Economis

ECONOMICS
CA FOUNDATION - ECONOMICS
01 INTRODUCTION OF BUSINESS
ECONOMICS
1. The origin of economics can be traced to Adam Smith book An Inquiry into the
Nature and Causes of Wealth of Nations published in the year 1776. Adam Smith
is the father of Economics. At its birth it was called ‘Political Economy’.
2. Economics has been defined in four different ways:

 Wealth Definition: Adam Smith, defined economics as a science of wealth-
which means production and consumption of wealth.
 Welfare Definition: Marshall defined the welfare aspect of economics as
attainment and use of material things. He defined economics in its normative
aspect.
 Scarcity Definition: Robbins emphasizes that economics is a study of human
behaviour, where there is a relationship between ends and scarce means
and that the scarce means have alternative uses. He said economics is
neutral between ends. He defined economics in its positive aspect.
 Growth Definition: Samuelson’s definition of economics is most
comprehensive, relevant and accepted. The definition includes both the
aspects of economics, i.e., distribution of limited resources and problem of
economic development.
3. Economics as a Science: Economics is a science where various facts are systematically

collected, classified and analyzed. Economics is a social science whose subject
matter is man who cannot be controlled and predicted. Physics, Chemistry and
Biology are pure sciences where experiments can be conducted in a laboratory
under controlled conditions.
4. Economics as an Art: Economics is an art as it has several branches which give

practical direction to some economic problems of the society.
5. Economics is a science having both positive and normative sides. The role of an
economist is not only to explain and explore but also to admire and condemn.
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This role of an economist is essential for healthy and rapid growth of an economy.
Positive economics deals with what is, and normative economics deals with what
ought to be. Positive economics deals with facts and normative economics deals
with ethics.
6. Microeconomics deals with behavior of individual decision making units such as

consumers, resource owners, etc. It is also called Price Theory. Macroeconomics
deals with aggregates such as national income, aggregate consumption, etc. It is
also called Theory of Income and Employment. Both micro and macro economics
are complementary and should be fully utilized for proper understanding of an
economy.
7. There are two methods of constructing an economic theory

(a) Deductive method (b) Inductive method.
(a) In the deductive method, the process of reasoning goes from general as-
sumptions to particular predictions. It was adopted by classical economists
and is simple. The method is more suitable when facts and data are not
available. This method is called abstract or priori method.
(b) In the inductive method, the process of reasoning goes from particular facts
to general theory. It was popular among modern economists and is more
precise, realistic and scientific. The method is more suitable when facts and
data are available.
Deductive and inductive methods are not alternative of each other. Both the
methods are needed for constructing an economic theory.
8. Business Economics integrates economic theory with business practice and relies
on economic analysis in the formulation of business policies.
9. While Business Economics is basically concerned with Micro Economics, Macro eco-
nomics analysis has got an important role to play. Macroeconomics analysis the
environment in which the business has to function.
10. Business Economics is a normative science which is interdisciplinary and pragmatic

in approach.
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11. There are two categories of business issues to which economic theories can be
directly applied, namely: Microeconomics applied to operational or internal issues
and Macroeconomics applied to environmental or external issues.
12. Business Economics makes use of microeconomic analysis such as, demand
analysis and forecasting, production and cost Analysis inventory management,
market structure and pricing policies, resource allocation, theory of capital and
investment decisions, profit analysis and risk and uncertainty analysis.
13. Business Economics also considers Macroeconomics related to economic systems,

business cycles, national income, employment, prices, saving and investment,
Government’s economic policies and working of financial sector and capital
market.
14. The central problem is the problem of choice or the problem of economizing. The
main causes of central problems are:
 unlimited human wants
 limited economic resources
 alternative uses of resources
The central problems are:-
1. What to produce and how much to produce.
2. How to produce
3. For whom to produce
4. Economic growth
15. All point on Production Possibility curve (PPC) solves the first two problems and
points on a higher PPC solves the problem of economic growth. PPC cannot solve
the problem of ‘For whom to produce.
 PPC shows various alternative combinations of goods and services that
an economy can produce when the resources are fully and efficiently
employed.
The slope of PPC measures opportunity cost of the commodity in terms of
alternative opportunity given up. Since the opportunity cost is increasing therefore
PPC is concave to the origin and scarcity of resources gives downward slope to PPC.
[Opportunity cost is cost of alternative opportunity given up.]
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16. There are three forms of economic organization:

(a) Capitalistic economy or free economy
(b) Socialistitc economy or Controlled economy
(c) Mixed economy.
 Capitalism is the system that advocates price mechanism to solve the central
economic problems. In a capitalistic economy, prices are determined by the
market forces of demand and supply. The only aim is profit maximization
and the consumers are free to consume whatever they like. It has faith in
liesez fair policy i.e least interference by the government.
 Socialism is the system where government or public sector owns the factors
of production (land, labor, capital and enterprise) and the central planning
authority solves central economic problems. The aim is to maximize welfare
of the society and the consumers can consume only those goods which are
produced by the government.
 In a mixed economy, public and private sectors exist side by side. Both
price mechanism and central planning authority solves central economic
problems. India is a mixed economy.
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02 THEORY OF DEMAND AND

SUPPLY
Theory of Demand:
1. Meaning of Demand: Demand for a commodity refers to the quantity of a com-
modity which a consum er is willing and able to purchase at a certain price during
any particular period of time.
2. In economics, demand means effective desire which means there should be desire to
own the good, sufficient money to buy it and willingness to spend the money.
3. The determinants of demand are (i) price of the good (ii) price of related goods (iii) income
of the consumers (iv) tastes and preferences of the consumers and (v) other factors such as
size of population, composition of population, distribution of income etc.
4. The law of demand states that there is an inverse relationship between price of
a commodity and its quantity demanded, ceteris paribus. The assumptions of the
law of demand are that Pr, Y, T and D are constant.
 The demand schedule is a tabular or numerical representation of law of
demand. It is of two types-:
 Individual demand schedule shows the quantity demanded on the part of a
single consumer at various prices per unit of time.
 Market demand schedule shows the aggregate of the quantity demanded
by all the consumers at various prices per unit of time.
 Demand curve is a graphical or geometric representation of law of demand.
It is of two types-:
 Individual demand curve is graphical representation of quantity demanded
by a single consumer at different prices.
 Market demand curve is constructed by horizontally or laterally summing
all the individual demand curves at each and every price.
5. The demand curve slopes downward because of (i) law of diminishing marginal
utility (ii) income effect, (iii) substitution effect, (iv) new consumers creating demand
and (v) several uses of a commodity.
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6. Exception to the law of demand are found in the following cases (i) Giffen goods,
(ii) Conspicuous goods or goods of status, (iii) Expectation of a price rise in future,
(iv) Demonstration effect, (v) conspicuous necessities, (vi) impulsive purchase and
(vii) Ignorance effect and (viii) Emergency.
7. Movement along a demand curve (change in quantity demanded) occurs due to

change in the price of the good itself other factors remaining constant.
8. Shift of the demand curve (change in demand) occurs due to change in (i) price of
other good (ii) income of the consumers (iii) tastes of the consumers etc. price of
the commodity remains constant.
 Movement on demand curve can be expansion or contraction of demand
whereas change in demand can be increase or decrease in demand.
9. Price Elasticity of Demand (Ep) measures percentage change in quantity demanded

of a good due a percentage change in its price Therefore, Ep can be calculated
as:
Percentage change in quality demanded
Ep=
Percentage change in price
or, = – ∆Q × P
∆P Q
10. The major determinants of price elasticity of demand are:

(i) Nature of the commodity
(ii) Availability of substitutes
(iii) Several uses of the commodity
(iv) Share of a commodity in consumers budget
(v) Time – period
(vi) Habit of the consumer.
(vii) Tied demand.
(viii) Price range.
11. There are five degrees of ep.

