Unit - I 1. What is Economics? Economics is a social science which deals with human wants and their satisfaction.

It is mainly concerned with the way in which a society chooses to employ its scarce resources which have alternative uses, for the production of goods for present and future consumption. Economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants which are unlimited and of varying degrees of importance. 2. What are the three fundamental Economic Questions? a) What to Produce? capital goods consumer goods

The choice of product based on scarcity. b) How to produce? Decision to how to mix technology and scare resources and production. Partially by man power and machine or fully automated. c) For whom to produce? The person who actually receives. Who gets maximum satisfaction Who is having the buying power.

3. What is Economic Efficiency? Productive efficiency? Allocative efficiency It refers to the use of resources so as to maximize the production of goods and services. Productive efficiency (also known as technical efficiency) occurs when the economy is utilizing all of its resources efficiently, producing most output from least input. Allocative efficiency is a theoretical measure of the benefit or utility derived from a proposed or actual selection in the allocation or allotment of resources. 4. What is Stability? Stability is a condition in which national output is growing steadily with low inflation and full employment of resources. Economic stability refers to the condition in which national outputs growing steadily, with low inflation and full employment of resources. 5. What is PPF? The Production Possibility Frontier (PPF) is a graph that shows all of the combinations of goods and services that can be produced if all of societys resources are used efficiently. 6. What is Micro & Macro Economics ? Micro Economics is a study of the specific economic units and a detailed consideration of the behavior of these individual units. Macro Economics is the study of large part of the economy i.e., The whole economy.The study of economic behavior of the economy as a whole & not the individual economic units of the economy.

7.

Explain the themes of economics. 1. Concepts & Economics Systems Similarities and Differences in Economics Systems Traditional Command and Market Economics Measures of Economics Activity Expansion Recession and Depression in the Economy 2. Scarcity and Choices,& Decision Making Scarcity and limited Resources Economic Reasoning of Choices Allocation of Resources Marginal Analysis and Decision making Opportunity Cost Innovatives 3. Work, Earnings, and Finance Management Factors Influencing Wages Labor Productivity Types of Business Profits and Losses Distribution of Welch Entrepreneurship Costs and Benefits of Saving Impact of Interest Rates 4. Business and Entrepreneurship 5. Economic Interdependence Specification Trade Implementation or Reduction of Trade Barriers Global Production and Consumption of Goods or Services Comprehensive Advantage Geographic Patterns of Economic Activities

6. Market and the Functions of Governments Market Transactions Costs and Benefits of competition Function of money Economic Instructions Change in Supply and Demand Forces that cause change price Sources of Tax Revenue Economic Roles for Governments Public Goods Costs and Benefits of Taxation Impact of Media on the Cost and Benefits of Decision Exchange Rates

8. Explain the concept of Production Possibility Frontier The Production Possibility Frontier (PPF) is a graph that shows all of the combinations of goods and services that can be produced if all of societys resources are used efficiently. The production possibility frontier curve has a negative slope that indicates the trade-off that a society faces between two goods.

Points inside of the curve are inefficient. We refer to this situation as Underutilization. At point H, resources are unemployed, or are being used inefficiently. Point F is desirable because it yields more of both goods However, it is not attainable given the amount of resources currently available in the economy. Point C is one of the possible combinations of goods produced when resources are fully and efficiently employed. either

A move along the curve illustrates the concept of opportunity cost. In order to increase the production of capital goods, the amount of consumer goods will have to decrease. The Law of Increasing Opportunity Cost The concave shape of the production possibility frontier curve reflects the law of increasing costs. Unit II 1. What is meaning of Demand? Demand for a commodity refers to the desire backed by ability to pay and willingness to buy. 2. State the Law of Demand? The law of demand states that there is a negative or inverse relationship between the price and quantity demanded of a commodity over a period of time. Thus the law of demand states that people will buy more at lower prices and buy less at higher prices, other things remaining the same.

3. What is Consumer Surplus? Marshall defines Consumers surplus as follows: The excess of price which a person would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus of satisfaction. It may be called consumers surplus. 4. What is Market Equilibrium? It normally refers to equilibrium in a market. Where the demand and supply curve intersects with each other. There is only one price at which the preferences of sellers and buyers meet together. At that point the quantity demanded of a commodity by the buyer is equivalent to the quantity the seller is willing to sell. This price is called as the equilibrium price and it occurs at the point of intersection of the supply curve and the demand curve. In other words, equilibrium refers to a particular pair of prices and quantity. 5. What is Elasticity of Demand? According to Marshall, the elasticity (or responsiveness) of demand in a market is great or small accordingly as the demand changes (rises or falls) much or little for a given change (rise or fall) in price. Ep = [Percentage change in quantity demanded / Percentage change in the price] 6. Explain the Factors determining demand 1. Tastes and preferences of the consumer Demand for a commodity may change due to a change in tastes, preferences and fashion. For example, the demand for dhoties has come down and demand for trouser cloth and jeans has gone up due to change in fashion. 2. Income of the consumer When the income of the consumer increases, more will be demanded. Therefore, we can say that as income increases, other things being equal, the demand for a commodity also increases. Comforts and luxuries belong to this category. 3. Price of substitutes Some goods can be substituted for other goods. For example, tea and coffee are substitutes. If the price of coffee increases while the price of tea remains the same, there will be increase in the demand for tea and decrease in the demand for coffee. The demand for substitutes moves in the opposite direction. 4. Number of consumers Size of population of a country is an important determinant of demand. For instance, larger the population, more will be the demand, for certain goods like food grains, and pulses etc. When the number of consumers increases, there will be greater demand for goods. 5. Expectation of future price change If the consumer believes that the price of a commodity will rise in the future, he may buy a larger quantity in the present. Suppose he expects the price to fall, he may defer some of his purchases to a future date. 6. Distribution of income Distribution of income affects consumption pattern and hence the demand for various goods. If the government attempts redistribution of income to make it equitable, the demand for luxuries will decline and the demand for necessities of life will increase.

