Maharashtra State Board Class 12th Economics Sample Paper Set 5 with Solutions Answers Pdf Download.
Maharashtra Board Class 12 Economics Model Paper Set 5 with Solutions
Time: 3 Hours
Max. Marks: 80
Notes:
- All questions are compulsory.
- Draw neat tables/diagrams wherever necessary.
- Figures to the right indicate full marks.
- Write answers to all main questions on new page.
Question 1. (A)
Choose the correct option: (5) [20]
Question 1.
The branch of economics that deals with the allocation of resources. (5) [20]
i. Micro-economics
ii. Macro-economics
iii. Econometrics
iv. None of these
a. i, ii and iii
b. i and ii
c. only i
d. None of these
Answer:
c. only i
Question 2.
Types of foreign trade:
i. Import trade
ii. Export trade
iii. Entrepot trade
iv. Internal trade
a. i and ii
b. i, ii and iii
c. i, ii, iii and iv
d. None of these
Answer:
b. i, ii and iii
Question 3.
Which of the following is true for demand?
i. Demand is a relative concept
ii. Demand is expressed w.r.t time & price.
iii. Demand is an absolute concept.
iv. Demand is expressed w.r.t time & income.
a. i, ii and iii
b. i and ii
c. only i
d. All of these
Answer:
b. i and ii
Question 4.
Identify the incorrect pair.
i. National Income Committee – 1949
ii. Financial year – 1st April to 31st March
iii. Income method – National Income = Rent + Wages + Interest + Profit + Mixed income + Net Income from abroad
iv. Expenditure method – National Income = Rent + Wages + Interest + Profit
a. i
b. ii
c. iii
d. iv
Answer:
d. iv
Question 5.
The following statements are true with respect to stock.
i. Stock can be increased by increasing production.
ii. Stock is potential supply.
iii. Stock is expressed in relation to price, time and quantity.
iv. Without stock, supply is not possible.
a. i, ii, iv
b. i, iii, iv
c. only i
d. All of these
Answer:
a. i, ii, iv
(B) Complete the correlation: (5)
Question 1.
Wheat from Punjab : Natural monopoly : : Pharmaceutical company applied for patent : ____
Answer:
Legal Monopoly
Question 2.
____ : Base year prices : : p1 : Current year prices
Answer:
p0
Question 3.
Perfectly elastic demand : Ed = ∞ : : ____ : Ed = 0
Answer:
Perfectly inelastic demand
Question 4.
_______ : Obligatory functions : : Provision of social security: Optional functions
Answer:
Protection from external attacks
Question 5.
Change in shape : Form utility : : Ownership of goods transferred : ____
Answer:
Possession utility
(C) Give Economic term: (5)
Question 1.
The wear and tear of capital assets.
Answer:
Depreciation
Question 2.
A desire which is backed by willingness to purchase and ability to pay.
Answer:
Demand
Question 3.
A market for lending and borrowing of short term funds.
Answer:
Money market
Question 4.
The two main branches of modem economics.
Answer:
Micro-economics and Macro-economics
Question 5.
The sum total of the quantity of the commodity produced at a given period of time in the economy.
Answer:
Total output
(D) Find the odd word out: (5)
Question 1.
Types of foreign trade: Import trade, Internal trade, Export trade, Entrepot trade
Answer:
Internal trade
Question 2.
Positive Income Elasticity: Medicines, Branded shirts, Movie tickets, Petrol for personal vehicle
Answer:
Medicines
Question 3.
Market structure on the basis of competition: Monopoly, Oligopoly, Very Short Period market, Perfect competition.
Answer:
Very short period market
Question 4.
Classification of public expenditure: Revenue, Capital, Budgetary, Developmental
Answer:
Budgetary
Question 5.
Rationality, Constancy, Subjectivity, Divisibility
Answer:
Subjectivity
Question 2. (A)
Identify and explain the following concepts: (Any Three) (6) [12]
Question 1.
Ramesh decided to take all decisions related to production, such as what and how to produce?
Answer:
Concept: Free market economy
Explanation:
i. A free market economy refers to an economy wherein the economic decisions regarding:
a. What to produce?
b. How much to produce?
c. How to produce? etc. are taken at individual level. There is no intervention of government or any other agency while taking decisions regarding the production.
ii. Hence, this illustration relates to the concept of ‘free market economy’ as Ramesh decided to take all decisions related to production, such as what and how to produce.
Question 2.
Kalpana started shopping for clothes frequently after she got a good salary increment last year.