(i) Perfectly inelastic demand (ep = 0) demand curve will be vertical line parallel
to y-axis.
(ii) Inelastic demand (0 < ep < 1) demand curve will be relatively stipper.
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(iii) Unitary elastic demand (ep = 1) demand curve will be like rectangular
hyperbola.
(iv) Elastic demand (1 < ep < ∞) demand curve will be relatively flatter.
(v) Perfectly elastic demand (Ep = ∞)s. demand curve will be a horizontal line
parallel to x-axis.
Check List
Inelastic demand Elastic Demand
 Essential goods  Luxurious goods
 Substitute not available  Substitute available
 Single or limited no.of use of  Multiple uses of the commodity
commodity  High share in consumer’s budget
 Low share in consumer’s budget  Long period
 Short period  Non–habitual consumer
 Habitual consumer  Independent demand
 Tied demand  Medium price range
 Low & high price range
12. Measurement of Price Elasticity of Demand:-

(I) Percentage or proportionate method
(II) Geometric (or point) method.
(III) Total outlay or expenditure method
(IV) Arc or mid – value method.
(i) In the percentage method, Ep is calculated by the formula:
Ep = ∆Q P
×
∆P Q
(ii) In the geometric method, ep at a point on a linear (straight) demand
curve is calculated as:
ep= Lower segment of the demand curve

Upper segment of demand curve
(iii) In the total outlay method, the ep is measured on the basis of change
in total expenditure (TE) or total revenue as a result of change in price of
commodity. If -
(a) price rises and TE/TR also rises and vice-versa then ep < 1
(b) price rises or falls TE/TR remains constant then ep=1
(c) price rises and TE/TR falls and vice-versa then ep > 1
Q –Q P1 – P2
(iv) For arc elasticity, the formula is Ep= Q1 + Q2 x
1 2
P1 + P2
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13. Income Elasticity of Demand measures % ag changes in demand due to % ag

change in income of the consumer.
∆Q Y
Therefore, ey= x
∆Y Q
(a) If value of ey is between 0 to 1 then good is normal or essential.
(b) If ey > 1 then good is luxury and
(c) If ey is negative i.e. less than 0 then good is inferior.
14. Cross-Elasticity of Demand (ec ): It measures % ag changes in the quantity demanded

of good x due to % ag change in price of good y. The formula for calculating ec is:
∆Qx Py
ec=
∆Py
× Qx
 When ec = + ∞ , goods are perfect substitutes
 When ec = + ve goods are substitutes
 When ec = 0, goods are totally unrelated
 When ec = -ve, goods are complements.
15. Advertisement elasticity of sales or promotional elasticity of demand measures

the responsiveness of a good’s demand to changes in the firm’s spending on
advertising. Value of advertisement elasticity of demand is positive and various
between 0 and 00.
16. Demand Distinctions

 Producer’s goods and Consumer’s goods
 Durable goods and Non-durable goods
 Derived demand and Autonomous demand
 Industry demand and Company demand
 Short-run demand and Long-run demand
17. Forecasting of demand is the art and science of predicting the probable demand for
a product or a service at some future date on the basis of certain past behaviour
patterns of some related events and the prevailing trends in the present.
18. Methods of Demand Forecasting

 Survey of Buyer’s Intentions
 Collective Opinion Method
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 Expert Opinion Method

 Barometric Method
 Statistical Methods such as:-
 Trend Projection Method
 Graphical Method
 Least Square Method
 Regression Analysis
 Controlled Experiments Method
 Laboratory Experiments Method
Theory of Consumer’s Behaviour

1. The logical basis of consumer behaviour has been explained by different theories.
Some of the most important theories of consumer behavior are:
(i) Marshall’s Marginal Utility Theory
(ii) Hicks and Allen's Indifference Curve Theory.
2. Marginal Utility Theory:

 The law of diminishing marginal utility states that as the consumer con-
sumes more and more units of a commodity, its marginal utility falls.
 Utility is expected satisfaction to a consumer when he is willing to spend
money on a stock of commodity which has the capacity to satisfy his
want.
 Marginal utility (MU) is addition made to total utility (TU) as a result of con-
sumption of one more unit of the commodity.
 When MU is 0, TU is maximum. It is called saturation point.
 When MU is falling but positive TU is rising but with diminishing rate.
 When MU is negative, TU is falling.
 Assumption of the theory
(i) Rationality
(ii) Cardinality
(iii) Measurement in terms of money.
(iv) Constant marginal utility of money
(v) Independent utility
 Marshall's consumer surplus :-
The amount consumer is willing to pay - The amount he actually
pays. = Area between the MU curve and price of the commodity.
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3. Indifference Curve Theory

 Assumptions of the theory are:
(i) Rationality
(ii) Ordinarily
(iii) Diminishing marginal rate of substitution
(iv) Consistency and transitivity of choice
(v) More is better
Indifference curve shows different combinations of two goods that gives the same
level of satisfaction to the consumer.
A set of indifference curves is called an indifference map.
Features of indifference curve are:
(i) Downward sloping to the right
(ii) Convex to the origin
(iii) Two indifference curve can never intersect each - other.
(iv) Higher indifference curve represents higher level of satisfaction.
(v) Indifference curve can not touch either of the axis.
 Budget line shows all the possible combinations of the two goods
that canbe bought by a consumer with given income and prices of
goods.
Px
 Slope of the budget line is the price ratio, i.e., Py
 Slope of an indifference curve is called Marginal Rate of Substitution

(MRSxy ).
 A consumer is in equilibrium when he maximises his utility with his
given income and prices of the commodities. Equilibrium is reached at
the point of tangency between indifference curve and budget line.
Conditions for consumer equilibrium is:
MRSXY = Px .................. (1)

Py
Or MUx = Px ................... (2)

MUy Py
And Diminishing MRS
Supply
1. Definition of Supply: Supply of a commodity at a given price is the quantity of the
commodity which is actually offered for sale per unit of time
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2. There is difference between supply and stock. Supply is that part of stock which
is actually brought in the market for sale. In case of perishable goods there is no
differences between supply and stock.
3. The major factors affecting supply of a good are:

(i) Price of the good (Px)
(ii) Price of related goods (Pr)
(iii) Prices of the factors of production (Pf)
(iv) State of technology (T)
(v) Government policy (G) etc.
4. The law of supply states that there is a direct relationship between price and
quantity supplied of a commodity, other things remaining constant.
5. The supply schedule shows the different quantities of a commodity supplied by a
firm within a given period of time at different prices.
6. The data of supply schedule is plotted on price-quantity axes to derive the supply
curve.
7. Movement along a supply curve occurs due to changes in the price of good (PX) itself.
8. Shift of the supply curve occurs due to changes in factors affecting supply other
than commodity’s is own price.
9. Movement on supply curve can be expansion or contraction in supply whereas shift
of supply curve can be increase or decrease in supply.
10. The concept of Elasticity of supply (ES) was developed by Marshall. Elasticity of supply
is defined as the responsiveness of quantity supplied of a commodity due to change
in its own price.
∆Q P
Symbolically, ES= ∆P × Q
11. There are Five degree of ES:

(i) Perfectly inelastic supply (ES = 0)
(ii) Inelastic supply (0 < ES < 1)
(iii) Unitary elastic supply (ES = 1)
(iv) Elastic supply (1 < ES < ∞ )
(v) Perfectly elastic supply (ES = ∞ ).
12. Methods of measurement of elasticity of supply –

