Maharashtra State Board Class 12th Economics Sample Paper Set 1 with Solutions Answers Pdf Download.
Maharashtra Board Class 12 Economics Model Paper Set 1 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.
Complete the following statements by choosing the correct alternatives:
1A. Assertion and Reasoning
(i) Assertion (A): Micro economics is a small part of the national economy.
Reasoning (R): Micro economics divides the economy into small units.
Options:
(a) (A) is true but (R) is false.
(b) (A) is false but (R) is true.
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
Answer:
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(ii) Assertion (A): Micro economics is known as Price theory.
Reasoning (R): Macro economics is known as Income theory.
Options:
(a) (A) is true but (R) is false.
(b) (A) is false but (R) is true.
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
Answer:
(d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
(iii) Assertion (A): Elasticity of demand explains that . one variable is influenced by another variable.
Reasoning (R): The concept of elasticity of demand indicates the effect of price and changes in other factors on demand.
Options:
(a) (A) is true but (R) is false.
(b) (A) is false but (R) is true.
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
Answer:
(d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
(iv) Assertion (A): In Simple Index number, every commodity is given equal importance.
Reasoning (R): Simple index number includes price index, quantity index.
Options:
(a) (A) is true but (R) is false.
(b) (A) is false but (R) is true.
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
Answer:
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(v) 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:
(a) (A) is true but (R) is false.
(b) (A) is false but (R) is true.
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
Answer:
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
1B. Complete the correlation:
(i) Money market: Short-term funds :: __________ : Long-term funds
(ii) __________ : Central Bank:: SBI: commercial bank
(iii) __________ : C + I + G + (X-M):: GNP: C + I + G + (X-M) + (R-P)
(iv) Perfect competition: Free entry and exit:: __________ : Barriers to entry.
(v) Micro-economics: Slicing method :: Macroeconomics : __________
Answer:
(i) Capital market
(ii) RBI
(iii) GDP
(iv) Monopoly
(v) Lumping method
1C. Complete the following statements:
(i) Development financial institutions were established to __________ .
(a) provide short funds.
(b) develop industry, agriculture and other key sectors.
(c) regulate the money market.
(d) regulate the capital market.
Answer:
develop industry, agriculture and other key sectors
(ii) Money market faces shortage of funds due to __________ .
(a) inadequate savings.
(b) growing demand for cash.
(c) presence of unorganised sector.
(d) financial mis-management.
Answer:
inadequate savings
(iii) While estimating National Income we include only value of final goods and services in order to __________ .
(a) make computation easier
(b) avoid double counting
(c) maximize national welfare of the people
(d) evaluate the total economic performance of a nation
Answer:
avoid double counting
(iv) When supply curve is upwards sloping, it’s slope is __________ .
(a) positive
(b) negative
(c) first positive then negative
(d) zero
Answer:
positive
(v) Price elasticity of demand on a linear demand curve at the X axis is __________
(a) zero
(b) one
(c) infinity
(d) less than one
Answer:
zero
1D. Give the economic term:
(i) A situation where more quantity is demanded at lower price.
Answer:
Expansion of demand
(ii) Graphical representation of demand schedule.
Answer:
Demand curve
(iii) Degree of responsiveness of quantity demanded to change in income only.
Answer:
Income elasticity of demand
(iv) Cost incurred on fixed factor.
Answer:
Total fixed cost
(v) The market where there are few sellers.
Answer:
Oligopoly
Question 2.
A. Identify & Explain the Concepts from the given illustrations: (Any 3)
(i) Gauri collected the information about the income of a particular firm.
(ii) Salma purchased sweater for her father in winter season.
(iii) Vrinda receives monthly pension of ₹ 5,000 from the State Government.
(iv) Raghu’s father regularly invests his money in stocks and bonds.
(v) India purchased petroleum from Iran.
Answer:
(i) Concept—Micro Economics
Explanation—Micro economics studies the individual economic units such as individual consumers, individual producers, individual firms, the price of a particular commodity, factor, etc.
(ii) Concept—Time Utility
Explanation—When the utility of a commodity increases with a change in its time of utilisation, it is called time utility. Time utility is also created by storing goods and making it available during the time of need or scarcity.