7. Climate and weather conditions Demand for a commodity may change due to a change in climatic conditions. For example, during summer, demand for cool drinks, cotton clothes and air conditioners will increase. In winter, demand for woolen clothes increases. 8. State of business During boom, demand will expand and during depression demand will contract. 9. Consumer Innovativeness When the price of wheat flour or price of electricity falls, the consumer identifies new uses for the product. It creates new demand for the product.

7. Explain the types of Elasticity of Demand There are three types of elasticity of demand; 1. Price elasticity of demand; 2. Income elasticity of demand; and 3. Cross-elasticity of demand 1. Price elasticity of demand The degree of responsiveness of quantity demanded to a change in price is called price elasticity of demand Price elasticity of demand = Percentage change in quantity demanded Perfectly inelastic demand (ep = 0) Inelastic (less elastic) demand (e < 1) Unitary elasticity (e = 1) Elastic (more elastic) demand (e > 1) Perfectly elastic demand (e = ) PERFECTLY INELASTIC DEMAND (EP = 0) This describes a situation in which demand shows no response to a change in price. In other words, whatever be the price the quantity demanded remains the same. The vertical straight line demand curve as shown alongside reveals that with a change in price (from OP to Op1) the demand remains same at OQ. Thus, demand does not at all respond to a change in price. Thus ep = O. Hence, perfectly inelastic demand. Fig a RELATIVELY INELASTIC (LESS ELASTIC) DEMAND (E < 1)In this case the proportionate change in demand is smaller than in price. In the alongside figure percentage change in demand is smaller than that in price. It means the demand is relatively c less responsive to the change in price. This is referred to as an inelastic demand. Fig e UNITARY ELASTICITY DEMAND (E = 1) When the percentage change in price produces equivalent percentage change in demand, we have a case of unit elasticity. The rectangular hyperbola as shown in the figure demonstrates this type of elasticity. In this case percentage change in demand is equal to percentage change in price, hence e = 1. Fig c

RELATIVELY ELASTIC (MORE ELASTIC) DEMAND (E > 1) In case of certain commodities the demand is relatively more responsive to the change in price. It means a small change in price induces a significant change in, demand. It can be noticed that in the above example the percentage change in demand is greater than that in price. Hence, the elastic demand (e>1) Fig d PERFECTLY ELASTIC DEMAND (E = ) This is experienced when the demand is extremely sensitive to the changes in price. In this case an insignificant change in price produces tremendous change in demand. The demand curve showing perfectly elastic demand is a horizontal straight line. Fig b INCOME ELASTICITY OF DEMAND Demand for a commodity changes in response to a change in income of the consumer. In other words, income elasticity of demand means the responsiveness of demand to changes in income. Thus, income elasticity of demand can be expressed as: EY = [Percentage change in demand / Percentage change in income] The following types of income elasticity can be observed: Income Elasticity of Demand Greater than One: When the percentage change in demand is greater than the percentage change in income, a greater portion of income is being spent on a commodity with an increase in income- income elasticity is said to be greater than one. Income Elasticity is unitary: When the proportion of income spent on a commodity remains the same or when the percentage change in income is equal to the percentage change in demand, EY = 1 or the income elasticity is unitary. Income Elasticity Less Than One (EY< 1): This occurs when the percentage change in demand is less than the percentage change in income. Zero Income Elasticity of Demand (EY=o): This is the case when change in income of the consumer does not bring about any change in the demand for a commodity. Negative Income Elasticity of Demand (EY< o): It is well known that income effect for most of the commodities is positive. But in case of inferior goods, the income effect beyond a certain level of income becomes negative. This implies that as the income increases the consumer, instead of buying more of a commodity, buys less and switches on to a superior commodity. The income elasticity of demand in such cases will be negative. CROSS ELASTICITY OF DEMAND While discussing the determinants of demand for a commodity, we have observed that demand for a commodity depends not only on the price of that commodity but also on the prices of other related goods. Thus, the demand for a commodity X depends not only on the price of X but also on the prices of other commodities Y, Z.N etc. The concept of cross elasticity explains the degree of change in demand for X as, a result of change in price of Y. This can be expressed as: EC = [Percentage Change in demand for X / Percentage change in price of Y]