Answer:
Concept: Positive income elasticity
Explanation:
- Income elasticity of demand is a ratio of proportionate change in quantity demanded of a commodity to a proportionate change in income of an individual. Normal goods have positive income elasticity.
- Hence, this illustration relates to the concept of ‘positive income elasticity’ as Kalpana’s demand for clothes increased when her income increased.
Question 3.
Mr. Patil is ready to sell his flat in Mumbai only if he gets ₹ 1 crore for it.
Answer:
Concept: Supply
Explanation:
- Supply refers to the quantity of a commodity that a seller is willing and able to offer for sale at a given price during a certain period of time.
- Hence, this illustration relates to the concept of ‘supply’ as Mr. Patil is ready (willing) and able to sell his flat for ₹ 1 crore.
Question 4.
Shobha collected data regarding the money value of all final goods and services produced in the country for the financial year 2018-2019.
Answer:
Concept: National income
Explanation:
- National income refers to the money value of all final goods and services produced in a country during the given time period.
- Hence, this illustration relates to the concept of ‘national income’ as Shobha collected the data regarding money value of all final goods & services produced in the country for F.Y. 2018-19.
Question 5.
Tina deposited a lump sum amount of ₹ 50.000 in the bank for a period of one year.
Answer:
Concept: Fixed deposit
Explanation:
- Fixed deposits refer to a lump sum amount deposited by a customer for a specified period of time.
- Hence, this illustration relates to the concept of ‘fixed deposit’ as Tina deposited lumpsum amount of ₹ 50,000 in the bank for a period of one year.
(B) Distinguish between: (Any Three) (6)
Question 1.
Micro-economics and Macro-economics
Answer:
| Micro-Economics | Macro – Economics |
| i. Micro-economics deals with a small part of national economy. It studies the individual units such as individual consumer, individual producer, individual firm, the price of a particular commodity or a factor etc. | i. Macro-economics analyses the entire economy. It deals with total employment, national income, national output, total investment, total consumption, total savings, general price level, interest rates, inflation, trade cycles. etc. |
| ii. Micro-economics is a study of micro variables. | ii. Macro-economics is a sty of macro variables or aggregates. |
| iii. It uses slicing method. | iii. It uses lumping method. |
| iv. Micro-economic analysis is based on partial equilibrium analysis. It neglects the interdependence between economic variables. | iv. Macro-economic analysis is based on general equilibrium analysis. It studies the functional relationship and interdependence between economic variables. |
| v. The scope of micro-economics is narrow or limited. | v. The scope of macro-economics is wide. |
| vi. It deals with determination of factor prices as well as prices of goods arid services. Hence, it is also called as price theory. | vi. It explains what determines level of national income and employment and what causes fluctuations in them. Hence, it is also called theory of income and employment. |
Question 2.
Increase in demand and Decrease in demand
Answer:
Question 3.
Demand Curve and Supply Curve
Answer:
Question 4.
Price Index and Quantity Index
Answer:
| Price Index | Quantity Index |
| i. Price index measures the general changes in the prices of goods. | i. Quantity index measures changes in the level of output or volume of production physical in the economy. |
| ii. It compares the level of prices between two different time periods. | ii. It compares the level of output between two different time periods. |
| iii. Price Index Number: P01 = \(\frac{\sum \mathrm{p}_1}{\sum \mathrm{p}_0}\) × 100 |
iii. Quantity Index Number: Q01 = \(\frac{\sum q_1}{\sum q_0}\) × 100 |
Question 5.
Public finance and Private finance
Answer:
| Public Finance | Private Finance |
| i. Objectives | |
| Public finance aims to offer maximum social advantage to the society. | Private finance aims to fulfil private interests. |
| ii. Determination of Expenditure | |
| Government first determines the volume and different ways of its expenditure. | An individual considers his income and then determines the volume of expenditure. |
| iii. Credit status | |
| Government gets high degree of credit in the market. | Credit of a private individual is limited. |
| iv. Right to Print Currency | |
| Government can print notes through Reserve Bank of India. | Private individual does not enjoy the right to print currency. |
| v. Elasticity of Finance | |
| Public finance is more elastic. | There is not much scope for changes in private finance. |
| vi. Effect on Economy | |
| Public finance has tremendous impact on the economy of a country. | Private finance has marginal effect on the economy of a country. |
Question 3.
Answer the following: (Any Three) [12]
Question 1.
Explain the scope of micro-economics.
Answer:
Micro-economics is a branch of modern economics. Micro-economics deals with a small part of the national economy. It studies the individual economic units such as individual consumer, individual producer, individual firm, the price of a particular commodity or a factor etc.