% change in quantity supplied
 Percentage method – es = % change in prive
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dq p
 Point elasticity method – es = ×
dp q
q1 – q2 P1 + P2
 Arc method – Es = q + q × P + P
1 2 1 2
13. Diagrammatic Method -

The rule is that
 if the supply curve passes through the point of origin, es is equal to unity,
 if the supply curve intercepts the x-axis, es is less than unity and
 if supply curve intercepts the y-axis, es is greater than unity.
 if supply curve is a vertical line parallel to y-axis es is equal to zero.
 if supply curve is a horizontal line parallel to y-axis es is equal to infinite.
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03 THEORY OF PRODUCTION
AND COST
Theory of Productions
1. Production means creation or addition of utilities which can be form utility, time
utility, place utility, knowledge utility and possession utility.
2. There are four factors of production namely, land, labour, capital and
organisation.
3. Land:-
 Land is a primary factor which includes besides physical territory, all natural
resources such as water, soil, climate, wind, sea, etc.
 Features of land are:
(a) Its supply is perfectly inelastic.
(b) It is imperishable (indestructible).
(c) It is a passive factor.
(d) It has perfectly inelastic supply (when taken as a whole).
(e) It is a free gift of nature.
(f) It is immobile.
(g) It has heterogeneous use.
4. Labour:-
Labour is any physical or mental exertion undertaken to create or produce goods
or services. Features of labour are:
(a) It is perishable.
(b) It is inseparable from a labourer.
(c) He sells his services and not himself.
(d) Supply curve of labour is backward bending.
(e) Labour is a live factor of production.
(f) It is an active factor.
(g) Labour is a man, not a machine.
(h) All labourers are not equally efficient.
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(i) Labour is mobile.

(j) Individual labour has weak bargaining power.
5. Capital is defined as man made goods that are used for further production of
wealth. It is produced means of production.
6. Capital formation or investment is defined as the surplus of production over

consumption in an accounting year which is further used for production.
 Significance of capital formation lies in the following points:
(a) It determines the growth rate of an economy.
(b) It increases production.
(c) It raises productive capacity.
(d) It raises employment opportunities.
 There are three stages of capital formation which are inter-related. These
are:
Stage I : Creation/Generation of Savings
Stage II: Mobilisation of Savings
Stage III: Investment of Savings.
7. Entrepreneur:-
 Entrepreneur is the person who organises. manages and coordinates all
factors of production .
 Functions of an entrepreneur are:
(a) Initiating a business enterprise and resource coordination
(b) To take advantage of changes in a dynamic economy
(c) To bring about innovations
(d) To bear uncertainties.
 Objectives of Entrepreneur –
I. Organic objectives II. Economic objectives
III. Social objectives IV. Human objectives
V. National objectives
 Problems of Enterprise - An enterprise faces a number of problems from
its inception, through its life time and till its closure. These may relate to
objective, location size, physical facilities, finance, organization structure,
marketing, legal formalities and industrial relations
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8. Factors of production can be divided into two categories – Fixed factors are those
factors whose quantity remains unchanged with change in output within a capacity
and variable factors are those the quantity of which change with a change in the
level of output.
9. Production function is the process of getting the maximum output from a given
quantity of inputs in a particular time period. It establishes physical input-output
relationship.
 There are two types of production function:
(a) Short-run production function: where some factors are in fixed
supply.
(b) Long-run production function: where all factors are in variable
supply.
10. Law of variable proportions

 The three concepts of production are total, average and marginal
product.
 Total product is aggregate of the quantity of a good produced by a firm with
the given inputs during a specified period of time, i.e TP=ΣMP
 Average product is the amount of output per unit of the variable factor
TP
employed, i.e. AP = Q
 Marginal product is the change in total product resulting from the
∆TP
employment of one more unit of variable factor, i.e. MP = ∆Q
 TP curve starts from the origin. Initially rises with an increasing rate, then
rises at a decreasing rate, reaches a maximum and then starts falling.
Both AP and MP curves are graphically derived from the TP curve. Both AP and
MP curves are inverted-U shaped. They have special relationship which is as
follows:
(a) When AP is rising, then MP > AP.
(b) When AP is at its maximum then MP=AP.
(c) When AP is falling then MP<AP.
Law of variable proportions states that ‘when total output of a commodity is

increased by adding units of a variable factor, while the quantities of other inputs
are held constant, the increase in total production i.e. marginal product becomes
after some point smaller and smaller’. The three product curves are drawn to
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graphically illustrate the law of variable proportions. The three stages are
partitioned into increasing, diminishing and negative returns.
A rational producer will always operate in Stage II. In this stage both AP and MP
are declining but positive. The reason for diminishing returns is optimal use of
fixed factor and imperfect substitution between factors. The law is applicable in
short run.
11. Law of Returns to Scale

 It is a long-run law.
 It states that ‘when all factors of production are increased in the same
proportion then output will increase. but the increase may be at an increasing
rate or constant rate or decreasing rate’.
 The three stages of law of return to scale are increasing, constant and
decreasing.
 Reasons behind increasing returns to scale are economies of scale which can
be internal or external, division of labour and specialization of activities.
 Reason behind decreasing returns to scale is diseconomies of scale which
can also be internal or external.
 Constant returns to scale operates when economies and diseconomies are
counter balanced.
12. Production Optimization

 It refers to cost minization. It explains producer’s equilibrium through
isoquant and iso-cost lines.
 Isoquants or product indifference curves show all those combinations of
two factors of production which give the same output to the producer.
 Isocost lines show various combinations of two factors which the firm can
buy with given expenditure or outlay.
 By combining Isoquants and isocost lines, a producer can find out the
combination of factors of production which is optimum i.e. the combination
of factors of production which would minimize his cost of production.
 For producing a given output, the tangency point of the relevant isoquant
with an isocost line represents the least cost combination of factors. i.e.
producer’s equilibrium.
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Theory of Cost
1. Cost analysis refers to the study of behaviour of cost in relation to one or more
production criteria. It is concerned with the financial aspects of production.
2. Opportunity Cost vs. Outlay Cost-: Opportunity cost is defined as the cost of
alternative opportunity given up or forgone. It is also called alternative cost or
transfer earnings. Outlay cost is actual expenditure of firms.
3. Explicit Cost vs. Implicit Cost:- Explicit cost is the actual money expenditure
incurred by a firm in the production process. It is also called direct cost or money
cost. Implicit cost is the cost of factors owned by the firm and used by the firm in
its own production process. It is also called imputed cost.
4. Direct Cost vs. Indirect Cost:- Direct cost can be traced to a particular product.
Indirect cost cannot be traced to a particular product.
5. Accounting Cost vs. Economic Cost:- Accounting costs are explicit cost or actual
cash payments. Economic cost is accounting cost plus implicit cost.
6. Incremental cost refers to the additional cost incurred by a firm as a result of a
business decision.
7. Sunk costs are already incurred once and for all, and cannot be recovered.
8. Historical cost refers to the cost incurred in the past on the acquisition of a
productive asset.
9. Replacement cost is the money expenditure that has to be incurred for replacing
an old asset.
10. Private costs are costs actually incurred or provided for by firms and are either
explicit or implicit.
11. Social cost refers to the total cost borne by the society on account of a business
activity and includes private cost and external cost.
12. Short-Run Cost Curves
(a) Short- run Total Costs -
 Total Cost is inverse-S shaped starting from the level of fixed cost.
 TFC is horizontal line parallel to X axis
 TVC is inverse S-shaped curve starting from origin
 Semi-variable cost is the cost which have a fixed element and a
variable element
 Stair-step cost which remain fixed over a certain range of output and
suddenly jump to a higher level when output goes beyond a given
limit and become constant for next range of output.
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(b) Short-run Average Costs -