8. Explain Law of Returns to Scale: Definition and Explanation: The laws of returns are often confused with the law of returns to scale. The law of returns operates in the short period. It explains the production behavior of the firm with one factor variable while other factors are kept constant. Whereas the law of returns to scale operates in the long period. It explains the production behavior of the firm with all variable factors. There is no fixed factor of production in the long run. The law of returns to scale describes the relationship between variable inputs and output when all the inputs, or factors are increased in the same proportion. The law of returns to scale analysis the effects of scale on the level of output. Here we find out in what proportions the output changes when there is proportionate change in the quantities of all inputs. The answer to this question helps a firm to determine its scale or size in the long run. (1) Increasing Returns to Scale: If the output of a firm increases more than in proportion to an equal percentage increase in all inputs, the production is said to exhibit increasing returns to scale. For example, if the amount of inputs are doubled and the output increases by more than double, it is said to be an increasing returns returns to scale. When there is an increase in the scale of production, it leads to lower average cost per unit produced as the firm enjoys economies of scale. (2) Constant Returns to Scale: When all inputs are increased by a certain percentage, the output increases by the same percentage, the production function is said to exhibit constant returns to scale. For example, if a firm doubles inputs, it doubles output. In case, it triples output. The constant scale of production has no effect on average cost per unit produced. (3) Diminishing Returns to Scale: The term 'diminishing' returns to scale refers to scale where output increases in a smaller proportion than the increase in all inputs. For example, if a firm increases inputs by 100% but the output decreases by less than 100%, the firm is said to exhibit decreasing returns to scale. In case of decreasing returns to scale, the firm faces diseconomies of scale. The firm's scale of production leads to higher average cost per unit produced. Graph/Diagram: The three laws of returns to scale are now explained with the help of a graph below: The figure shows that when a firm uses one unit of labor and one unit of capital, point a, it produces 1 unit of quantity as is shown on the q = 1 isoquant. When the firm doubles its outputs by using 2 units of labor and 2 units of capital, it produces more than double from q = 1 to q = 3. So the production function has increasing returns to scale in this range. Another output from quantity 3 to quantity 6. At the last doubling point c to point d, the

production function has decreasing returns to scale. The doubling of output from 4 units of input, causes output to increase from 6 to 8 units increases of two units only.

Unit -III

1. What is market? A market is a set of conditions in which buyers and sellers meet each other for the purpose of exchange of goods and services for money. 2. What is Perfect Competition: "Perfect competition is a market in which there are many firms selling identical products with no firm large enough, relative to the entire market, to be able to influence market price". 3. What are the Factors of Production? (i) The share of land, is named as Rent. (ii) The share of labor as Wages. (iii) The share of capital as Interest. (iv) The share of organization as Profit. 4. What is Oligopoly? "Oligopoly is an industry structure characterized by a few firms producing all or most of the output of some good that may or may not be differentiated".The term 'a few firms' covers two to ten firms dominating the entire market for a good. If there are only two firms in the market, the oligopoly is called Duopoly. 5. What is Monopolistic competition? "Monopolistic competition is found in the industry where there is a large number of small sellers selling differentiated but close substitute products". 6. Explain the Features/Characteristics or Conditions of Perfect Competition. (1) Large number of firms. The basic condition of perfect competition is that there are large number of firms in an industry. Each firm in the industry is so small and its output so negligible that it exercises little influence over price of the commodity in the market. A single firm cannot influence the price of the product either by reducing or increasing its output. (2) Large number of buyers. In a perfect competitive market, there are very large number of buyers of the product. If any consumer purchases more or purchases less, he is not in a position to affect the market price of the commodity. (3) The product is homogeneous. Another provision of perfect competition is that the good produced by all the firms in the industry is identical. In the eyes, of the consumer, the product of one firm (seller) is identical to that of another seller.

(4) No barriers to entry. The firms in a competitive market have complete freedom of entering into the market or leaving the industry as and when they desire. There are no legal, social or technological! barriers for the new firms (or new capital) to enter or leave the industry. (5) Complete information. Another condition for perfect competition is that the consumers and producers possess perfect information about the prevailing price of the product in the market. The consumers know the ruling price, the producers know costs, the workers know about wage rates and so on. (6) Profit maximization. For perfect competition to exist, the sole objective of the firm must be to get maximum profit. 7. Explain the Comparison Between Monopoly and Competitive Equilibrium or Perfect Competition. The main points of difference and similarities of monopoly model with competitive model are as follows: Monopoly (1) The firm is in equilibrium at that level of output where MR equals MC. Perfect Competition or Competitive Equilibrium (1) The most profitable output is also at a point where MR is equal to MC. (2) The AR and MR curves facing (2) The AR and MR curves are negatively inclined competitive producer are perfectly elastic, i.e., it is i.e., a firm can sell more goods at lower and fewer a horizontal straight line. A firm cannot alter the goods at higher prices. The MR curve ties below the market price by selling more or by selling less. The AR curve. AR and MR curves are equal and, therefore, coincide. (3) The monopolist can earn supernormal profits in (3) The firm can earn abnormal profits in the short the short as well as in the long period. The firm run but in the long run only normal profits are need not equate the AR to the lowest point of AC earned. The firm is in equilibrium when MR = MC = in the long run AR = Minimum AC in the long run. (4) As the production of a commodity is in the (4) The competitive producer has no control over hands of a single producer, therefore, a firm has the price of the commodity. It has to sell at the control over the output and price of the price determined by the intersection of the forces commodity. of demand and supply in the market (5) The single firm comprises the whole industry. (5) There are many firms comprising an industry. All The firm may not be of the optimum size. The the firms are of the optimum size in the long run. possibility of the new firms to enter into The new firms can enter the industry. the industry, is restricted. (6) The equilibrium price is higher than MC. The (6) The equilibrium price is equal to MC. monopolist always tries to maximize profits by The entrepreneur charges the price which gives him fixing the price higher than the competitive price. the normal profit in the long run. So customers do The consumers, therefore, have to pay a not stand at a disadvantage. higher price and thus stand at a disadvantage. (7) The monopoly firm is a price seeker. (8) A monopoly firm is not a price taker. Hence, it cannot have a supply curve. It chooses output and price in a way that gives. It the highest possible profit. (7) The competitive firm is a price taker. (8) A competitive firm cannot exert any influence on the price. The firm is a price taker and so has a supply curve. The portion of MC curve above AVC curve is supplied.