The scope of micro-economics can be explained with the following points:
i. Theory of Product Pricing
The price of an individual commodity is determined by the market forces of demand and supply. Micro-economics is concerned with demand analysis i.e. individual consumer behaviour and supply analysis i.e. individual producer behaviour. The theory of product pricing explains how the price of a commodity is determined.
ii. Theory of Factor Pricing
Land, labour, capital and entrepreneur are all factors of production and contribute to the process of production. For this contribution, they get rewards in the form of rent, wages, interest and profits, respectively. The theory of factor pricing explains how the factor prices (or rewards) are determined.
iii. Theory of Economic Welfare
Theory of Economic Welfare basically deals with the efficiency in allocation of resources. Efficiency in the allocation of resources is attained when it results in maximisation of satisfaction of people. Economic efficiency involves three efficiencies:
a. Efficiency in Production: Efficiency in production means producing maximum possible amount of goods and services from the given amount of resources.
b. Efficiency in Consumption: Efficiency in consumption means distribution of produced goods and services among the people for consumption in such a way as to maximise total satisfaction of the society.
c. Overall Economic Efficiency: Overall efficiency means the production of those goods which are most desired by people.
Micro-economic theories show under what conditions these efficiencies are achieved.
Thus, we can conclude that the scope of Micro-economics is limited to price theory (factor pricing and product pricing) and allocation of resources. It does not study the aggregates relating to the whole economy.
Question 2.
Explain the importance or significance of the law of DMU.
Answer:
The following is the importance or significance of the law of DMU:
i. Usefulness to the Consumers
A consumer always tries to maximise his satisfaction. Therefore, the consumer diversifies his limited resources among various commodities in such a way that MU acquired from a commodity is at least equal to the price.
E.g.: You will hesitate to pay ₹ 50 for a vada pav because you know that the MU of the one vada pav is not worth ₹ 50.
ii. Usefulness to the Government
The law is useful to the government in framing various policies such as progressive tax policy, trade policy, pricing policy etc.
E.g.: Higher taxes are collected from rich people because MU of money is less for them.
iii. Basis of Paradox of Values
The law helps us to understand ‘paradox of values’ by explaining the difference between value-in-use and value-in-exchange. Some commodities have high value-in-use while some commodities have high value-in-exchange.
E.g.: Commodities like air, water, sunshine, have high value-in-use but less or zero value-in-exchange. On the other hand, gold, diamonds etc. have high value-in-exchange but less or zero value-in-use.
iv. Basis of Law of Demand
The law of demand is based on the law of DMU. According to the law of demand, higher the price, lower is the quantity demanded and vice versa. When a consumer purchases more and more units of a good, its MU steadily declines. Hence, he would buy additional units only at a lower price.
E.g.: There are always combo offers like “By 2 get 1 free” or “Pack of 3 @ 599”. It is mainly to make the consumer feel that he is deriving more utility by paying lesser amount.
v. Usefulness to the Producers
The law helps the producer to fix the prices of products. Larger the stock of the commodity, lower is the MU and hence, the producer may decide to fix a lower price (and vice versa).
E.g.: The prices of “limited edition” items are kept very high because producers have limited stock of these items.
Question 3.
Explain any four factors influencing elasticity of demand.
Answer:
Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in its price (or any other factor).
The following are the factors influencing elasticity of demand:
i. Nature of the Commodity
Commodities which are necessities (E.g.: food grains, medicines etc.) have relatively inelastic demand as it is essential for survival. On the other hand, comfort goods and luxury goods (E.g.: cars, perfumes etc.) have relatively elastic demand.
ii. Availability of Substitutes
The demand for a commodity will be relatively elastic if its close substitute is easily available in the market.
E.g.: Surf Excel and Ariel, Pepsi and Coke, Tea and Coffee. The demand for a commodity will be inelastic if its close substitute is not available.
E.g.: Salt, public transport, academic books of a particular publisher etc.
iii. Number of Uses
The demand for commodities having single use will be less elastic or relatively inelastic.
E.g.: washing powder etc. The demand for commodities having multiple uses will be more elastic.
E.g.: Coal, electricity.
iv. Habits
The demand for commodities which are consumed as a habit or preference is relatively inelastic.
E.g.:
a. A coffee drinker’s demand for coffee powder will be relatively inelastic.
b. A smoker’s demand for cigarette will be relatively inelastic.
v. Durability
The demand for durable goods is relatively elastic.
E.g.: Furniture, washing machine etc. The demand for perishable goods is relatively inelastic.
E.g.: meat, vegetables etc.
vi. Complementary Goods
The goods which are demanded jointly to satisfy a single want are called as complementary goods. Generally, the demand for complementary goods is relatively inelastic.
