SKY EDUCATION

SKY EDUCATION
ECONOMICS
Q.4 State with reasons whether you agree or disagree with the following statements:
i. The scope of microeconomics is unlimited
Ans: I Disagree with the given statement.
Reason:
a. Microeconomics and macroeconomics are the two main branches of modern economics.
b. The term micros derived from the Greek word mikros which means small or a millionth part.
c. Microeconomic deals with a small part of the national economy.
d. It studies individual economic units such as individual consumer, individual producer, individual firm, the price of a
particular commodity or a factor etc.
e. In simple terms, it is examination of the tree and not the forest.
f. The scope of microeconomics is limited to only individual firms.
g. It doesn’t deal with nation wide economic problems like inflation, deflation, balance of payments, poverty,
unemployment, population, Economic growth etc.
Therefore, the scope of microeconomics is limited.

ii. Macroeconomics is different from Microeconomics

Ans: I Agree with the given statement.
Reason:
a. Macroeconomics analysis the entire economy while microeconomics deal with the small part of national economy.
b. Macroeconomics deals with total employment, national income, National output, total investment, total
consumption, total savings, general price level, interest rates, inflation, trade cycles, etc.
c. Microeconomic studies the individual unit such as individual consumer, individual producer, individual firm, the price
of a particular commodity or a factor etc.
d. Macroeconomic uses lumping method while microeconomic uses slicing method.
e. Macroeconomics analysis is based on General equilibrium analysis why microeconomic analysis is based on partial
equilibrium analysis.
f. The scope of macroeconomics is wide while that of microeconomics is narrow or limited. Therefore
macroeconomic is different from microeconomics.

iii. When total utility is maximum, marginal utility is zero

Ans: I Agree with the given statement.
Reason:
a. Total utility is the sum total of the utilities derived by a consumer by consuming all units of a commodity and point of
time. In simple words it is the sum of marginal utilities derived from successive consumption of units.
b. Marginal utility if the additional utility derived by the consumer or consumption of an additional unit of commodity.
In short it is additional utility derived from the last unit consumed.
c. Marginal utility derived from various units of a commodity and its total utility are interrelated. This can be explained
with the help of following schedule:
d. This shows that when total utility is maximum, marginal utility is zero.

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iv. There are no exceptions to the law of diminishing

marginal utility
Ans: I Agree with the given statement.
Reason:
All exceptions to the law of DMU are only apparent. They violate some or the other assumptions of the law and hence they
are not real exceptions it can be explained as follows:
a. Hobbies: a person having hobby of collecting old coins gets more pleasure when he collects more of it. How about
the assumption of homogeneity is violated as a person does not collect the same coins. For the he does not collect
them in continuous succession. So the assumption of continuity is also violated.
b. Miser: MU of money increases for a miser as his stock of money keeps on increasing. However the assumption of
rationality is violated in this case.
c. Addiction: MU of alcohol keeps increasing for a drunkard as he consumes more of it. However in case of all addicts
the assumption of rationality is violated.
d. Power: the MU of power keeps increasing as a person continues to get more power. Have a what is not a real
exception as the assumption of rationality is violated.
e. Money: MU of money keeps on increasing a stock of money increases. However money cannot be considered to be
real exception.
Therefore there are no real exceptions to the law of DMU.

v. All desires are demand

Ans: I Disagree with the given statement.
Reason:
a. In ordinary language, demand means a desire.
b. Desire means and urge to have something.
c. In economics demand means a desire which is packed by willingness and ability to pay. d. Thus, Demand is an
effective desire.
e. Demand = Desire + Ability to Pay + Willingness to spend.

vi. Marginal utility curve slopes downwards

Ans: I Agree with the given statement.
Reason:
a. That is an inverse relation between the stock of a commodity and its marginal utility.
b. As the stock of a commodity goes on increasing the MU decreases.
c. Law of DMU states that other things being equal the addition benefit which a person derives from the increase in
the stock of a thing diminishes with every increase in the stock that he already has.
d. Thus, the MU curve slope downward from left to right.

vii. When the prices of Giffen goods falls, demand for such
goods rises
Ans: I Disagree with the given statement.
Reason:
a. Giffen goods are inferior or low quality Goods like vanaspati , low quality rice etc.
b. Sir Robert Giffen observed a behavior related to bread in England.

