Economics in Everyday Life

Important Questions and Answers

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Module I
Basic Concepts and the Methods of Economics
What is Economics? (2 Marks)
• Economics is a social science that examines the production, distribution, and
consumption of goods and services. It focuses on understanding human behavior and
decision-making in the context of resource scarcity.
• The term economics comes from the Ancient Greek word “oikonomia” which
means“ household management”
DEFINITION OF ECONOMICS (2 Marks for any Definition)
• Wealth Definition: According to Adam Smith “Economics is an inquiry in to the
nature and causes of the wealth of nation”-Wealth of Nation- 1776
• Welfare Definition- Alfred Marshall-Principles of Economics
• Scarcity Definition: The most generally accepted definition of Economics- Lionel
Robbins, 1932
• “Economics is a science that studies human behavior as a relationship between ends
and scare means which have alternative uses”
• Human wants are unlimited.
• Resources are limited.
• Resources have alternative uses.
• Growth Definition-Paul Samuelson-Economics
Basic problems of an economy and how different economic systems solve the basic
problems (10 Marks)
Basic problems of an economy (5 Marks)
• What to produce
• How to produce
• For whom to produce
• Every economy has unlimited wants and limited resources to fulfill these wants.
• Therefor every economy has to make a choice between different wants.
• This problem of making choice is known as economic problem. As it is faced by every
economy, it is called central problem of an economy.
• Main central problems are asunder:
What to produce?
• A major problem before a country is to decide what commodities should be produced
and in what quantities.
 • It has to make choice among different types of goods, for instance: choice between
consumption goods and capital goods, choice between mass goods and luxury goods,
choice between private goods and public goods.
How to produce?
• The second major problem before a country is to decide the manner in which goods
and services should be produced. In other words, the problem is to decide between
labour-intensive and capital intensive technique in production.
• When the proportion of labour is high, labour-intensive technique should be preferred
and when the proportion of capital is high, then capital-intensive technique should be
preferred.
For whom to produce?
• The third important problem before an economy is to decide for whom to be produced
or who should consume how much. (Richer section or poorer section of society).
• This problem refers to the decision regarding the share of different factors of
production in the total national product of the country.
• This is basically the problem of distribution of income and wealth in the society.
Problem of Efficiency: Efficiency refers to the optimal use of resources so that the
economy produces the maximum possible output with the given resources. In other
words, efficiency means producing as much as possible without wasting any resources.
Problem of Fuller Utilization of Resources: The problem of fuller utilization involves
using all available resources to their maximum potential in the production of goods and
services.
Problem of Growth of Resources: This problem concerns whether the productive capacity
of an economy is increasing, remaining the same, or declining over time. Growth of
resources is necessary for economic development.
Each of these problems—efficiency, full utilization, and growth—focuses on maximizing
resources, meeting consumer needs, and ensuring long-term economic sustainability.
How the basic problems are solved by different economic systems (5 Marks)
Economic Systems
• Market Economy
• Centrally Planned Economy
• Mixed Economy

Parameters Market Centrally Mixed

Economy Planned Economy
Economy
 Determination of Demand and The central Prices is
price supply in the authority that is influenced by
market Government both demand
determine the decides prices of and supply as
price goods and well as
services Government

Property Ownership vest Public Property is

ownership with private ownership of owned by public
entities property and private
entities

Production Production is The production Production in a

undertaken only is made for mixed economy
with a profit improving the includes both
motive social welfare profit motive
and social
welfare

Competition There exist No competition Only entities in

competition in the market private sector
among entities in owing to state experience
the market ownership of competition
firms

Government Less role to The Govt. Govt. has a full

intervention Govt. retains full holding in
control over public sector
firms but a limited
role in private
sector

Microeconomics vs Macroeconomics (5 Marks)

Ragnar Frisch (1895–1973) was a Norwegian economist, widely known as one of the
founders of modern economics. He played a key role in formalizing the distinction between
microeconomics and macroeconomics (1933),
Microeconomics: Microeconomics focuses on the decisions of individual households and
firms and how they interact in specific markets.
Macroeconomics: Macroeconomics, on the other hand, looks at the economy as a whole.
 Aspect Microeconomics Macroeconomics
Scope Deals with individual units such Focuses on the economy as a
as consumers, firms, or whole (national or global level).
industries.
Key Focus Pricing, demand, supply, Growth, inflation, unemployment,
Areas production, and market and government policies.
equilibrium.
Decision Households, firms, and individual Governments, central banks, and
Makers markets. international organizations.
Examples How the price of coffee affects How inflation impacts the
consumer behavior. purchasing power of a country.
Main - Demand and Supply Theory - Keynesian Economics
Theories - Utility and Profit Maximization - Monetarism

- Market Structures (perfect - Business Cycle Theories

competition, monopoly, etc.)
Application Helps in setting prices, improving Involves policy decisions like
business efficiency, and setting interest rates or planning
understanding market fiscal stimulus packages.
competition.
Approach Bottom-up (starts from individual Top-down (focuses on the big
agents). picture first).
Tools Elasticity, Marginal Analysis, and GDP, Inflation Rate, Employment
Consumer Theory. Statistics, Interest Rates.
Policy Useful for businesses to optimize Used for framing economic
Implications production and pricing. policies to stabilize the economy.