8. Explain the three important economic models of Oligopoly. (1) Price and output determination under collusive oligopoly. (2) Price and output determination under non-collusive oligopoly. (3) Price leadership model. (1) Price and Output Determination Under Collusive Oligopoly: The term 'collusion' implies to 'play together'. When firms under oligopoly agree formally not to compete with each other about price or output, it is called collusive oligopoly. The firms may agree on setting output quota, or fix prices or limit product promotion or agree not to 'poach' in each other's market. The completing firms thus from a 'cartel'. The members of firms behave as if they are a single firm. Assumptions of Price and Output Determination Under Collusive Oligopoly: For price output determination in a collusive oligopoly, we assume that (i) there are only three firms in the industry and they form a cartel, (ii) the products of all the three firms are homogenous (iii) the cost curves of these firms are identical. Under the assumptions stated above, the equilibrium of the industry under collusive oligopoly is explained with the help of a diagram. Diagram: In this figure 17.4, the industry demand curve DD consisting of three firms is identical. So is the case with the MR curve and MC curve which are identical. The cartel's MR curve intersects the MC curve at point L. Profits are maximized at output OQ1, where MC = MR. The cartel will set a price OP1, at which OQ1, output will bedemanded. Having agreed on the cartel price, the members may then complete each other using non price competition togain as big share of resulting sales OQ1 as they can. There is another alternative also. The cartel members may agree to divide the market between them. Each member would given a quota. The sum of all the quotas must add up to Q 1. In case the quotas exceeded OQ1either the output will remain unsold at OP price or the price would fall. (2) Price and Output Determination Under Non-Collusive Oligopoly: It will be explain with the help of kinked Demand Curve Model. (i) The Kinked Demand Curve Model: The Kinked demand curve model was developed by Paul Sweezy (1939). According to him, the firms under oligopoly try to avoid any activity which could lead to price wars among them. The firms mostly make efforts to operate in non price competition for increasing their respective shares of the market and their

profit. An analytical device which is used to explain the oligopolistic price rigidity is the Kinked Demand Curve. This model operates on fulfilling certain conditions which, in brief, are as under: (a) All the firms in the industry are quite developed with or without product differentiation. {b} All the firms are selling the goods on fairly satisfactory price in the market. (c) If any one firm lowers the price of its product to capture a larger share of the market, the other firms follow and reduce the price of their goods in order to retain their share of the market. (d) If one firm raises the price of its goods, the other firms will not follow the price increase. Some of the customers of the price raising firm will shift to the relatively low priced firms. Mr. Paul Sweezy used two demand curve concepts to explain the model. These are reproduced below: In the figure 17.5. DD/ is a kinked demand curve. It is made up or two segments DB and BD/. The demand curve is kinked Or has a bend at point B. The kink is formed at the prevailing market price level BM (10 per unit). The segment of the demand curve above the prevailing price level (10) is highly elastic and the segment of the demand curve below the prevailing price level is fairly inelastic. This is explained now in brief. Explanation: Price increase. If an oligopolistic raises the price of his products from 10 per unit to 12 per unit, he loses a large part of the market and his sale comes down to 40 units from 120 units. There is a loss of 80 units in sale as most of his customers are now purchasing goods from his competitor firms who are selling the goods at 10 per units. So an increase in price above the prevailing level-shows that the demand curve to the left of and above point B is fairly elastic. Price reduction. If an oligopolistic reduces the prices of its goods below the prevailing price level BM (10 per unit) for increasing his sales, his competitors will also match price changes so that their customers do not go away from them. Let us assume that Oligopolist has lowered the price to 4.0 per unit. Its competitors in the industry match the price cut. The sale of the oligopolist with a big price cut of .6.0 per unit has increased by only 40 units (160 - 120 = 40). The firm does not gain as the total revenue decreases with the price cut. The BD/ portion of the demand curve which lies on the right side and below point B is fairly inelastic. Rigid Prices. The firms in the oligopolist market 'have no incentive to raise or lower the prices of the goods. They prefer to sell the goods at the prevailing price level due to reaction function. The price BM (10 per unit) will, therefore, tend to remain stable or rigid, as every member of the oligopoly does not see any gain by lowering or raising the price of his goods.