E.g.:
a. A person having printer will have relatively inelastic demand for ink cartridge.
b. A person having a car will have relatively inelastic demand for petrol.
vii. Income of the Consumer
A consumer with higher income will have inelastic demand as compared to a consumer having lower income.
E.g.: Mr. Mukesh Ambani will not stop commuting by helicopter even if the price of aviation fuel rises. On the other hand, if the prices of certain food items increase, a middle-class person might reduce his consumption. The demand pattern of a very rich and an extremely poor person is rarely affected by significant changes in the price.
viii. Urgency of Needs
The goods which are urgently needed will have a relatively inelastic demand.
E.g. medicines. Luxury goods which are less urgent will have relatively elastic demand.
ix. Time Period
Elasticity of demand is always related to time period. It varies with the length of time. In short-term, demand is generally relatively inelastic. However, in long-term, demand is relatively elastic as consumer can change his consumption habits and find cheaper substitutes.
x. Proportion of Expenditure (Proportion of Income Spent)
If consumers spend small proportion of their income on consumption of a good, then their demand for such good tends to be relatively inelastic. However, if they are spending large proportion of their income on a good, then they would spend it carefully and such good is likely to have relatively elastic demand.
xi. Possibility of Postponement of Demand
The demand for a commodity whose purchase can be postponed will be relatively elastic.
E.g.: fridge, car, sofa, mobile etc. The demand for a commodity whose purchase cannot be postponed will be relatively inelastic.
E.g.: medicines, academic books etc.
Question 4.
What is a monopoly? Explain its features.
Answer:
Monopoly is a type of imperfect market structure. The term ‘Monopoly’ is derived from the Greek word ‘Mono’ which means ‘Single’ and ‘Poly’ which means ‘Seller’.
In monopoly, 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.”
Features
The following are the features of monopoly:
i. A Single Seller
In a monopoly, there is a single producer or seller in the market, i.e., a monopolist. The monopolist does not face any competition as he is the sole seller. But, the number of buyers is large.
ii. Price Maker
In monopoly, the seller himself fixes the price. He has complete control over the supply and there is no close substitute for his product. So, he can charge any price for the product. Therefore, the monopolist is the “price maker”.
iii. Entry Barriers
Entry of the rivals is restricted due to legal, natural, technological barriers. These barriers do not allow the competitors to enter the market.
iv. No Close Substitute
The product sold by the monopolist is unique. There is no close substitute available for that product in the market. So, the buyers have no choice. They either have to buy the product from the monopolist or go without it. The cross elasticity of demand for monopolist’s product is either zero or negative.
v. Complete Control Over Market Supply
The monopolist has a complete control over the market supply as he is the sole producer or seller of that commodity. There is no other seller selling the same commodity or even a close substitute.
vi. Also No Distinction Between Firm and Industry
In a monopoly, there is no distinction between a firm and industry because there is only one firm producing and selling the product. Therefore, a monopoly firm itself is the industry.
vii. Price Discrimination
Monopolist, being a price maker, can charge different prices to different consumers for the same product, on the basis of time, place, consumer’s income status etc. Thus, price discrimination is an important feature of monopoly market.
Question 5.
Explain the expenditure method of measuring national income.
Answer:
National income is one of the important subject matter of macroeconomics. 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.
The expenditure method of measuring national income is explained below.
i. Under this method, total expenditure incurred by the society in a particular year is added together.
ii. It is also known as outlay method.
iii. Income can be spent either on consumer goods or capital goods. Under this method, national income is calculated by adding up all the consumption expenditure and investment expenditure made by individuals, firms as well as the government during a year.
iv. Thus, Gross National Product (GNP) is calculated as follows:
NI = C + I + G + (X – M) + (R – P)
Where,
C = Private Final Consumption Expenditure
I = Gross Domestic Private Investment Expenditure
G = Government Final Consumption and Investment Expenditure
(X – M) = Net Foreign Investment/Net Exports
(R – P) = Net receipts
a. Private Final Consumption Expenditure (C)
Private Final Consumption Expenditure (C) by households includes expenditure on:
- Non-durable goods which are used immediately (E.g.: food)
- Durable goods which are generally used for longer period of time
(E.g.: car, computer, television set, washing machine etc.) - Services like transport services, medical services, etc.
b. Gross Domestic Private Investment Expenditure (I)
It refers to expenditure made by private businesses on replacement, renewals and new investment.
c. Government Final Consumption and Investment Expenditure (G)
1. Government’s Final Consumption Expenditure: It refers to the expenditure on various administrative services like, law and order, defence, education, health etc.