 AFC, is fixed cost per unit of output produced. AFC curve has a
rectangular hyperbole shape.
 AVC is variable cost per unit of output produced. It is U shaped due to
law of variable proportion.
 AC is also called average total cost (ATC). It can be obtained in two
ways:
TC
ATC = or ATC = AFC + AVC. ATC is U-shaped curve.
Q
The reason behind its shape is the law of variable proportions.
(c) Marginal Cost -
MC is addition made to TC (or TVC) when one more unit of output is Produced.
∆TC
(MC = or (MCn = TCn - TCn-1)
∆Q
MC is the slope of the TC curve at each and every point. MC curve
is U-shaped reflecting the law of variable proportions.(MCn=TCn-TCn-1)
MC is independent from TFC. It is function of variable cost and can also be
∆TVC
calculated as MC =
∆Q
(d) Relationship between AC and MC
 When AC is falling, MC is below it. i.e. MC<AC
 When AC is rising, MC is above it. i.e. MC>AC
 When AC is minimum MC = AC.
13. Long run average Cost (LAC) curve is an envelope curve. It is also known as
planning curve. It envelopes infinite short run AC curves. Each point on LAC gives
the minimum cost per unit for corresponding level of output.
14. LAC curve is ‘U’ shaped curve because of operation of law of return to scale.
15. According to modern approach LAC curve is ‘L’ shaped curve because modern
approach believes technological advancement is possible during production
process over the period of time.
16. Economies of scale are of two kinds – External Economies of scale and Internal
Economies of Scale.
 External Economies of scale accrue to a firm due to factors which are external a firm.
 Internal Economies of scale accrue to a firm when it engages in large scale
production.
 Increase in scale, beyond the optimum level, results in Diseconomies of scale.
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04 PRICE DETERMINATION IN
DIFFERENT MARKETS
Meaning and Types of Markets

1. Definition:- A market is a complex set of activities by which potential buyers and
sellers interact to determine the price and quantity of a good or service.
2. Value and Price: Price is the value of good in terms of money and value is econom-
ic worth of a good expressed in relation to another good.
3. Market Structures:
On the basis of the area
 Local Market  Regional Market
 National Market  International Market
On the basis of time
 Very short period Market or Market Period Market
 Short-period Market
 Long Period Market
 Very Long Period or secular Period Market
On the basis of Nature of Transactions
 Spot Market
 Future Market
On the basis of Regulation
 Regulated Market
 Unregulated Market
On the basis of volume of business
 Wholesale Market
 Retail Market
On this basis of competition
 Perfect Competition  Monopoly
 Monopolistic Competition  Oligopoly
 Duopoly
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4. Revenue is the money payment received by a firm from the sale of a commodity.
 TR is the total or aggregate of proceeds to the firm from the sale of all the
units of a commodity. It is given as: TR = P × Q.
 AR is revenue per unit of output sold and is always equal to price .i.e., AR = P
[ AR =
TR
Q
=
P×Q
Q
=P [
 MR is the addition made to TR when one more unit of output is sold. It is
given as
MR = ∆TR or MRn = TRn – TRn-1.

∆Q
MR = AR 1– ) 1
e (
5. There are two basic principle governing all market conditions
(a) Firms should produce Only if TR ≥ TVC or AR ≥ AVC
(b) To be equilibrium i.e. to maximaize profits of minimize losses a firm should
produce at that level where MC=MR and MC must be rising.
Determination of Price
1. Equilibrium price is that price at which demand and supply equals each other
and quantity demanded and supplied at that price are regarded as equilibrium
quantity.
2. Shifts in demand and supply curves takes place due to changes in factors other
than price of the commodity.
3. A change in demand, supply remaining constant, leads to a change in the equilibrium
price. If demand increases, both equilibrium price and quantity will rise. If demand
decreases, both equilibrium price and quantity will fall.
4. A change in supply, demand remaining constant, leads to a change in the equilibrium
price and quantity. If Supply increases, price will fall and quantity will rise and if
supply decreases, price will rise and quantity will fall.
5. If both demand and supply change – There can be simultaneous changes in both
demand and supply and the equilibrium price will change according to the pro-
portionate change in demand and supply. Which may be –
 When both demand and supply increase, the equilibrium quantity increases
but the change in equilibrium price in uncertain.
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 When both demand and supply decrease, the equilibrium quantity decreas-
es but the change in equilibrium price is uncertain.
 When demand increases and supply decreases, the equilibrium price rises but
nothing certain can be said about the change in equilibrium quantity.
 When demand decreases and supply increases, the equilibrium price falls but
nothing certain can be said about the change in equilibrium quantity.
Price – Output Determination under Different Forms of Market

Perfect Competition
1. Perfect competition is a market situation where large number of sellers are selling
homogeneous product to large number of buyers at uniform price.
2. In perfect competition price is determined by the industry which individual firm
has accept as given and constant. Thus, firms under perfect competition is price
taker.
3. Short-run equilibrium of a firm –
Conditions for equilibrium –
(i) MC=MR and (ii) MC must be rising
4. In short run following three situations can take place –
(a) Supernormal or abnormal profits when price (AR)>ATC
(b) Normal profits when price(AR)=ATC and
(c) Losses when price (AR) < ATC
5. In the long – run, adjustment process takes place and all firms earn just normal
profits at the minimum point on LAC curve where SAC=LAC=SMC=LMC=P=AR=MR
Monopoly:-
1. Monopoly is a market situation where single seller is selling the product having
no substitute available in the market to large number of buyers at same or
differentiated prices.
2. Monopolist is a price maker and faces a downward sloping demand curve.
3. In short-run following three situations can take place –
(a) Supernormal or abnormal profits when price (AR)>ATC
(b) Normal profits when price(AR) = ATC and
(c) Losses when price (AR) < ATC
4. In a long-run monopolist can continue to enjoy super-normal profits because en-
try-exit is restricted.
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Pricing under Discriminating Monopoly:-

1. Discriminating monopoly is a situation where the monopolist charges different
prices from different buyers for same product.
2. Conditions necessary for price-discrimination:-
 Seller should have some monopoly power,
 Seller must be in a position to divide his total market in two or more than
two sub-markets,
 There should be effective separation of the market and
 Elasticity of demand should be different in different sub-markets.
3. Objective of Price discrimination:-
 To earn maximum profit
 To dispose of surplus stock
 To enjoy the economies of scale
 To capture foreign markets
 To secure equity through pricing
4. Degrees of price discrimination:-
 First degree-entire consumer surplus will be withdrawn
 Second degree a part of consumer surplus will be withdrawn
 Third degree price varies according to location or by customer segment
Pricing under Monopolistic Competition:-

1. Monopolistic competition is a market situation where large number of sellers are
selling slightly differentiated products to large number of buyers and price charged
by different sellers for their product is different.
2. In short-run following three situations can take place –
 Supernormal or abnormal profits when price (AR)>ATC
 Normal profits when price(AR)=ATC and
 Losses when price (AR) < ATC
3. In the long-run due to free entry and exit adjustment will take place and only
normal profits will be earned. But, at equilibrium level firm will have excess
capacity i.e. firm will be in equil. before optimum level of output.
Pricing under Oligopoly

1. Oligopoly is a market situation where few sellers (2 to 10) are selling slightly
differentiated or identical products to large number of buyers.
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2. The demand curve is not defined as there are action-reaction patterns among
firms. There is no general theory of pricing under oligopoly.
3. Sweezy’s Kinked demand curve model - It is based on the assumption that firms
match price cuts but not price rises. It rationalises price rigidity in oligopolistic
market. It shows that even if cost changes, prices charged for the commodity does
not change.
Distinguishing features of major types of markets