Module II
Microeconomic Concepts
Demand (2 Marks)
• Demand for a commodity is consumer’s desire backed by ability and willingness to
pay for it.
Demand vs Quantity Demanded (2 Marks)
• Demand: It refers to various quantities that a consumer plan to buy at various prices
of a good during a period of time.
• Quantity Demand: It is the amount of good or service which consumers plan to buy at
a particular price.
 Price Quantity

1 5

2 3

3 2

P Q

1 5

• Determination of the demand (2 Marks)

Individual Demand for a commodity depends on
• Price
• Income of consumer
• Price of related goods
• Taste and preference
• Advertising
• Price expectations, etc..
Demand function (2 marks)
• Demand function is the functional relationship between demand and factors
influencing demand (that is determinants of demand)
Qd = f(Px, y, Pr, T, A, E )
Law of Demand
• Other things remain constant, quantity demand of a commodity is inversely related to
its price.
• When the price of the commodity falls then quantity demand will rise and if the price
of the commodity rises , its quantity demanded will decline.
Demand Schedule & Demand Curve (2/5 Marks)
• A demand schedule is a table that shows the quantity of a good or service that
consumers are willing to buy at different prices. A demand curve is a graphical
representation of a demand schedule, showing the relationship between the price of a
good or service and the quantity of it that consumers are willing to buy.
Supply (2 Marks)
• Supply refers to the quantity of a good or service that producers are willing and
able to offer for sale at various prices over a given period. It reflects the
relationship between price and the quantity supplied, holding other factors
constant.
Supply Function (2 Marks)
The supply function is a mathematical representation that shows the relationship between
the quantity supplied of a good and its price, as well as other influencing factors (such as
production costs, technology, and number of sellers).
Qs = f(P, C, T, N, ... )
Where:
( Qs ) = Quantity supplied
( P ) = Price of the good
( C ) = Cost of production (including wages, raw materials, etc.)
( T ) = Technology level
( N ) = Number of sellers in the market
- Other factors may also include government policies, taxes, and subsidies.
Supply Curve (2 Marks)
The supply curve is a graphical representation of the supply function, depicting the
relationship between the price of a good and the quantity supplied. It typically slopes
upward from left to right, indicating that as the price increases, the quantity supplied also
increases.
Law of Supply (2 Marks)
It states that, all else being equal, an increase in price results in an increase in quantity
supplied. Conversely, a decrease in price leads to a decrease in quantity supplied.
Supply Schedule (2 Marks)
A supply schedule is a tabular representation that shows the quantity of a good that
producers are willing to supply at different price levels over a specific period. It provides a
clear view of how supply changes with varying prices.

Market equilibrium (2 Marks)

Market equilibrium is a key concept in economics that occurs when the quantity of a good
or service demanded by consumers equals the quantity supplied by producers. At this point,
the market is in balance, and there is no tendency for the price to change unless an external
factor influences supply or demand.
Elasticity of Demand
• It is the degree of responsiveness of demand for a commodity to change in its
determinants.
• Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand

Price Elasticity of demand (10 Marks)

• Price elasticity of demand measures the degree of responsiveness or sensitiveness of
the demand for a given commodity to a given change in the price of the commodity.
• Suppose the price of cloth falls by 10 percent and its quantity demanded expands by
15 percent, the demand is more responsive or sensitive to a change in price or price
elasticity of demand of the given commodity is high.
• On the opposite, if 10 percent fall in the price of cloth leads to just 4 percent rise in its
demand, the price elasticity of demand is said to be low.
• It is the ratio of percentage change in quantity demanded to the percentage
change in price of the commodity.

% 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝

𝑬𝒅 =
%𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞
∆𝐐 𝑷
𝑬𝒅 = 𝒙
∆𝐏 𝑸

Types (Degrees) of Price Elasticity of Demand

a) Perfectly Elastic Demand (Ed=)
b) Perfectly Inelastic Demand (Ed=0)
c) Elastic (More elastic) demand (Ed1)
d) Unitary Elastic Demand (Ed=1)
e) Inelastic (Less elastic) Demand (Ed1)
Perfectly Elastic Demand (Ed=)
• A given change in price will leads to an infinite change in quantity demanded
• Also known as infinitely elastic demand.
• Demand curve will be a horizontal straight line.
• Demand curve of competitive market
Perfectly Inelastic Demand (Ed=0)
• Quantity demanded of a commodity will be zero with whatever changes in its price.
• Demand curve- Vertical straight line.
• Demand for medicine

Elastic (More elastic) demand (Ed1)

• A given change in price will leads to a more than proportionate change in quantity
demanded.
• 10% change in price leads to 15% change in QD
• Demand curve will be flatter.

Unitary Elastic Demand (Ed=1)

• A given change in price will leads to an equal proportionate change in QD.
• 10% change in price leads to same 10% change in Demand.
• Shape of Rectangular hyperbola.
Inelastic (Less elastic) Demand (Ed1)
• A given change in price will leads to a less than proportionate change in demand
 • 10% change in price leads to 5% change in QD
• Demand curve will be steeper.

DETERMINANTS OF PRICE ELASTICITY OF DEMAND (5 Marks)

• Whether the demand for a product is more or less elastic, is conditioned by several
factors or influences.
Nature of the commodity
• In case of necessaries of life like foodgrains, salt, matchbox, kerosine etc., the price
elasticity of demand is low because the quantity demanded of such commodities
remains almost unchanged even though their prices rise or fall.
• In case of goods considered as comforts such as fan, table, chair etc., the price elasticity
of demand may be equal to unity as the quantity demanded in their case changes in the
same proportion in which their price changes.
• If the commodity is of the nature of luxury commodity such as gold, diamonds, motor
cars, T.V. sets, air conditioners etc., the price elasticity of demand is high and a small
change in price can cause more than proportionate change in demand.