(iii) Concept—Transfer Payments
Explanation—Transfer payments refer to the one¬way payment of money for which no money, good or service is received in exchange. Government uses transfer payments as a mean of income re¬distribution. e.g.: pension, scholarship, grants, etc
(iv) Concept—Stock Exchange
Explanation—Stock exchange is an association or organisation in which stocks, bonds, commodities, etc are traded, e.g.: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
(v) Concept—Import Trade
Explanation—Import trade refers to the purchase of goods by one country from another or the inflow of goods to the home country from a foreign country- 28.
2B. Distinguish between: (Any 3)
(i) Money Market and Capital Market
(ii) Demand Deposit and Time Deposit
(iii) Public Finance and Private Finance
(iv) Relatively Elastic and Relatively Inelastic Demand
(v) Desire and Demand
Answer:
(i) Distinguish between Money Market and Capital Market
| Basis for Comparison | Money Market | Capital Market |
| Meaning | A segment of financial market where lending and borrowing of short-term securities are done. | A section of financial market where long-term securities are issued and traded. |
| Nature of Market | Informalin nature. | Formalin nature. |
| Financial Instruments | Treasury Bills, Commercial Papers, Certificate of Deposit Trade Credit, etc. | Shares, Debentures, Bonds, Retained Earnings, Asset Securitization, etc. |
| Risk Factor | Money markets have a low risk. | Capital markets have more risk compared to the money markets. |
| Return on Investment | ROI is usually low. | ROI is comparatively high. |
| Liquidity | Money markets are highly liquid. | Capital markets are comparatively less liquid. |
(ii) Distinguish between Demand Deposit and Time Deposit
| Basis for Comparison | Demand Deposit | Time Deposit |
| Time Period | There is no time period involved in case of a demand deposit. | Time deposits are deposited in a bank for a fixed period of time. |
| Example | Saving and Current accounts. | Fixed or Term deposit accounts. |
| Rate of Interest | It is usually lower. | It is higher. |
| Facilities | In case of demand deposits, one need all types of facilities like ATM, credit card, online banking, etc. as tKese 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, credit card, online banking, as funds are tied for a specific period. |
(iii) Distinguish between Public Finance and Private Finance
| Points | Public Finance | Private Finance |
| Meaning | Public finance is concerned with the revenue/ incomes and expenditure, borrowings, etc. of the economy or government. | Private finance is the study of income and expenditure, borrowings, etc. of individuals, households and business firms. |
| Adjustments | Government adjusts the . income, according to the size of expenditure on different segments. | Individuals adjust their spending as per their income. |
| Objective | To promote social welfare. | To maximize profit. |
| Nature of Budget | The government prefers a deficit budget. | An individual attempts to maintain a surplus budget. |
| Financial Transaction |
Transactions are open and known to all. | Transactions are kept secret. |
(iv) Distinguish between Relatively Elastic and Relatively Inelastic Demand
| Points | Relatively Elastic Demand | Relatively inelastic Demand |
| Meaning | In this case, the change in price leads to a proportionately greater change in the quantity demanded. | In this case, the change in price leads to a proportionately less change in the quantity demanded. |
| Represents | It represents a flatter demand curve. | It represents a steeper demand curve. |
| Symbol | Symbolically it is represented as Ed > 1 | Symbolically it is represented as Ed < 1 |
| Example | For example- 50% fall in price leads to 100% rise in quantity demanded. | For example- 50% fall in price leads to 25% rise in quantity demanded. |
(v) Distinguish between Desire and Demand
| Points | Desire | Demand |
| Meaning | Desires means an urge to have something. | Demand is a desire backed by a willingness and ability to pay. |
| Relation | There is no relation between desire and price. | There is an inverse relationship between demand and price. |
| Time and Price | Reference of time and price is not necessary to express desire. | Reference of time and price is necessary to express demand. |
| Example | Eg: Desire of a poor person to go on a vacation to Europe. | Eg: Consumer demands 2kg sugar at f 10 per kg and 3 kg sugar at R8 per kg. |
Question 3.
Answer the following questions in brief: (Any 3)
(i) Explain the features of Micro-economics.
(ii) Explain the concept of total cost and totaL revenue.
(iii) Explain the features of index numbers.
(iv) Explain the two sector model of circular flow of National Income.
(v) Explain the concept of foreign trade and its types.
Answer:
(i) The following are the features of Micro-economics:
(a) Individual Units—Micro-economics is a study that basically focuses on the behaviour of individual units such as individual consumers and producers.
(b) Price Theory—Micro-economics is also called the price theory, as it helps in determining the prices of both the commodities and factors of production in their respective markets.
