as agricultural policy, industrial policy, fixation of wages and dearness allowances in accordance with the cost of living etc.
- Studies trends and tendencies: Index numbers are widely used to measure changes in economic variables such as production, prices, exports, imports etc. over a period of time. For example, by examining the index of industrial production for the last five years, we can draw important conclusions about the trend of industrial production whether it shows an upward tendency or a downward tendency.
- Forecasting about future economic activity: Index numbers are useful for making predictions for the future based on the analysis of the past and present trends in the economic activities. For example, based on the available data pertaining to imports and exports, future predictions can be made. Thus, forecasting guides in proper decision making.
- Measurement of inflation: Index numbers are also used to measure changes in the price level from time to time. It enables the government to undertake appropriate anti-inflationary measures. There is a legal provision to pay the D.A. (dearness allowance) to the employees in organised sector on the basis of changes in Dearness Index.
- Useful to present financial data in real terms: Deflating means to make adjustments in the original data. Index numbers are used to adjust price changes, wage changes etc. Thus, deflating – helps to present financial data in real terms (at’ constant prices).
(iv) I disagree with the above statement.
- Transfer payments: Individuals get pension, unemployment allowance etc. but whether these transfer payments should be included in national income or not, is a major problem. On one hand they are a part of individual income and on the other hand, they are part of Government expenditure. Hence, these transfer payments are not included in national income.
- Illegal income: Illegal incomes like income from gambling, black marketing, theft, smuggling etc. are not included in national income.
- Unpaid services: For the purpose of calculating national income, only paid goods and services are considered. However, there are a number of unpaid services which are not accounted for in the calculation of national income. For example, services of housewives and the services provided out of love, affection, mercy, sympathy, charity etc. are not included in national income.
- Production for self consumption: The products kept for self consumption by the farmers and other allied producers do not enter the market. Hence, it is not accounted for in the national Income.
- Income of foreign firms: According to IMF, income of a foreign firm, should be included in the national income of the country, where the firm actually undertakes the production work.
- Valuation ofGovernmentServices: Government provides a number of public services such as law and order, defence, public administration, education, health services etc. The calculation of these services at market price is difficult, as the real value of these services is not known. Therefore, it is difficult to calculate National Income.
- Changing price level: Difficulties in calculating national income also arise due to changes in price levels. For example, when the price level rises, the national income may show an increase even though the production may have decreased. Also, when the price level falls, the national income may show a decrease even though there may be an increase in production.
(v) I agree with the above statement.
1. Micro Economics:
(a) Micro means a small part of a thing. Micro economics thus deals with a small part of the national economy. It studies the economic actions and behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor etc.
(b) Micro economics helps in understanding the working of a free market economy. A free market economy is that economy where the economic decisions regarding production of goods, such as ‘What to produce? How much to produce ? How to produce’? etc.’ are taken at individual Levels. There is no intervention by the Government or any other agency.
2. Macro Economics:
(a) Macro economics is the branch of economics ’ which analyses the entire economy. It deals with the total employment, national income, national output, total investment, total consumption, total savings, general price level interest rates, inflation, trade cycles, business fluctuations etc. Thus, macro economics is the study of aggregates.
(b) Macroeconomic analysis gives us an idea of the functioning of an economic system. It helps us to understand the behaviour pattern of aggregative variables in a large and complex economic system.
Question 5.
Study the following table, figure, passage and answer the questions given below it (Any TWO): [8]
(i) Observe the following table and answer the questions given below it: (4)
Questions:
(1) Complete the above tabLe. (2)
(2) (a) When total utility is Maximum, the marginal utility is: ___________ (1)
(b) When total utility falls, the marginaL utility becomes ___________ (1)
(ii) In the following diagram AE is the linear demand curve of a commodity. On the basis of the given diagram state whether the following statements are True or False: (4)
(1) Demand at point ‘C is relatively elastic demand. (1)
(2) Demand at point ‘B’ is unitary elastic demand. (1)
(3) Demand at point ‘D’ is perfectly inelastic demand. (1)
(4) Demand at point ‘A’ is perfectly elastic demand (1)
(iii) Read the given passage and answer the questions: (4)
Index Number is a technique of measuring changes’ in a variable or group of related variables with , reference to time, geographical location and other characteristics.