Market types
Assumption Pure Monopolistic
Oligopoly Monopoly
competition competition
Number of sellers Many Many A few One
(2 to 10)
Product differentiation None Slight None to Extreme
substantial
Price elasticity of demand of a firm Infinite Large Small Small
Degree of control over price None Some Some Very
considerable
Note:- Other Important Market Forms are –

(i) Duopoly – a subset of oligopoly, is a market situation in which there are only two
firms in the market.
(ii) Monopsony – is a market characterized by a single buyer of a product or service
and is mostly applicable to factor markets in which a single firm is the only buyer
of a factor.
(iii) Oligopsony – is a market characterized by a small number of large buyers and is
mostly relevant to factor markets.
(iv) Bilateral monopoly – is a market structure in which there is only a single buyer
and a single seller i.e. it is a combination of monopoly market and a monopsony
market.
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05 BUSINESS CYCLES
1. The rhythmic fluctuations in aggregate economic activity that an economy

experience over a period of time are called business cycles or trade cycles and are
manifested in fluctuations in measured of aggregate economic activity such as
gross national product, employment and income.
2. A typical business cycle has four distinct namely.

 Expansion (also called boom or upswing) characterized by increase in
national output and all other economic variables.
 Peak or boom or prosperity refers to the top or the highest point of the
business cycle.
 Contraction (also called downs-wing or recession) when there is fall in the
levels of investment, employment.
 Trough or depression occurs when the process of recession is complete and
there is severe contraction in the economic activities.
3. Economists use changes in a variety of activities to measures the business cycle and
to predict where the economy is headed towards. These are called indicators.
4. A leading indicator is a measurable economic factor that changes before the

economy starts to follow a particular patter or trend. i.e. they change before the
real output changes.
5. Variables that change after real output changes are called ‘Lagging indicators”.
6. Coincident economic indicator, also called concurrent indictors, coincide or occur

simultaneously with the business-cycle movements.
7. According to Keynes, fluctuations in economic activities are due to fluctuations in

aggregate effective demand.
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8. According to some economists, fluctuations in investments are the prime cause

of business cycles. Investment spending is considered to be the most volatile
component of the aggregate demand.
9. Fluctuations government spending with its impact on aggregate economic activity

result in business fluctuations.
10. Macroeconomic policies, (monetary and fiscal policies) also cause business cycle.
11. According to Hawtrey, trade cycle is purely monetary phenomenon. Unplanned

changes in the supply of money may cause business fluctuation in an economy.
12. According to Pigou, modern business activities are based on the anticipations of
business community and are affected by waves of optimism or pessimism.
13. According to Schumpeter, trade cycles occur as a result of innovations which take
place in the system from time to time.
14. Understanding what phase of the business cycle an economy is in and what
implications the current economic conditions have for their current and future
business activity, helps businesses to better anticipate the market and to respond
with greater alertness.
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QUESTION PAPER 1 (60 MARKS)
1. Which of the following statements is true?

(a) The services of a doctor are considered production
(b) Man can create matter
(c) The services of a housewife are considered production
(d) When a man creates a table, he creates matter.
2. The rhythmic fluctuation in aggregate economic activity that an economy

experiences over a period o time is called
(a) Business cycle (b) Recession (c) Contraction phase (d) Recovery
3. Economic in terms of Dynamic Growth and development defined by

(a) Adam Smith (b) Robbins
(c) Alfred Marshall (d) Paul A Samuelson
4. _____ state continues till there is full employment of resources and production is
at its maximum possible level using available productive resources.
(a) Expansion (b) Peak (c) Contraction (d) Depression
5. Which of the following is not a characteristics of labour?

(a) It is perishable
(b) It has weak bargaining power
(c) Labour and Labour power cannot be separated
(d) Labour is not mobile
6. Which phase is the highest point of the business Cycle

(a) Upswing (b) Downswing (c) Peak (d) Trough
7. Demand for a commodity refers to:

(a) Desire backed by ability to pay for the commodity
(b) Need for the commodity and willingness to pay for it
(c) The quantity of demanded of that commodity at a certain price
(d) The quantity of the commodity demanded at a certain price during any
particular period of time
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8. The price elasticity of demand of a firm in Pure competition is:

(a) Infinite (b) Finite (c) Large (d) Small
9. The ____ is the market where the commodities are bought and sold in bulk or
large quantities. Transactions generally take place between trades.
(a) Wholesale Market (b) Regulated Market
(c) Local Market (d) Retail Market
10. Which of the following is not the feature of Contraction?

(a) Decrease in input demand pulls input prices down
(b) Increase of wage and interest earns gradually decline
(c) Producers lower their prices in order to dispose of their inventories
(d) Business firms become optimistic about future state of economy
11. In every economic system, scarcity imposes limitations on

(a) Households, business firms, governments and the nation as a whole.
(b) Households and business firms, but not the governments.
(c) Local and state governments, but not the federal government
(d) Household and government but not business firms
12. Which of the following Competition is characterized by many sellers who are selling
identical products to many buyers?
(a) Perfect Competition (b) Monopolistic Competition
(c) Monopoly (d) Oligopoly
13. The term Ceteris Paribus refers to_____

(a) Other things being equal
(b) Other things also change
(c) Other things may change
(d) None of the above
14. Business economics is essentially a component of _________ as it includes

application of selected quantitative techniques.
(a) Pure Economics (b) Applies Economics
(c) Statistical Economics (d) None of the above
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15. The most feature of business cycle

(a) Pervasive nature (b) Regular length
(c) Periodic intensity (d) None of these
16. A good which cannot be consumed more than once is known as

(a) Durable goods (b) Non-Durable goods
(c) Producer goods (d) None of the above
17. Macro economics is also known as ______ economics.

(a) Applied (b) Aggregate
(c) Micro (d) Experimental
18. ______Mobilize factors of production, combines them in the right proportion,

initiates the process of production and bears the risk involved in it.
(a) Businessman (b) Manager
(c) CEO (d) Entrepreneur
19. An increase in the demand for computers, other things remaining same, will:
(a) Increase the number of computers bought.
(b) Decrease the price but increase the number of computers bought.
(c) Increase the price of computers.
(d) Increase the price and numbers of computers bought.
20. Average revenue is equal to.

(a) The change in P & due to a one unit change in output
(b) Nothing but price of one unit of output
(c) The change in quantity divided by change in price
(d) Graphically it denotes the firm’s supply curve
21. ____ has have explained the law of demand in terms of Substitution Effect and
income effect
(a) Marshall (b) Hicks
(c) Allen (d) Both (a) & (b)
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22. Assume that when price is Rs. 20, the quantity demanded is 15 units, and when
price is Rs. 18 the quantity demanded is 16units. Based on this information, what
is the marginal revenue resulting from an increase in output to 16 units?
(a) Rs. 18 (b) Rs. 16 (c) Rs. 12 (d) Rs. 28
23. A leading indicator is

(a) A variable that tends to move along with the level of economic activity.
(b) A variable that tends to move in advance of aggregate economic activity
(c) A variable that tends to move consequent on the level of aggregate economic
activity
24. Movement along the demand curve may be due to _________

(a) Expansion of demand (b) Contraction of Demand
(c) Increase / Decrease in Demand (d) Both (a) & (b)
25. When total Revenue (TR) is at the peak Marginal Revenues is equal to
(a) Zero (b) Positive (c) Negative (d) More than one
26. Which of the following macro economic variables would you include in an index of
leading economic indicators
(a) Employment (b) Inflation
(c) Real interest Rate (d) Residential investment
27. Which of the following statements about price elasticity of demand is correct
(a) Price elasticity of demand is a measure of how much the quantity demanded
of a good responds to a change in the price of that goods.
(b) Price elasticity of demand is computed as the percentage change in quantity
demanded divided by the percentage change in price.
(c) Price elasticity of demand in the long run would be different from that of the
short run.
(d) All of the above.
28. In a straight line demand curve the price elasticity at the middle point is equal to
(a) 0 (b) 1 (c) >1 (d) <1
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29. If regardless of changes in its price the quantity demanded of a good remains
unchanged, when the demand curve for the good will be.
(a) Horizontal (b) Vertical
(c) Positively sloped (d) Negative sloped
30. Which of the following statement is False?