(c) Slicing Method—Micro-economic analysis adopts the slicing method. Under this method, the entire economy is divided into smaller units and then each unit is analysed individually in detail
(d) Partial Equilibrium—Micro-economics uses a partial equilibrium approach. The equilibrium points are identified assuming “other things remain constant” (ceteris paribus). It ignores the interdependence of economic variables.
(e) Microscopic Approach—Just as a microscope enables us to see a larger view of smaller things, micro-economics shows a magnified view of an individual unit. It analyses small units in detail It examines how these individual units perform economic activities and reach equilibrium.
(f) Marginalism Principle—Marginal means change in the total due to an additional unit The additional unit is known as the marginal unit Micro-economics is based on the principle of marginalism as important economic decisions are based on the marginalunit.
(g) Analysis of Market—Micro-economic studies deals in the study of different market structure namely, perfect competition, monopoly, monopolistic competition, oligopoly. It analyses how prices and output are determined in the market.
(h) Based on Assumptions—Micro-economic analysis is based on certain assumptions such as laissez- faire, full employment, perfect competition, ceteris paribus, etc. Such assumptions although make the analysis simple, but may not exists in reality.
(ii) (1) Cost Concepts:
When an entrepreneur undertakes an act of production, he has to use various inputs like raw material, labour, capital etc. He has to make payments for such inputs. The expenditure incurred on these inputs is known as the cost of production. Cost of production increases with an increase in need of output There are three types of costs which are as follows:
(a) Total Cost (TC)—
Total cost is the total expenditure incurred by a firm on the factors of production required for the production of goods and services. Total cost is the sum of total fixed cost and total variable cost at various levels of output.
TC = TFC + TVC
TC = Total Cost
TFC = Total Fixed Cost
TVC = Total Variable Cost
Total Fixed Cost (TFC)—
Total fixed costs are those expenses of production which are incurred on fixed factors such as land, machinery etc.
Total Variable Cost (TVC)—
Total variable costs are those expenses of production which are incurred on variable factors such as labour, raw material power, fuel etc.
(b) Average Cost (AC)—
Average cost refers to cost of production per unit. It is calculated by dividing total cost by total quantity of production.
AC = TC/TQ
AC = Average cost
TC = Total cost
TQ = Total quantity
(c) Marginal Cost (MQ—Marginal cost is the net addition made to total cost by producing one more unit of output.
MCn = TCn – TCn-1
n = Number of units produced
MCn = Marginal cost of the nth unit
TCn = Total cost of nth unit
TCn-1 = Total cost of previous units
(2) Revenue Concepts:
The term ‘revenue’ refers to the receipts obtained by a firm from the sale of certain quantities of a commodity at given price in the market. The concept of revenue relates to total revenue, average revenue and marginal revenue.
(a) Total Revenue (TR)—
Total revenue is the total sales proceeds of a firm by selling a commodity at a given price. It is the total income of a firm. Total revenue is calculated as follows:
Total revenue = Price × Quantity
(b) Average Revenue (AR)—
Average revenue is the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold.
AR = TR/TQ
AR = Average Revenue
TR = Total Revenue
TQ = Total Quantity
(c) Marginal Revenue (MR)—
Marginal revenue is the net addition made to total revenue by selling an extra unit of the commodity.
MRn = TRn – TRn-1
MRn = Marginal revenue of nth unit
TRn = Total revenue of nth unit
TRn-1 = Total Revenue of previous units
n = Number of units sold
(iii) Features of Index Numbers Definition:
According to Croxton and Cowden, “Index Numbers are devices for measuring differences in the magnitude of a group of related variables.
Following are the various features of index number:
(a) Statistical Tool—Index numbers are statistical devices.
(b) Can be expressed in %— Index numbers are specialized averages which are capable of being expressed in terms of percentages.
(c) Measure the Net Change— Index numbers measure the net change in one or more related variables over time or between two different localities.
(d) Variable Involved — Index number computed from a single variable is called ‘univariate index’ while index constructed from a group of variables is called ‘composite index’.
(e) Base Year — The year with which the changes are measured is termed as the base year. In other words, the year with respect to which comparisons are made is the base year and it is denoted by the suffix ‘O’.
(f) Current Year — The year for which the index number is prepared is termed as the current year. In other words, the year for which comparisons are required to be made is the current period and it is denoted by the suffix ‘1’.
(g) Base Year Index — The base year’s index is assumed as 100 and accordingly the value of the current year is calculated.