Availability of substitutes
• If close or good substitutes for a commodity are easily available in the market, any rise
in its price can result in other commodities being substituted in place of it so that its
demand falls proportionately much more than the rise in its price. It means the demand
for a commodity such as tea that has milk, coffee, cocoa as substitutes is relatively
more elastic.
• On the opposite, the demand for a commodity like salt, having no substitute, is
inelastic. Its quantity bought may remain unchanged even if its price falls.
Possibility of Postponement
• Those commodities the use or purchase of which can be postponed when their prices
rise such as gold, diamonds, motor cars etc., have a high price elasticity of demand.
• On the opposite, if there is a commodity like wheat, rice, salt etc., the purchase of
which cannot be postponed, its price elasticity of demand will be low. People cannot
reduce the purchase of such a commodity even when its price goes up.
Complementary goods
• The complementary goods are those which are bought together or in case of which
there is joint demand. In case of such commodities, the price elasticity of demand for
one is conditioned by the price elasticity of the other.
• For instance, if price elasticity of demand for motor cars is high, the price elasticity of
demand for petrol will also be high.
• If price elasticity of demand of pen is low, the price elasticity of demand of the jointly
demanded good ink will also be low.
Goods with several uses
• The price elasticity of demand is high in case of goods having several uses such as
coal, milk etc.
• As the prices of such commodities fall, they can be put to more uses so that there can
be substantial rise in demand for them and vice-versa.
Habits
• The price elasticity of demand is low in case of those goods which are bought by the
consumers because of the force of habit.
• For instance, the demand for cigarettes and liquor may remain unchanged even if their
prices rise.
Income level
• At very high levels of income, the price elasticity of demand is low. At higher levels
of income, the rich have already satisfied most of their consumer wants.
• If the price of a commodity falls, the rise in demand may be very negligible in case of
the rich.
• At very low levels of income, the s poor spend almost their entire incomes on
necessaries which have low price elasticity of demand. At the intermediate income
levels, the demand is relatively more elastic.

Income elasticity of demand (2 Marks)

Income elasticity of demand measures the responsiveness of the quantity demanded of a
good or service to a change in consumer income. It indicates how much the quantity
demanded changes as consumer incomes change, reflecting the nature of the good—
whether it is a normal good, inferior good, or luxury good.
Formula
% 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝
𝑬𝒚 =
%𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐈𝐧𝐜𝐨𝐦𝐞
∆𝐐 𝒀
𝑬𝒚 = 𝒙
∆𝐘 𝑸
Cross elasticity of demand (2 Marks)
Cross elasticity of demand measures the responsiveness of the quantity demanded for one
good to a change in the price of another good. It helps in understanding the relationship
between two goods—whether they are substitutes, complements, or independent goods.
Formula
% 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝 𝐨𝐟 𝐆𝐨𝐨𝐝 𝐱
𝑬𝒙𝒚 =
%𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞 𝐨𝐟 𝐆𝐨𝐨𝐝 𝐲
∆𝐐𝐱 𝑷𝒚
𝑬𝒙𝒚 = 𝒙
∆𝐏𝐲 𝑸𝒙
1. Substitutes:
o 𝑬𝒙𝒚 > 0: This indicates that the goods are substitutes. As the price of Good B
increases, the quantity demanded of Good A also increases.
o Example: If the price of coffee rises, the demand for tea may increase.
2. Complements:
o 𝑬𝒙𝒚 < 0: This indicates that the goods are complements. As the price of Good
B increases, the quantity demanded of Good A decreases.
o Example: If the price of printers rises, the demand for printer ink may
decrease.

Elasticity of supply (5 Marks)

Elasticity of supply measures the responsiveness of the quantity supplied of a good or
service to a change in its price. It reflects how much the supply of a product changes when
its price changes, providing insights into how producers adjust their output in response to
market conditions.
 % 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐬𝐮𝐩𝐩𝐥𝐲
𝑬𝒔 =
%𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞
∆𝐐 𝑷
𝑬𝒔 = 𝒙
∆𝐏 𝑸

Degrees of Elasticity of Supply

Elasticity of supply can be categorized into several degrees:
1. Perfectly Elastic Supply (Es = ∞):
o The quantity supplied changes infinitely with any change in price.
2. Perfectly Inelastic Supply (Es = 0):
o The quantity supplied remains constant regardless of price changes.

3. Elastic Supply (Es > 1):

o The percentage change in quantity supplied is greater than the percentage
change in price.
4. Unitary Elastic Supply (Es = 1):
o The percentage change in quantity supplied is equal to the percentage change
in price.
5. Inelastic Supply (Es < 1):
o The percentage change in quantity supplied is less than the percentage change
in price.
Factors Influencing Elasticity of Supply
1. Time Frame: Supply elasticity varies over time. In the short run, supply may be
inelastic due to fixed resources, while in the long run, it may become more elastic as
producers adjust their production capabilities.
2. Availability of Resources: If resources are readily available, supply is likely to be
more elastic. Conversely, if resources are scarce, supply may be inelastic.
3. Production Capacity: Industries with excess capacity can respond more flexibly to
price changes, making supply more elastic.
4. Nature of the Product: Goods that can be produced quickly and easily tend to have
more elastic supply compared to those requiring significant time or investment.
Market (2 Marks)
A market is a system, where buyers and sellers come together to engage in the exchange of
goods, services, or information. It facilitates transactions through the interaction of supply
and demand, helping to determine prices and allocate resources efficiently. Key 4o mini
Market structure (2 Marks)
Market structure refers to the characteristics and organization of a market, particularly
regarding the nature and degree of competition among firms. It influences pricing strategies,
production levels, and overall market behavior. The main types of market structures
include:
1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly
5. Monopsony
6. Duopoly