2. Government’s Investment Expenditure: It refers to the expenditure on creating infrastructural facilities like construction of roads, railways, bridges, dams, canals etc. These facilities are used by the business sector for production of goods and services.
d. Net Foreign Investment/ Net Exports (X – M)
It refers to the difference between exports and imports of a country during a period of one year.
e. Net Receipts (R – P)
It refers to the difference between expenditure incurred by foreigners on domestic goods and services (R) and expenditure incurred abroad by residents on foreign goods and services (P).
Question 4.
State with reasons whether you agree or disagree with the following statements: (Any Three) [12]
Question 1.
When MU is zero, TU is maximum.
Answer:
Yes, I agree with the above statement.
Reason:
i. Total Utility is the sum total of the utilities derived by a consumer by consuming all units of a commodity at given point of time. In simple words, it is the sum of marginal utilities derived from successive (back to back) consumption of units.
ii. Marginal Utility is the additional utility derived by the consumer on consumption of an additional unit of the commodity. In short, it is additional utility derived from the last unit consumed.
iii. Marginal utility (MU) derived from various units of a commodity and its total utility are interrelated. This can be explained with the help of the following schedule:
| No. of Units | TU | MU |
| 1 | 10 | 10 |
| 2 | 18 | 8(18-10) |
| 3 | 22 | 4(22-18) |
| 4 | 24 | 2(24-22) |
| 5 | 24 | 0(24-24) |
| 6 | 22 | -2(22-24) |
iv. From the above schedule, it can be observed that:
a. After the first unit is consumed, the TU and MU are the same.
b. As the consumer consumes more units, the TU goes on increasing from 10 to 18 to 22 to 24 while the MU goes on decreasing from 10 to 8 to 4 to 2.
c. TU increases at a diminishing rate and MU goes on diminishing with additional consumption.
d. After consumption of 4th unit, TU reaches its maximum and remains constant even after consumption of 5th unit whereas MU becomes zero at that point. This is called the point of satiety. (TU highest, MU = 0)
e. Thus, when MU is zero, TU is maximum.
Question 2.
The supply curve of labour is backward bending.
Answer:
Yes, I agree with the above statement.
Reason:
- Labour supply refers to the total number of hours that a worker is willing to work at given wage rate. It can be represented graphically by a supply curve. As the wage rate increases, the number of hours that a labourer is willing to work for also increase. Thus, the supply curve of labour slopes upwards.
- However, beyond a certain point, when the wage rate rises further, the supply of labour will decrease because the labourer would prefer leisure to work. Thus, after a certain point, the supply of labour tends to fall even at higher wage rate.
- This can be explained with the help of the backward bending labour supply curve:
| Wage rate per hour | Hours of work per day | Total amount of wages |
| 100 | 5 | 500 |
| 200 | 7 | 1400 |
| 300 | 6 | 1800 |
a. In diagram, the supply of labour is shown on X-axis and the wage rate per hour is shown on Y-axis. The curve SASi is the backward bending labour supply curve.
b. When the wage rate is ₹ 100 per hour, the labourer works for 5 hours per day and earns a total wage of ₹ 500. When the wage rate increases to ₹ 200 per hour, the labourer works for 7 hours per day and earns a total wage of ₹ 1,400. Till this point, the law of supply is followed.
c. Now, when the wage rate increases to ₹ 300 per hour, the labourer prefers leisure over work and denies to work for extra hours because he earns more by working for lesser hours. He is ready to work for 6 hours and earns a total wage of ₹ 1,800. At point A, the supply curve bends backward. It becomes an exception to the law of supply.
Question 3.
A seller is a price maker in monopoly market.
Answer:
Yes, I agree with the given statement.
Reason:
- Monopoly is a type of imperfect market structure in which there is only one seller who controls the entire market supply for a product which has no close substitute.
- The product that is sold by the seller in a monopoly is unique to him.
- In other words, there is no close substitute available for that product in the market.
- So, buyers have no choice. They have to either buy the product from the monopolist or go without it.
- Therefore, the seller is in a position to fix the price that he wants.
- In fact, he may charge different prices from different customers for the same product.
- Thus, a seller is a price maker in monopoly.
Question 4.
Trade is an engine of growth for an economy.
Answer:
Yes, I agree with the above statement.
Reason:
- Trade refers to buying and selling goods and services in exchange of money.
- Trade plays an important role in the process of economic development.
- In developed countries, it represents a significant share of Gross Domestic Product (GDP).
- Foreign trade helps to earn foreign exchange for a country which can be put to productive use.