(3) Price Leadership Model: The firms in the oligopolistic market are not happy with price competition among themselves. They try various methods to maximize joint profits. Price leadership is one of the means which provides relief to the firms from the strains of price competition.
Unit -IV

1. What is Aggregate Demand? AD is the total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels 2. What is Macroeconomic equilibrium? Macroeconomic equilibrium for an economy in the short run is established when aggregate demand intersects with short-run aggregate supply. 3. What are the components of Aggregate Demand?
AD = C + I + G + (X-M) C- Consumption I Investments G- Government Expenditure (X-M)- Exports - Imports 4. What is fiscal policy? Fiscal policy is meant the regulation of the level of government expenditure and taxation to achieve full employment without inflation in the economy

5. Marginal propensity to save? Marginal propensity to save is the ratio of change in saving to change in income. The MPS measures the change in saving generated by a change in income. Formula: MPS = Change in Saving = S Change in Income Y 6. What is marginal propensity to consume "As the relationship between a change in consumption (C) that resulted from a change in disposable income (Y)". Formula: MPC = Change in Consumption = C Change in Income Y

7. Explain the Methods of Measurement of National Income Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods: 1. Output or Production method 2. Income method, and 3. Expenditure method. Let us discuss these methods in detail. 1. Output or Production Method: This method is also called the value-added method. This method approaches national income from the output side. Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. Then, the gross product is found out by adding up the net values of all the production that has taken place in these sectors during a given year. In order to arrive at the net value of production of a given industry, intermediate goods purchase by the producers of this industry are deducted from the gross value of production of that industry. The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP. If we deduct depreciation from the GNP we get NNP at market price. NNP at market price indirect taxes + subsidies will give us NNP at factor cost or National Income. The output method can be used where there exists a census of production for the year. The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy. 2. Income Method: This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country. Thus, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs and income of self-employed people. This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc. 3. Expenditure Method: This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government: (a) Expenditure on consumer goods and services by individuals and households denoted by C. This is called personal consumption expenditure denoted by C. (b) Expenditure by private business enterprises on capital goods and on making additions to inventories or stocks in a year. This is called gross domestic private investment denoted by I. (c) Governments expenditure on goods and services i.e. government purchases denoted by G. (d) Expenditure made by foreigners on goods and services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports imports denoted by(X M). Thus, GDP = C + I + G + (X M).

8. Explain the important concepts of national income. 1. Gross Domestic Product (GDP) 2. Gross National Product (GNP) 3. Net National Product (NNP) at Market Prices 4. Net National Product (NNP) at Factor Cost or National Income 5. Personal Income 6. Disposable Income 1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year. First, it measures the market value of annual output of goods and services currently produced. This implies that GDP is a monetary measure. Secondly, for calculating GDP accurately, all goods and services produced in any given year must be counted only once so as to avoid double counting. So, GDP should include the value of only final goods and services and ignores the transactions involving intermediate goods.Thirdly, GDP includes only currently produced goods and services in a year. Market transactions involving goods produced in the previous periods such as old houses, old cars, factories built earlier are not included in GDP of the current year. Lastly, GDP refers to the value of goods and services produced within the domestic territory of a country by nationals or non-nationals. 2. Gross National Product (GNP): Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore, GNP = GDP + Net factor income from abroad. Net factor income from abroad = factor income received by Indian nationals from abroad factor income paid to foreign nationals working in India. 3. Net National Product (NNP) at Market Price: NNP is the market value of all final goods and services after providing for depreciation. That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore NNP = GNP Depreciation Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear. 4.Net National Product (NNP) at Factor Cost (National Income): NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that: NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies. 5. Personal Income: Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and

undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore, Personal Income = National Income Social Security contributions corporate income taxes undistributed corporate profits + transfer payments. 6. Disposable Income: From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus, Disposable Income = Personal income personal taxes. Disposable Income can either be consumed or saved. Therefore, Disposable Income = consumption + saving. 9. Explain the Circular Flow of Macroeconomic Activity In economics, the terms circular flow of income or circular flow refer to a simple economic model which describes the reciprocal circulation of income between producers and consumers. In the circular flow model, the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and provide each other with factors in order to facilitate the flow of income. Firms provide consumers with goods and services in exchange for consumer expenditure and "factors of production" from households. More complete and realistic circular flow models are more complex. They would explicitly include the roles of government and financial markets, along with imports and exports. Human wants are unlimited and are of recurring nature therefore, production process remains a continuous and demanding process. In this process, household sector provides various factors of production such as land, labour, capital and enterprise to producers who produce by goods and services by co-ordinating them. Producers or business sector in return makes payments in the form of rent, wages, interest and profits to the household sector. Again household sector spends this income to fulfil its wants in the form of consumption expenditure. Business sector supplies them goods and services produced and gets income in return of it. Thus expenditure of one sector becomes the income of the other and supply of goods and services by one section of the community becomes demand for the other. This process is unending and forms the circular flow of income, expenditure and production. A continuous flow of production, income and expenditure is known as circular flow of income. It is circular because it has neither any beginning nor an

end. The circular flow of income involves two basic principles:- 1.In any exchange process, the seller or producer receives the same amount what buyer or consumer spends. 2.Goods and services flow in one direction and money payment to get these flow in return direction, causes a circular flow. Unit -V
1. What is Philips Curve? The Phillips curve shows the inverse relationship between inflation and unemployment. It illustrates the trade off theory of inflation. According to this view, a nation can buy a lower level of unemployment if it is willing to pay the price of a higher rate of inflation.