Perfect competition vs Monopoly/Monopolistic Competition (5 Marks)

Perfect competition (5 Marks)

Perfect competition is an idealized market structure characterized by a number of
conditions that lead to an efficient allocation of resources. In a perfectly competitive
market, no single buyer or seller can influence the market price, and the forces of supply
and demand determine prices. Here are the key characteristics of perfect competition:
Characteristics of Perfect Competition
1. Many Buyers and Sellers:
o The market consists of a large number of buyers and sellers, each of whom has
a negligible share of the market. This ensures that no single participant can
influence the market price.
2. Homogeneous Products:
o All firms produce identical or nearly identical products. Because the goods are
substitutes for one another, consumers have no preference for the product of
one seller over another.
3. Free Entry and Exit:
o There are no significant barriers to entry or exit in the market. New firms can
enter the market easily when they see profit opportunities, and existing firms
can exit without incurring substantial costs if they cannot compete.
4. Perfect Information:
o All participants (buyers and sellers) have complete knowledge about prices,
products, and market conditions. This transparency allows consumers to make
informed purchasing decisions and enables firms to respond quickly to market
changes.
5. Price Takers:
o Individual firms are price takers, meaning they accept the market price as
given. They cannot influence the price of their product; if they set their price
higher than the market price, they will sell nothing.
6. No Government Intervention:
 o In a perfectly competitive market, there is no government interference or
regulations that might distort the market conditions, allowing supply and
demand to dictate prices.
7. Profit Maximization:
o Firms aim to maximize profits by producing at a level where marginal cost
(MC) equals marginal revenue (MR). In the long run, firms will only earn
normal profits (zero economic profit) due to competition.
Monopolistic competition (5 Marks)
Monopolistic competition is a type of market structure that combines elements of both
perfect competition and monopoly. In this structure, many firms compete with similar but
not identical products, giving them some degree of market power. Here are the key
characteristics of monopolistic competition:
Characteristics of Monopolistic Competition
1. Many Sellers and Buyers:
o The market consists of a large number of firms and consumers. Each firm
holds a small market share, ensuring that no single firm can dominate the
market.
2. Product Differentiation:
o Firms in monopolistic competition sell products that are similar but
differentiated from one another. This differentiation can be based on quality,
features, branding, packaging, or customer service. As a result, consumers may
prefer one product over another, even if they serve similar purposes.
3. Some Control Over Price:
o Due to product differentiation, firms have some degree of pricing power. They
can set prices above marginal cost without losing all their customers. However,
their ability to raise prices is limited by the availability of substitute products.
4. Free Entry and Exit:
o There are few barriers to entering or exiting the market. New firms can enter
when they see potential profits, and existing firms can leave the market without
incurring significant losses if they are not profitable.
5. Non-Price Competition:
o Firms often compete through marketing, advertising, and product
enhancements rather than solely on price. This non-price competition is crucial
in differentiating their products and attracting customers.
 6. Perfect Information:
o While not as complete as in perfect competition, there is a relatively high level
of information available in the market. Consumers are generally aware of the
different products and their prices, enabling them to make informed decisions.
Monopoly (5 Marks)
A monopoly is a market structure in which a single firm or entity dominates the entire
market for a particular good or service. This firm is the sole provider, facing no direct
competition. As a result, the monopolist has significant control over price and supply. Here
are the key characteristics of a monopoly:
Characteristics of Monopoly
1. Single Seller:
o A monopoly consists of a single firm that produces and sells a unique product
or service. This firm controls the entire supply of the good, meaning there are
no direct competitors in the market.
2. Unique Product:
o The product or service offered by the monopolist has no close substitutes. This
uniqueness gives the monopolist considerable pricing power, as consumers
cannot easily switch to alternative products.
3. High Barriers to Entry:
o Significant barriers prevent other firms from entering the market. These
barriers can be legal (patents, licenses), technological (high research and
development costs), or economic (large capital requirements, economies of
scale). These factors protect the monopolist from potential competition.
4. Price Maker:
o Unlike firms in competitive markets that are price takers, a monopolist can
influence the market price by adjusting the level of output. The monopolist
determines the price by choosing the quantity of the product to produce,
allowing it to maximize profits.
5. Market Power:
o A monopoly possesses significant market power, enabling it to set prices above
marginal costs. This power can lead to higher prices for consumers and
reduced consumer surplus.
6. Lack of Competition:
 o The absence of competition can result in inefficiencies in production and
allocation. Monopolists may have less incentive to innovate or improve
product quality, as they face no pressure from competitors.
7. Price Discrimination:
o Monopolists may engage in price discrimination, charging different prices to
different consumers based on their willingness to pay. This practice can
increase profits but may also lead to issues of fairness and equity.
Oligopoly (2 Marks)
An oligopoly is a market structure characterized by a small number of firms that dominate
the market, leading to a significant degree of interdependence among them. Because of this
limited competition, the actions of one firm can have a substantial impact on the others.
Here are the key characteristics of oligopoly:
Characteristics of Oligopoly
1. Few Large Firms:
2. Interdependence:
3. Product Differentiation or Homogeneity:
4. Barriers to Entry:
5. Price Rigidity:
6. Collusion:
7. Kinked Demand Curve:
Multinational Corporation (MNC) (5/10 Marks)
A Multinational Corporation (MNC) is a large company that operates in multiple
countries, typically with headquarters in one nation and subsidiaries or branches in others.
MNCs play a significant role in the global economy, influencing trade, investment, and
economic development. Here are the key features of MNCs:
Features of Multinational Corporations (MNCs)
1. Global Operations:
o MNCs conduct business in several countries, managing production, sales, and
distribution on an international scale. This global presence allows them to tap
into new markets and leverage resources from different regions.
2. Centralized Control:
 o MNCs often have a centralized management structure, with decision-making
authority resting primarily with the headquarters. However, they may also
grant some level of autonomy to local subsidiaries to adapt to regional markets.
3. Economies of Scale:
o MNCs can achieve economies of scale due to their large size and scope of
operations. By producing goods in large quantities, they can lower production
costs, which enhances competitiveness and profitability.
4. Diverse Product Portfolio:
o MNCs typically offer a wide range of products and services across different
markets. This diversity allows them to cater to various consumer preferences
and reduce risks associated with market fluctuations.
5. Access to Resources:
o MNCs can access a variety of resources, including raw materials, labor, and
technology, from different countries. This access enables them to optimize
production and improve efficiency.
6. Investment and Capital Flow:
o MNCs often invest heavily in foreign markets, contributing to capital inflow in
host countries. This investment can drive economic growth, create jobs, and
enhance infrastructure in those regions.
7. Transfer of Technology:
o MNCs can facilitate the transfer of technology and innovation across borders.
By establishing research and development facilities in various countries, they
can develop new products and processes and share knowledge with local firms.
8. Cultural Adaptation:
o MNCs must navigate diverse cultural environments and consumer behaviors.
To succeed, they often adapt their marketing strategies, products, and services
to align with local preferences and customs.
9. Regulatory Challenges:
o Operating in multiple countries exposes MNCs to different regulatory
environments, including labor laws, environmental regulations, and trade
policies. Compliance with these regulations can be complex and requires a
comprehensive understanding of local laws.
10.Global Supply Chains:
 o MNCs often establish extensive global supply chains, sourcing materials and
components from various countries. This interconnectedness enables them to
optimize costs and enhance production flexibility.

