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Assalamu alaikum dear aspirants

I feel immensely pleased to present before you the e-book of Economics section for Panchayat
Accounts Assistant Exam. However, this book is very helpful for other competitive exams as
well. Preparation of this book has consumed lot of my energy and time. So here are some
instructions for the aspirants which should be strictly followed:
1. Candidates are strictly advised not to share this book to others after downloading it as
we have consumed a lot of time and expenditure for the preparation of this book. So, be
honest with us and don’t share the book.
2. This book must be read in accordance with the video lectures available on our youtube
channel, “Learn With Waffa”. For the comfort of students, link of our youtube channel
has been provided at the top of the page.
3. This book contains sufficient information and material for upcoming JKSSB Panchayat
Accounts Assistant Exam.
4. Subject to positive response for this book, we will prepare E-books for all other sections
of the syllabus.
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Lecture 01
Introduction of Economics- Basic Concepts and Principles
General Definition
The English word- derived from two Greek words “Oikos” which means Household and
“Nemiens” which means management. (Household Management).
 Economics is a branch of social science which deals with the rational

management of limited resources in relation to unlimited wants in such a
manner that an individual consumer is able to maximise his satisfaction, a
producer is able to maximise his profit and the society is able to maximise its
social welfare.
 Optimum utilisation of scarce resources.
Specific Definitions:-
1. Wealth Definition:- Given by Adam Smith, Father of Economics, in his

remarkable work “An Enquiry into the nature and Causes of Wealth of Nations”
popularly known as Wealth of Nations, published in 1776.
 “The great object of the political economy of every country is to increase
the riches and power of that country”.
 Economics is concerned with the generation of wealth of Nations. (Economics is
Science of wealth)
 This view is supported by J S Mill, William Senior.
 Also known as classical definition of economics.
2. Welfare Definition:- Put forward by Alfred Marshall in his book “Principles of

Economics” published in 1890.
 Laid emphasis on human welfare rather than wealth.
 “Economics is a study of mankind in the ordinary business of l ife; it
examines that part of individual and social action which is closely
connected with individual well being”.
 Wealth is not an end in itself, but a means to an end i.e., human welfare.
 A.C. Pigou is main supporter of this view.
3. Scarcity Definition:- Given by Lionel Robbins in 1932 in his book “An essay on
the nature and significance of Economic Science.
 Neither wealth nor welfare is the subject matter of economics.
 Most acceptable definition of Economics.
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 “Economics is the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses”.
Main propositions:-
a. Human wants are unlimited.

b. The means or resources to satisfy wants are limited or scarce.
Major Classification of Economics:-
 Economics is generally classified into Micro-economics and Macro-

economics.
 These terms were first coined by Ragnar Frisch, a Norwegian Economist, in
1933. (Got Noble Prize in 1969).
 Micro means small. Therefore, Microeconomics is the study of economics at the
level of smaller units of an economy such as an individual, household or firm. It
deals with the concepts like Demand, supply, consumer behaviour and producer
behaviour.
 Macroeconomics, on the other hand, is the study of a national economy as a
whole. Macroeconomics focuses on issues that affect the economy as a whole.
Some of the most common focuses of macroeconomics include unemployment
rates, the gross domestic product of an economy, and the effects of exports and
imports.
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Lecture 02
Basic Concepts and Principles of Economics
1. Economy:- Defined as a system where various economic activities like
production, distribution, consumption, investment and exchange take place.
 Types of Economies:- Economic activities are controlled by the govt of a country.
However, the degree of control varies from one country to the other. This control has
three levels- High, low and moderate and economies are classified on the basis of these
levels of control.
a) Controlled Economy/ Centrally Planned Economy:- Where the economic activities
are completely and firmly controlled by the state (govt.).
 Economic decisions are taken after having social welfare under consideration.
 Resources are owned by the state.
 Public sector dominates the economy.
b) Free Economy/ Market Economy:- An Economy where the economic activities are
controlled by the market forces i.e., demand and supply.
 Economic decisions are driven by the motive of profit maximisation.
 Most resources are controlled or owned by the people.
 Private sector dominates the economy.
c) Mixed Economy:- An economy where economic activities are governed by market
forces but regulated by the government.
 Economic decisions are driven by the motive of both profit maximisation and social
welfare.
 Resources are controlled both by the government and by the people.
 Both public and private sectors dominate the economy.
2. Scarcity:- When demand for goods and services exceeds their supply, the
phenomenon is known as scarcity.
DEMAND> SUPPLY
 Scarcity of resources is a hard fact of life and is a universal problem. Scarcity, in other
words, means that resources are limited. But these resources have alternative uses.
3. Utility:- Ultimate goal of a consumer is always assumed to be the satisfaction of his

wants.
 Wants are satisfied by consumption of goods and services. For instance, when we take
food, our wants are satisfied.
 Every commodity has a want satisfying capacity which is known as utility.
 Measurement of utility:- Difference of opinions regarding measurement of
utility.
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a) Cardinal Utility Approach:- Given by Alfred Marshall.

 Utility can be measured in terms of cardinal numbers like 1, 2, 3,........etc.
 When we consume a bread, for instance, we can say that we got 3 utils (Units) of utility.
b) Ordinal Utility Approach:- Given by Hicks.
 Utility can only be ranked as “high” or “Low”; it can’t be expressed in terms of units.
 We can only say that a cup of tea gives us more satisfaction than a cup of coffee.
Types of Utility:-
1. Total Utility:- Sum total of utility derived from the consumption of all the units of a
commodity. (Illustration).
2. Marginal utility:- Additional Utility on account of consumption of one more unit of
a commodity. For instance, if 10 units of a commodity yield 100 utils and 11th unit of the
commodity yields 110 utils, then marginal utility is 110-100=10 utils. It is measured as
under:-
MUnth = TUn – TUn-1
Law Of Diminishing Marginal Utility:- Intensity of wants tends to decrease

as more and more units of a commodity are consumed.
 So, the successive units of commodity give less and less satisfaction. It means that MU
tends to decline with the consumption of more and more units of a commodity.
 Law of Diminishing MU states that as more and more units of a commodity are
consumed, MU derived from every additional unit must decline. It happens in
respect of all goods and services.
 Also known as Fundamental Law of Satisfaction or Fundamental Psychological Law.
4. Demand:- Demand is defined as the desire to by a commodity backed by sufficient

