Chapter-5

Economic Theory
1*. If peoples income of a country is denoted in a curved line space
that it has increased, then what does it denote?
a) the income is increasing
b) the income is decreasing
c) dissimilarity is decreasing in income distribution
d) dissimilarity in income distribution is increasing
2*. Multiplier process in economic theory is conventionally taken
to mean
a) the manner in which prices increase
b) the manner in which banks create credit
c) income of an economy grows on account of an initial investment
d) the manner in which government expenditure increases
3*. A financial instrument is called a primary security if it repre-
sents the liability of
a) some ultimate borrower
b) the Government of India
c) a primary cooperative bank
d) a commercial bank
4*. Personal disposable income is
a) always equal to personal income
b) always more than personal income
c) equal to personal income minus direct taxes paid by household
d) equal to personal income minus indirect taxes
5*. Which of the following most closely approximates our defi-
nition of oligopoly?
a) The cigarette industry b) The barber shops
c) The gasoline stations d) Wheat farmers
6. Who said Supply creates its own demand?
a) Adam Smith b) J B Say
c) Marshall d) Ricardo
7*. One of the essential conditions of perfect competition is
a) product differentiation
b) multiplicity of prices for identical products at any one time
c) many sellers and a few buyers
d) Only one price for identical goods at any one time
8*. The theory of distribution relates to which of the following?
a) The distribution of assets
b) The distribution of income
c) The distribution of factor/payments
d) Equality in the distribution of the income and wealth
9*. If an industry is characterised by economies of scale then
a) barriers to entry are not very large
b) long-run unit costs of production decreases as the quantity the
firm produces increases
c) capital requirement are small due to the efficiency of the large
scale operation
d) the costs of entry into the market are likely to be substantial
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10*. Says Law of Market holds that
a) supply is not equal to demand
b) supply creates its own demand
c) demand creates its own supply
d) supply is greater than demand
11*. Movement along the same demand curve is know as
a) Extension and Contraction of Demand
b) Increase and Decrease of Demand
c) Contraction of supply
d) Increase of supply
12*. When there is a change in demand leading to a shift of the
Demand Curve to the right, at the same price as before, the
quantity demanded will
a) decrease b) increase
c) remain the same d) contract
13*. The income elasticity of demand being greater than one, the
commodity must be
a) a necessity b) a luxury
c) inferior goods d) None of these
14*. Marginal efficiency of capital is
a) expected rate of return on new investment
b) expected rate of return of existing investment
c) difference between rate of profit and rate of interest
d) value of output per unit of capital invested
15*. When there is one buyer and many sellers then, that situation
is called
a) Monopoly b) Single buyer right
c) Down right d) Double buyers right
16*. The measure of a workers real wage is
a) The change in his productivity over a given time
b) His earnings after deduction at source
c) His daily earnings
d) The purchasing power of his earnings
17*. Average Revenue means
a) the revenue per unit of commodity sold
b) the revenue from all commodities sold
c) the profit realised from the marginal unit sold
d) the profit realised by sale of all commodities
18*. Economic rent refers to
a) Payment made for the use of labour
b) Payment made for the use of capital
c) Payment made for the use of organisation
d) Payment made for the use of land
19*. If the price of an inferior goods falls, its demand
a) rises b) falls
c) remains constant d) can be any of the above
20*. The Marginal Utility Curve slopes downward from left to right
indicating
a) A direct relationship between marginal utility and the stock of
commodity
b) A constant relationship between marginal utility and the stock
of commodity
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c) A proportionate relationship between marginal utility and the
stock of commodity
d) An inverse relationship between marginal utility and the stock
of commodity
21*. Capital output ratio of a commodity measures
a) its per unit cost of production
b) the amount of capital invested per unit of output
c) the ratio of capital depreciation to quantity of output
d) the ratio of working capital employed to quantity of output
22*. In equilibrium, a perfectly competitive firm will equate
a) marginal social cost with marginal social benefit
b) market supply with market demand
c) marginal profit with marginal cost
d) marginal revenue with marginal cost
23*. An economy is in equilibrium when
a) planned consumption exceeds planned savings
b) planned consumption exceeds planned investment
c) intended investment equals intended savings
d) intended investment exceeds intended savings
24*. What is book-building?
a) Preparing the income and expenditure ledgers of a company (book-
keeping)
b) Manipulating the profit and loss statements of a company
c) A process of inviting subscriptions to a public offer of securities,
essentially through a tendering process
d) Publishers activity
25*. The method of calculating the national income by the product
method is otherwise known as
a) Income method b) Value added method
c) Expenditure method d) Net output method
26*. Entrepreneurial ability is a special kind of labour that
a) is hired out to firms at high wages
b) organises the process of production
c) produces new capital goods to earn interest
d) manages to avoid losses by continual innovation
27*. What is narrow money?
a) The sum of currency in circulation and the demand deposits in
banks
b) The sum of M1 money and the time deposits
c) The sum of currency in circulation with the public and the cash
reserves held by banks
d) The market value of the stocks held by all the holders excluding
the promoters
28*. Transfer earning or alternative cost is otherwise known as
a) Variable cost b) Implicit cost
c) Explicit cost d) Opportunity cost (economic cost)
29*. Which of the following concepts are most closely associated
with J M Keynes?
a) Control of money supply
b) Marginal utility theory
c) Indifference curve analysis
d) Marginal efficiency of captial
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30*. Devaluation of money means
a) decrease in the internal value of money
b) decrease in the external value of money
c) decrease in both internal and external values of money
d) the government takes back currency notes of any denominations
31*. Demand of commodity mainly depends upon
a) Purchasing will b) Purchasing power
c) Tax policy d) Advertisement
32*. Basic infrastructure facilities in Economics are known as
a) Human capital b) Physical capital
c) Social overheads capital d) Working capital
33*. Evaluating all the options to find out most suitable solution to
business problems is inter-disciplinary activities. It is called
a) Professional research b) Management research
c) Operational research d) Commercial research
34*. A seller or buyer protects his business or holdings from changing
prices and takes action against it. It is known as
a) defence b) betting
c) inter-trading d) mortgage
35*. Devaluation usually causes the internal prices to
a) fall b) rise
c) remain unchanged d) None of the above
36. According to Keynesian theory of income determination, at full
employment, a fall in aggregate demand causes
a) a fall in prices of output and resources
b) a fall in real gross national product and employment
c) a rise in real gross national product and investment
d) a rise in prices of output and resources
37*. When aggregate supply exceeds aggregate demand
a) unemployment falls b) prices rise
c) inventories accumulate d) unemployment develops
38*. Equilibrium price means
a) Price determined by demand and supply
b) Price determined by cost and profit
c) Price determined by cost of production
d) Price determined to maximise profit
39*. When marginal utility is zero, the total utility is
a) Minimum b) Increasing
c) Maximum d) Decreasing
40*. Which unit of valuation is known as Paper Gold?
a) Eurodollar b) Petrodollar c) SDR d) GDR
41*. Dear Money means
a) low rate of interest b) high rate of interest
c) depression d) inflation
42*. Sellers market denotes a situation where
a) commodities are available at competitive rates
b) demand exceeds supply
c) supply exceeds demand
d) supply and demand are evenly balanced
43*. Legal Tender Money refers to
a) Cheques b) Drafts
c) Bill of exchange d) Currency notes
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44*. The sum total of incomes received for the services of labour,
land or capital in a country is called
a) Gross domestic product b) National income
c) Gross domestic income d) Gross national income
45*. Greshams Law means
a) Good money replaces bad money in circulation
b) Bad money replaces good money in circulation
c) Good money promotes bad money in the system
d) Bad money promotes good money in the system
46*. Bull and bear are related to which commercial activity?