Advantages and Disadvantages of Multinational Corporations (5 Marks)

Advantages of Multinational Corporations (MNCs)
1. Economic Growth:
o MNCs can significantly contribute to economic growth in host countries by
investing capital, creating jobs, and enhancing local production capabilities.
2. Job Creation:
o They generate employment opportunities, often providing better wages and
benefits compared to local firms, which can help improve living standards.
3. Technology Transfer:
o MNCs facilitate the transfer of technology and innovation, helping local
industries adopt advanced practices and improve productivity.
4. Access to International Markets:
o MNCs can help local businesses access international markets, enhancing trade
opportunities and market expansion.
5. Enhanced Competition:
o The presence of MNCs can foster competition in local markets, driving
innovation and improving product quality and services.
6. Improved Infrastructure:
o MNCs often invest in local infrastructure, such as transportation,
communication, and utilities, benefiting the broader community.
7. Diverse Product Offerings:
o MNCs can introduce a variety of products and services to local markets, giving
consumers more choices.
8. Skill Development:
o MNCs often provide training and development programs for employees,
enhancing the skills and capabilities of the local workforce.
9. Stability and Reliability:
 o Large, established MNCs can offer a stable business environment, which can
be beneficial in regions with volatile economies.
Disadvantages of Multinational Corporations (MNCs)
1. Market Dominance:
o MNCs can dominate local markets, leading to reduced competition and
potentially driving smaller local businesses out of the market.
2. Profit Repatriation:
o A significant portion of profits generated by MNCs is often repatriated to the
home country, which can limit the economic benefits for the host country.
3. Exploitation of Resources:
o MNCs may exploit natural resources in host countries without adequate
consideration for environmental sustainability, leading to ecological
degradation.
4. Labor Exploitation:
o In some cases, MNCs may engage in practices that exploit labor, such as
paying low wages, providing poor working conditions, or employing child
labor.
5. Cultural Erosion:
o The global presence of MNCs can lead to cultural homogenization,
undermining local traditions, values, and practices.
6. Political Influence:
o MNCs can exert significant influence over local governments and policies,
potentially leading to corruption or the prioritization of corporate interests over
public welfare.
7. Volatility in Local Economies:
o The withdrawal of an MNC from a market can lead to economic instability, job
losses, and adverse effects on local suppliers and service providers.
8. Dependence on MNCs:
o Host countries may become overly reliant on MNCs for economic growth,
making them vulnerable to changes in global market conditions or corporate
strategies.
Cartels (2 Marks)
A cartel is a formal agreement between competing firms to coordinate their actions to limit
competition, control prices, or manipulate market conditions to their advantage.
Key Features of Cartels:
1. Price Fixing: Cartels often agree to set prices at a certain level, which can lead to
higher prices for consumers.
2. Market Allocation: Members may agree to divide markets among themselves to
avoid competition.
3. Production Limits: Cartels may restrict the quantity of goods produced to maintain
higher prices.
4. Collusion: The firms involved in a cartel engage in collusive behavior, which is
typically illegal in many jurisdictions due to its anti-competitive nature.
Examples:
• OPEC (Organization of the Petroleum Exporting Countries) is often cited as an
example of a cartel, where member countries coordinate production levels to
influence oil prices.
Mergers (2 Marks)
A merger occurs when two or more companies combine to form a single entity. Mergers
can happen for various strategic reasons, including to enhance market share, achieve
economies of scale, or diversify product lines.
Types of Mergers:
1. Horizontal Merger: Between firms operating in the same industry and at the same
stage of production (e.g., two automobile manufacturers).
2. Vertical Merger: Between firms at different stages of the production process (e.g., a
car manufacturer merging with a tire company).
3. Conglomerate Merger: Between firms in unrelated industries (e.g., a food company
merging with a technology firm).
Acquisitions (2 Marks)
An acquisition refers to the purchase of one company by another, where the acquired
company becomes a subsidiary or part of the acquiring firm. Unlike mergers, which imply a
mutual agreement to combine, acquisitions often involve one company taking over another.
Types of Acquisitions:
1. Friendly Acquisition: Involves a mutual agreement between both companies, often
supported by the management of the acquired firm.
 2. Hostile Acquisition: Occurs when the acquiring company seeks to take control of the
target company against the wishes of its management or board of directors.
Cartels vs Mergers (2 Marks)