purchasing power and the willingness to spend at a given price.
 Demand is always related to the price of the commodity.
5. Supply:- Supply is defined as the quantity of a commodity that the producer is willing
to sell at different possible prices of the commodity at a point of time.
 Like demand, supply is also related to the price of the commodity.
6. Market:- Market refers to all such arrangements that brings the buyers and sellers in
contact with each other to settle the sale and purchase of goods and services.
 It does not refer to any shopping complex.
7. Cost:- Cost is defined as the expenditure incurred by a producer on the factor as well
as non factor inputs for a given output of a commodity.
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Explicit and Implicit Cost:- A producer does not always purchase inputs from the
market. He may sometimes make use of some self owned inputs. For example, he may use his
family members as labour instead of hiring workers. Or he may use his personal land instead of
taking it on lease.
Expenditure incurred by the producer on the purchase of inputs from the market is
known as explicit cost.
Estimated expenditure on the use of self owned inputs is called as implicit cost
8. Revenue:- The revenue of a firm is defined as its sale receipts or money receipts
from the sale of a product.
 For Example, if you are running a match stick factory and you produce 100 match boxes
daily. Suppose by selling these match boxes, you earn Rs 1000. This Rs. 1000 is your
revenue.
 Revenue= Costs + Profit
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Lecture 03
Pricing Under Various Forms Of Markets
Introduction:- Sale and purchase are the necessary businesses of human life and this
business is done through the medium of markets.
 A market is defined as a system or an arrangement that brings the buyers

and sellers together in order to settle the sale and purchase of goods and
services.
 This system may include an electronic mail or a telephonic communication that
brings the buyers and sellers in contact with each other.
 Therefore, the existence of shopping complexes is not a necessary condition for
the existence of markets.
Forms of Market
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Perfect Competition
It is a market situation in which there are large number of buyers and sellers of a
commodity.
 No individual buyer or seller has any control over its price.

 A homogeneous product is sold in such a market and its price is determined by
the forces of market supply and market demand.
Features
1. Large number of small buyers and sellers:- Number of buyers and sellers is so large
in perfect competition that the demand of a single buyer or the supply of a single seller
can not affect the overall demand and supply of the market.
 When market demand or supply is not affected, market price is also not affected. It
remains constant in the market.
 As a result, the price line of a firm in perfect competition becomes a horizontal straight
line.
 At a given price, it can sell any amount of the commodity.
 Let’s understand with the help of an example.
Subscribe Our Youtube Channel
Learn With Waffa P Price Line
O X
2. Homogeneous Product:- Under perfect competition, each firm sells a homogeneous

product.
 A product is said to be homogeneous when each unit of it is identical in size, shape,
colour, weight (Or any other respect) so that the buyers do not find any difference in the
product as sold by different firms in the market,
 In such a situation, the buyers find products of different firms (in the industry) as
perfect substitutes of each other.
 As there is zero degree of product differentiation, a firm has no control over price. Even
a slightest increase in the price by one firm will shift its buyers to other firms producing
the same commodity.
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 There is no need for advertisement to promote sales of the firm. So there are no
advertisement costs or selling costs.
Implications:-
3. Perfect knowledge:- Buyers and sellers have full knowledge of the price in the market.
 So, producers cannot charge different prices from different buyers.
 So there is no price discrimination.
4. Freedom of entry and exit:- Any new firm is free to enter the industry and an existing
firm is free to leave it.
 Here we need to understand the concepts of short period and long period. Short period
is too short for a firm that it cannot leave the industry and too short for a new firm to
enter into the industry. Whereas, long period is long enough for a firm to leave the
industry as well as long enough for the new firm to enter the industry.
 Thus, Entry and exit of firms is possible only in the long period, not in the short period.
Important Conclusions regarding perfect competition:-
1. Firm is a price taker, not a price maker.

 In perfect competition, price is determined by the forces of market demand and market
supply. A firm sells its product at a given market price.
 A firm under perfect competition is a price taker, not a price maker.
 This is because of
a) Large number of firms;
b) Homogeneous product; and
c) Perfect Knowledge.
2. Demand curve of the firm is perfectly elastic:-

 It means that the firm can sell any amount of the product at the prevailing market price.
 But a small increase in price would lead to zero demand.
Firms Demand Curve under Perfect Competition
P P
Price
O A B X
Demand
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The firm can sell any output at the given price OP. But a slight increase in the price would lead
to zero demand.
3. A firm under perfect competition earns only normal profits in the long run.
 It is owing to the fact that the firms have no control over price and cannot increase the
price to earn more profit.
Lecture 04
Monopoly
Monopoly:- The word monopoly has been derived from the combination of two words i.e.,
‘Mono’ and ‘Poly’. Mono refers to a single and poly to control.
 In this way, monopoly refers to a market situation in which there is only one seller of a
commodity.
 The single producer may be in the form of individual owner or a single partnership or a
joint stock company.
 Under monopoly there is no difference between firm and industry (An industry is a
group of firms producing a particular product).
 There are no close substitutes of the monopoly product and there are legal, technical or
natural barriers to the entry of new firms in the monopoly market.
 A monopolist has complete control over price and can also practise price discrimination.
Main features:-
1. One seller and large number of buyers:- Under monopoly, there is a single producer.
He may be alone, or there may be a group of partners or a joint stock company .
However there is a large number of buyers of the product.
 Because he is a single seller, the monopolist enjoys full market control. He can fix the
price of his product as he desires. The monopolist, thus, is a price maker.
2. Restrictions on the entry of new firms:- Usually there are patent rights.
 Because of these restrictions, the monopolist earns extra-normal profits both in the
short period as well as in the long period.
3. No Close Substitutes:- A monopoly firm produces a commodity that has no close
substitutes. For instance, there is no close substitute of railways in India as a bulk
carrier.
4. Full control over price:- Being a single seller of the product, a monopolist has full
control over price. A monopolist is therefore a price maker.
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5. Price Discrimination:- Price discrimination refers to the practice of charging different
prices from different buyers for the same good. A monopolist may charge different
prices from different customers according to his own will.
Important Terms:-
1. Patent Rights:- Patent right is an official recognition of the innovators of a new
productor technology. Nobody can copy their product or technology without obtaining a
licence.
2. Patent Life:- It refers to the number of years for which a patent right is granted.
3. Cartels:- It refers to the formation of a group by the competing firms in the market. Of
course, this is possible when the number of firms is small. The group as a whole secures
monopoly control of the market.
Demand curve of a Monopoly Firm
 Full control over price under monopoly does not mean that the monopolist can sell any
amount of the commodity at any price.
 Once the monopolist fixes price of the commodity, quantity demanded will depend upon
the buyers.
 Buyers will demand more at low price and less at higher price. So, there is an inverse
(Negative or opposite) relationship between price and quantity sold by the monopoly
firm. This inverse relationship is show by a downward sloping demand curve.
Price
P1
DM
O Q Q1 X
Demand
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Lecture 05
Monopolistic Competition
 Monopolistic competition is a form of the market in which there are many buyers and
sellers of the product, but the product of each seller is different from the other. Thus,
there are many sellers selling a differentiated product.
 This product differentiation is generally promoted through brand name or trademark.
Trademark or brand name gives some monopoly to the firms
 For example:- Firms producing different brands of toothpastes viz., colgate, pepsodant,
and Close up.
 Monopolistic competition shares features of both perfect competition and monopoly.
 Different firms often charge different prices for their product and therefore, tend to
exercise some control over price.
 On the other hand, since many firms are producing a commodity (like toothpaste), there
is competition in the market.
 No firm is able to exercise full control over price of the product.
 Therefore, we can say that a firm under monopolistic competition exercises only a
partial control over price.