a) Banking b) E-commerce
c) International trade d) Stock market
47*. The share broker who sells shares in the apprehension of falling
prices of shares is called
a) Bull b) Dog c) Bear d) Stag
48*. The fixed cost on such factors of production which are neither
hired nor bought by the firm is called
a) social cost b) opportunity cost
c) economic cost d) surcharged cost
49*. The break-even point is where
a) marginal revenue equals marginal cost
b) average revenue equals average cost
c) total revenue equals total cost
d) None of these
50*. One of the essential conditions of Mono-polistic competition
i s
a) Many buyers but one seller
b) Price discrimination
c) Product differentiation
d) Homogeneous product
51*. In a Laissez-Faire economy
a) the customers take all the decisions regarding production of all
the commodities
b) the Government does not interfere in the free functioning of
demand and supply forces in the market
c) the private-sector takes all the decisions for price-determination
of various commodities produced
d) the Government controls the allocation of all the factors of
production
52*. A firm is in equilibrium when its
a) marginal cost equals the marginal revenue
b) total cost is minimum
c) total revenue is maximum
d) average revenue and marginal revenue are equal
53*. Given the money wages, if the price level in an economy
increases, then the real wages will
a) increase b) decrease
c) remain constant d) become flexible
54*. The outcome of devaluation of currency is
a) increased export and improvement in balance of payment
b) increased export and foreign reserve deficiency
c) increased import and improvement in balance of payment
d) increased export and import
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55*. What is referred to as Depository Services?
a) A new scheme of fixed deposits
b) A method for regulating stock exchanges
c) An agency for safe-keeping of securities
d) An advisory service to investors
56*. The Interest Rate Policy is a component of
a) Fiscal Policy b) Monetary Policy
c) Trade Policy d) Direct Control
57*. A mixed economy works primarily through the
a) market mechanism
b) central allocative machinery
c) market mechanism regulated by Government policy
d) market mechanism guided by Government participation and
pl anni ng
58*. In Economics, production means
a) manufacturing b) making
c) creating utility d) farming
59*. According to modern thinking, the Law of Diminishing Returns
applies to
a) agriculture b) industry
c) mining d) all fields of production
60*. The concept that under a system of free enterprise, it is
consumers who decide what goods and services shall be produced
and in what quantities, is known as
a) Consumer Protection b) Consumers Decision
c) Consumer Preference d) Consumers Sovereignty
61*. Seawater, fresh air, etc are regarded in Economics as
a) Giffen goods b) Inferior goods
c) free goods d) normal goods
62*. If the price of tea falls, demand for coffee will
a) increase b) decrease
c) remain same d) None of these
63*. Which of the following does not determine supply of labour?
a) Size and age-structure of population
b) Nature of work
c) Marginal productivity of labour
d) Work-leisure ratio
64*. Prime cost is equal to
a) Variable cost plus administrative cost
b) Variable cost plus fixed cost
c) Variable cost only
d) Fixed cost only
65*. The practice of selling goods in a foreign country at a price
below their domestic selling price is called
a) diplomacy b) discrimination
c) dumping d) double pricing
66*. Who propounded the market law?
a) Adam Smith b) J B Say
c) T R Malthus d) David Recardo
67*. The national income consists of a collection of goods and
services reduced to common basis by being measured in terms
of money. Who says this?
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a) Samuelson b) Kuznets
c) Hicks d) Pigou
68*. Capital-Output Ratio measures
a) its per unit cost of production
b) the amount of capital invested per unit of output
c) the ratio of capital depreciation to quantity of output
d) the ratio of working capital employed to quantity of output
69*. Engels Law states the relationship between
a) quantity demanded and price of a commodity
b) quantity demanded and price of substitutes
c) quantity demanded and tastes of the consumers
d) quantity demanded and income of the consumers
70*. The demand curve for Giffen goods is
a) upward rising
b) downward falling
c) parallel to the quantity axis
d) parallel to the price axis
71*. All of the goods which are scarce and limited in supply are
called
a) Luxury goods b) Expensive goods
c) Capital goods d) Economic goods
72*. Which is the most essential function of an entrepreneur?
a) Supervision b) Management
c) Marketing d) Risk bearing
73*. Knowledge, technical skill, education etc in economics, are
regarded as
a) social-overhead capital b) human capital
c) tangible physical capital d) working capital
74*. Purchasing Power Parity theory is related with
a) Interest rate b) Bank rate
c) Wage rate d) Exchange rate
75*. Imputed gross rent of owner-occupied buildings is a part of
a) capital formation b) final consumption
c) intermediate consumption d) consumer durable
76*. Economies of Scale means reduction in
a) unit cost of prouction b) unit cost of distribution
c) total cost of production d) total cost of distribution
77*. With which form of economy is the term Laissez-faire
associated?
a) Capitalist economy b) Socialist economy
c) Mixed economy d) Command economy
78*. The supply of agricultural products is generally
a) elastic b) inelastic
c) perfectly elastic d) perfectly inelastic
79*. Who among the following is not a classical economist?
a) David Ricardo b) John Stuart Mill
c) Thomas Malthus d) John Maynard Keynes
80*. The process of curing inflation by reducing money supply is
called
a) Cost-push Inflation b) Demand-pull inflation
c) Disinflation d) Reflation
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81*. The main determinant of real wage is
a) extra earning b) nature of work
c) promotion prospect d) purchasing power of money
82*. A refrigerator operating in a chemists shop is an example of
a) free goods b) final goods
c) producers goods d) consumers goods
83*. When average cost production (AC) falls, marginal cost of
production must be
a) Rising
b) Falling
c) Greater than the average cost
d) Less than the average cost
84*. Production function expresses
a) technological relationship between physical inputs and output
b) financial relationship between physical inputs and output
c) relationship between finance and technology
d) relationship between factors of production
85*. Interest is a reward for parting with liquidity is according to
a) Keynes b) Marshall
c) Haberler d) Ohlin
86*. Extension or contraction of quantity demanded of a commodity
is a result of a change in the
a) unit price of the commodity
b) income of the consumer
c) tastes of the consumer
d) climate of the region
87*. Cross elasticity of demand between petrol and car is
a) infinite b) positive
c) zero d) negative
88*. The Law of Demand expresses
a) effect of change in price of a commodity on its demand
b) effect of change in demand of a commodity on its price
c) effect of change in demand of a commodity over the supply of its
substitute
d) None of the above
89*. A situation where we have people whose level of income is not
sufficient to meet the minimum consumption expenditure is
considered as
a) Absolute Poverty b) Relative Poverty
c) Urban Poverty d) Rural Poverty
90*. Full convertibility of a rupee means
a) purchase of foreign exchange for rupees freely
b) payment for imports in terms of rupees
c) repayment of loans in terms of rupees
d) determination of rate of exchange between rupee and foreign
currencies freely by the market forces of demand and supply
91*. An exceptional demand curve is one that moves
a) upward to the right b) downward to the right
c) horizontally d) vertically
92*. Production function explains the relationship between
a) initial inputs and ultimate output
b) inputs and ultimate consumption
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c) output and consumption
d) output and exports
93*. The term stagflation refers to a situation where
a) growth has no relation with the change in prices
b) rate of growth and prices both are decreasing
c) rate of growth is faster than the rate of price increase
d) rate of growth is slower than the rate of price increase
94*. In Economics the Utility and Usefulness have
a) same meaning b) different meaning
c) opposite meaning d) None of the above
95*. If two commodities are complements, then their cross-price
elasticity is
a) zero b) positive
c) negative d) imaginary number
96*. Opportunity cost of production of a commodity is
a) the cost that the firm could have incurred when a different
technique was adopted
b) the cost that the firm could have incurred under a different method
of production
c) the actual cost incurred
d) the next best alternative output
97*. Surplus earned by a factor other than land in the short period of
time referred to as
a) economic rent b) net rent
c) quasi-rent d) super-normal rent
98*. Price theory is also known as
a) Macroeconomics b) Development Economics
c) Public Economics d) Microeconomics
99*. A want becomes a demand only when it is backed by the
a) Ability to purchase b) Necessity to buy
c) Desire to buy d) Utility of the product
100*. The terms Microeconomics and Macro-economics were coined
by
a) Alfred Marshall b) Ragner Nurkse
c) Ragner Frisch d) J M Keynes
101*. Economics is what it ought to be, This statement refers to
a) Normative economics b) Positive economics
c) Monetary economics d) Fiscal economics
102*. The excess of price a person is to pay rather than forego the
consumption of the commodity is called
a) Price b) Profit
b) Producers surplus c) Consumers surplus
103*. When the price of a commodity falls, we can expect
a) the supply of it to increase
b) the demand for it to fall
c) the demand for it to stay constant
d) the demand for it to increase
104*. The most distinguishing feature of oligopaly is
a) number of firms
b) interdependence
c) negligible influence on price
d) price leadership
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105*. Which of the following cost curve is never U-shaped?