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c. People had a limited money therefore they used to consume more bread (inferior and cheaper commodity)and Less
meat(a costlier commodity).
d. He observed that when price of bread decreased less bread was demanded than before.
e. The people saved money and used it to purchase meat and thus the demand for meet increased.
f. This happens because every person wants to constantly increase his standard of living.
g. Therefore, when price of Giffen goods fall, the demand for it also falls.

viii. There are no exceptions to the law of demand

Ans: I Disagree with the given statement.
Reason:
Under exceptional circumstances are consumer buys more when the price of commodity rises and buys less when price of
commodity falls such exception to the law of demand are as follows:
a. Habitual goods :
Due to habit of consumption, certain goods like tea is purchased in required quantities even at a higher price. b.
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.
c. 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.
d. 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.
e. Prestige goods :
Expensive goods like diamond, gold etc. are status symbol. So rich people buy more of it, even when their prices are
high.
f. 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.

ix.There is an inverse relationship between price and demand

Ans: I Agree with the given statement.
Reason:
a. The law of demand states that 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.
b. Demand Curve :

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c. In fig., X axis represents the demand for the commodity and Y axis represents the price of commodity x. DD is the
demand curve which slopes downward from left to right due to an inverse relationship between price and quantity
demanded.

x. The supply curve of labour is backward bending

Ans: I Agree with the given statement.
Reason:
a. Labour supply is the total number of hours that workers to 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
b. 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. It can be explained with the help of a backward bending supply curve. The schedule and
diagram explains the backward bending supply curve of labour.

xi.There is a direct relationship between price and quantity

supplied
Ans: I Agree with the given statement.
Reason:
a. “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 remaining constant, a rise in price results in a rise in the quantity supplied and
viceversa. Thus, there is a direct relationship between price and quantity supplied.
Supply Curve:

b.

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In the 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.

xii. There are many exceptions to the law of

supply
Ans: I Agree with the given statement.
Reason:
a. Supply of labour :
Labour supply is the total number of hours that workers to 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.

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

xiii. Seller is the price maker under perfect competition

Ans: I Disagree with the given statement.
Reason:
a. In a perfectly competitive market there are large number of sellers.
b. Each seller forms a negligible part of the entire Market.
c. No single seller is in a position to influence the market price.
d. Sellers are said to be price takers under perfect competition.
e. In contrast in Monopoly Market there is only one seller who controls the entire market supply for a product which
has no close substitute therefore the seller is a price maker in Monopoly.

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xiv. There is product differentiation under monopolistic
competition
Ans: I Agree with the given statement.
Reason:
a. In monopolistic competition each product is different from other products and some way or the other.
b. The difference could be in the form of brand name, trademarks, shapes, quality, ingredients, design colors, smell etc.
c. The products are different but they are closed substitute to each other.
d. The above points show that there is product differentiation under monopolistic competition.

xv. Selling cost is the only feature of monopolistic competition

Ans: I Disagree with the given statement.
Reason:
In addition to selling cost monopolistic competition as many other features as follows: 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 monopoly.
b. Fairly large number of buyers :
In this market there are fairly large number of buyers. Consequently, 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, trade marks,
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. Close substitutes :
In monopolistic competition, goods have close substitutes to each other. For example, different brands of soaps, toothpastes
etc.
f. Concept of group :
Under monopolistic competition, 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, group of firms producing medicines, automobiles etc.

xvi. Index numbers measure changes in the price level

only
Ans: I Disagree with the given statement.
Reason:
a. An index number is device to measure changes in economic variable over a period of time.
b. Index numbers are one of the most used statistical tool in economics.
c. Index numbers were originally developed to measure changes in price level.
d. In present time it is also used to measure trends in wide variety of areas such as stock market prices cost of living,
industrial agricultural production, changes in exports and imports etc.
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e. Hence, index numbers measure changes in many economic variables.

xvii. Any year can be selected as the base year

Ans: I Disagree with the given statement.
Reason:
a. 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 in base year it is denoted by suffix.
b. The base year should be normal. i.e. it should be free from natural calamities.
c. Also it should not be too distant in the past.
d. Therefore any year cannot be selected as the base year.

xviii. There are many theoretical difficulties in the

estimation of national income
Ans: I Agree with the given statement.
Reason:
a. There are various difficulties in the measurement of national income.
b. There are Two difficulties in the measurement of national income. i.e. Theoretical difficulties and Practical
difficulties.
c. Some of the Theoretical difficulties are transfer payments, illegal income, unpaid services, valuation of government
services, etc.

xix. Transfer payments are included in national income

Ans: I Disagree with the given statement.
Reason:
a. Transfer incomes or transfer payments such as scholarships gives donation, charity, old age pensions, unemployment
allowance, etc are ignored while calculating national income.
b. They are a part of individual income on one hand and part of government expenditure on the other hand.
c. These payments represent a mere transfer of income without any addition to the production.
d. Therefore transfer payments are excluded from national income.

xx. Obligatory functions is the only function of the

government
Ans: I Disagree with the given statement.
Reason:
a. Government is a formal or informal institution created by the people in specific region to perform various functions.
b. The functions of government can be classified as obligatory function and optional functions.
c. The obligatory functions include protection from external attacks maintaining internal Law and order etc.
d. The optional functions include provisions of education and health Services provision of social security like pensions
and other welfare measures etc.
e. Therefore obligatory function is not the only function of the government.