Features of Monopolistic Competition:

1. Large Number of Sellers:
There are large numbers of firms selling closely related, but not homogeneous products.
Each firm acts independently and has a limited share of the market. So, an individual firm has
limited control over the market price.
Large number of firms leads to competition in the market.
2. Product Differentiation:
Each firm is in a position to exercise some degree of monopoly control over price through
product differentiation.
Product differentiation refers to differentiating the products on the basis of brand, size, colour,
shape, etc. The product of a firm is close, but not perfect substitute of other firm.
Implication of ‘Product differentiation’ is that buyers of a product differentiate between the

same products produced by different firms. Therefore, they are also willing to pay different
prices for the same product produced by different firms. This gives some monopoly power to an
individual firm to influence market price of its product.
6. Some examples of Product Differentiation:
i) Cycles: Atlas, Hero, Avon, etc.
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ii) Tea: Tata tea, Today tea, Taj mahal etc.
iii) Soaps: Lux, Hamam, Lifebuoy, Pears, etc.
3. Selling costs:
Under monopolistic competition, products are differentiated and these differences are made
known to the buyers through selling costs.
 Selling costs refer to the expenses incurred on marketing, sales promotion and adver-
tisement of the product.
 Such costs are incurred to persuade the buyers to buy a particular brand of the product
in preference to competitor’s brand.
 It must be noted that there are no selling costs in perfect competition as there is perfect
knowledge among buyers and sellers. Similarly, under monopoly, selling costs are of
small amount (only for informative purpose) as the firm does not face competition from
any other firm.
4. Freedom of Entry and Exit:

Under monopolistic competition, firms are free to enter into or exit from the industry at any
time they wish.
5. Lack of Perfect Knowledge:

Buyers and sellers do not have perfect knowledge about the market conditions.
Selling costs create artificial superiority in the minds of the consumers and it becomes very
difficult for a consumer to evaluate different products available in the market.
As a result, a particular product (although highly priced) is preferred by the consumers even if
other less priced products are of same quality.
6. Pricing Decision:
A firm under monopolistic competition is neither a price- taker nor a price-maker. However, by
producing a unique product, each firm has partial control over the price. The extent of power to
control price depends upon how strongly the buyers are attached to his brand
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Demand Curve under Monopolistic Competition
Partial control over price leads to downward sloping demand curve of the firm. Quantity sold
increases when price is reduced whereas quantity sold decreases when price is increased.
Price
Quantity
Lecture 06
Oligopoly
It is a form of market in which there are few big firms and a large number of
buyers of a commodity. Each firm has a significant share of the market.
 Price and output decisions of one firm affect the price and output decision of the
other firms in the market.
 For example, there are only a few car producers in the Indian auto market like
Ford, Toyota, Audi, BMW etc. Each one of them has a significant share in the
market
Features:-
1. Small number of Big Firms:- There is a small number of bigger firms.
 A firm in oligopoly enjoys partial control over price through brand loyalty
(positive feeling towards a brand). Brand loyalty is achieved through heavy
advertisement.
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 However, full control over price is not possible as there are other competitors in
the market.
2. High Degree of interdependence:- There is a very high degree of
interdependence among the competing firms with regard to their price and
output policy.
 Price and output behaviour of one firm often leads to reaction by the other firms.
3. Formation of Cartels:- When there are a few producers in the market, there is a
tendency to form cartels in order to avoid price competition and to achieve
monopoly control over the market.
 Formation of Organisation of Oil Producing Countries (OPEC) is an example in
this regard.
 In this way, Oligopoly is converted into monopoly. As a result, there is low level
of output, high product price and extra-normal profits.
4. Entry Barriers:- there are barriers to the entry of new firms created largely
through patent rights.
 In this way, existing firms continue to control the market.
5. Difficult to trace firm’s demand curve:- It is not possible to determine a firm’s
demand curve under oligopoly. This is because of high interdependence among
the competing firms.
 Thus, when a firm raises its price, the buyers will shift to other firms.
 When the firm lowers its price, the other firms may lower their price more,
because of which the buyers shift to the rival firms.
 It implies that there is no specific response of demand to change in price. This
makes it impossible to draw any specific demand curve for a firm under
oligopoly.
6. Non-price competition:- Under Oligopoly, firms always try to avoid price
competition.
 Instead they focus on non price competition.
 For example, in India, both Coke and Pepsi sell their product at the same price.
But, in order to increase its share in the market, each firm adopts the policy of
aggressive non-price competition.
 Coke and Pepsi sponsor different games and sports. They also offer schemes.
 Non price competition leads to brand loyalty. Greater the brand loyalty, higher
the market control or control over price.
Classification of Oligopoly:-
1. Collusive oligopoly:- It is a form of oligopoly in which there are few firms in the
market and all of them decide to avoid competition through a formal agreement.
They agree to form a cartel. Price and output of the member firms is decided in
cooperation with each other.
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 This is the reason it is also known as Cooperative Oligopoly.
 Sometimes, a leading firm in the market is accepted as a price leader. Members of
the cartel accept the price policy as specified by the price leader.
2. Non-Collusive Oligopoly:- It is a form of Oligopoly in which there are few firms
in the market and each firm pursues its own price and output policy independent
of the other firms.
 Each firm tries to increase its market share through competition.
 Competition is preferred over collusion (Agreement) for profit maximisation.
 Because there are only a few big firms in the market, there is a cut throat
competition. Brand loyalty is developed through aggressive advertisement
3. Perfect Oligopoly:- If Oligopoly firms are producing homogeneous products, it is
called perfect oligopoly.
4. Imperfect Oligopoly:- If Oligopoly firms are producing differentiated products,
it is called imperfect Oligopoly.
Lecture 07
Demand Analysis
Demand:- Demand is defined as the desire to buy a commodity backed with sufficient
purchasing power and the willingness to spend.
Demand and Quantity Demanded:- Demand refers to different possible quantities to

be purchased at different possible prices of a commodity. On the other hand, quantity
demanded refers to a specific quantity to be purchased against a specific price of the
commodity.
Demand Schedule
It is a table showing the relation between different quantities of a commodity to be

purchased at different prices of that commodity. It has two types:-
1. Individual Demand Schedule; and

2. Market Demand Schedule.
1. Individual Demand Schedule:- Individual demand schedule refers to demand
schedule of an individual buyer or consumer of a commodity in the market. It
shows quantities of a commodity which an individual buyer will buy at different
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possible prices of that commodity at a point of time. Following table represents
an individual demand schedule.
Individual demand Schedule
Px Qx
Inverse relation between
(Price of Good-X) in Rs. (Quantity Demanded of
PX and Qx
Good-X) in Rs.
1 4
Px Qx
2 3
Px Qx
3 2
4 1
2. Market Demand Schedule:- In every market, there are several buyers/

consumers of a commodity. Market demand schedule represents demand for a
commodity by all consumers in the market. It shows different quantities of a
commodity which the consumers demand at different possible prices of the
commodity at a point of time.
 If we suppose that there are only two consumers in the market, market demand
schedule for Good-x may be shown as under:-
Market Demand Schedule
Px Qx Qx Qx (Consumer A+
Consumer B=
(Price of Good- (Quantity Demanded (Quantity Demanded
Market Demand)
X) in Rs. of Consumer A) of Consumer B)
1 4 5 4+5=9
2 3 4 3+4=7
3 2 3 2+3=5
4 1 2 1+2=3
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Assumption:- There are only two consumers in the market.
Note:- It must be noted here that the inverse relationship between own price of
the commodity and its quantity demanded holds good both in case of individual
demand schedule and market demand schedule.
Demand Curve
Slope of Demand Curve:-
Normally, a demand curve slopes downward from left to right, indicating a negative
relationship between price of a commodity and its quantity demanded.
Price
Quantity X
Demand Curve
Demand curve is a graphic presentation of demand schedule showing how quantity
demanded of a commodity is related to its own price. Like demand schedule, demand
curve also includes:-
1. Individual Demand Curve; and