a) Marginal cost curve
b) Average variable cost curve
c) Average fixed cost curve
d) Average cost curve
106*. Kinked demand curve is a feature of
a) Monopoly b) Oligopoly
c) Monopsony d) Duopoly
107*. Demand for complementary goods is known as
a) Joint demand b) Derived demand
c) Direct demand d) Cross demand
108*. Plant and machinery are
a) Producers goods b) Consumers goods
c) Distributors goods d) Free goods
109*. The addition to total cost by producing an additional unit of
output by a firm is called
a) Variable cost b) Average cost
c) Marginal cost d) Opportunity cost
110*. In a perfectly competitive market a firms
a) Average Revenue is always equal to Marginal Revenue
b) Marginal Revenue is more than Average Revenue
c) Average Revenue is more than Marginal Revenue
d) Marginal Revenue and Average Revenue are never equal
Answers
1. c 2. c 3. a 4. c 5. a 6. b
7. d 8. d 9. b 10. b 11. b 12. b
13. b 14. a 15. b 16. d 17. a 18. d
19. a 20. d 21. b 22. d 23. c 24. c
25. d 26. b 27. a 28. d 29. d 30. b
31. b 32. c 33. c 34. a 35. c 36. a
37. c 38. a 39. c 40. c 41. b 42. b
43. d 44. c 45. b 46. d 47. c 48. a
49. b 50. c 51. b 52. a 53. b 54. a
55. c 56. b 57. d 58. c 59. d 60. d
61. c 62. b 63. c 64. a 65. c 66. b
67. c 68. b 69. d 70. a 71. d 72. d
73. b 74. d 75. b 76. a 77. a 78. b
79. d 80. c 81. d 82. b 83. d 84. a
85. a 86. a 87. d 88. a 89. a 90. d
91. b 92. a 93. d 94. b 95. c 96. d
97. c 98. d 99. a 100. c 101. a 102. c
103. d 104. b 105. c 106. b 107. a 108. a
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109. c 110. a
Explanatory Notes
1. It shows inequality in income distribution. Inequality indices can
also be derived directly from the Lorenz curve. Perhaps the most
commonly used inequality index is the Gini coefficient, which
ranges from 0 (perfect equality) to 1 (perfect inequality). It is the
ratio of the area enclosed by the Lorenz curve and the perfect equal-
ity line to the total area below that line.
2. In economics, a multiplier is a factor of proportionality that measures
how much an endogenous variable changes in response to a change
in some exogenous variable. For example, suppose a one-unit change
in some variable x causes another variable y to change by M units.
Then the multiplier is M. In monetary macroeconomics and banking,
the money multiplier measures how much the money supply increases
in response to a change in the monetary base. The multiplier may
vary across countries, and will also vary depending on what measures
of money are considered.
3. Instruments (certificates) issued by the ultimate borrower are called
primary securities. Instruments issued by intermediaries on behalf
of the ultimate borrower are called indirect securities. The market
for instruments (also called securities) issued for the first time, is
called the primary market. Primary security is the asset created
out of the credit facility extended to the borrower and/or which are
directly associated with the business/project of the borrower for
which the credit facility has been extended.
4. Disposable income is total personal income minus personal current
taxes. In national accounts definitions, personal income minus
personal current taxes equal s di sposabl e personal i ncome.
Subtracting personal outlays (which includes the major category of
personal (or, private) consumption expenditure) yields personal (or,
private) savings.
5. An oligopoly is a market form in which a market or industry is
dominated by a small number of sellers (oligopolists). Because there
are few sellers, each oligopolist is likely to be aware of the actions
of the others. The decisions of one firm influence, and are influ-
enced by, the decisions of other firms. Businesses that are part of
an oligopoly, share some common characteristics: they are less con-
centrated than in a monopoly, but more concentrated than in a
competitive system. This creates a high amount of interdependence
which encourages competition in non-price-related areas, like ad-
vertising and packaging. The tobacco companies, soft drink compa-
nies, and airlines are examples of an imperfect oligopoly.
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7. The fundamental condition of perfect competition is that there must
be a large number of sellers or firms. Homogeneous Commodity is
the second fundamental condition of a perfect market. The products
of all firms in the industry are homogeneous and identical. In other
words, they are perfect substitutes for one another. There are no
trademarks, patents etc to distinguish the product of one seller
from that of another. Under perfect competition, the control over
price is completely eliminated because all firms produce homogeneous
commodities. This condition ensures that the same price prevails
in the market for the same commodity.
8. In economics, distribution theory is the systematic attempt to account
for the sharing of the national income among the owners of the
factors of productionland, labour and capital. Traditionally,
economists have studied how the costs of these factors and the size
of their returnrent, wages, and profitsare fixed. The theory of
distribution involves three distinguishable sets of questions. First,
how is the national income distributed among persons? Second,
what determines the prices of the factors of production? Third,
how is the national income distributed proportionally among the
factors of production?
9. In microeconomics, economies of scale are the cost advantages that
an enterprise obtains due to expansion. There are factors that cause
a producers average cost per unit to fall as the scale of output is
increased. Economies of scale is a long run concept and refers to
reductions in unit cost as the size of a facility and the usage levels
of other inputs increase.
10. Says Law, or the Law of Market, is an economic principle of
classi cal economics named after the French businessman and
economist Jean Baptiste Say (1767-1832), who stated that supply
creates its own demand. Supply creates its own demand is the
formulation of Says Law by John Maynard Keynes.
11. A shift in the demand curve is caused by a factor affecting demand
other than a change in price. If any of these factors change then
the amount consumers wish to purchase changes whatever the price.