Index Number is very usefulfor economists, farmers, traders, government, educationalists and trade union leaders for planning and implementing the plans according to their sector.
The scope of index number is not limited to only one subject but it extends to many subjects such as Economics, Educational science, Psychology, History, Sociology, Geography etc.
While framing index number its objective must be determined. To attain the objective the information is collected in various ways and this information is used for comparing two different time periods. For this purpose, the base year’s index is assumed as 100 and accordingly the value ofthe current year is calculated.
Laspeyre, Paasche and Fisher have suggested different methods for constructing index numbers.
Questions:
(1) Explain the meaning of Index Number. (1)
(2) To whom the Index Number is useful? (1)
(3) Express your opinion about the given passage. (2)
Answer:
(i) (1) Completed table is as under:
| Unit of commodity | Total Utility (TU) units | Marginal Utility (MU) units |
| 1 | 6 | 6 |
| 2 | 11 | 5 |
| 3 | 15 | 4 |
| 4 | 15 | 0 |
| 5 | 14 | -1 |
(2) (a) Zero
(b) Negative
(ii)
- False. The correct statement is – Demand at point C is relatively inelastic demand.
Reason – The length of the lower segment is less as compared to the upper segment at point C.
Therefore, Ed < 1. Thus, at point C, demand is relatively inelastic. - False. The correct statement is – Demand at point B is relatively elastic demand. Reason – The length of lower segment is more as compared to the upper segment at point B. Therefore Ed > 1. Thus at point B, demand is relatively elastic.
- False. The correct statement is – Demand at point D is unitary elastic demand.
The length of the lower segment is equal to the upper segment at point D. Therefore Ed = 1. Thus, at point D, demand is unitary elastic. - True. The length of the upper segment is 0 at point A. Therefore, Ed = Infinity. Thus, at point A, demand is perfectly elastic.
(iii)
- Index numbers are one of the most used statistical tools in economics. An index number is a device to measure changes in an economic variable (or group of variables) over a period of time. Index numbers were originally developed to measure changes in the price level.
- Index Number is very useful to measure trends in a wide variety of areas such as for economists, farmers, traders, government, educationalists and trade union leaders for planning and implementing the plans according to their sector.
- This passage highlight the importance of index number. It is very useful for economists, farmers, traders, government educationalists and trade union leaders for planning and implementing the plan. Laspeyre, Paasche and fisher have suggested different method for constracting index number. Its scope is not limited to one subject but extends to other subject also.
Question 6.
Answer the following questions in detail (Any TWO): [16]
(i) State and explain the law of demand with exceptions.
(ii) Explain the meaning of Monopoly with its features.
(iii) Explain various reasons for the growth of public expenditure.
Answer:
(i) The law of demand was introduced by Prof. ALfred Marshall in his book, Principles of Economics, which was published in 1890. The law explains the functional relationship between price and quantity demanded.
Statement of the Law:
According to Prof. Alfred Marshall, “Other things being equal, higher the price of a commodity, smaller is the quantity demanded and lower the price of a commodity, larger is the quantity demanded.”
In other words, other factors remaining constant, if the price of a commodity rises, demand for it falls and when price of a commodity falls demand for the commodity rises. Thus, there is an inverse relationship between price and quantity demanded.
Following are the exceptions to the law of demand:
- Giffen’s paradox: Inferior goods or low quality goods are those goods whose demand does not rise even if their price falls. At times, demand decreases when the price of such commodities fall. Sir Robert Giffen observed this behaviour in England in relation to bread. He noted that, when the price of bread declined, people did not buy more because of an increase in their real income or purchasing power. They preferred to buy superior good like meat. This is known as Giffen’s paradox.