2. What is money? Money has overcome the difficulties of barter. Crowther, has defined money as anything that is generally acceptable as a means of exchange (i.e, as a means of settling debts) and that at the same time acts as a measure and as a store of value. 3. What is seasonal Unemployment? People engaged in such type of Work or Activities may remain Unemployed during the Off-Season which is termed as Seasonal Unemployment. 4. What are the motives of money? Precautionary Motive Transaction Motive Speculative Motive 5. What is monetary policy? Monetary policy is policy that employs the central banks control over the supply and cost of money as an instrument for achieving the objectives of economic policy 6. Explain the types of Inflation. 1. Types of Inflation on Coverage Types of inflation on the basis of coverage and scope point of view:Comprehensive Inflation : When the prices of all commodities rise throughout the economy it is known as Comprehensive Inflation. Another name for comprehensive inflation is Economy Wide Inflation. Sporadic Inflation : When prices of only few commodities in few regions (areas) rise, it is known as Sporadic Inflation. It is sectional in nature. For example, rise in food prices due to bad monsoon (winds bringing seasonal rains in India). 2. Types of Inflation on Time of Occurrence Types of inflation on the basis of time (period) of occurrence:-

War-Time Inflation : Inflation that takes place during the period of a war-like situation is known as WarTime inflation. During a war, scare productive resources are all diverted and prioritized to produce military goods and equipments. This overall result in very limited supply or extreme shortage (low availability) of resources (raw materials) to produce essential commodities. Production and supply of basic goods slow down and can no longer meet the soaring demand from people. Consequently, prices of essential goods keep on rising in the market resulting in War-Time Inflation. Post-War Inflation : Inflation that takes place soon after a war is known as Post-War Inflation. After the war, government controls are relaxed, resulting in a faster hike in prices than what experienced during the war. Peace-Time Inflation : When prices rise during a normal period of peace, it is known as Peace-Time Inflation. It is due to huge government expenditure or spending on capital projects of a long gestation (development) period. 3. Types of Inflation on Government Reaction Types of inflation on basis of Government's reaction or its degree of control:Open Inflation : When government does not attempt to restrict inflation, it is known as Open Inflation. In a free market economy, where prices are allowed to take its own course, open inflation occurs. Suppressed Inflation : When government prevents price rise through price controls, rationing, etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation. However, when government controls are removed, Suppressed inflation becomes Open Inflation. Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc. 4. Types of Inflation on Rising Prices Types of inflation on the basis of rising prices or rate of inflation:Creeping Inflation : When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation. According to R.P. Kent, when prices rise by not more than (upto) 3% per annum (year), it is called Creeping Inflation. Chronic Inflation : If creeping inflation persist (continues to increase) for a longer period of time then it is often called as Chronic or Secular Inflation. Chronic Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). It is called chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation. Walking Inflation : When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e between 3% and 10% per annum), it is called as Walking Inflation. According to some economists, walking inflation must be taken seriously as it gives a cautionary signal for the occurrence of Running inflation. Furthermore, if walking inflation is not checked in due time it can eventually result in Galloping inflation. Moderate Inflation : Prof. Samuelson clubbed together concept of Crepping and Walking inflation into Moderate Inflation. When prices rise by less than 10% per annum (single digit inflation rate), it is known

as Moderate Inflation. According to Prof. Samuelson, it is a stable inflation and not a serious economic problem. Running Inflation : A rapid acceleration in the rate of rising prices is referred as Running Inflation. When prices rise by more than 10% per annum, running inflation occurs. Though economists have not suggested a fixed range for measuring running inflation, we may consider price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation. Galloping Inflation : According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also referred as Jumping inflation. India has been witnessing galloping inflation since the second five year plan period. Hyperinflation : Hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate), it is termed as Hyperinflation. During a worst case scenario of hyperinflation, value of national currency (money) of an affected country reduces almost to zero. Paper money becomes worthless and people start trading either in gold and silver or sometimes even use the old barter system of commerce. Two worst examples of hyperinflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe's regime. 5. Types of Inflation on Causes Types of inflation on the basis of different causes:Deficit Inflation : Deficit inflation takes place due to deficit financing. Credit Inflation : Credit inflation takes place due to excessive bank credit or money supply in the economy. Scarcity Inflation : Scarcity inflation occurs due to hoarding. Hoarding is an excess accumulation of basic commodities by unscrupulous traders and black marketers. It is practised to create an artificial shortage of essential goods like food grains, kerosene, etc. with an intension to sell them only at higher prices to make huge profits during scarcity inflation. Though hoarding is an unfair trade practice and a punishable criminal offence still some crooked merchants often get themselves engaged in it. Profit Inflation : When entrepreneurs are interested in boosting their profit margins, prices rise. Pricing Power Inflation : It is often referred as Administered Price inflation. It occurs when industries and business houses increase the price of their goods and services with an objective to boost their profit margins. It does not occur during a financial crisis and economic depression, and is not seen when there is a downturn in the economy. As Oligopolies have the ability to set prices of their goods and services it is also called as Oligopolistic Inflation. Tax Inflation : Due to rise in indirect taxes, sellers charge high price to the consumers. Wage Inflation : If the rise in wages in not accompanied by a rise in output, prices rise. Build-In Inflation : Vicious cycle of Build-in inflation is induced by adaptive expectations of workers or employees who try to keep their wages or salaries high in anticipation of inflation. Employers and Organisations raise the prices of their respective goods and services in anticipation of the workers or employees' demands. This overall builds a vicious cycle of rising wages followed by an increase in general