(h) Measure Economic Activity — Index numbers are also referred to as ‘barometers of economic activity’ since it is used to measure the trends and changes in the economy.
(iv) The circular flow, of income refers to the process whereby an economy’s money receipts and payments flow in a circular manner continuously through time. The following figure explains the circular flow of income and expenditure in a two-sector model.
- The two sectors in the two-sector model are households and firms.
- The upper half of the diagram represents factor market while the lower half represents the commodity market.
- The factors of production flow from households to firms. The firms use these factors to produce goods and services required by households.
- Thus, goods flow from the households to the firms and from the firms back to the households. It is called product flows.
- Similarly, money flows from firms to households in the form of factor payments such as rent wages interest, and profit. Households use this income to purchase goods and services.
- Thus, money flows from the firms to the households and from the households back to the firms. It is called money flows.
- In the circular flow of income, production generates factor income, which is converted into expenditure.
- This flow of income continues as production a continuous activity due to never-ending human wants. It makes the flow of income circular.
(v) Foreign trade is a trade between the different countries of the world. It is called international trade or external trade.
According to Wasserman and Hultman, “International trade consists of the transactions between the residents of different countries.
Types of Foreign Trade:
Foreign trade is divided into the following three types:
(a) Import Trade—Import trade refers to the purchase of goods and services by one country from another country or inflow of goods and services from a foreign country to the home country. For example, India imports petroleum from Iraq, Kuwait, Saudi Arabia, etc
(b) Export Trade—Export trade refers to the sale of goods by one country to another country or outflow of goods from one country to a foreign country. For example, India exports tea, rice, jute to China, Hong Kong, Singapore, etc.
(c) Entrepot Trade—Entrepot trade refers to the 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.
Question 4.
State with reasons whether you agree or disagree with the following statements: (Any 3)
(i) Obligatory function is the only function of the Government
(ii) There are many theoretical difficulties in the measurement of National Income.
(iii) Index number measures changes in the price level only.
(iv) Demand curve slopes downward from left to right.
(v) The scope of micro-economics is unlimited.
Answer:
(i) I disagree with the statement. Reasons—
- Government is a institution created by the people in a specific region to perform various functions.
- The functions of the government can be classified as obligatory functions and optional functions.
- The obligatory functions include protection from external attacks, maintaining law and order, etc.
- The optional functions include the provision of education and health services provision of social security like pensions and other welfare measures, etc.
- Hence, obligatory functions is not the only function of the government
(ii) I agree with the statement. Reasons—
There are many theoretical difficulties in the measurement of National Income. For example, transfer payments, illegal income, unpaid services, production for self-consumption and so many.
(iii) I disagree with the statement Reasons—
- An index number is a device to measure changes in economic variables (or groups of variables) over a period of time.
- Index numbers are one of the most used statistical tools in economics.
- Index numbers were originally developed to measure changes in the price level.
- At the present time, it is also used to measure trends in a wide variety of areas such as stock market prices, cost of living industrial and agricultural production, changes in exports and imports, etc.
(iv) I agree with the statement.
The demand curve slopes downward from left to right. Demand curve is the graphical representation of the relationship between the demand for a good and its price, for a given income, price of related goods, tastes, and preferences. This curve slopes downwards from left to right because of the negative relationship between the price of the commodity and its demand. The following are the main reasons as to why demand curve is downward sloping:
(a) Law of Diminishing Marginal Utility—Due to this law, consumer tends to buy more quantity of a good when price falls.
(b) Income Effect—With a fall in price, the purchasing power of a person rises. As a result, he demands more of a good.
(c) Substitution Effect—With a rise in price, the substitutes of good become cheaper in comparison. As a result, person demands less of that good and more substitute goods.
(d) Multi-purpose Uses—The demand for goods having multipurpose uses rise with a fall in price and vice-versa.
(v) I disagree with the statement. The scope of micro-economics is limited.
The scope of micro-economics is limited to only individual units. It doesn’t deal with nationwide economic problems such as inflation, deflation, the balance of payments, poverty, unemployment, population, etc. Micro-economics is mainly confined to price theory and resource allocation. It does not study the aggregates relating to the whole economy. This approach does not study national economic problems such as unemployment, poverty, inequality of income, etc. Theory of growth, the theory of business cycles, monetary and fiscal policies etc. are beyond the limits of micro-economics.
Question 5.
Study the following table/passage/figure and answer the questions given below: (Any 2)
(i) Observe the following table and answer the following questions—
(a) Complete the market demand schedule.