2. Market Demand Curve.
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1. Individual Demand Curve:- It is a curve showing different quantities of a
commodity that one particular buyer is ready to buy at different possible prices
of the commodity at a point of time.
3 Individual Demand Curve
1 D
O 1 2 3 4 X
2. Market Demand Curve:- Market demand curve is the horizontal summation of

individual demand curves. It shows various quantities of a commodity that all
the buyers in the market are ready to buy at different possible prices of the
commodity at a point of time.
 It is a graphic presentation of market demand schedule.
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Lecture 08
Determinants of Demand or Demand Function
Demand function shows the relationship between demand for a commodity and its
various determinants. It shows how demand of a commodity is related to own price of
the commodity, income of the consumer or other determinants. Let’s discuss these
determinants one by one.
Dx = f(Px, Pr, Y, T, )
1. Price of the commodity:- Other things being constant, with a rise in own price
of the commodity, its demand contracts, and with a fall in its own price, the
demand increases.
 This inverse relationship between price of the commodity and its demand is
known as Law of Demand.
2. Price of Related Goods:- Demand for a commodity is also influenced byy change
in the price of related goods. They are of two types:-
a) Substitute Goods:- Those goods which can be substituted for each other like
tea and coffee or ball pen and ink pen.
 In case of these goods, increase in the price of one commodity causes increase in
the demand of the other.
b) Complementary Goods:- Complementary goods are those which complete the
demand for each other and are therefore demanded together. Pen and ink,
bread and butter are some examples. In case of these goods, a fall in the price
of one leads to the increase in the demand of the other and a rise in the price of
one leads to fall in the demand of the other.
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3. Income of the consumer:- Change in the income of the consumer also
influences his demand for different goods. The demand for normal goods
increases with increase in income and vice versa. On the other hand, the demand
for inferior goods decreases with increase in income and vice versa.
4. Tastes and Preferences:- Tastes and preferences of the consumer are

influenced by advertisement, change in fashion, climate, new inventions etc.
5. Future Expectations:- If a consumer expects a fall in the price of a commodity in
the near future, his demand for the commodity also falls and vice versa.
6. Population size/ Number of Buyers:- Positive relationship
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Lecture 09
Law of Demand
The law of Demand states that other factors remaining constant, there is an
inverse relationship between quantity demanded and price of the commodity. i.e.,
Quantity demanded increases with decrease in price and decreases with increase
in price.
 The term “other factors remaining constant” means that all the other
determinants of demand other than its price, remain constant.
The law may be explained with the help of the following demand schedule and demand
curve.
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Assumptions of the Law:-
 Law of demand holds good when the determinants of demand other than its price
remain the same.
 So, Income of the consumer, his tastes and preferences, price of related goods,
future expectations etc. Are assumed to be the same and do not change.
Exceptions of the Law:-
 There are some commodities in case of which the law of demand fails and hence
the demand of the commodity rises with rise in its price and falls with fall in its
price. In such situations, the demand curve slopes upward from left to right.
1. Articles of Distinction:- There are certain goods which are considered as
“Articles of Social Distinction”. These articles are demanded only because their
prices are very high.
 Thus, these goods defy the law of demand. Precious Diamonds and vintage cars
are some examples.
2. Giffen Goods:- Giffen goods are highly inferior goods, showing a very high
negative income effect.
 As a result, when price of these goods falls, their demand also falls.
 This is popularly known as Giffen Paradox.
3. Irrational Judgement:- Law of demand fails when buyers judge the quality of a
commodity by its price. It is an irrational judgement.
 Accordingly, quantity demanded of these products rises even when their prices
are extremely high.
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Lecture 10 & 11
Indifference Curve TechniqueOf Consumer’s

Demand & Consumer’s Equilibrium
Important Assumptions:-
1. Use of Ordinal Utility approach.

2. Money income of the consumer is given and does not change.
3. The consumer spends his income on two goods which are substitutes of each
other.
4. The consumer is rational. He always tries to maximise his satisfaction.
5. Application of law of diminishing marginal utility.
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 IC is an indifference curve. Each point on the curve shows a combination of two

goods, offering same level of satisfaction to the consumer. Thus, the consumer
remains indifferent at every point of the curve. Hence, the curve is known as
Indifference curve.
 Indifference curve is a diagrammatic representation of an indifference set
of a consumer. It is a locus of all such points which show different
combinations of two commodities (like apple and oranges) offering the
same level of satisfaction to the consumer.
26
Properties of an Indifference Curve
1. IC Slopes Downward:- IC Slopes downward from left to right.
 It means that IC has a negative slope which implies that if the consumer
wishes to have more of one good, he must have less of the other.
2. Higher IC shows Higher level of satisfaction:- The below figure shows a set of
indifference curves one above the other.
 A set of ICs drawn in a graph is known as Indifference Map.
3. ICs do not touch or intersect each other:-
27
Consider points A and B. These are on the same IC1. Therefore, they are equal in terms
of satisfaction. So, A=B. Similarly A=C, as these are on the same indifference curve IC2.
 Since A=B and A=C, we can conclude that B=C. But this is not logical.
4. IC does not touch X-axis or Y-axis:-

 This is because IC analysis assumes the consumption of two substitute goods. If IC
touches X-axis, it would mean that consumption of good Y is zero.
 Similarly, if IC touches X-axis, it would mean that the consumption of Good-Y is
zero.
28
Lecture 12
Consumer’s Equilibrium
Budget Line and Indifference Curve
Budget Set:-
Assumptions:-
1. A consumer has a budget of Rs. 60 to be spent on two substitute goods, Good-X

and Good-Y.
2. Price of Good-X is Rs. 2per unit and Price of Good-Y is Rs. 1 per unit.
3. Income of the consumer and price of the two substitute goods remains constant.
Accordingly, the following budget set can be formed.
Units of Good-X (Price=Rs. 2 per unit) Units of Good-Y (Price=Rs. 1 per unit)
0 60
10 40
20 20
30 0
 Budget set refers to the attainable combinations of a set of two goods, income of
the consumer and price of the two goods being the same.
 Also known as Budget Constraint.
Budget Line:-
 Diagrammatic presentation of budget Set.