prices of commodities. This cycle, if continues, keeps on accumulating inflation at each round turn and thereby results into what is called as Build-in inflation. Development Inflation : During the process of development of economy, incomes increases, causing an increase in demand and rise in prices. Fiscal Inflation : It occurs due to excess government expenditure or spending when there is a budget deficit. Population Inflation : Prices rise due to a rapid increase in population. Foreign Trade Induced Inflation : It is divided into two categories, viz., (a) Export-Boom Inflation, and (b) Import Price-Hike Inflation. Export-Boom Inflation : Considerable increase in exports may cause a shortage at home (within exporting country) and results in price rise (within exporting country). This is known as Export-Boom Inflation. Import Price-Hike Inflation : If a country imports goods from a foreign country, and the prices of imported goods increases due to inflation abroad, then the prices of domestic products using imported goods also rises. This is known as Import Price-Hike Inflation. For e.g. India imports oil from Iran at 100 per barrel. Oil prices in the international market suddenly increases to 150 per barrel. Now India to continue its oil imports from Iran has to pay 50 more per barrel to get the same amount of crude oil. When the imported expensive oil reaches India, the indian consumers also have to pay more and bear the economic burden. Manufacturing and transportation costs also increase due to hike in oil prices. This, consequently, results in a rise in the prices of domestic goods being manufactured and transported. It is the end-consumer in India, who finally pays and experiences the ultimate pinch of Import Price-Hike Inflation. If the oil prices in the international market fall down then the import price-hike inflation also slows down, and vice-versa. Sectoral Inflation : It occurs when there is a rise in the prices of goods and services produced by certain sector of the industries. For instance, if prices of crude oil increases then it will also affect all other sectors (like aviation, road transportation, etc.) which are directly related to the oil industry. For e.g. If oil prices are hiked, air ticket fares and road transportation cost will increase. Demand-Pull Inflation : Inflation which arises due to various factors like rising income, exploding population, etc., leads to aggregate demand and exceeds aggregate supply, and tends to raise prices of goods and services. This is known as Demand-Pull or Excess Demand Inflation. Cost-Push Inflation : When prices rise due to growing cost of production of goods and services, it is known as Cost-Push (Supply-side) Inflation. For e.g. If wages of workers are raised then the unit cost of production also increases. As a result, the prices of end-products or end-services being produced and supplied are consequently hiked. 6. Types of Inflation on Expectation Types of inflation on the basis of expectation or predictability:Anticipated Inflation : If the rate of inflation corresponds to what the majority of people are expecting or predicting, then is called Anticipated Inflation. It is also referred as Expected Inflation. Unanticipated Inflation : If the rate of inflation corresponds to what the majority of people are not expecting or predicting, then is called Unanticipated Inflation. It is also referred as Unexpected Inflation

7. Explain the PHILLIPS CURVE in Unemployment. The Phillips curve shows the inverse relationship between inflation and unemployment. It illustrates the trade off theory of inflation. According to this view, a nation can buy a lower level of unemployment if it is willing to pay the price of a higher rate of inflation. Short-run Phillips curve is a curve that shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant. 1. The natural unemployment rate is 6 percent. 2. The expected inflation rate is 3 percent a year. 3. This combination, at point B, provides the anchor point for the short-run Phillips curve.

A lower unemployment rate brings a higher inflation rate, such as at point A. A higher unemployment rate brings a lower inflation rate, such as at point C. The short-run Phillips curve passes through points A, B, and C and is the curve SRPC.

The Long-Run Phillips Curve The long-run Phillips curve is a vertical line that shows the relationship between inflation and unemployment when the economy is at full employment. Figure shows the long-run Phillips Curve. The long-run Phillips curve is a vertical line at the natural unemployment rate. In the long run, there is no unemployment-inflation tradeoff. No Long-Run Tradeoff Because the long-run Phillips curve is vertical, there is no long-run tradeoff between unemployment and inflation. In the long run, the only unemployment rate available is the natural unemployment rate, but any inflation rate can occur.

Changes in the Natural Unemployment Rate If the natural unemployment rate changes, both the long-run Phillips curve and the short-run Phillips curve shift. When the natural unemployment rate increases, both the long-run Phillips curve and the short-run Phillips curve shift rightward. When the natural unemployment rate decreases, both the long-run Phillips curve and the short-run Phillips curve shift leftward.