Aspect Cartel Mergers

Agreement between firms to Combination of two or more firms

Definition
limit competition into one

Nature of Collusion among independent

Integration into a single entity
Relationship firms

Legal, but subject to regulatory

Legal Status Generally illegal
scrutiny

Reduces competition, raises Can increase market power,

Market Impact
prices potentially reduce competition

Examples OPEC Disney-Pixar merger

MODULE III
MACROECONOMIC CONCEPTS
National Income (2 Marks)
• National income means the value of goods and services produced by a country during
a financial year.
• It is the net result of all economic activities of any country during a period of one
year and is valued in terms of money.
• National income is an uncertain term and is often used interchangeably with the
national dividend, national output, and national expenditure.
• The National Income is the total amount of income accruing to a country
from economic activities in a years time.
• It includes payments made to all resources either in the form of wages, interest, rent,
and profits.
• The progress of a country can be determined by the growth of the national income of
the country.
• According to Alfred Marshall: “The labor and capital of a country acting on
its natural resources produce annually a certain net aggregate of
 commodities, material and immaterial including services of all kinds. This is the true
net annual income or revenue of the country or national dividend.”
• Simon Kuznets defines national income as “the net output of commodities and
services flowing during the year from the country’s productive system in the hands of
the ultimate consumers.”
Gross Domestic Product (GDP) (2 Marks)
• The final value of all goods and services produced within domestic territory of a
country during a financial year is called Gross Domestic Product.
• As a broad measure of overall domestic production, it functions as a comprehensive
scorecard of a given country’s economic health.
• GDP provides an economic snapshot of a country, used to estimate the size of an
economy and growth rate.
• GDP can be calculated in three methods, using expenditures, production, or incomes.
It can be adjusted for inflation and population to provide deeper insights.
• Economists use a process that adjusts for inflation to arrive at an economy’s real
GDP.
Gross National Product (GNP) (2 Marks)
• It is the final value of all goods and services produced by a country plus income
arising in a country from abroad during a financial year.
• It takes into account net income of a country form other foreign countries also.
• GNP measures the monetary value of all the finished goods and services produced by
the country’s factors of production irrespective of their location.

GDP= GNP – Net Factor Income from Abroad

GDP and GNP on the basis of Market Price and Factor Cost;
a) Market Price
The Actual transacted price including indirect taxes such as GST, Customs duty etc. Such
taxes tend to raise the prices of goods and services in the economy.
b) Factor Cost
It Includes the cost of factors of production e.g. interest on capital, wages to labor, rent for
land profit to the stakeholders. Thus services provided by service providers and goods sold
by the producer is equal to revenue price.
Per Capita Income (2 Marks)
 • Per capita income is a measure of the amount of money earned per person in a nation
or geographic region.
• Per capita income can be used to determine the average per-person income for an
area and to evaluate the standard of living and quality of life of the population.
• Per capita income for a nation is calculated by dividing the country's national income
by its population.
Monetary Policy & Fiscal Policy (5/10 Marks)
Monetary Policy refers to the actions of Central Bank to achieve macroeconomic policy
objectives such as price stability, full employment, and stable economic growth.
Fiscal Policy refers to the tax and spending policies of a public authority like Central
Government.
Monetary Policy
• Monetary policy refers to the use of instruments under the control of the central bank
(RBI) to regulate the availability, cost and use of money and credit.
Objectives of Monetary Policy
1) Full Employment
2) Price Stability
3) Economic Growth
4) Balance of Payments
Instruments of Monetary Policy
1. Bank Rate- Bank Rate is also known as discount rate. It is the rate at which RBI lends to
the commercial banks or rediscounts their bills. If bank rate is increased, then commercial
banks also charge higher rate of interest on loans.
2. Cash Reserve Ratio (CRR)- It is a certain percentage of bank deposits which banks are
required to keep with RBI in the form of reserves or balances. Higher the CRR with the RBI
lower will be the liquidity in the system and vice-versa.
3. Statutory Liquidity Ratio (SLR)- It means a certain percentage of deposits is to be kept
by banks in form of liquid assets. This is kept by bank itself the liquid assets here include
government securities, treasury bills and other securities notified by RBI.
4. Repo Rate- Repo rate is the rate at which RBI lends to commercial banks generally
against government securities.
5. Reverse Repo Rate- Reverse Repo rate is the rate at which RBI borrows money from the
commercial banks.
6. Open Market Operation- t means that the bank controls the flow of credit through the
sale and purchase of securities in the open market.
Fiscal Policy
• It refers to a policy concerning the use of state treasury or the government finances to
achieve the macro-economic goals.
• Government uses its expenditure and revenue programme to produce desirable effects
on National Income, production and employment.
Objectives of Fiscal Policy
1) To Achieve Equal Distribution of Wealth
2) Increase in Savings
3) Degree of inflation
4) To Achieve Economic Stability
5) Price stability
Instruments of Fiscal Policy
1. Deficit Policy- Deficit Financing refers to financing the budgetary deficit. Budgetary
deficit here means excess of government expenditure over government income. It means
taking loans from reserve bank of India by the government to meet the budgetary deficit.
Reserve bank gives loans buy issuing new currency notes.
2. Public Expenditure- Public expenditure influences the economic activities of country
very much. Public expenditure may be of two kinds i.e. developmental and non
developmental.
3. Taxation Policy- Taxes are the main source of revenue of government. Government
levies both direct and indirect taxes in India.
4. Public Debt- government to mobilize resources for economic development resort to
public debt.