 A line showing different possible combinations of two substitute goods (Here
Good-X and Good-Y), which a consumer can buy, his budget and price of the goods
being constant.
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 Anywhere on the budget line, the consumer is spending his entire income on both
Good-X and Good-Y.
Budget Line or Price Line
60
50
40
30
20
10
10 20 30
 Budget Line slopes downwards. Because, given consumers’ income and prices of
Good-X and Good-Y, the consumer can buy more of Good-X only when he buys
less of Good-Y.
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Consumer’s Equilibrium
 Consumer’s equilibrium refers to a situation when he maximises his satisfaction
out of his given income and price of two substitute goods. Such a situation is
arrived when the price line is tangent to the indifference curve (touches the IC
from below).
Good-Y
IC
Good-X
Marginal Rate of Substitution

 The Marginal Rate of Substitution can be defined as the rate at which a consumer is
willing to forgo a number of units good X for one more of good Y at the same utility.
 The Marginal Rate of Substitution is used to analyze the indifference curve.
31
Lecture 13 &14
INFLATION AND ITS TYPES
Types of Inflation on the basis of causes
1. Demand pull Inflation:- Demand pull inflation refers to the rise in general price level
when aggregate demand increases much more rapidly than the aggregate supply.
 It occurs when there is a mismatch between Aggregate demand and Aggregate Supply.
 According to J M Keynes, father of modern Economics, either the demand increases over
the same level of supply or supply decreases with the same level of demand.
 So, Demand pull inflation is caused by demand side factors.
 However, for the monetarist school of thought, demand pull inflation is the result of
creation of extra purchasing power over the same level of production. Ion such a
situation, too much money chases a little output.
 In demand pull inflation, AD > AS.
 Demand pull inflation is caused by monetary as well as real factors.
 Monetary factors include the increase in money supply over the same level of output.
 Real factors include increase in govt. Spending, cut in tax rates, increase in population,
rapid GDP growth, which leads to more employment and higher wages.]
 Note:- According to Keynes, the price rise only at the state of full employment is
inflation. If the economy is below the full employment level, price rise in such a
situation is not inflation.
2. Cost Push Inflation:- Inflation is not caused by demand side factors alone. An increase
in factor input costs (wages, raw materials) also pushes up prices.
 The price rise which is the result of increase in production cost is known as cost-push
inflation.
 This type of inflation is caused by supply side factors.
 Cost push inflation is caused by factors like rise in labour cost, higher cost of imported
materials, monopoly of a single supplier enabling him to set prices etc.
 It has the following three types:-
a) Wage-Push Inflation:- Wages constitute an important part of price. Therefore, a rise in
wages causes a rise in prices.
 Wage push inflation is caused by the exercise of monopoly power by labour unions to
get the money wages enhanced.
 When prices rise due to rise in wages, it is known as inflation spiral.
b) Profit Push Inflation:- The use of monopoly power by the monopolistic and
oligopolistic firms to raise the price in order to enhance their profits is also one of the
aspects of cost push inflation.
 Existence of monopolistic and oligopolistic firms (Imperfect Competition) and the use of
their monopoly power to increase their prices is a necessary condition.
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c) Supply-Shock Inflation:- Supply shock is a sudden and unexpected decrease in the
supply of major commodities. This leads to the rise in general price level.
Lecture 15
Some Important terms Regarding Inflation
1. Deflation:- In economics, deflation is a decrease in the general price level of goods and
services.
 Deflation occurs when the inflation rate falls below 0% (a negative inflation rate).
 Inflation reduces the value of currency over time, but sudden deflation increases it.
2. Reflation:- Reflation is the act of stimulating the economy by increasing the money
supply or by reducing taxes, seeking to bring the economy (specifically price level) back
to its original position.
 It is actually a deliberate policy adopted by the central govt or central bank of a country
to bring the original level of prices back.
3. Phillip’s Curve:- It is a curve which advocates a relationship between inflation and
unemployment in an economy.
 As per the curve, there is an inverse relationship between inflation and unemployment.
 It implies that for reducing unemployment, higher rate of inflation has to be witnessed
and for reducing inflation, higher rate of unemployment has to be witnessed.
 It is a downward sloping curve.
 It is named after Alban William Phillips, a British Economist.
 Conclusion:- Inflation reduces unemployment.
4. Stagflation:-It is a situation when inflation and unemployment are both at higher levels.
Such a situation arose first in the US economy in 1970s.
 The concept of Phillip’s Curve thus proved to be false.
33
5. Skewflation:- A price rise in one or a small number of commodities is known as

skewflation. A price rise in a single sector of the economy is also known as skewflation.
6. Disinflation:- Disinflation is used to describe the slowing of price inflation. In other

words, it is a decrease in the rate of inflation. The term should not be confused
with deflation, which is used to describe a negative inflation rate.
7. Inflation targeting:- The announcement of an official target range for inflation is

known as inflation targeting.
 It is done be central bank as a part of monetary policy to realise the objective of stable
rate of inflation.
 In India, the target range of inflation ranges between 4-5 % popularly known as
“Comfort Zone” of inflation in India.

8. Core Inflation:- It represents the long term trend in the price level.
 In measuring long run inflation (Core inflation), transitory price changes are to be
excluded.
 It can be done by excluding items frequently subject to volatile prices like food and
energy (e.g., rise in prices of petrol or diesel).
9. Inflationary Gap:- An inflationary gap is a macroeconomic concept that describes the

difference between the current level of gross domestic product (Actual GDP) and the
anticipated GDP that would be experienced if an economy is at full employment
(Potential GDP).
 Under such a situation, AD>AS at full employment of resources.
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Lecture 16
EFFECTS OF INFLATION
Inflation has certain effects on certain sections of the society.
1. Creditors and debtors:

 During inflation, creditors lose because they receive in effect less in goods and services
than if they had received the repayments during a period of low prices.
 Debtors, on other hand, as a group gain during inflation, since they repay their debts in
currency that has lost its value (i.e., the same currency unit will now buy less goods and
services).
2. Producers and workers:

 Producers gain because they get higher prices and thus more profits from the sale of
their products. As the rise in prices is usually higher than the increase in costs,
producers can earn more during inflation.
 But, workers lose as they find a fall in their real wages as their money wages do not
usually rise proportionately with the increase in prices. They, as a class, however, gain
because they get more employment during inflation.
3. Fixed income-earners:
 Fixed income-earners like the salaried people, rent-earners, landlords, pensioners, etc.,
suffer greatly because inflation reduces the value of their earnings.
4. Traders, businessmen and black-marketers:

 They gain because they make more profits from the persistent rise in prices.
5. Farmers:
 Farmers also gain because the rise in the prices of agricultural products is usually higher
than the increase in the prices of other goods.
 Effects on Production:
 The rising prices stimulate the production of all goods—both of consumption and of
capital goods. As producers get more and more profit, they try to produce more and
more by utilising all the available resources at their disposal.
 But, after the stage of full employment the production cannot increase as all the
resources are fully employed. Moreover, the producers and the farmers would increase
35
their stock in the expectation of a further rise in prices. As a result hoarding and
cornering of commodities will increase.
 Effects on Growth
 A mild inflation promotes economic growth, but a runaway inflation obstructs

economic growth as it raises cost of development projects.
 Thus, inflation brings a shift in the pattern of distribution of income and wealth in the
country, usually making the rich richer and the poor poorer. Thus during inflation there
is more and more inequality in the distribution of income.
Lecture 17
Fiscal Policy
Meaning of Fiscal Policy:
 The word “fisc” means “state treasury and thus fiscal policy refers to the policy
related to the use of this state treasury or government finances to achieve certain
macroeconomic goals.
 Fiscal policy is a policy of the government under which the government makes
important changes in the pattern and level of its expenditure, taxation and borrowings
in order to achieve certain economic goals such as economic growth, employment,
income equality, price stability etc.
 In fact, it was Keynes who popularized this great instrument of macroeconomic policy
during the 1930s’ Depression.
 The use of such fiscal policy measures may be grouped into two:
i) Automatic or Built-in Fiscal Policy:
 Automatic fiscal policy is a change in fiscal policy that is triggered by the state of
the economy.
 This kind of fiscal policy adjusts automatically and, hence, no explicit action by
the government is needed.
ii. Discretionary Fiscal Policy:

 The deliberate policy changes which are meant to influence the level of economic
activity may be called discretionary fiscal policy.
 Government deliberately alters tax schedules and various expenditure
programmes.
 Expansionary fiscal policy is defined as an increase in government
expenditures and/or a decrease in taxes that causes the government's budget
deficit to increase or its budget surplus to decrease.
 Contractionary fiscal policy is defined as a decrease in government
expenditures and/or an increase in taxes that causes the government's budget
deficit to decrease or its budget surplus to increase.
36
Objectives of Fiscal Policy:

i) Economic Growth;
ii) Full Employment;
iii) Price stabilisation: Fiscal policy aims at the attainment of the goal of price
stability.
 Instability in price level, i.e., either inflation or deflation, produces some
undesirable consequences. That is why the government prepares its budget in
such a way that both inflation and deflation are controlled.
iv) Economic equality:- Modern welfare governments provide social justice by

providing equitable distribution of income and wealth.
 Fiscal policy is an important instrument that aims at reducing income and wealth
gaps between people.
 Government can use its tax- expenditure policies in such a way that income
distribution can be made more equitable.
 For this, it imposes new taxes and raises tax rates in a progressive manner. On
the other hand, it spends money for the persons who belong to the low income
group.
 Thus, by taxing the rich at a progressive rate and spending those revenues for
the betterment of the poor people, economic disparities between them can be
minimized.
v) Balanced Regional Development

A large part of the government tax revenues are given out to less developed states as
statutory and discretionary grant. This helps in the balanced regional development of
the country.
Components of Fiscal Policy

There are four key components of Fiscal Policy:
1. Taxation Policy;
2. Expenditure Policy;
3. Public Borrowings; and
4. Budgetary Policy.
1. Taxation Policy:-
 The government gets revenue from direct and indirect taxes.
37
 Direct taxes include taxes on personal incomes, corporate incomes, wealth and
property whereas indirect taxes (also known as commodity taxes) include taxes
on production and sale of goods and services like excise duty, custom duty,
service tax etc.
 Balanced taxation decisions are very important for economy because of two
reasons:
2. Higher than usual tax rate will reduce the purchasing power of people and will
lead to a decrease in investment and production.
3. Lower than usual tax rates would leave more money with people to spend and
this would lead to inflation.
 Thus, the government has to make a balance and impose correct tax rate for the
economy.
2. Expenditure Policy:-
 Expenditure policy of the government deals with revenue and capital
expenditures.
 These expenditures are done on areas of development like education, health,
infrastructure etc. and to pay internal and external debt and interest on those
debts.
3. Public (Govt.) Borrowings:-

 If the income of the government is more than its expenditure, it is called surplus
budget and if the expenditure is more than income, it is called deficit budget.
 To fund the deficit budget, the government has to borrow from domestic or
foreign sources. This is known as deficit financing.
 Accordingly, Public borrowings include both internal and external borrowings.
 Internal borrowings include i) borrowings from public in the form of treasury
bills and government bonds and ii) the central bank.
 External borrowings include borrowings from foreign governments,
international organisations like World Bank and IMF etc.
4. Budgetary Policy:-
 It is a policy of the government to keep its budget in balance.
 When the govt keeps its expenditure equal to its revenue, it is known as a
balanced budgetary policy.
 When the govt decides to spend more than its expected revenue, this is known as
deficit budgetary policy.
 When the govt adopts the policy of keeping its expenditure lower than its
revenue, it is known as a surplus budgetary policy.
 Adoption of different types of budgetary policies by the government depends
upon the need of hour.
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Lecture 18
GROSS DOMESTIC PRODUCT
Factor Income Transfer Income
Factor Income is a payment received in Transfer Income is received without rendering

exchange of any good or service. any service or good.
1. It comprises rent, wages, interest and 1. It comprises gifts, subsidies, donations,
profit. scholarships, etc.
2. It is received in return for rendering 2. It is received without providing any good or

productive service. service in return.
3. It is an earned income (earning concept). 3. It is an unearned income (receipt concept).
4. It is bilateral payment. 4. It is unilateral payment.
5. It is included in national income. 5. It is not included in national income.
Normal Resident of a country:-
 A normal resident is said to be one who ordinarily resides in a country (for at

least one year or more) and whose centre of economic interest lies in that
country.
 A person is said to have his economic interest in a country when he conducts his
economic transactions (relating to production, consumption or investment) in
that country.
 The following observations need to be borne in mind:-
a) Normal residents include individuals as well as institutions (excluding
international financial institutions like IMF and World Bank).
b) It is not necessary that normal resident of a country is also a citizen of that
country. A person may be a normal resident of one country even when he is a
citizen of another country.
39
Domestic Territory:-
Domestic territory is defined as the area administered by a govt within which persons,
goods and capital can circulate freely.
The domestic territory of a country includes the following:-
i) Territory lying within the political borders including territorial waters of a

country.
ii) Ships and aircrafts operated by residents of the country across different parts
of the world. For example, planes operated by Air India between England and
Canada are part of the domestic territory of India.
iii) Embassies and military establishments of the country located abroad. For
example, Indian embassy located in the USA is a part of domestic territory of
India.
Depreciation:-
 The monetary value of an asset decreases over time due to use, wear and tear or
obsolescence. This decrease is measured as depreciation.
 Machinery, equipment, currency are some examples of assets that are likely to
depreciate over a specific period of time.
 Opposite of depreciation is appreciation which is increase in the value of an asset
over a period of time.
40
Lecture 19
GDP (Part II)
 Gross Domestic Product (GDP) is the total money value of all final goods and
services produced within the domestic territory of a country.
 To avoid double-counting, GDP includes the monetary value of final goods and
services. For example, a footwear manufacturer uses shoelaces and other
materials to make shoes, but only the value of the shoe gets counted; the
shoelaces don't.
 The components of GDP include consumption expenditures (C), investments
(I), government spending (G) and net exports (Difference between exports and
imports). Therefore, GDP is equal to C + I + G + (X - M).
 The first basic concept of GDP was invented at the end of the 18th century.
 The modern concept was developed by the American economist Simon Kuznets
in 1934 and adopted as the main measure of a country's economy at the Bretton
Woods conference in 1944.
 GDP in India is calculated by the Central Statistical Office which comes under the
Ministry of Statistics and Programme Implementation
Not included in GDP:
 Unpaid work: work performed within the family, volunteer work, etc.
 Goods not produced for sale in the marketplace
 Bartered goods and services
 Black market
 Illegal activities
 Transfer payments
 Sales of used goods
 Intermediate goods and services that are used to produce other final goods and
services.
41
GDP Per Capita:-
 GDP per capita is calculated by dividing nominal GDP by the total population of a
country. It expresses the average economic output (or income) per person in the
country
Note:-
 When an economy experiences several consecutive quarters of positive GDP growth,