(b) Draw market demand curve based on the above market demand schedule.
(ii) Read the given passage and answer the following questions—
The conventional notion of social security is that the government would make periodic payments to look after people in their old age, ill-health, disability, and poverty. This idea should itself change from writing a cheque for the beneficiary to institutional arrangements to care for beneficiaries, including by enabling them to look after themselves, to a large extent. The write-a-cheque model of social security is a legacy from the rich world at the optimal phase of its demographic transition when the working population was numerous enough and earning enough to generate the taxes to pay for the care of those not working. This model is ill-suited for less, well-off India with growing life expectancy, increasing urbanization, and resultant migration. Social security under urbanization will be different from social security in a static society.
(a) State kind of conventional notion of social security.
(b) What kind of conceptual change is suggested in the given paragraph?
(c) What is legacy of social security from the rich world?
(d) Which features of India make the traditional model of social security ill-suited for the economy?
(iii) Identify and define the degree of elasticity of demand from the following demand curves—
Answer:
(i) (a) Market Schedule
(b) Barket Curve based on the Schedule
(ii) (a) The conventional notion of social security is that the government would make periodic payments to look after people in their old age, ill-health, disability, and poverty.
(b) The conceptual change in the paragraph is about writing a cheque for the beneficiary to institutional arrangements to take care for beneficiaries, by enabling them to look after themselves, to a large extent.
(c) The write-a-cheque model of social security is a legacy from the rich world at the optimal phase of its demographic transition.
(d) The traditional model is ill-suited for less, well-off India with a growing life expectancy, increasing urbanization, and resultant migration. Social security under urbanization will be different from social security in a static society.
(iii)
(a) Perfectly Inelastic Demand—When a change in the price has no effect on the quantity demanded of a commodity, it is called perfectly inelastic demand. In this case, Ed = 0.
(b) Perfectly Elastic Demand—When a slight or zero change in the price brings about infinite change in the quantity demanded of that commodity, it is called perfectly elastic demand. In this case, Ed = Infinity.
(c) Unitary Elastic Demand—When the proportionate or percentage change in demand for a commodity is the same as the proportionate or percentage change in its price, it is called as unitary elastic demand. In this case, Ed = 1.
(d) Relatively Elastic Demand—When the proportionate or percentage change in demand for a commodity is greater than the proportionate or percentage change in its price, it is called as relatively elastic demand. In this case, Ed > 1.
Question 6.
Answer the following questions in detail: (Any 2)
(i) State and explain the law of diminishing marginal utility with exceptions.
(ii) State and explain law of supply with exceptions.
(iii) Explain the meaning of monopolistic competition with its features.
Answer:
(i) 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.” The law of diminishing marginal utility states that “As a consumer consumes more and more units of a commodity at succession, the
Marginal Utility derived from the consumption of each additional unit of the commodity falls.”
Following are the exceptions of law of diminishing marginal utility:
(a) Hobbies—Flobbies such as jewellery collection by women, stamp collection, old coins, antiques etc. violate the law.
(b) Misers—In case of misers, MU increases with the increase in the total amount of money available to them, violating the law.
(c) Drunkards—The consumption of products like liquor and cigarettes violates the law. As people tend to consume more of these products, the thirst utility for additional units is greater. This is the reason for the violation.
(d) Power—The law also fails in case of acquiring power. An individual feels more pleasure and derives a higher level of utility, with a greater degree of power.
(e) Listening of Music—In the initial phase, listening to good music again and again violates this law. Flowever; after a certain limit, listening to the same music becomes boring. As a result, the marginal utility tends to diminish. Thus, it is only in the initial period when listening to good music violates the law of diminishing marginal utility.
(f) Reading—More and more reading gives an individual more pleasure and a higher level of utility. This happens because, with more and more reading, an individual acquires a greater degree of knowledge and higher education.
(g) Money—The law of diminishing marginal utility fails in case of earning money. Due to the greed of earning money, people tend to earn as much money as they can. Thus, MU of money never becomes zero.
(ii) The law of supply is also a fundamental principle of economic theory like the law of demand. It 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 supplied.
Statement of the Law:
“Other things being constant, higher the price of a commodity, more is the quantity supplied and lower the price of a commodity less is the quantity supplied”. In simple words, “other factors remain constant, a rise in price results in a rise in the quantity supplied and vice-versa. Thus, there is a direct relationship between price and quantity supplied.