- Trade encourages investment in the economy.
- It leads to division of labour & specialisation. It also leads to optimum allocation and utilisation of resources.
- It also brings stability in prices in the economy.
- Thus, trade is an engine of growth for an economy.
Question 5.
Index numbers are free from limitations.
Answer:
No, I do not agree with the above statement. Index numbers suffer from certain limitation.
Reason: Various limitations of index numbers are explained below:
- Based on samples: Index numbers are generally based on samples. It is not practically possible to include all the items in the construction of index numbers. Hence, they suffer from sampling errors.
- Bias in the data: Index numbers are constructed based on various types of data. There may be bias or errors in the collected data. This is bound to affect the results of the index numbers.
- Misuse of index numbers: Index numbers can be misused. They compare a situation in the current year with a situation in the base year. Hence, a person may choose base year which is suitable for his purpose.
- Defects in formulae: There is no perfect formula for the construction of index number. It is only an average and so, it suffers from all the limitations of an average.
- Changes in the economy: The habits, tastes and expectations of people are always changing and all these changes cannot be included in the estimation of index numbers.
- Qualitative changes: The price or quantity index numbers may ignore the changes in product qualities. At any given time, a better quality commodity will have higher production cost and higher price than ordinary commodity.
- Arbitrary weights: The weights assigned to different commodities may be arbitrary.
- Limited scope: An index number has limited scope because if it is constructed for one purpose then it cannot be used for any other purpose.
Question 5.
Study the following table, figure, passage and answer the questions given below it: (Any Two) [8]
Question 1.
Identify the price elasticity of demand from the following diagrams:
i.
ii.
iii.
iv.
Answer:
i. Perfectly inelastic demand
ii. Perfectly elastic demand
iii. Relatively inelastic demand
iv. Relatively elastic demand
Question 2.
Calculate Price Index Number from the given data:
| Wage rate per hour | Hours of work per day | Total amount of wages |
| 100 | 5 | 500 |
| 200 | 7 | 1400 |
| 300 | 6 | 1800 |
Answer:
Quantity Index Number: Q01 = \(\frac{\sum q_1}{\Sigma q_0}\) × 100
Ans: Price Index Number = 120
Question 3.
India follows the system of regional accounts. Regional accounts offer comprehensive information on the numerous transactions occurring in the regional economy. It fosters the process of decision making at the regional level. Net State Domestic Product (NSDP) computes the value of all final goods and services produced in the state within given time period in monetary terms. Per Capita State Income (PCSI) is obtained by dividing the NSDP by the population of the state. Currently, all Indian states and union territories engage in the calculation of regional income estimates.
These estimates are prepared by the State Income Units of the respective State Directorates of Economics and Statistics (DESs). The CSO assists the states by rendering advice on conceptual and methodological problems. There are certain activities such as railways, communications, banking and insurance that cut across state boundaries and consequently, their economic contribution cannot be assigned to any one state. These are known as the ‘Supra-regional sectors’ and estimates for them are compiled for the economy as a whole and allocated to the states on the basis of relevant indicators.
i. State the formula for calculating PCSI.
ii. Which organisation compute regional level income estimates?
iii. How does the CSO assist states in the preparation of regional estimates?
iv. Explain the concept of supra-regional sectors and computation of estimates for these sectors.
Answer:
i. Per Capita State Income (PCSI) = Net State Domestic Product (NSDP) / State population. [1 Mark]
ii. Regional level income estimates are prepared by the State Income Units of the respective State Directorates of Economics and Statistics (DESs). [1 Mark]
iii. The CSO assists the states in the preparation of regional estimates by rendering advice on conceptual and methodological problems. [1 Mark]
iv. There are certain activities that cut across state boundaries and consequently, their economic contribution cannot be assigned to any one state. These are known as the ‘Supra-regional sectors’. The estimates for these sectors are compiled for the economy as a whole and allocated to the states based on relevant indicators.
Question 6.
Answer the following questions in detail (Any Two): [16]
Question 1.
State and explain the law of demand with assumptions.
Answer:
The law of demand was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics’ 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”.
Explanation: Other factors remaining constant, when the price of a commodity rises, demand for it falls and when the price of a commodity falls, demand for it rises. Thus, there is an inverse relationship between price and quantity demanded.
Symbolically, the functional relationship between demand and price is expressed
Dx = f (Px)
Where,
D = Demand for a commodity
x = Commodity
f = Function
Px = Price of a commodity
Demand Schedule
The law of demand is explained with the help of the following demand schedule:
| Demand Schedule | |
| Price of commodity ‘x’ | Quantity demand per |
| (in ₹) | week (in kgs.) |
| 10 | 1 |
| 8 | 2 |
| 6 | 3 |
| 4 | 4 |
| 2 | 5 |
- From the above schedule, it can be observed that when the price of the commodity is ₹ 10, the demand is 1 kg.