(a) No economy follows a perfectly timed Cycle.
(b) Business Cycles vary in intensity and length
(c) There is no set pattern which Business Cycle follows
(d) Every Business Cycle has relatively longer period
31. A fixed input is defined as

(a) That input whose quantity can be quickly changed in the short run in response
to the desire of the company to change its production
(b) That inputs whose quantity cannot be quickly changed in the short run, in
response to the desire of the company to change its production
(c) That input whose quantities can be easily changed in response to the desire
to increase or reduce the level of production
(d) That input whose demand can be easily changed in response to the desire to
increase or reduce the level of production
32. As per behavioural Principal, It will be profitable for the firm to expand output
whenever marginal _____is ________than Marginal______.
(a) Cost, greater, Revenue (b) Revenue, greater, Cost
(c) Revenue, less, Cost (d) None of the above
33. Which of the following is not the scope of business economics?

(a) Cost standard (b) Cost analysis
(c) Demand analysis (d) Inventory management
34. Suppose a consumer’s income increases from Rs.30000 to Rs. 36000 A a result the
consumer increases her purchases of compact discs (CDs) from 25 CDs to 30 CDs.
What is the consumers income elasticity of demand for CDs? (Use ARC Elasticity
method)
(a) 0.5 (b) 1.0 (c) 1.5 (d) 2.0
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35. With a given supply curve, a decrease in demand curve

(a) An overall decrease in price but an increase in equilibrium quantity
(b) An overall increase in price but a decrease in equilibrium quantity
(c) An overall decrease in price and a decrease in equilibrium quantity
(d) No change in overall price but a reduction in equilibrium quantity
36. Who gave the positive aspect of science

(a) Alfred Marshall (b) A.C. Pigou
(c) Adam Smith (d) Robbins
37. Cross elasticity of demand refers to the quantities of commodity which will e
demanded in response to _____, keeping other things remaining the same.
(a) Income of consumer
(b) Price of same commodity
(c) Price of related commodity
(d) Both (a) & (b)
38. The zero advertisement Elasticity represent:

(a) Demand responds proportionately
(b) Demand does not respond proportionately
(c) Demand does not respond at all
39. Suppose the first four unit of a variable input generate corresponding total output of 150,
200, 350, 550, What will be the marginal product of the third unit of input ?
(a) 50 (b) 100 (c) 150 (d) 200
40. If supply increase in a greater proportion than demand

(a) The new equilibrium price and quantity will be greater than the original
equilibrium price and quantity.
(b) The new equilibrium price will be greater than the original equilibrium price
but equilibrium price will be higher.
(c) The new equilibrium price and quantity will be lower than the original
equilibrium price and quantity.
(d) The new equilibrium price will be lower than the original equilibrium and
the new equilibrium will be higher.
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41. Of the following who developed the Delphi technique of demand for casting ?
(a) Olaf Helmer (b) David Richardson
(c) Michael Porter (d) J.M. Keynes
42. Business cycle have______ Consequences on the wellbeing of the society

(a) Some (b) Serious (c) No (d) Moderate
43. Wants may arise due to _____ cause

(a) Elementary (b) Psychological
(c) Internal (d) Both (a) & (b)
44. Diminishing marginal return for the first our units of a variable input is exhibited by
the total product sequence:
(a) 50, 50, 50, 50 (b) 50, 110,180, 260
(c) 50, 100, 150, 200 (d) 50, 90, 120, 140
45. Which of the following is not an essential condition of pure competition?

(a) Large number of buyers and sellers
(b) Homogeneous product
(c) Freedom of entry
(d) Absence of transport
46. Which of the following is true with MU?

(a) When MU is positive, Total utility raises at a diminishing rate
(b) When marginal utility is zero, total utility is maximum
(c) When marginal utility is negative, total utility is diminishing
(d) All of the above
47. Business Economists use methods ______ to maintain optimum stock of inventories
(a) ABC Analysis (b) Simple simulation exercise
(c) Mathematical models (d) All of the above
48. Suppose that the demand curve for the XYZ Co. Slopes downward and to the right.
We can conclude Suppose that the demand curve for the XYZ Co. Slopes downward
and to the right. We can conclude
103
(a) The firm operates in perfectly competitive market

(b) The firm can sell all that it was to at the established market price
(c) The XYZ Co. Is not a price taker in the market because it must lower price to
sell additional units of output.
(d) The XYZ co. Will not be maximize profits because price and revenue are
subject to change.
49. Increase return to scale occurs due to

(a) Economies of scale (b) Specialization
(c) Indivisibility of factors (d) All of these
50. A capitalist economy consist of

(a) Central planning authority
(b) A mechanism to decide as what how and for whom to produce
(c) Both (a) and (b)
51. Marshall defined the concept of consume surplus as the____

(a) Area covered in between the average revenue an marginal revenue curves
(b) Area inside the budget line
(c) Difference between the minimum amount a person is willing to pay for a
good and its market price
(d) Difference between the maximum amount a person is willing to pay for a
good and the amount he actually pays
52. The internal cause of business cycle is

(a) Technology shocks
(b) Fluctuation in effective demand
(c) Post war reconstruction
(d) Population Growth
53. One of the essential conditions of Perfect Competition is

(a) Product differentiation
(b) Many sellers and few buyer
(c) Only one price for identical goods at any one time
(d) Multiplicity of price for identical product at any one time
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54. A free market economy solves its central problems through _______
(a) Planning authority (b) Market mechanism
(c) Both (d) None
55. According to which economist trade cycle is a purely monetary for phenomenon
(a) Schumpeter (b) Pigou (c) Hawtrey (d) Marshall
56. Freedom of choice is the advantage of

(a) Socialism (b) Capitalism
(c) Communism (d) None of the above
57. Under which of the following forms of market structure does a firm have no control
over the price of its product
(a) Monopoly (b) Monopolistic Completion
(c) Oligopoly (d) Perfect Competition
58. Price under perfect competition is determined by the

(a) Firms (b) Industry (c) Government (d) Society
59. Which External Factor affect the business cycle?