The shift in the demand curve is referred to as an increase or
decrease in demand. A movement along the demand curve occurs
when there is a change in price. This may occur because of a change
in supply conditions. The factors affecting demand are assumed to
be held constant. A change in price leads to a movement along the
demand curve and it referred to as a change in quantity demanded.
12. In economi cs, the demand curve i s the graph depi cti ng the
relationship between the price of certain commodity and the amount
of it that consumers are willing and able to purchase at that given
price. The shift of a demand curve takes place when there is a
change in any non-price determinant of demand, resulting in a
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new demand curve. There is movement along a demand curve when
a change in price causes the quantity demanded to change. When
there is a change in an influencing factor other than price, there
may be a shift in the demand curve to the left or to the right, as the
quantity demanded increases or decreases at a given price. For
example if there is a positive news report about the product the
quantity demanded at each price may increase as demonstrated by
the demand curve shifting to the right.
13. In economics, i ncome elasticity of demand measures the
responsiveness of the demand for the goods to a change in the
income of the people demanding the goods, ceteris paribus. It is
calculated as the ratio of the percentage change in demand to the
percentage change in income. For example, if in response to a 10%
increase in income, the demand for the goods increased by 20%,
the income elasticity of demand would be
2
% 10
% 20

. A positive income
elasticity of demand is associated with normal goods; an increase
in income will lead to a rise in demand. If income elasticity of
demand of a commodity is less than 1, these are necessity goods. If
the elasticity of demand is greater than 1, these are luxury goods or
superior goods.
14. The volume of investment depends upon the following two factors:
(a) rate of interest; and (b) marginal efficiency of capital. Before
investing the money businessman compares interest with the rate
of marginal efficiency capital. If they expect that rate of profit will
be greater than the rate of interest, then they invest the money
otherwise not. The expected rate of return on capital is called the
marginal efficiency of capital. In other words, marginal efficiency
of capital is a return on investment which is based partly on
expectations of future yields and partly on the actual price of the
capital goods concerned.
15. In economics, a monopsony (mono: single) is a market form in
which only one buyer faces many sellers. It is an example of imperfect
competition, similar to a monopoly, in which only one seller faces
many buyers. As the only purchaser of goods or services, the
monopsonist may dictate terms to its suppliers in the same manner
that a monopolist controls the market for its buyers. It is also known
as Single Buyer Right. A single-payer universal health care system,
in which the government is the only buyer of health care services,
is an example of a monopsony. Another possible monopsony could
develop in the exchange between the food industry and farmers.
16. A real wage rate is a nominal wage rate divided by the price of
goods and is a transparent measure of how much of the goods an
hour of work buys. It provides an important Indicator of the living
standards of workers, and also of the productivity of workers. While
differences in earnings or incomes may be misleading indicators of
worker welfare, real wage rates are comparable across time and
location. Nominal wages are not sufficient to tell us if workers gain
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since, even if wages rise, the price of one of the goods also rises
when moving to free trade. The real wage represents the purchasing
power of wages that is, the quantity of goods the wages will
purchase
17. Average revenue is the revenue per unit of the commodity sold.
Since the demand curve shows the relationship between price and
the quantity demanded, it also represents the average revenue or
price at which the various amounts of a commodity are sold, because
the price offered by the buyer is the revenue from sellers point of
view. Therefore, average revenue curve of the firm is the same as
demand curve of the consumer.
18. Rent refers to that part of payment by a tenant which is made only
for the use of land, ie, free gift of nature. The payment made by an
agriculturist tenant to the landlord is not necessarily equals to the
economic rent. A part of this payment may consist of interest on
capital invested in the land by the landlord in the form of buildings,
fences, tube wells, etc. The term economic rent refers to that part
of payment which is made for the use of land only, and the total
payment made by a tenant to the landlord Is called contract rent.
Economic rent is also called surplus because it emerges without
any effort on the part of a landlord.
19. Some goods are known as inferior goods. With inferior goods, there
is an inverse relationship between real income and the demand for
the goods in question. If real incomes rise, the demand for inferior
goods will fall. If real incomes fall (in a recession, for instance), the
demand for inferior goods will rise. For example, bus travel. As
people get richer, they are more likely to buy themselves a car, or
use a taxi, rather than rely on the more inferior bus, so the demand
for bus travel falls as real incomes rise.
20. The Marginal Utility Curve is a curve illustrating the relation
between the marginal utility obtained from consuming an additional
unit of goods and the quantity of the goods consumed. The negative
slope of the marginal utility curve reflects the law of diminishing
marginal utility. The marginal utility curve also can be used to derive
the demand curve. Marginal Utility is the utility derived from the
last unit of a commodity purchased. One of the earliest explanations
of the inverse relationship between price and quantity demanded is
the law of diminishing marginal utility. This law suggests that
as more of a product is consumed the marginal (additional) benefit
to the consumer falls; hence consumers are prepared to pay less.
21. Capital Output Ratio is the ratio of capital used to produce an
output over a period of time. This ratio has a tendency to be high
when capital is cheap as compared to other inputs. For instance, a
country with abundant natural resources can use its resource in
lieu of capital to boost its output; hence the resulting Capital Output
Ratio is low. The Capital Output Ratio tends to increase if the capital
available in country is cheaper than the other inputs. Therefore the
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countries that are rich in natural resources have a low capital output
ratio. This is because they can easily substitute the capital with
natural resource in order to increase the output. When countries
use their natural resources instead of capital then Capital Output
Ratio (COR) reduces.
22. A perfectly competitive firms supply curve is that portion of its
marginal cost curve that lies above the minimum of the average
variable cost curve. A perfectly competitive firm maximises profit by
producing the quantity of output that equates price and marginal
cost. In that price equals marginal revenue for a perfectly competitive
firm, price is also equal to marginal cost. In other words, the firm
produces by moving up and down along its marginal cost curve. The
marginal cost curve is thus the perfectly competitive firms supply
curve.
23. In economics, economic equilibrium is a state of the world where
economi c forces are bal anced and in the absence of external
influences the (equilibrium) values of economic variables will not
change. The condition of equilibrium of income is the equality of
intended savings and intended i nvestment. An economy is in
equilibrium when total savings equals total investment.
24. Book-building refers to the process of generating, capturing, and
recording investor demand for shares during an IPO (or other
securities during their issuance process) in order to support efficient
price discovery. Usually, the issuer appoints a major investment
bank to act as a major securities, underwriter or book-runner. The
book is the off market collation of investor demand by the book-
runner and i s conf identi al to the book-runner, i ssuer, and
underwriter. Book-building is a process of price discovery used in
public offers. The issuer sets a base price and a band within which
the investor is allowed to bid for shares.
25. Primarily there are three methods of measuring national income.
Which method is to be employee depends on the availability of data
and purpose. The three methods are Product Method, Income Method
and Expenditure Method. According to Product Method the total
value of final goods and services produced in a country during a
year is calculated at market prices. According to this method only
the final goods and services are included and the intermediary goods
and services are not taken into account. In this method, National
Output National Expenditure (Aggregate Demand) = National
Income.
26. In economics, factors of production are the inputs to the production
process. Factors of production may also refer specifically to the
primary factors, which are stocks including land, labour (the ability
to work), and capital goods applied to production. Many economists
today consider human capital (skills and education) as the fourth
factor of production, with entrepreneurship as a form of human
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capital. In markets, entrepreneurs combine the other factors of
production, land labour and capital, in order to make a profit. Often
these entrepreneurs are seen as innovators, and developing new
ways to produce new products. In a planned economy, central
planners decide how land, labour and capital should be used to
provide for maximum benefit for all citizens.