- When the price falls from ₹ 10 to ₹ 8, the demand rises from 1 kg to 2 kg.
- Similarly, as the price falls from ₹ 8 to 6 and from ₹ 6 to 4, the demand rises from 2 kgs to 3 kgs and 3 kgs to 4 kgs, respectively.
- If we look at the schedule from bottom to top, when the price rises from ₹ 2 to ₹ 4, the demand falls from 5 kgs to 4 kgs.
- Thus, we can conclude that, as the price of a commodity falls, quantity demanded rises and when price of the commodity rises, quantity demanded falls.
- This shows an inverse relationship between price and quantity demanded.
Demand Curve
Law of demand can be further explained with the help of the following demand curve:
In the above diagram, Y-axis represents price and the X-axis represents quantity demanded. DD is the demand curve which slopes downward from left to right. It represents inverse relation between price and quantity demanded.
Assumptions
Marshall begins the law of demand with the words ‘Other things being equal’. These ‘other things’ refer to the various factors other than price which affect demand. The law of demand only establishes the relationship between price and demand. If there is a change in other factors, the demand will change even without a change in price. In such cases, the law of demand will not hold true. Hence, Marshall assumes that other factors are equal or they do not change (i.e. remain constant).
The law of demand is based on the following assumptions:
i. No Change in Price of Related Goods
It is assumed that there is no change in the price of substitute goods or complementary goods. Any change in the price of these goods will lead to a change in the demand for the commodity without change in its own price.
ii. No Change in Income
It is assumed that there is no change in the income of consumers. If there is a rise in income, then there will be rise in overall demand in spite of no change in price.
iii. No Change in Overall Population
It is assumed that there is no change in overall population. A change in the size or composition (age, sex ratio etc.) of population will affect the overall demand for goods and services.
iv. No Change in Tastes, Habits, Preferences, Fashions
It is assumed that the tastes, habits, preferences and fashion choices of people remain the same. Any change in these factors will lead to a change in demand even when price remains the same.
v. No Change in Level of Taxation
The taxation policy of the government has a great impact on the demand for various goods and services. Therefore, it is assumed that the taxation policy remains the same.
vi. No Change in Advertisement
Advertisement, sales promotion schemes and effective salesmanship tend to change the preference of consumers and may lead to higher demand. Therefore, it is assumed that there is no change in the advertisements and promotions.
vii. No Change in the Other Factors
It is assumed that the other factors like climatic conditions, technology, government policy, customs and traditions etc. remain the same. Any change in these factors will lead to a change in demand.
viii. No Change in Expectation About Future Prices
It is assumed that the consumers do not expect any further change in the price in near future. If consumer expects a rise in prices in the future, he may demand more in present even if the price is high.
Question 2.
Explain various sources of public revenue
Answer:
Public revenue refers to the total collection of income with the government through various sources. The necessity of public revenue arises due to public expenditure. Public revenue is an important component in the study of public finance.
The main sources of public revenue are as follows:
i. Taxes
A tax is a compulsory contribution from the person to the government without reference to special benefits conferred. The taxes can be classified as direct and indirect taxes. Tax is one of the main sources of public revenue.
Types of Taxes
a. Direct Tax
Meaning: Direct tax refers to the tax paid on the basis of income and property of a taxpayer.
Tax Burden: The burden of direct tax is borne by the person on whom it is levied. Since it is impossible for the taxpayer to transfer the burden to others, impact and incidence of direct tax falls on the same person.
E.g.: personal income tax, wealth tax etc.
b. Indirect Tax
Meaning: Indirect tax is levied on goods or services. It is paid at the time of production or sale and purchase of commodity/ service.
Tax Burden: The burden of indirect tax can be shifted by the taxpayer (i.e., producers) to other person/s. So, impact and incidence of tax falls on different persons.
E.g.: Goods and Services Tax (GST) in India has replaced almost all indirect taxes, custom duty.
ii. Non-Tax Revenue
Non-tax revenue refers to the revenue received by the government administration, public enterprises, etc. from sources other than the taxes.
The various non-tax sources of revenue are as follows:
a. Fees
Unlike taxes, fee is payment made by citizens in return for certain specific services provided by the government.
E.g.: education fee, registration fee, court fee etc.
b. Prices of Public Goods and Services
Modern governments sell various goods and services to citizens. A price is a payment made by the citizens to the government for the goods and services sold to them.