(a) Population Growth
(b) Variation in Government sending
(c) Money Supply
(d) Macro-economic policies
60. Under_______ the consumers have no freedom of choice

(a) Capitalist
(b) Socialist
(c) Mixed
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QUESTION PAPER 2 (60 MARKS)
1. The central problems of an economy arises because of ___________

(a) Unlimited wants
(b) Scares resources having alternative uses
(c) Limited wants and unlimited resources
(d) Both (a) and (b)
2. Normative economics is ______in nature

(a) Modern (b) Descriptive
(c) Prescriptive (d) None of the above
3. Market demand is the sum total of___

(a) All quantities that producers can produce
(b) All quantities actually sold in the market
(c) All quantities demanded by individual household and consumers
(d) All the above
4. If the demand for a product is independent of the demand for other goods, it is
called as ______
(a) Company (b) Industry
(c) Autonomous (d) Derived
5. If quantity demanded of good ‘X ‘ is plotted against the price of its substitute good
‘Y’ , the demand curve will be _________
(a) Vertical Straight line (b) Positively sloped
(c) Horizontal Straight line (d) Negatively sloped
6. A Giffen good is one which a small change in price results in _________

(a) Zero income effect out weighted by a positive substitution effect
(b) Zero income effect being equal to Zero substitution effect
(c) Negative income effect weighed by a positive substitution effect
(d) None of these
106
7. A demand curve is perfectly inelastic if ___________

(a) A rise in price causes a fall in quantity demanded
(b) A fall in price causes rise in sellers total receipts
(c) The commodity in question is very perishable
(d) A change in price does not change quantity demanded
8. Socialistic Economy
(i) Ensure minimum standard of living to all people
(ii) Restricts freedom of individuals
(iii) Does not give importance of personal efficiency and productivity
(iv) Emphasis on equal distribution of wealth
(a) (i) and (ii) (b) (i), (ii) and (iv)
(c) (i), (ii), (iii) and (iv) (d) (ii) and (iv)
9. The factor which mobilize land, labour and capital; combines them in the right
proportion and then organizes the production activity is __
(a) Owner (b) Labour (c) Manager (d) Entrepreneur
10. When there is a fixed factor and a variable factor, then the law would be___
(a) Law of increasing returns to scale
(b) Law of constant returns to scale
(c) Law of decreasing returns to scale
(d) Law of variable proportion
11. When MP is at a Maximum __

(a) AP = MP and TP is rising (b) AP < MP and TP is rising
(c) AP > MP and TP are rising (d) AP and TP are falling
12. A right – angled isoquant denotes that the ____

(a) Two factors are perfect substitute of each other
(b) Two factor are imperfect substitute of other
(c) Two factor are perfect complements
(d) Position between perfect substitutes and perfect complements
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13. If the quantity demanded of Product X increases from 8 to 12 units in response to

an increase in the price of product Y from Rs. 23 to Rs. 27, the Cross Elasticity of
Demand for X with respect to Price of Y is approximately -
(a) 0.35 and X and Y is Complements (b) 0.35 and X and Y are Substitutes
(c) 2.5 and X and Y are Complements (d) 2.5 and X and Y are Substitutes
14. Increase in the size of as firm and production capacity determines__________

(a) Short-run production function (b) Long –run production function
(c) Fixed production function (d) No one of the above
15. If increase in demand is more than increase in supply then __________

(a) Equilibrium price will fall but equilibrium quantity will increase
(b) Equilibrium price will increase but Equilibrium quantity will decrease
(c) Both Equilibrium price and Equilibrium quantity will increase
(d) Both Equilibrium price and Equilibrium quantity will decrease
16. Under perfect competition the price of commodity

(a) Can be controlled by a firm
(b) Cannot be controlled by a firm
(c) Controlled up for some extent by a firm
17. If a monopolist resorts to price discrimination, price will be higher in the market
where demand is-
(a) Unitary elastic (b) Elastic (c) Inelastic (d) None of these
18. Which of the following is not a characteristic of a “price taker”?

(a) TR = P X Q (b) AR = Price
(c) Negatively sloped demand curve (d) Marginal Revenue = Price
19. In Expansion phase all but one of the following characteristic

(a) Increase in national output
(b) Increase in consumer spending
(c) Excess production capacity of industries
(d) Expansion of bank credit
108
20. During depression _______ industry suffer from excess production capacity
(a) Capital goods (b) Consumer durable goods
(c) Non-durable goods (d) Both ‘a’ and ‘b’
21. Which of the following describe best a typical trade cycle?

(a) Economic expansions are followed by economic contractions
(b) Inflation is followed by rising income and employment
(c) Economic expansion are followed by economic growth and development
(d) Stagflation followed by rising employment
22. Business cycles appear due to present fluctuations in price affecting the output
and employment in future is _____
(a) Cobweb theory by Nicholas Kaldor
(b) Ordinal theory by Allen & Hicks
(c) Cobweb theory by JM Keyens
23. At all level of output AR = MR in _____

(a) A perfect competition market (b) A monopoly market
(c) A oligopoly market (d) All the above
24. Charging different prices by monopolists’ to customers in geographically separate

market is a ___ degree of price discrimination
(a) First
(b) Second
(c) Third
(d) Price discrimination is not separate markets
25. A monopolistic competitive firm has a position of ATC = price in the _________
(a) Short run equilibrium (b) Very short run equilibrium
(c) Long run equilibrium (d) Any period of time
26. The demand curve of a commodity faced by a competitive firm is ________

(a) Very elastic (b) Perfectly inelastic
(c) Very inelastic (d) Perfectly elastic
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27. Which one of the following is not a determinate of the firm’s cost function
(a) Price of firm’s output (b) Production function
(c) Price of Labour (d) Rent paid for use of building
28. All but one are true about opportunity cost. Which one is not true?
(a) Opportunity costs are recorded in the books of account
(b) Opportunity costs are applicable to those factor which have alternative uses
(c) Opportunity cost is also known as ‘alternative cost’
(d) Opportunity cost is also known as implicit cost
29. When a firm’s dependence on external sources of funds increase and it finds
difficulty to repay, it is a case of ___________
(a) Financial diseconomies (b) Financial economies
(c) Managerial diseconomies (d) Technical diseconomies
30. The slope of isocost line with factor ‘Y’ on the vertical axis and factor ‘X’ on the
horizontal axis is-
Py X y Px
(a) (b) (c) (d)
Px Y x Py
31. In order to increases output, if both inputs must be increased in fixed proportion, it
follow that the inputs are ___________ of each other.
(a) Perfect substitutes (b) Perfect complements
(c) Imperfect substitutes (d) Imperfect complements
32. Reason for fall in both AP and MP curve is _________

(a) Under utilization of the fixed factor
(b) Over utilization of the fixed factor
(c) Under utilization of the variable
(d) Full utilization of the variable
33. The stage of production where the marginal product is greater than the average
product is ___________
(a) Stage if increasing returns (b) Stage of diminishing returns
(c) Stage of negative returns (d) Stage of constant returns
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34. Which of the following statement is incorrect?

(a) Mobilization of savings is done through network of banking and other
financial institutions
(b) Land lacks geographical mobility but has occupational mobility
(c) Entrepreneur is also called the organizer, the manager or the risk taker
(d) Labour can be stored
35. Economic utility may be created or added

(a) By changing the form of raw material into finished goods
(b) By transporting goods from one place to another
(c) By making things available when they are required
(d) All the above
36. Utility of a good can be termed as the _____

(a) Monetary value a consumer gains from consuming a particular good
(b) The difference between what a consumers is willing to pay and actually pays
(c) The satisfaction a consumer derives from the consumption of a particular good
(d) he desire to consume a good
37. The price that a consumer is ready to pay for a commodity represents the utility he
is expecting from the commodity means___
(a) Utility is measurable (b) Utility is not measurable
(c) Money is the measuring rod of utility (d) Both ‘a’ and ‘c’
38. Which of the following statements regarding Perfect Competition is false?