Symbolically,
Sx = f (Px)
S = Supply x = Commodity
f = Function
P = Price of commodity
Law of supply is explained with the help of the following schedule and diagram:
| Price of Commodity × (in ₹) | Supply of Commodity × (in kgs.) |
| 10 | 100 |
| 20 | 200 |
| 30 | 300 |
| 40 | 400 |
| 50 | 500 |
The above table explains the direct relationship between price and quantity of commodity supplied. When price rises from ₹ 10 to ₹ 20, ₹ 30, ₹ 40 and ₹ 50, the supply also rises from 100 to 200,300,400 and 500 units respectively.
It means, when price rises supply also rises and when the price falls supply also falls.
Thus, there is a direct relationship between price and quantity supplied which is shown in the following figure:
In the above figure, X-axis represents quantity supplied and Y-axis represents the price of the commodity. Supply curve ‘SS’ slopes upwards from left to right which has a positive slope. It indicates a direct relationship between price and quantity supplied. Exceptions to the Law of Supply:
(a) Supply of Labour:
Labour supply is the total number of hours that workers work at a given wage rate. It is represented graphically by a supply curve. In the case of labour, as the wage rate rises the supply of labour (hours of work) would increase. So the 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 a higher amount of wages. Thus, after a certain point when the wage rate rises the supply of labour tends to fall.
It can be explained with the help of a backward bending supply curve. The following table and diagram explain the backward bending supply curve of labour.
In the above figure, the supply of labour (hours of work) is shown on X-axis and wage rate per hour is shown on the Y-axis. The curve SASj represents the backward bending supply curve of labour. Initially, when the wage rate is ₹ 100 per hour, the hours of work are 5. The total amount of wages received is ₹ 500. When the wage rate rises from ₹ 100 to ₹ 200, hours of work will, also rise from 5 hours to 7 hours / and the total amount of wages would also rise from ₹ 500 to ₹ 1400. At this point, labourers enjoy the highest amount i.e. ₹ 1400 and work for 7 hours. If the wage rate rises further from ₹ 200 to ₹ 300, the total amount of wages may rise, but the labourer will prefer leisure time and denies working for extra hours. Thus, he is ready to work only for 6 hours. At point A, the supply curve bends backward, which becomes an exception to the law of supply.
(b) 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.
(c) Urgent need for Cash—If the seller is in urgent need for hard cash, he may sell his product at which may even be below the market price.
(d) 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.
(e) 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.
(iii) Monopolistic competition is very realistic in nature.
In this market there are some features of perfect competition and some features of monopoly acting together. Prof. E. H. Chamberlin coined this concept in his book “Theory of Monopolistic Competition” which was published in 1933.
Definition:
According to Chamberlin, “Monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes.”
Following are the main features of monopolistic competition:
(a) Fairly Large Number of Sellers—In monopolistic competition, the number of sellers is large but comparatively, it is less than that of perfect competition. Due to this reason, sellers’ behaviour is like a monopoly.
(b) Fairly Large Number of Buyers—In this market, there are fairly large numbers of buyers. Conse-quently, no single buyer can influence the price of the product by changing his individual demand.
(c) Product Differentiation—Product differentiation is the main feature of monopolistic competition. In this market, there are many firms producing a particular product, but the product of each firm is in some way differentiated from the product of every other firm in the market. This is known as product differentiation. Product differentiation may take the form of brand names, trademarks, a peculiarity of package or container, shape, quality, cover, design, colour etc. This means that the product of a firm may find close substitutes and its cross elasticity of demand is very high. For example, mobile handsets, cold drinks etc.
(d) Free Entry and Exit—Under monopolistic competition there is freedom of entry and exit, that is new firms are free to enter the market if there is profit. Similarly, they can leave the market, if they find it difficult to survive.
(e) Selling Cost—Selling cost is peculiar to monopolistic competition only. It refers to the cost incurred by the firm to create more demand for its product and thus increase the volume of sales. It includes expenditure on advertisements, radio and television broadcasts, hoardings, exhibitions, window display, free gifts, free samples etc.
(f) Close Substitutes—In monopolistic competition, goods have close substitutes to each other. For example, different brands of soaps, toothpastes etc.
(g) ConceptofGroup—Undermonopolisticcompetition, Chamberlin introduced the concept of ‘Group’ in place of industry. Industry means the number of firms producing identical products. A ‘Group’ means a number of firms producing differentiated products which are closely related. For example, a group of firms producing medicines, automobiles etc.