27. The four main monetary aggregates of measures of money supply
which ref l ect the state of the monetary sector are:
(i) M1 (Narrow money) = Currency with the public + demand deposits
of the publ i c, ( ii) M2 = Ml + Post Of fi ce Savi ngs deposits;
(iii) M3 (Broad money) = Ml + time deposits of the public with banks
and (iv) M4 = M3 + Total post office deposits. So Narrow Money is
simply a category of money supply that includes all physical money
like coins and currency along with demand deposits and other liquid
assets held by the central bank. This category of money is considered
to be the most readily available for transactions and commerce.
28. Opportunity cost is the cost of any activity measured in terms of
the value of the next best alternative forgone (that is not chosen). It
is the sacrifice related to the second best choice available to someone,
or group, who has picked among several mutually exclusive choices.
When economists refer to the opportunity cost of a resource, they
mean the value of the next-highest-valued alternative use of that
resource. If, for example, we spend time and money going to a movie,
we cannot spend that time at home reading a book, and we cannot
spend the money on something else. If our next-best alternative to
seeing the movie is reading the book, then the opportunity cost of
seeing the movie is the money spent plus the pleasure we forgo by
not reading the book.
29. The Marginal Efficiency of Capital (MEC) is that rate of discount
which would equate the price of a fixed capital asset with its present
discounted value of expected income. The term marginal efficiency
of capital was introduced by John Maynard Keynes in his General
Theory, and defined as the rate of discount which would make the
present value of the series of annuities given by the returns expected
from the capital asset during its life just equal its supply price.
30. Devaluation refers to a decline in the value of a currency in relation
to another, usually brought about by the actions of a Central Bank or
Monetary Authority. Devaluation is sometimes used more generally
to describe any si gni ficant drop in a currencys international
exchange rate, although usually a decline caused by market forces
with no government i ntervention is termed depreciation.
Devaluations are most often associated with developing
countries that dont allow their currency prices to float freely
on the open market.
31. The demand of commodity mainly stems from the consumption
capacity of the buyer. Demand is equal to desire plus ability to pay
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plus will to spend. Demand for a commodity depends upon number
of factors called determinants.
32. Social overheads capital is the capital spent on social infrastructure,
such as schools, universities, hospitals, libraries. They are capital
goods of types which are available to anybody, hence social; and are
not tightly linked to any parti cular part of production, hence
overhead. Because of their broad availability they often have to be
provided by the government. Examples of social overhead capital
include roads, schools, hospitals, and public parks.
33. Operational research is a discipline that deals with the application
of advanced analytical methods to help make better decisions.
Employing techniques from other mathematical sciences, such as
mathe-matical modeling, statistical analysis, and mathematical
optimisation, operation research arrives at optimal or near-optimal
solutions to complex decision-making problems. In a nutshell,
operation research (OR) is the discipline of applying advanced
analytical methods to help make better decisions.
34. It is known as defence. It is a type of resistance against danger,
attack, or harm to business or holding. A seller or buyer resorts to
defence as a means of protection.
35. Devaluation reduces the export price in term of foreign currencies
in the world market. As a result the exports are increased so as to
increase the revenue of the country. When the exports are increased
all efforts are made to increase the production of the country.
However, devaluation of currency is in relation to external currencies
and external trade. It has effects on a countrys international trade
by alluring traders. But, internal prices remain unaffected.
37. Deflation and recession set in when aggregate supply exceeds
aggregate demand. This will lead to a buildup in stocks (inventories)
and this sends a signal to producers either to cut prices (to stimulate
an increase in demand) or to reduce output so as to reduce the
buildup of excess stocks. Either way, there is a tendency for output
to move closer to the current level of demand.
38. Equilibrium price is a state in economy where the supply of goods
matches demand. When a major index experiences a period of
consolidation or sideways momentum, it can be said that the forces
of supply and demand are relatively equal and that the market is in
a state of equilibrium. In short, it is the market price at which the
supply of an item equals the quantity demanded.
39. Marginal utility measures the extra utility (or satisfaction) from
consuming an additional unit of a product. Total utility is the total
satisfaction from the consumption of the product. According to the
Law of Diminishing Marginal Utility, total utility increases at a
diminishing rate. When marginal utility is 0 this means there is no
increase in total satisfaction from the consumption of that unit. So
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the total unit is at maximum.
40. Paper Gold is a measure of a countrys reserve assets in the
international monetary system. It is also called Special Drawing
Rights (SDRs) which is an international reserve asset, created by
the IMF in 1969 to supplement its member countries official reserves.
Its value is based on a basket of four key international currencies,
a n d
SDRs can be exchanged for freely usable currencies. SDRs may
actually represent a potential claim on IMF member countries non-
gold foreign exchange reserve assets which are usually held in
those currencies.
41. Dear Money, also Known as tight money, is money which has to
be borrowed at a high interest rate, and so restricts expenditure by
companies. This situation can be a result of a restricted money
supply, causing interest rates to be pushed up due to the forces of
supply and demand. Businesses may have a tough time raising capital
during a period of dear money.
42. Sellers market is a market which has more buyers than sellers.
High prices result from this excess of demand over supply. The
opposite of the sellers market is the buyers market, where supply
greatly exceeds demand.
43. Legal Tender is a medium of payment allowed by law or recognised
by a legal system to be valid for meeting a financial obligation. Paper
currency and coins are common forms of legal tender in many
countries. Legal Tender Money is a type of payment that is protected
by law. A legal tender, also known as the forced tender, is a very
secured and it is impossible to deny the legal tender while subsiding
a debt which is assigned in the same medium of exchange. The
term legal tender does not represent the money itself; rather it is a
kind of status which can be bestowed on certain types of money.
44. The Gross Domestic Income (GDI) is the total income received by
all sectors of an economy within a nation. It includes the sum of all
wages, profits, and taxes, minus subsidies. Since all income is
derived from production (including the production of services), the
gross domestic income of a country should exactly equal its gross
domestic product (GDP).
45. Greshams Law is an economic principle that states: When a
government compul sori ly overval ues one type of money and
undervalues another, the undervalued money will leave the country
or disappear from circulation into hoards, while the overvalued
money will flood into circulation. It is commonly stated as: Bad
money drives out good. More exactly, if coins containing metal of
different value have the same value as legal tender, the coins
composed of the cheaper metal will be used for payment, while
those made of more expensive metal will be hoarded or exported
and thus tend to disappear from circulation.
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46. Both the terms are related to stock market. Investors who take a
bull approach purchase securities under the assumption that they
can be sold later at a higher price. A bear is considered to be the
opposite of a bull. Bear Investors believe that the value of a specific
security or an industry is likely to decline in the future.
47. A bear market is a market condition in which the prices of securities
are falling, and widespread pessimism causes the negative sentiment
to be self-sustaining. As investors anticipate losses in a bear market
and selling continues, pessimism only grows. Bear investors believe
that the value of a specific security or an industry is likely to decline
in the future.
48. Social cost is defined as a sum of the private cost and external
costs. The social cost is generally not borne by an individual. It may
be borne by entire society, city or even country. This is not a one-
time cost like private cost. This cost is recurrent and it is very
difficult to calculate due to the inclusion of external costs. The cost
may result from an event, action, or policy changes. Social costs are
not calculated whenever a seller sells any product or item to buyer.