Inflation (2/5 Marks)

Inflation refers to increase in general price level of goods and services in a economy.
It can be defined as too much money chasing too few goods.
Inflation is defined as a sustained increase in the price level or a fall in the value of money.
Value of money depreciates with the occurrence of inflation.
According to C.Crowther, “Inflation is State in which the Value of Money is Falling and the
Prices are rising.”
In Economics, the Word inflation Refers to General rise in Prices Measured against a
Standard Level of Purchasing Power.
Types of Inflation
1. Open Inflation - The rate where Costs rise due to Economic trends of Spending
Products and Services.
2. Suppressed Inflation - Existing inflation disguised by government Price controls or
other interferences in the economy such as subsidies. Such suppression, nevertheless,
can only be temporary because no governmental measure can completely contain
accelerating inflation in the long run. It is Also Called Repressed Inflation.
3. Galloping Inflation - Very Rapid Inflation which is almost impossible to reduce.
4. Creeping Inflation - Circumstance where the inflation of a nation increases gradually,
but continually, over time. This tends to be a typically pattern for many nations.
Although the increase is relatively small in the short-term, as it continues over time
the effect will become greater and greater.
5. Hyper Inflation -: Hyperinflation is caused mainly by excessive deficit spending
(financed by printing more money) by a government.
Causes of Inflation
1. On Demand side
1. Increase in money supply
2. Increase in disposable income
3. Deficit financing
4. Foreign exchange reserves
2. On Supply side
1. Rise in administered prices
2. Erratic agriculture growth
3. Agricultural price policy
4. Inadequate industrial growth
Effects of Inflation
• They add inefficiencies in the market, and make it difficult for companies to budget
or plan long-term.
 • Uncertainty about the future purchasing power of money discourages investment and
saving.
• There can also be negative impacts to trade from an increased instability in currency
exchange prices caused by unpredictable inflation.
• Higher income tax rates.
• Inflation rate in the economy is higher than rates in other countries; this will increase
imports and reduce exports, leading to a deficit in the balance of trade.
• Adverse effect on production.
• Adverse effect on distribution of income.
• Obstacle to development.
Controlling Inflation
There are broadly two ways of controlling inflation in an economy;
1). Monetary measures
(i) Bank rate policy
(ii) CRR
(iii) Open market operations
2). Fiscal measures
(i)Increase in Taxes
(ii) Increase in savings
(iii) Surplus budgets

BUDGET (2 Marks)
A budget is a statement of the estimated revenue and expenditure of the government in
respect to a particular financial year.
According to Findlay Shirras “The budget is an annual statement of expenditure and
revenue to meet that expenditure prepared by public authorities and usually covers at least
two fiscal periods-the closing period and the period to come”.
Revenue Budget– It consists of the Revenue Expenditure and Revenue Receipts.
• Revenue Receipts are receipts which do not have a direct impact on the assets
and liabilities of the government. It consists of the money earned by the
government through tax (such as excise duty, income tax) and non-tax sources
(such as dividend income, profits, interest receipts).
• Revenue Expenditure is the expenditure by the government which does not
impact its assets or liabilities. For example, this includes salaries, interest
payments, pension, and administrative expenses.
Capital Budget– It includes the Capital Receipts and Capital Expenditure.
• Capital Receipts indicate the receipts which lead to a decrease in assets or an
increase in liabilities of the government. It consists of: (i) the money earned
by selling assets (or disinvestment) such as shares of public enterprises, and
(ii) the money received in the form of borrowings or repayment of loans by
states.
• Capital expenditure is used to create assets or to reduce liabilities. It
consists of: (i) the long-term investments by the government on creating assets
such as roads and hospitals, and (ii) the money given by the government in the
form of loans to states or repayment of its borrowings.

Government Deficit (2 Marks)