it is considered to be in an expansion (also called economic boom).
 Conversely, when it experiences two or more consecutive quarters of negative GDP
growth, the economy is generally considered to be in a recession (also called
economic bust).
 In India, the tertiary sector or the service sector contributes the most to the GDP.
Lecture 20
GDP AT MARKET PRICE AND FACTOR COST
 Factor cost: Total cost of all factors of production or factor inputs (land, labour,
capital and entrepreneur) consumed or used in producing a good or service.
 Market price: Market price is the price at which a product is sold in the market.
 It includes the cost of production in the form of wages, rent, interest, input
prices, profit etc. It also includes the taxes imposed by the government. When
the governments roll out subsidies for the producers that also would be reflected
in the price.
 Subsidy:- Subsidy refers to the discount given by the government to make
available the essential items to the public at affordable prices.
 Specific entities or individuals can receive these subsidies in the form of tax
rebate or cash payment.
42
 This helps to keep essential items such as food, fuel, fertilisers within the reach
of poor people.
 Indirect Taxes:- Indirect taxes are basically taxes that can be passed on to another
entity or individual. They are usually imposed on a manufacturer or supplier who then
passes on the tax to the consumer.
 The most common examples of indirect taxes include sales tax, excise duty, custom
duty etc.
 GDP at Factor Cost is defined as the sum total of all factor payments (wages,
interest, rent, profit and depreciation).
 GDP at market price is defined as “the market value of all the final goods and
services produced in the domestic territory of a country by normal residents
during an accounting year including net indirect taxes.
GDPmp = GDPfc + Net Indirect Taxes
Lecture 21
GOVERNMENT BUDGET
 Feb 1 is a well known date in India when the union finance minister presents
annual budget of the government.
 The budget unfolds two things:-
a) The financial performance of the government over the past one year; and
b) The financial programmes and policies of the government for the next one
year.
 The programmes and policies of the govt (as presented in the budget) are known
as “Budgetary Policy” of the government, or “Fiscal Policy” of the government.
 It has two aspects:-

a) Revenue aspect;
b) Expenditure aspect.
 On the revenue side, the budgetary policy unveils expected receipts of the govt.
 On the expenditure side, it unveils the expected expenditure of the government.
 It is bay managing the budgetary revenue and budgetary expenditure that the
govt tries to increase the GDP growth along with stability of the economy.
Govt budget is a statement of expected receipts and expected expenditure of the

govt (for the financial (April 1 to March 31) year to follow) that reveals budgetary
policy of the govt to achieve the twin objective of growth with stability.
43
 In India, article 112 of the constitution requires the central government to
prepare “Annual Financial Statement” (Budget) for the country as a whole before
the two houses of the Parliament i.e., Lok Sabha and Rajya Sabha.
 Likewise, Article 202 of the constitution requires every state govt to prepare
“Annual Financial Statement” for the concerned state before the state legislative
assembly.
Objectives of Govt Budget

1. GDP Growth:- Achieved in two ways:-
a) By making public investment on infrastructure; and
b) By inducing private investment.
2. Balanced Regional growth:- The fiscal policy or budgetary policy focuses on the
development of the backward regions in the country.
 This is achieved through liberal tax laws for the backward regions.
3. Redistribution of income and wealth:- The government imposes heavy

taxation on a high income groups redistribute it among the people of weaker
section in the society.
 The government can provide subsidies and other amenities to people whose
income levels are low. These increase their disposable income and this reduces
the inequalities.
4. Reallocation of Resources: Reallocation of resources in the manner such that

there is a balance between the goals of profit maximization and social welfare.
Government uses budgetary policy to allocate resources.
 This is done by imposing higher rate of taxation on goods whose production is to

be discouraged and subsidies provided on goods whose production is to be
promoted.
5. Managing Public Enterprises: In the budget, government can make various

provisions to manage public sector enterprises and also provides them financial
help.
6. Economic Stability:- Government budget is a tool to prevent economy from

inflation or deflation and to maintain economic stability.
The budget is divided into three types
 Balanced Budget – A government budget is assumed to be balanced if the

expected expenditure is similar to anticipated receipts for a fiscal year.
 Surplus Budget – A budget is said to be surplus when the expected revenues
surpass the estimated expenditure for a particular business year. Here, the
budget becomes surplus, when taxes imposed, are higher than the expense.
44
 Deficit Budget- A budget is on deficit if the expenditure surpasses the revenue
for a designated year.
Lecture 22
Components of Government Budget
 The main components or parts of government budget are explained below.
1. Revenue Budget:-This financial statement includes the revenue receipts

of the government i.e. revenue collected by way of taxes & other receipts.
It also contains the items of expenditure met from such revenue.
a) Revenue Receipts:- These are the incomes which are received by the
government from all sources in its ordinary course of governance.
 These receipts do not create a liability or lead to a reduction in assets.
 Revenue receipts are further classified as tax revenue and non-tax revenue.
i) Tax Revenue :-Tax revenue consists of the income received from different
taxes and other duties levied by the government.
 It is a major source of public revenue. Every citizen, by law is bound to pay them
and non-payment is punishable.
 Taxes are of two types, viz., Direct Taxes and Indirect Taxes.
 Direct taxes:- are those taxes which have to be paid by the person on whom
they are levied. Its burden cannot be shifted to someone else.
 E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes.
45
 Indirect taxes are those taxes which are levied on the production of goods and
services. Here the burden can be shifted to some other person.
 E.g. Custom duties, sales tax, GST, services tax, excise duties, etc. are indirect
taxes.
Progressive & Regressive Tax