This cost is added up from the use of that product.
49. The Break-Even Point (BEP) is the point at which cost or expenses
and revenue are equal there is no net loss or gain, and one has
broken even.
50. Monopolistic competition is a type of imperfect competition such
that many producers sell products that are differentiated from one
another as goods but not perfect substitutes (such as from branding,
quality, or location). In monopolistic competition, a firm takes the
prices charged by its rivals as given and ignores the impact of its
own prices on the prices of other firms. In a monopoli stically
competitive market, firms can behave like monopolies in the short-
run, including by using market power to generate profit. In the
long-run, however, other firms enter the market and the benefits of
differentiation decrease with competition; the market becomes
more like a perfectly competitive one where firms cannot gain
economic profit.
51. Laissez Faire is an economic theory from the 18th century that is
strongly opposed to any government intervention in business affairs.
Sometimes it is referred to as let it be economics. It is an economic
environ-ment in which transactions between private parties are
free from tariffs, government subsidies, and enforced monopolies,
with only enough government regulations sufficient to protect
property rights against theft and aggression.
52. A consumer is in a state of equilibrium when achieves maximum
aggregate satisfaction on the expenditure that he makes depending
on the set of conditions relating to his tastes and preferences,
income, price and supply of the commodity etc. Producers equilibrium
occurs when he maximises his net profit subject to a given set of
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economic situations. A firms equilibrium point is when it has no
inclination in changing its production. In short-run Marginal
revenue = Marginal cost is the condition of equilibrium.
53. If workers receive a higher nominal wage and the price level does
not change, then the real purchasing power of their wages is higher
and they are inclined to increase the quantity of labour supplied. If
the workers receive the same nominal wage, but the price level
increases, then the real purchasing power of their wages is lower
and they are inclined to decrease the quantity of labour supplied.
Any combination of changes in nominal resource prices or the price
level that changes the purchasing power of resource price entices
resource owners to change quantities supplied.
54. Devaluation is a reduction in the exchange value of a countrys
monetary unit in terms of gold, silver or foreign currency. By
decreasing the price of the home countrys exports abroad and
increasing the price of imports in the home country, devaluation
encourages the home country s export sales and di scourages
expenditures on Imports, thus improvising its balance of payments.
55. It is a service offered by a securities depository under which the
depository maintains book accounts recording the ownership of
securities held on behalf of the depositorys participants, for eligible
securities.
56. Monetary policy is the process by which the monetary authority of
a country controls the supply of money, often targeting a rate of
interest for the purpose of promoting economic growth and stability.
The official goals usually include relatively stable prices and low
unemployment. The contraction of the monetary supply can be
achi eved i ndirectl y by i ncreasing the nomi nal interest rates.
Monetary authorities in different nations have differing levels of
control of economy-wide interest rates.
57. Mixed economy is an economic system in which both the State
and Private Sector direct the economy, reflecting characteristics of
both market economies and planned economies. The basic idea of
the mixed economy is that the means of production are mainly under
private ownership; that markets remain the dominant form of
economic coordination; and that profit-seeking enterprises and the
accumulation of capital remain the fundamental driving force behind
economic activity. However, unlike a free-market economy, the
government would wield considerable indirect influence over the
economy through fiscal and monetary policies designed to counteract
economic downturns and capitalisms tendency towards financial
crises and unemployment, along with playing a role in interventions
that promote social welfare.
58. All factors of production like land, labour, capital and entrepreneur
are required in combination at a time to produce a commodity.
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Production means creation or an addition of utility. Factors of
production (or productive inputs or resources) are any commodities
or services used to produce goods and services.
59. The Law of Diminishing Returns ( also Law of Diminishing
Marginal Returns or Law of Increasing Relative Cost) states that
in all productive processes, adding more of one factor of production,
while holding all others constant (ceter i s par i bus), will at some
point yield lower per-unit returns. The law of diminishing returns
does not imply that adding more of a factor will decrease the total
production, a condition known as negative returns, though in fact
this is common.
60. Consumer Sovereignty means that buyers ultimately determine
which goods and services remain in production. While businesses
can produce and attempt to sell whatever goods they choose, if the
goods fail to satisfy the wants and needs, consumers decide not to
buy. If the consumers do not buy, the businesses do not sell and the
goods are not produced.
61. Free goods are what are needed by the society and are available
without limits. The free goods is a term used in economics to describe
the goods that are not scarce. Free goods are available in as great a
quantity as desired with zero opportunity cost to society.
62. Tea and coffee are substitutes to each other to a great extent. Hence,
the rise in price of one causes the increase in demand of the other
and vice-versa.
63. The term supply of labour refers to the number of hours of a
given type of labour which will be offered for hire at different wage
rates. Usually, it is found that higher the wage rates larger is the
supply indicating a direct relationship that exists between the wage
rate ie the price of labour and labour hours supplied. The supply of
labour is very much affected by the work leisure ratio which in turn
is affected by the changes in wage rates. The supply of labour in an
economy depends on various economic and non-economic factors
such as population, sex composition, age composition of the
population, willingness to work, wage rates, migration and
immigration, working hours, social attitude and standard, legal
barriers, education and training, employers attitude, labour
supply and leisure, efficiency of workers, etc. In economics, the
Marginal Product of Labour (MPL) is the change in output that
results from employing an added unit of labour. It has nothing to do
with the supply of labour.
64. The Prime Cost refers to a Businesss expenses for the materials
and labour it uses in production. Prime cost is a way of measuring
the total cost of the production inputs needed to create a given
output. By analysing its prime costs, a company can determine how
much it must charge for its finished product in order to make a
profit. Variable costs are expenses that change in proportion to the
activity of a business. Variable cost is the sum of marginal costs
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over all units produced. It can also be considered normal costs.
Fixed costs and variable costs make up the two components of
total cost. Prime Cost = Direct Materials + Direct Labour + Direct
Expenses. This comes to Variabl e cost + Admini strati ve cost.
Admi ni strati ve cost i s the cost associ ated wi th the general
management of organisation in accounting.
65. In economics, dumping is a kind of predatory pricing, especially
in the context of international trade. It occurs when manufacturers
export a product to another country at a price either below the price
charged in its home market, or in quantities that cannot be explained
through normal market competition.
66. Says Law, or the Law of Market, is an economic principle of
classi cal economics named after the French businessman and
economist Jean-Baptiste Say (1767-1832), who stated that products
are paid for with products and a glut can take place only
when there are too many means of production applied to one
kind of product and not enough to another.
67. British economist John Hicks sai d that National income is a
collection of goods and services reduced to a common basis by being
measured in terms of money. Hicks was one of the most important
and influential economists of the twentieth century. The most familiar
of his many contributi ons i n the fi eld of economics were his
statement of consumer demand theory in micro-economics, and the
IS/LM model (1937) , whi ch summari sed a Keynesian vi ew of
macroeconomics. His book Value and Capital (1939) significantly
extended general-equilibrium and value theory.
68. Capital-Output Ratio (COR) is the ratio of capital used to produce
an output over a period of time. This ratio has a tendency to be high
when capital is cheap as compared to other inputs. For instance, a
country with abundant natural resources can use its resources in
lieu of capital to boost its output; hence the resulting Capital-Output
Ratio is low.
69. Engels Law is an observation in economics stating that as income
rises, the proportion of income spent on food falls, even if actual
expenditure on food rises. In other words, the income elasticity of
demand of food is between 0 and 1. Engels Law doesnt imply that
food spending remains unchanged as income increases. It suggests
that consumers increase their expenditures for food products (in %
terms) less than their increases in income.