8. Explain the Instruments of Monetary Policy Roughly we may say that monetary policy is credit control policy. The instruments of credit control can be broadly divided into : (1) Quantitative credit control measures ; and (2) Selective credit control measures. Quantitative credit control instruments include bank rate policy, variation of cash reserve ratios and open market operations. 1. Bank Rate : The Bank rate is the minimum rate at which the central bank of a country will lend money to all other banks. Suppose, there is too much of money in circulation. Then the central bank should take some money out of circulation. It can do it by increasing the bank rate. When the bank rate goes up, the rates charged by other banks go up. The belief is that if the rate of interest goes up, businessmen will be discouraged to borrow more money and producers will borrow less money for investment. Generally, to control inflation, the central bank will increase the bank rate. 2. Variation of cash Reserve Ratios : The ability of a commercial bank to create credit depends upon its cash reserves. The central bank of a country has the power to vary the cash reserve ratios. During inflation, to check the sharp rise in commodity prices and to control credit, the central bank can make use of this weapon. 3. Open Market Operations : In India, the open market operations have been conducted in Central Government securities and State Government securities. The success of open market operations as a weapon of credit control, depends mainly on (i) the possession by the central bank of adequate volume of securities ; (2) the presence of well developed bill (securities) market ; and (3) stability of cash reserve ratios maintained by commercial banks. These things are missing to a great degree in India. So, open market operations have not become a powerful weapon of credit control in our country. They have been

largely used in India more to assist the Government in its borrowing operations rather than controlling credit. Selective credit controls Selective credit controls can play an important role in an underdeveloped money market with a planned economy. Unlike the instruments of quantitative credit control, the selective instruments affect the types of credit extended by commercial banks. They not only prevent flow of credit into undesirable channels, but also direct the flow of credit into useful channels. The Reserve Bank of India had started applying the selective credit controls since 1955. The weapons of selective credit controls include (a) Fixing minimum margin of lending or for purchase of securities. (For example, shares or commodities like foodgrains and raw materials which are in short supply). In this case, the central bank specifies the fraction of the purchase price of securities that must be paid in cash. Unlike general controls, selective controls make it possible for the central bank to restrain what is regarded as an unhealthy expansion of credit. (eg. for financing the purchase of securities or automobiles) ; b) Ceiling on the amount of credit for expansion and c) Different rates of interest will be charged to encourage certain sectors and to discourage certain other sectors. In our country, the last weapon has been used especially, to encourage exports, agricultural production and production in small scale and cottage industries sector. d) The central bank will persuade the commercial banks to follow certain policies through moral suasion. 9. Explain the types of Unemployment Disguised Unemployment Voluntary Unemployment. Frictional Unemployment. Casual Unemployment. Seasonal Unemployment. Structural Unemployment. Technological Unemployment. Cyclical Unemployment. Chronic Unemployment. People who are unwilling to Work at the Prevailing Wage Rate & People who get a continuous flow of Income from their Property or other Sources & need not to Work, such people are Voluntarily Unemployed. Voluntarily Unemployment is a National Waste of Human Energy, but it is not a Serious Economic

Problem. A temporary phenomenon which results from Workers which are temporarily out of Work while changing Jobs or are suspended due to Strikes or Lockouts. Frictional Unemployment is due to difficulties in getting Workers & Vacancies together. For example, Big Industries Units & Polluting Industries have been moved out of the large towns and cities like Delhi. In Industries, such as Construction, Catering or Agriculture, where Workers are Employed on a day to day basis, there are chances of Casual Unemployment occurring due to Short-term Contracts, which are terminable any time. Industries & Occupations such as Agriculture, the catering trade in Holiday Resorts, where Production Activities are seasonal in nature offer Employment only for a certain Period of Time in a Year. People engaged in such type of Work or Activities may remain Unemployed which is termed as Seasonal Unemployment. Unemployment which arises due to change in the Pattern of Demand leading to Changes in the Structure of Production in the Economy is termed as Structural Unemployment. Example use of Synthetic Rubber is bound to reduce Demand for Natural Rubber & lead to Unemployment in Rubber Plantation. The only way to remove such Unemployment is to retrain the Unemployed in new Vocations so that they learn new Technologies & are thus absorbed in the expanding Economic Sectors. Due to Introduction of New Machinery, improvement in methods of Production, Labour-Saving devices, etc.., some Workers tend to be replaced by Machines. Their unemployment is termed as Technological Unemployment. Associated with the Cyclical Fluctuations in Economic Activity, especially in the Recessionary Depressionary Phases of Trade Cycle. Mostly found in Capitalist Countries like the USA and Western European Nations, etc. The Solution for Cyclical Unemployment lies in measures for increasing Total Expenditure in Economy, thereby pushing up the level of Effective demand. When Employment tends to be a Long-term feature of a Country, it is called Chronic Unemployment. Underdeveloped Countries suffer from Chronic Unemployment on account of the Vicious Circle of Poverty, Lack of Developed Formation, etc. Refers to a position where People may be Working & apparently Employed, yet their Contribution to Output may be Zero. Hence, they seem to be employed, but technically they are Unemployed because their Marginal Productivity is Zero. Common feature of Underdeveloped Economies especially in their Rural Sectors. In short, Overcrowding in an Occupation leads to Disguised Unemployment. Resources & their under utilization, High Population Growth, Low Capital during the Off-Season