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xxi. Public finance is more elastic compared to private
finance
Ans: I Agree with the given statement.
Reason:
a. Public Finance aims to offer maximum social advantage to the society while private Finance aims to fulfill private
interest.
b. That is not much scope for changes in private Finance.
c. On the other hand government determines the volume and different ways of its expenditure based on the need of
an hour.
d. The government can also print notes through Reserve Bank of India.
e. Hence Public Finance is more classic than private Finance. i.e. accent of public expenditure can be varied as per the
needs.

xxii. Issue of currency notes is the only function of Reserve

Bank of India
Ans: I Disagree with the given statement.
Reason:
In additions to issue of currency notes RBI performs a range of functions as follows:
a. Banker to the Government :
RBI acts as a banker, agent and advisor to the Government. It transacts the business of both, the Central and State
Governments. It accepts money as well as makes payments on behalf these Governments. It also undertakes the
management of public debt. It advises the Government on a wide range of economic issues.
b. Banker’s Bank :
RBI exercises statutory control over the commercial banks. All scheduled banks are compulsorily required to maintain a
certain minimum of cash reserves with the RBI against their demand and time liabilities. RBI provides financial assistance to
banks in the form of discounting of eligible bills. Loans and advances are also provided against approved securities.
c. Custodian of Foreign Exchange Reserves :
RBI acts as a custodian of the country’s foreign exchange reserves. It has to maintain the official rate of exchange of rupee as
well as ensure its stability. RBI also undertakes to buy and sell the currencies of all the members of the International
Monetary Fund (IMF).
d. Controller of Credit :
As a supreme banking authority of the country, RBI has the power to influence the volume of credit created by commercial
banks. It also monitors the purpose or use of credit. Quantitative
methods such as bank rate, open market operations, variable reserve ratios such as Cash Reserve Ratio (CRR), Statutory
Liquid Ratio (SLR) etc. control the volume of credit created. Qualitative methods such as fixing margin requirements, credit
rationing, moral suasion etc. regulate the purpose or use of credit.
e. Collection and Publication of Data :
RBI collects and compiles statistical information related to banking and other financial sectors of the economy.
f. Promotional and Developmental Functions :
RBI also performs certain promotional and developmental functions such as extending banking services to semiurban and
rural areas, providing security to depositors, development of specialized institutions for agricultural credit, industrial finance
etc.
g. Other Functions :

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RBI acts as a clearing house for settling the accounts between its member banks. As a lender of last resort, it also provides
liquidity.

xxiii. Commercial banks create credit

Ans: I Agree with the given statement.
Reason:
a. Commercial banks are the creators of credit.
b. Demand and time deposits constitute the primary deposits of Bank.
c. After meeting a reserve requirements the balance amount is used for giving loans.
d. The procedure is followed by entire banking system in the country leading to credit creation.

xxiv. Foreign trade leads to division of labour and specialization

Ans: I Agree with the given statement.
Reason:
a. Foreign trade refers to trade between different countries of the world. Some countries have plentiful natural
resources.
b. Ideally search countries should export raw materials and import finish goods from the countries which have
abundant supply of skilled manpower.
c. Foreign trade enables countries to specialize in production of those goods for which it has abundant resources.
d. In other words each country can specialize in production of those goods which is best suited for them as per the
availability of resources.
e. Therefore, foreign trade leads to division of labor and specialization.

xxv. There is no difference between Balance of payment and

Balance of trade.
Ans: I Disagree with the given statement.
Reason:
a. Balance of payments is a systematic record of all International economic transactions of a country during given
period usually a year.
b. On the other hand balance of trade refers to the difference between the value of a country’s export and imports for
given period.
c. Balance of payment is broader concept than balance of trade.
d. Balance of payments includes the value of exchange of goods and services among citizens and businessmen and also
forms and governments etc.
e. Balance of trade includes the value of imports and exports of visible goods and invisible Goods.
f. Therefore a balance of payment and balance of trade are two different concepts.

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