70. The Giffen goods are the goods whose consumption increases as
its price increases. (For normal goods, as the price increases,
consumption decreases.) Thus, the demand curve will be upward
instead of downward sloping. The Giffen goods have an upward
sloping demand curve because these are exceptionally inferior. It
has a strong negative income elasticity of demand such that when a
price changes the income effect outweighs the substitution effect
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and this leads to perverse demand curve.
71. In economics, the goods are something that are intended to satisfy
some wants or needs of a consumer and thus has economic utility.
The economic goods are consumable items that are useful to people
but scarce in relation to their demands, so that human effort is
required to obtain them. In contrast, free goods (such as air) are
naturally in abundant supply and need no conscious effort to obtain
them.
72. An entrepreneur performs a series of functions necessary right
from the genesis of an idea up to the establishment and effective
operati on of an enterpri se. The functions of an entrepreneur
as risk bearer are specific in nature. The entrepreneur assumes
all possible risks of business which emerges due to the possibility
of changes i n the tastes of consumers, modern techni ques
of production and new inventions. Such risks are not insurable
and i ncal cul abl e. In si mple terms such ri sks are known as
uncertainty concerning a loss.
73. Human capital is the stock of competencies, knowledge, social
and personality attributes, including creativity, embodied in the
abil i ty to perform l abour so as to produce economi c value.
It is an aggregate economic view of the human being acting within
economies, which is an attempt to capture the social, biological,
cultural and psychological complexity as they interact in explicit
and/or economic transactions.
74. Purchasing Power Parity (PPP) is an economi c theory and a
techni que used to determine the relati ve value of currencies,
estimating the amount of adjustment needed on the exchange rate
between countries in order for the exchange to be equivalent to (or
on par with) each currencys purchasing power. It asks how much
money would be needed to purchase the same goods and services in
two countries, and uses that to calculate an implicit foreign exchange
rate. Using that PPP rate, an amount of money thus has the same
purchasing power in different countries.
75. The figure of final private consumption expenditure includes the
imputed gross rent of owner-occupied dwellings, consumption
of own-account production and payment by households of wages
and salaries in kind valued at cost, eg, provision for food, shelter
and clothing to the employees, wherever they exist. Production for
self-consumption is a part of production and hence an income and
is also a part of final consumption expenditure.
76. In microeconomics, economies of scale are the cost advantages
that an enterprise obtains due to expansion. Economies of scale is
a long-run concept and refers to reductions in unit cost as the size
of a facility and the usage levels of other inputs increase.
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77. In economics, laissez-faire means allowing industry to be free of
state intervention, especially restrictions in the form of tariffs and
government monopolies. The growth of industry in England in the
early 19th century and American industrial growth in the late 19th
century both occurred in a laissez-faire capitalist environment. The
laissez-faire period ended by the beginning of the 20th century,
when large monopolies were broken up and government regulation
of business became the norm.
78. In the conditions of a free market, the terms of trade are constantly
changing. The supply of agricultural products is generally
inelastic in the sense that a rise in prices cannot call forth, before
a year has passed, a commensurate increase in sales. At the same
time, demand is inelastic, in the sense that a rise in prices of
foodstuffs does not cause purchases to be reduced proportionately.
79. Classical economics is widely regarded as the first modern school
of economic thought. Its major developers include Adam Smith, Jean-
Baptiste Say, David Ricardo, Thomas Malthus and John Stuart
Mill. John Maynard Keynes was a British economist whose ideas
have prof oundl y af fected the theory and practi ce of modern
macroeconomics, and formed the economic policies of governments.
He built on and greatly refined earlier work on the causes of business
cycles and is widely considered to be one of the founders of modern
macroeconomics and the most influential economist of the 20th
century. His ideas are the basis for the school of thought known as
Keynesian economics, as well as its various offshoots.
80. Disinflation is a decrease in the rate of inflationa slowdown in
the rate of increase of the general price level of goods and services
in a nations gross domestic product over time. It is the opposite of
reflation. Disinflation occurs when the increase in the consumer
price level slows down from the previous period when the prices
were rising. Disinflation is the reduction in the general price level
in the economy but for a very short period of time. Disinflation
takes place only when an economy is suffering from recession.
81. The term real wages refers to wages that have been adjusted for
infl ation. This term is used i n contrast to nominal wages or
unadjusted wages. Real wages provide a clearer representation of
an individuals wages. The real purchasing power of income or
money is the key determinant of real wages. It is an indication of an
individuals actual purchasing power. Real wages are a useful
economic measure, as opposed to nominal wages, which simply
show the monetary value of wages in that year. However, real wages
does not take into account other compensation like benefits or old
age pensions.
82. Final goods are goods that are ultimately consumed rather than
used in the production of another goods. For example, a car sold to
a consumer is an example of the final goods; the components such
as tires sold to the car manufacturer are not; they are intermediate
goods used to make the final goods.
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83. Average cost is the total cost per unit of output. Marginal cost, on
the other hand, is the addition to the total cost by producing one
more units of output. Economies of scale are said to exist if an
additional unit of output can be produced for less than the average
of all previous unitsthat is, if long-run marginal cost is below
long-run average cost, so the latter is falling. Conversely, there may
be levels of production where marginal cost is higher than average
cost, and average cost is an increasing function of output.
84. Production involves transformation of inputs into outputs. The output
is a function of input. The functional relationship between physical
inputs and physical outputs of a firm is called production function.
The word function in mathematics means the precise relationship
that exists between one dependent variable and a number (or one) of
independent variables. The production function states the maximum
quantity of output that can be produced from any given quantities of
various inputs during a given period of time.
85. In macroeconomic theory, liquidity preference refers to the demand
for money, considered as liquidity. The concept was first developed
by John Maynard Keynes in his book The General Theory of
Employment, Interest and Money (1936) to explain determination
of the interest rate by the supply an demand for money. The demand
for money as an asset was theorised to depend on the interest
foregone by not holding bonds. Interest rates, he argues, cannot be
a reward for savings as such because, if a person hoards his savings
in cash, keeping it under his mattress say, he will receive no interest,
although he has nevertheless refrained from consuming all his
current income. Instead of a reward for savings, interest in the
Keynesian analysis is reward for parting with liquidity.
86. Demand for a commodity refers to the quantity of the commodity
that people are willing to purchase at a specific price per unit of
time, other factors (such as price of related goods, income, tastes
and preferences, advertising, etc) being constant. Demand includes
the desire to buy the commodity accompanied by the willingness to
buy it and sufficient purchasing power to purchase it. So changes
in the unit price of a commodity leads to either extension or
contraction in demand. The law of demand states that there is an
inverse relationship between quantity demanded of a commodity
and its price, other factors being constant. In other words, higher
the price, lower the demand and vice versa, other things remaining
constant.
87. In economics, the cross elasticity of demand or the cross-price
elasticity of demand measures the responsiveness of the demand
for the goods to a change in the price of another goods. It is measured
as the percentage change in demand for the first goods that occurs
in response to a percentage change in price of the second goods.
For example, if, in response to a 10% increase in the price of fuel,
the demand of new cars that are fuel inefficient decreased by 20%,
the cross elasticity of demand would be 2. A negative cross elasticity
denotes two products that are complements, while a positive cross
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elasticity denotes two substitute products.