- Prestige goods: Expensive goods like diamond, gold etc. are status symbol. So rich people buy more of it, even when their prices are high. –
- Speculation: The law of demand does not hold true when people expect prices to rise still further. In this case, although the prices have risen today, consumers will demand more in anticipation of further rise in price. For example, prices of oil, sugar etc. tend to rise before Diwali. So people go on purchasing more at a high price as they anticipate that prices may rise during Diwali.
- Price illusion: Consumers have an illusion that high priced goods are of a better quality. Therefore, the demand for such goods tend to increase with a rise in their prices. For example, branded products which are expensive are demanded even at a high price.
- Ignorance: Sometimes, due to ignorance people buy more of a commodity at high price. This may happen when consumer is ignorant about the price of that commodity at other places.
- Habitual goods: Due to habit of consumption, certain goods like tea is purchased in required quantities even at a higher price.
(ii) The term monopoly is derived from the Greek word ‘Mono’ which means single and ‘poly’ which means seller. Monopoly is a market in which there is only one selLer who controls the entire market supply for a product which has no close substitute.
According to E. H. Chamberlin, “Monopoly refers to a single firm which has control over the supply of a product which has no close substitute.”
Following are the main features of monopoly market:
- Singleseller: In monopoLy, there is no competition as there is only one single producer or seller of the product. But, the number of buyers is large.
- No close substitute: There are no close substitutes for the product of the monopolist. Therefore, the buyers have no choice. They have to either buy the product from the monopolist or go without it. The cross elasticity of demand for his product is either zero or negative.
- Barriers to entry: Entry of the rivals is restricted due to legal, natural, technological barriers which do not allow the competitors to enter the market.
- Complete control over the market supply: The monopolist has complete hold over the market. He is the sole producer or seller of the product.
- Price maker: A monopolist can fix the price of his own product as he controls the whole market supply. Monopolist is a price maker.
- Price discrimination: Monopolist being a price maker, he can charge different prices to different consumers for the same product, on the basis of time, place etc. Thus price discrimination is an important feature of monopoly market. For example, students and senior citizens are provided railway tickets at concessional rates.
- No distinction between firm and industry: A monopolist is the sole seller and producer of the product. A monopoly firm itself is an industry.
(iii) Public expenditure is that expenditure which is incurred by the public authority [Central, State and Local Bodies] for protection of their citizens, for satisfying their collective needs and for promoting their economic and social welfare.
Some of the important reasons are:
- Increase in the activities of the government: These functions include spread of education, public health, public works, public recreation, social welfare schemes etc. It is observed that new functions are continuously being undertaken and old functions are being performed more efficiently on a large scale by the government. This leads to increase in public expenditure.
- Rapid increase in population: Population of developing countries like India is increasing fast In 2011 Census, it was 121.02 crores. As a result, the government has to incur greater expenditure to fulfil the needs of the increasing population.
- Growing urbanization: Spread of urbanization
is a global phenomenon of the day. This leads to increase in the government expenditure on water supply, roads, energy, schools and colleges, public transport, sanitation etc. - Increasing defence expenditure: In modern times, defence expenditure of the government is increasing even in the peace time due to unstable and hostile international relationships.
- Spread of democracy: Majority of the countries in the world are democratic in nature. A democratic form of government is expensive due
to regular elections and other such activities. This. results in the increase in total expenditure of the government - Inflation: Just like a private individual, the government has to buy goods and services from the market forthe spread of economic and social development. Normally, prices show a rising trend. Due to this, the government has to incur increasing costs.
- Industrial development: Industrial development leads to an increase in production, employment and overaLl growth in the economy. Hence, the government makes huge efforts for implementing various schemes and programmes for industrial development. This results in increase in government expenditure.
- Disaster management: Many natural and man-made calamities like earthquakes, floods, cyclones, social unrest etc. are occurring more frequently. The government has to spend a huge amount for the disaster management which increases total expenditure. Modern governments are working for .welfare state. Hence, there is a continuous increase in the public expenditure.