E.g.: railway fares, postal charges etc.
c. Special Assessment
Special assessment refers to the payment made by the citizens of a particular locality in exchange for certain special facilities provided to them by the public authorities.
E.g.: local bodies can levy special charge on the residents of a particular area where extra/special facilities of roads, energy, water supply etc. are provided.
d. Fines and Penalties
The government imposes fines and penalties on people who violate the laws framed by the government. Here, the objective is not to earn income, but to discourage the citizens from violating the laws.
E.g.: fines for violating traffic rules. The public revenue arising from fines and penalties is small.
e. Gifts, Grants and Donations
The government may earn some revenue in the form of gifts by citizens. It may also receive grants from the foreign governments and institutions for general as well as specific purposes. Foreign aid has become an important source of development finance for developing countries like India. However, this source of revenue is uncertain in nature.
f. Special Levies
Special levy is charged on commodities whose consumption is harmful to the health and well-being of citizens. Like fines and penalties, the objective is to discourage the consumption of such commodities.
E.g.: duties levied on wine, opium and other intoxicants.
g. Borrowings
The government can borrow money from people in the form of deposits, bonds etc. It also gets loans from foreign governments and organisations such as International Monetary Fund (IMF), World Bank etc. In the modern times, loans have become popular source of revenue.
Question 3.
Explain the functions of commercial bank.
Answer:
Commercial banks act as intermediaries in the country’s financial system by bringing the savers and investors together. They are profit seeking financial institutions. Commercial banks play an important role in mobilising savings and allocating them to various economic sectors. It includes both scheduled commercial banks and non-scheduled commercial banks. Scheduled commercial banks are banks included in the second schedule of the Reserve Bank of India Act, 1934. Based on ownership and function, Indian commercial banks can be classified into four categories; namely, public sector banks, private sector banks, regional rural banks and foreign banks.
The functions of commercial banks are as follows:
i. Acceptance of Deposits
Accepting deposits is one of the primary functions of commercial banks. Deposits constitute the main source of funds for these banks. Savings lead to the creation of deposits. The deposits are categorised as follows:
a. Demand Deposits: These deposits are withdrawable on demand. They are in the form of current account and savings account deposits.
1. Current Account is usually opened by businessmen, corporations, industrial houses, trusts etc. They are provided with overdraft facility, i.e. they are allowed to withdraw in excess of the balance in their account.
2. Savings Account is operated mainly by the salaried class, small traders etc. who wish to save a part of their income with the bank.
b. Time Deposits: These deposits are repayable after a certain period of time. In other words, they can be withdrawn only on maturity. They are in the form of recurring deposits and fixed deposits
- Recurring Deposit refers to a deposit wherein a customer deposits fixed amount at regular intervals for specified period of time.
- Fixed Deposits refer to lumpsum amount deposited by a customer for specified period of time. This deposit carries high rate of interest compared to all other deposits.
ii. Providing Loans and Advances
Providing loans and advances is another primary function of commercial banks. The banks mobilise savings and lend these funds to institutions and individuals for various purposes.
a. Loans: Based on the tenure, loans can be classified as call loans, short-term, medium-term and long-term loans. Longer the duration, greater will be the rate of interest.
b. Advances: The banks also provide cash credit, overdraft facility and discount bills of exchange.
iii. Ancillary Functions
Commercial banks provide a range of ancillary services such as:
a. Transfer of funds
b. Collection of money
c. Making periodical payments on customer’s behalf
d. Merchant banking
e. Foreign exchange
f. Safe deposit lockers
g. Demat facility
h. Internet banking
i. Mobile banking
iv. Credit Creation
Credit creation is an important function of commercial banks. These banks are the creators of credit. Demand and time deposits constitute the primary deposits of banks. After meeting the reserve requirements, the balance amount is used for giving loans. Thus, secondary deposits or derivative deposits are created out of the loans given by the banks.
E.g.: Say, Mr. A goes to State Bank of India (SBI) to ask for a personal loan. When SBI provides loan to Mr. A, the loan amount is credited into bank account of Mr. A, say HDFC bank. After meeting the reserve requirements, HDFC bank lends the remaining amount to some other customer, say Mr. B. This amount will be credited into bank account of Mr. B, say ICICI bank. Even ICICI bank will lend the balance amount after meeting reserve requirements, say to Mr. C. This shows that secondary or derivative deposits are created out of the loans given by the banks. This procedure is followed by the entire banking system in the country. In short, commercial banks create deposits out of the loans given thereby, leading to credit creation.