• Deficit is the amount by which the spends done in a budget surpasses the earnings.
• The Government Deficit is the amount of money in the budget set by which the
government spending surpasses the revenue earned by the government.
• This deficit presents a picture of the financial health of the economy.
 • To minimise the deficit or the gap between the expends and income, the government
may reduce a few expenditures and also rise revenue initiating pursuits.
Revenue Deficit(2 Marks)
• The revenue deficit mentions to the surplus of government’s revenue expenditure
over the revenue receipts.
Revenue deficit = Revenue expenditure – Revenue Receipts
• This deficit only incorporates current income and current expenses.
• A high degree of deficit symbolises that the government should reduce its expends.
• The government may raise its revenue receipts by rising income tax.
• Disinvestment is selling off assets is another corrective measure to minimise revenue
deficit.
Fiscal Deficit (2 Marks)
• Fiscal deficit is the distinction between the government’s total expenditure and its
total receipts, and this excludes borrowing.
• Gross fiscal deficit = Net borrowing at home + Borrowing from RBI +
Borrowing from abroad
• The fiscal deficit has to be financed by borrowing. Hence, it manifests the total
borrowing necessities of the government from all the possible sources.
Balance of Trade (BoT) and Balance of Payment (BoP) (5 Marks)
Balance of Payments (BOP) and Balance of Trade (BOT) are two important measures in
international economics that provide insight into a country's financial transactions with the
rest of the world.
Balance of Trade (BOT): The Balance of Trade (BOT) measures the difference between
the monetary value of a country's exports and imports of goods. It's a subset of the broader
Balance of Payments and focuses exclusively on the trade of physical goods, not services.
BOT=Exports of Goods−Imports of Goods
Types of BOT:
1. Trade Surplus: When exports exceed imports, the BOT is positive, indicating a trade
surplus.
2. Trade Deficit: When imports exceed exports, the BOT is negative, indicating a trade
deficit.
Balance of Payments (BOP): The Balance of Payments (BOP) is a comprehensive account
that records all economic transactions between residents of a country and the rest of the
world over a specific period. It includes not just goods, like BOT, but also services, capital
flows, and financial transfers.
Components of BOP:
1. Current Account:
o Records the trade of goods (similar to BOT), trade of services, income receipts,
and current transfers.
o Includes the balance of trade, but also services like tourism, intellectual
property, and remittances.
2. Capital Account:
o Records capital transfers and the acquisition or disposal of non-produced, non-
financial assets (such as patents and trademarks).
3. Financial Account:
o Records investments in financial assets, such as direct investments (FDI),
portfolio investments (stocks and bonds), and other financial flows.
Formula: The BOP should ideally balance to zero:
BOP=Current Account Balance+Capital Account Balance+Financial Account Balance+Err
ors and Omissions
Types of BOP:
• BOP Surplus: When the inflow of funds from abroad (through exports, investments,
etc.) exceeds the outflow, the BOP shows a surplus.
• BOP Deficit: When outflows exceed inflows, leading to a BOP deficit.
Key Differences Between BOT and BOP

Aspect Balance of Trade (BOT) Balance of Payments (BOP)

Measures trade of goods Encompasses goods, services, income,

Scope
only. and capital transfers.

Exports and imports of Current Account, Capital Account, and

Components
goods. Financial Account.

Balance
Not required to balance. Should ideally balance (BOP = 0).
Requirement

Trade surplus/deficit based Reflects broader economic conditions and

Deficit/Surplus
on goods trade. international relationships.
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two major
forms of foreign investments that play significant roles in a country’s economic
development and financial market dynamics. Here’s an overview of both types, along with
their key differences and economic impacts.
Foreign Direct Investment (FDI): FDI refers to an investment made by a foreign entity
(individual or company) directly into a business or assets in another country. The investor
has a lasting interest and a significant degree of influence or control over the business.
1. Types of FDI:
o Greenfield Investment: Establishing new facilities from the ground up, such
as factories or offices.
o Brownfield Investment: Acquiring or merging with an existing business in
the host country.
Examples of FDI:
• A car manufacturer setting up a factory in a foreign country.
• A tech company acquiring a majority stake in a local software firm in another
country.
Benefits:
• Generates employment opportunities and boosts infrastructure.
• Provides technology transfer and managerial expertise.
• Contributes to economic growth and increases exports.
Challenges:
• Potential risk of over-reliance on foreign companies.
• May lead to the repatriation of profits, limiting gains for the host country.
Foreign Portfolio Investment (FPI): FPI refers to investments made in a foreign country’s
financial assets, such as stocks, bonds, or other financial instruments, without significant
control or influence over the business.
Characteristics:
1. Types of FPI:
o Equity investments in stocks.
o Investments in debt securities, such as government or corporate bonds.
 o Investment funds like mutual funds or exchange-traded funds (ETFs) with
foreign holdings.
Examples of FPI:
• Purchasing shares of a foreign company on a stock exchange.
• Investing in a bond issued by a foreign government.
Benefits:
• Provides additional capital for the host country's financial markets.
• Enhances market liquidity and development of local stock markets.
• Brings foreign exchange inflows and stabilizes the currency in the short run.
Challenges:
• Highly volatile and sensitive to global economic changes.
• May lead to sudden capital outflows, affecting the stability of the host country’s
financial markets.
Key Differences Between FDI and FPI

Foreign Direct Investment

Aspect Foreign Portfolio Investment (FPI)
(FDI)

Provides investor control and No control over the management of the

Control
influence over the company. company.

Long-term commitment, stable Short-term and highly liquid, with

Time Horizon
investment. potential for rapid withdrawal.

Nature of Involves physical assets or a Involves securities like stocks and

Investment large stake in a business. bonds without physical assets.

Establish a long-term business Earn returns on financial assets

Objective
presence. without long-term involvement.

Economic Greater impact on employment, Limited impact on the real economy

Impact tech transfer, and growth. but boosts capital market liquidity.

Economic Impact of FDI and FPI

1. FDI:
o Promotes Industrial Growth: By creating facilities, FDI supports industrial
growth, infrastructure, and technology transfer.
 o Boosts Employment: New businesses established through FDI create jobs in
the local economy.
o Increases GDP: FDI often leads to higher productivity, enhancing the GDP of
the host country.
2. FPI:
o Enhances Market Liquidity: By bringing in capital, FPI supports stock
market stability and liquidity.
o Volatile Capital Flows: Unlike FDI, FPI is prone to quick withdrawals,
making the financial system vulnerable to economic shifts.
o Exchange Rate Impacts: Inflows can strengthen the currency, but outflows
can lead to depreciation.
Both FDI and FPI are essential for a country’s economic growth, yet they serve different
purposes. While FDI fosters long-term growth through direct investment and operational
control, FPI provides short-term capital and liquidity to financial markets. Balancing the
two helps maintain economic stability and a robust growth trajectory.