(a) The Marginal Revenye Curve is a straight line
(b) In the short run, Fixed Costs remain constant and cannot be changed
(c) The Firm becomes a Price - Taker and tries to achieve equilibrium
(d) Marginal Revenue is more than the price
39. When there is an infinite demand at a particular price and with a slight rise in the
price demand changes unlimited then _____
(a) Demand by commodity is perfectly elastic
(b) Ed=∞
(c) Demand curve is horizontal straight line parallel to X – axis
(d) All the above
111
40. Downward slope of the demand curve shows___

(a) Positive relationship between price and quantity demanded
(b) Inverse relationship between price and quantity demanded
(c) No relationship between price and quantity demanded
41. When the numerical value of cross elasticity between two goods is very high, it
means
(a) The goods are perfect complements and therefore have to be used together.
(b) The goods are perfect substitutes and can be used with ease in place of one
another.
(c) There is a high degree of substitutability between the two goods.
(d) The goods are neutral and therefore cannot be considered as substitutes.
42. The consumer is in equilibrium at a point where the budget line :

(a) is above an indifference curve
(b) is below an indifference curve
(c) is tangent to an indifference curve
(d) cuts an indifference curve
43. The marginal product of a variable input is best described as :

(a) Total product divided by the number of units of variable input.
(b) the additional output resulting from a one unit increase in the variable input.
(c) the additional output resulting from a one unit increase in both the variable
and fixed inputs.
(d) the ratio of the amount of the variable input that is being used to the amount
of the fixed input that is being used.
44. Which of the following is an example of “explicit cost “?

(a) The wages a proprietor could have made by working as an employee of a
large firm.
(b) The income that could have been earned in alternative uses by the resources
owned by the firm.
(c) The payment of wages by the firm
(d) The normal profit earned by a firm
112
45. The negatively – sloped (i.e. falling) part of the long – run average total cost curve
is due to which of the following ?
(a) Diseconomies of scale
(b) Diminishing returns
(c) The difficulties encountered in coordinating the many activities of a large
firm.
(d) The increase in productivity that results from specialization.
46. It is assumed in economic theory that

(a) decision making within the firm is usually undertaken by managers, but
never by the owners.
(b) the ultimate goal of the firm is to maximize profits, regardless of firm size or
type of business organization.
(c) as the firm’s size increases, so do its goals.
(d) the basic decision making unit of any firm is its owners.
47. Discriminating monopoly implies that the monopolist charges different prices for
his commodity :
(a) from different groups of consumers (b) for different uses
(c) at different places (d) Any of the above
48. The kinked demand curve model of oligopoly assumes that

(a) the response (of consumers) to price increase is less than the response to
price decrease
(b) the response (of consumers) to price increase is more than the response to a
price decrease.
(c) the elasticity of demand is constant regardless of whether price increases or
decreases.
(d) the elasticity of demand is perfectly elastic if price increases and perfectly
inelastic if price decreases.
49. The different phases of a business cycle

(a) Do not have the same length and severity
(b) expansion phase always last more than ten years
(c) last many years and are difficult to get over in short periods
113
50. The most probable outcome of an increase in the money supply is

(a) interest rates to rise, investment spending to rise, and aggregate demand to
rise
(b) interest rates to rise, investment spending to fall, and aggregate demand to
fall
(c) interest rates to fall, investment spending to rise, and aggregate demand to
rise
(d) interest rates to fall, investment spending to fall, and aggregate demand to
fall
51. The term “Ceteris Paribus” in the Laws of Demand means ____
(a) All factors except one of remain constant
(b) All other factor remains constant
(c) All factor are variable
52. To enable Employees enjoy a good standard of living and maintain work - life
balance, is a
(a) Social Objective (b) Human Objective
(c) National Objective (d) Economic Objective
53. To measure price elasticity over large changes in price we use ___
(a) Point elasticity method (b) Arc elasticity method
(c) Income elasticity method (d) None of the above
54. The risks which can be anticipated and can be insured against are called ________
(a) Insurable risks (b) Non-insurable risks
(c) Unforeseeable risks (d) None of the above
55. Which of the following is an economic activity?

(a) Playing friendly cricket match
(b) Teaching one’s own daughter at home
(c) Manufacturing Chairs at subsidized rate
(d) A Housewife doing household duties
114
56. Which of the following statements reveal the diminishing returns?

(a) The MP of a factor is constant
(b) The MP of a factor is positive and rising
(c) The MP of a factor is falling and negative
(d) The MP of a factor is positive but falling
57. Opportunity costs find its application in situations ___________

(a) For short run and long run decision making
(b) Capital expenditure budgeting
(c) When the supply of input factor is strictly limited
(d) All the above
58. Doctors, lawyers, consultants, services like power supply, telecommunication fees
to different patients/clients. This is a _______ price discrimination
(a) First degree (b) Second degree
(c) Third degree (d) Both second and third degree
59. The sale of branded goods is common situation is case of _______

(a) Perfect competition (b) Monopolistic competition
(c) Monopoly (d) Pure competition
60. If any unemployment exits during expansion phase of business cycle, it is ____
unemployment
(a) Voluntary and frictional (b) Technological and structural
(c) Frictional and structural (d) Structural and involuntary
115

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ECONOMICS

2. Economics has been defined in four different ways:

3. Economics as a Science: Economics is a science where various facts are systematically

4. Economics as an Art: Economics is an art as it has several branches which give

6. Microeconomics deals with behavior of individual decision making units such as

7. There are two methods of constructing an economic theory

10. Business Economics is a normative science which is interdisciplinary and pragmatic

13. Business Economics also considers Macroeconomics related to economic systems,

16. There are three forms of economic organization:

02 THEORY OF DEMAND AND

7. Movement along a demand curve (change in quantity demanded) occurs due to

9. Price Elasticity of Demand (Ep) measures percentage change in quantity demanded

10. The major determinants of price elasticity of demand are:

11. There are five degrees of ep.

12. Measurement of Price Elasticity of Demand:-

ep= Lower segment of the demand curve

13. Income Elasticity of Demand measures % ag changes in demand due to % ag

14. Cross-Elasticity of Demand (ec ): It measures % ag changes in the quantity demanded

15. Advertisement elasticity of sales or promotional elasticity of demand measures

16. Demand Distinctions

18. Methods of Demand Forecasting

 Expert Opinion Method

Theory of Consumer’s Behaviour

2. Marginal Utility Theory:

3. Indifference Curve Theory

 Slope of an indifference curve is called Marginal Rate of Substitution

MRSXY = Px .................. (1)

Or MUx = Px ................... (2)

3. The major factors affecting supply of a good are:

11. There are Five degree of ES:

12. Methods of measurement of elasticity of supply –

13. Diagrammatic Method -

(i) Labour is mobile.

6. Capital formation or investment is defined as the surplus of production over

10. Law of variable proportions

Law of variable proportions states that ‘when total output of a commodity is

11. Law of Returns to Scale

12. Production Optimization

(b) Short-run Average Costs -

Meaning and Types of Markets

MR = ∆TR or MRn = TRn – TRn-1.

Price – Output Determination under Different Forms of Market

Pricing under Discriminating Monopoly:-

Pricing under Monopolistic Competition:-

Pricing under Oligopoly

Distinguishing features of major types of markets

Note:- Other Important Market Forms are –

1. The rhythmic fluctuations in aggregate economic activity that an economy

2. A typical business cycle has four distinct namely.

4. A leading indicator is a measurable economic factor that changes before the

6. Coincident economic indicator, also called concurrent indictors, coincide or occur

7. According to Keynes, fluctuations in economic activities are due to fluctuations in

8. According to some economists, fluctuations in investments are the prime cause

9. Fluctuations government spending with its impact on aggregate economic activity

11. According to Hawtrey, trade cycle is purely monetary phenomenon. Unplanned

QUESTION PAPER 1 (60 MARKS)

1. Which of the following statements is true?

2. The rhythmic fluctuation in aggregate economic activity that an economy

3. Economic in terms of Dynamic Growth and development defined by