88. The Law of Demand states the inverse relation that comes to exist
of between price in one hand and quantity demanded on the other.
The law of demand portrays that demand is the function of price.
Price is the key determinant of demand. Fluctuations in price leads
to changes in the quantity demanded. In other words, the higher
the price of a product, the lower the quantity demanded.
89. Absolute poverty is defined as a situation in which the individuals
basic needs are not covered. In other words, there is a lack of basic
goods and services (normally related to food, housing and clothes).
This concept of poverty is strongly linked to destitution which is
an inability to meet the minimum consumption expenditure. It is a
level of poverty as defined in terms of the minimal requirements
necessary to afford minimal standards of food, clothing, health care
and shelter. According to a UN declaration that resulted from the
World Summit on Social Development in Copenhagen in 1995,
absolute poverty is a condition characterised by severe deprivation
of basic human needs, including food, safe drinking water, sanitation
facilities, health, shelter, education and information. It depends
not only on income but also on access to services.
90. The Full Convertibility of the Indian Currency means that the
rupee would be made freely exchangeable into other currencies and
vice versa. The rupee was made parti ally convertible in 1994.
Currently, it can be changed freely into foreign currency for business
and trade expenses but not freely for activities like acquiring overseas
assets. Full converted of the currency means the local currency can
be exchanged to foreign currency without any governmental control.
Presently, the i ssue of capital account converti bility is in the
discussion stage.
91. A Demand Curve that violates the law of demand is termed as an
exceptional demand curve. If a household expects the price of a
commodity to increase, it may start purchasing a greater amount of
the commodity even at the presently increased price. Similarly, if
the household expects the price of the commodity to decrease, it
may postpone its purchases. Thus, law of demand is violated in
such cases. In this case, the demand curve does not slope down
from left to right; instead it presents a backward slope from the top
right to down left. This curve is known as an exceptional demand
curve.
92. Production function explains the relationship between factor input
and output under given technology. It explains as to for increasing
the output, in which proportion of various inputs or factors may be
employed under given technological conditions. In short, production
function may be defined as a technological relationship that tells
the maximum output producible from various combinations of inputs.
Production function explains the physical relationship between
input and output under given technology.
93. In economics, stagflation is a situation in which the inflation rate
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is high, the economic growth rate slows down, and unemployment
remains steadily high. Stagflation occurs when the economy is not
growing but prices are, which is not a good situation for a country
to be in. This happened to a great extent during the 1970s, when
world oi l pri ces rose dramati call y, fueli ng sharp i nfl ati on i n
developed countries. For these countries, incl uding the USA,
stagnation increased the inflationary effects.
94. In economics, utility is a representation of preferences over some
set of goods and services. Preferences have a utility representation
so long as they are transitive, complete and continuous. Usefulness
refers to which extent something is useful and the utility is the
quality of that piece in practical use. Both are inter-related terms.
Utility is a factor of usefulness term. Usefulness means having
practi cal uti li ty of a pi ece whi ch i s benef icial , pertinent and
functional.
95. In economi cs, the cross elasticity of demand or cross-price
elasticity of demand measures the responsiveness of the demand
for the goods to a change in the prices of another goods. It is measured
as the percentage change in demand for the first goods that occurs
in response to a percentage change in price of the second goods. A
negative cross elasticity denotes two products that are complements,
while a positive cross elasticity denotes two substitute products.
96. The concept of opportunity cost is based on scarcity and choice.
The opportunity cost of a commodity is the next best alternative
commodity sacrificed. In other words, opportunity cost of a commodity
is forgoing the opportunity to produce alternative goods and services.
If one commodity is produced another commodity is sacrificed. So
opportunity cost of producing the goods is equal to the cost of not
producing another commodity.
97. Quasi-rent is the surplus which is received in the short period
because of demand exceeding the supply by the man made factors
besides land. It is an analytical term in economics, for the income
earned, in excess of post-investment opportunity cost, by a sunk
cost investment. In general, an economic rent is the difference
between the income from a factor of production in a particular use,
and either the cost of bringing the factor into economic use (Classical
factor rent), or the opportunity cost of using the factor, where
opportunity cost is defined as the current income minus the income
available in the next best use.
98. Price theory is also known as micro-economics and is concerned
with the economic behaviour of individual consumers, producers
and resource owners.
99. Need, Want and Demand are the three key concepts of
marketing. Needs are the basic human requirements. These needs
become wants when they are directed to specific objects that might
satisfy the need, though these wants in themselves are not essential
f or l i vi ng. Wants are theref ore shaped by one s society and
surroundings. The third concept, demands, are wants for specific
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products backed by an ability to pay.
100. The terms microeconomics and macroeconomics were coined by
Professor Ragnar Frisch of Oslo University for the first time in
1933 and since then they gained popularity and were widely used
by other economists. Now they have become an integral part of
economic terminology.
101. Normative economics (as opposed to positive economics) is that
part of economics that expresses value judgements (normative
judgements) about economic fairness or what the economy ought to
be like or what goals of public policy ought to be. It is the study or
presentation of what ought to be rather than what actually is.
Normati ve economi cs deal s heavi l y i n val ue judgements and
theoretical scenarios.
102. Producers Surplus is an economic measure of the difference
between the amount that a producer of the goods receives and the
minimum amount that he or she would be willing to accept for the
goods. The difference, or surplus amount, is the benefit that the
producer receives for selling the goods in the market.
103. In economics, the Law of Demand is an economic law, which
states that consumers buy more of goods when its price is lower
and less when its price is higher. The Law of Demand states that
the quantity demanded and the price of a commodity are inversely
related, other things remaining constant. That is, if the income of
the consumer, prices of the related goods, and preferences of the
consumer remain unchanged, then the change in quantity of goods
demanded by the consumer will be negatively correlated to the change
in the price of the goods.
104. An oligopoly is a market form in which a market or industry is
dominated by a small number of sellers, (oligopolists). Because there
are few sellers each oligopolist is likely to be aware of the actions of
the others. The decisions of one firm influence, and are influenced
by, the decisions of other firms. Some of its characteristics are:
Prof i t maxi mi sati on condi ti ons. Number of f i rms; Product
differentiation: Interdependence. Non-Price Competition, etc The
distinctive feature of an oligopoly is interdependence. Oligopolies
are typically composed of a few large firms. Each firm is so large
that its actions affect market conditions. Therefore, the competing
firms will be aware of a firms market actions and will respond
appropriately. This means that in contemplating a market action, a
firm must take into consideration the possible reactions of all
competing firms and the firms countermoves.
105. Average fixed cost curve is never U-shaped. Since total fixed costs
are unchanged as output rises, the average fixed cost curve falls
continuously as output is increased.
106. The kinked demand curve theory is an economic theory regarding
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oligopoly and monopolistic competition. Kinked demand was an
initial attempt to explain sticky prices.
107. Demand for complementary goods is called Joint Demand. Joint
Demand is the demand in which goods are related in such a way
that an increase in the demand for one causes an increase in the
demand for the other.
108. Plant and machinery are Producers goods. Together with stocks
and work in progress, these goods are collectively termed Capital.
109. The addition to total cost by producing an additional unit of output
by a firm is called marginal cost. Average cost is the total cost of
producing a given output divided by that output.
110. Average Revenue is the amount of money received by a firm per
unit of output sold. Marginal Revenue is the change in total revenue
resulting from a small change in the quantity sold. In a perfectly
competitive market, a firms Average Revenue is always equal to
Marginal Revenue.