A tax is said to be progressive when the rate of tax increases with an increase in
income. So, the burden of this tax is more on rich than on poor.
Example:- Tax rate is 10% for income between 2-5 lakh rupees. It increases to
15% between 5-10 lakh rupees and so on.
A tax is said to be regressive when it decreases with an increases in income. Such

a tax causes a greater real burden on the poor than the rich.
ii) Non-Tax Revenue:-Apart from taxes, governments also receive revenue

from other non-tax sources. The non-tax sources of public revenue are as
follows :-
1. Fees:- The government provides variety of services for which fees have to be
paid. E.g. fees paid for registration of property, births, deaths, etc.
2. Fines and penalties:- Fines and penalties are imposed by the government for
not following (violating) the rules and regulations.
3. Profits from public sector enterprises:- Many enterprises are owned and
managed by the government. The profits receives from them is an important
source of non-tax revenue.
 For example in India, the Indian Railways, Oil and Natural Gas Corporation
(ONGC), Air India, Indian Airlines, etc. are owned by the Government of India.
The profit generated by them is a source of revenue to the government.
4. Gifts and grants:- Gifts and grants are received by the government when there
are natural calamities like earthquake, floods, famines, etc.
 Citizens of the country, foreign governments and international organisations like
the UNICEF, UNESCO, etc. donate during times of natural calamities.
5. Special assessment duty:- It is a type of levy imposed by the government on the

people for getting some special benefit. For example, in a particular locality, if
roads are improved, property prices will rise.
 The Property owners in that locality will benefit due to the appreciation in the
value of property. Therefore the government imposes a levy on them which is
known as special assessment duties.
46
b) Revenue Expenditure:- Revenue expenditure is the expenditure incurred for
the routine, usual and normal day to day running of government departments
and provision of various services to citizens.
 It includes both development (Plan) and non-development (non-plan)
expenditure of the Central government.
 Usually expenditures that do not result in the creation of assets nor reduction of
liability are considered revenue expenditure.
 Expenses included in Revenue Expenditure :-

1. Interest payments.
2. Expenditure on agricultural and industrial development, scientific research,
education, health and social services.
3. Expenditure on defence and civil administration.
4. Expenditure on exports and external affairs.
5. Grants given to State governments even if some of them may be used for creation of
assets.
6. Payment of interest on loans taken in the previous year.
7. Expenditure on subsidies.
2. Capital Budget:-The budget which allocates money for the acquisition

and maintenance of fixed assets such as land, buildings and equipment is
known as capital budget. Capital budget consists of capital receipts &
Capital expenditure.
(a) Capital Receipts:-Receipts which create a liability or result in a reduction in

assets of the government are called capital receipts.
 They are obtained by the government by raising funds through borrowings.
 Items included in Capital Receipts :

1. Loans raised by the government from the public through the sale of bonds and
securities. They are called market loans.
2. Borrowings by government from RBI and other financial institutions.
3. Loans and aids received from foreign countries and other international Organisations
like International Monetary Fund (IMF), World Bank, etc.
4. Recoveries of loans granted to state and union territory governments and other
parties.
(b) Capital Expenditure:- Any expenditure which is incurred for creating assets for
the govt. And reducing liabilities of the govt. is known as capital expenditure.
 Thus, expenditure on land, machines, equipment, irrigation projects, oil
exploration etc. are capital expenditure.
47
Lecture 23
Budgeting for Panchayats
and
Own Resource Generation By Panchayats
 The passage of the Constitution (73rd Amendment) Act, 1992 (or simply the
Panchayati Raj Act) marks a new era in the federal democratic set up of the
country.
 It came into force with effect from April 24, 1993.
 It has a 3-tier system of Panchayati Raj for all States having population of over 20
lakh.
 Panchayats have been one of the basic features of the Indian society.
 As we know even Mahatma Gandhi advocated for panchayats and village

republics.
 Since independence, we had multiple provisions of Panchayats in India from

time to time finally reaching epitome with the 73rd Constitutional Amendment
Act of 1992.
 A major portion of Part IX of the Constitution covering Articles 243C, 243D,

243E, 243 G and 243 K deals with the structural empowerment of the PRIs.
 But the real strength in terms of both autonomy and efficiency of these
institutions is dependent on their financial position (including their capacity to
generate own resources).
 In general, Panchayats in our country receive funds in the following ways:
1. Grants from the Union Government based on the recommendations of the

Central Finance Commission as per Article 280 of the Constitution.
2. Devolution from the State Government based on the recommendations of the
State Finance Commission as per Article 243 I.
3. Loans/grants from the State Government
4. Own Resource Generation (tax and non-tax).
 Across the country, States have not given adequate attention to fiscal
empowerment of the Panchayats.
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 Panchayats’ own resources are meagre. Kerala, Karnataka and Tamil Nadu are
the states which are considered to be progressive in PRI empowerment but even
there, the Panchayats are heavily dependent on government grants.
 One can draw the following broad conclusions:
1. Internal resource generation at the Panchayat level is weak.

2. Panchayats are heavily dependent on grants from Union and State Governments.
3. A major portion of the grants both from Union and the State Governments is
scheme specific. Panchayats have limited discretion and flexibility in incurring
expenditure.
4. In view of their own tight fiscal position, State Governments are not keen to
devolve funds to Panchayats.
 Overall, a situation has been created where Panchayats have responsibility but
grossly inadequate resources.
 This calls for a two-fold approach – first demarcation of a fiscal domain for PRIs
and second devolution of funds from the Union and State Governments.
 In the Indian context, the concept and practice of local government taxation have
not progressed much since the early days of the British rule.
 Most of the revenue accrual comes from taxation of property and profession
with minor supplement coming from non-tax receipts like rent from property
and fees for services.
 It is high time that a national consensus emerges on broadening and deepening
the revenue base of local governments. A comprehensive exercise needs to be
taken up in this sector on a priority basis.
Own Resource Generation

 Though, in absolute terms, the quantum of funds the Union/State Government
transfers to a Panchayat forms the major component of its receipt, the PRI’s own
resource generation is the soul behind its financial standing.
 It is not only a question of resources; it is the existence of a local taxation system
which ensures people’s involvement in the affairs of an elected body. It also
makes the institution accountable to its citizens.
 In terms of own resource collection, the Gram Panchayats are, comparatively in a
better position because they have a tax domain of their own, while the other two
tiers are dependent only on tolls, fees and non-tax revenue for generating
internal resources.
The taxation power of the Panchayats essentially flow from Article 243 H which reads
as follows: “the Legislature of a State may, by law
49
1. Authorise a Panchayat to levy, collect and appropriate such taxes, duties, tolls
and fees in accordance with such procedure and subject to such limits;
2. Assign to a Panchayat such taxes, duties, tolls and fees levied and collected by the
State Government for such purposes and subject to such conditions and limits;
3. Provide for making such grants-in-aid to the Panchayats from the Consolidated
Fund of the State; and
4. Provide for constitution of such funds for crediting all moneys received,
respectively, by or on behalf of the Panchayats and also for the withdrawal of
such moneys therefrom as may be specified in the law.”
 State Panchayati Raj Acts have given most of the taxation powers to Village
Panchayats.
 A gram panchayat fund has been created on the pattern of the consolidated fund of the
state.
 All money received by the Gram Panchayat like contribution or grants made by the State
Government, Union Government, Zila Parishad and all sums received by the panchayat
in the form of taxes, rates, duties, fees, loans, fines and penalties, compensation, court
decree, sale proceeds and income from panchayat property etc. go into that fund.
 Village Panchayats have been empowered to levy taxes or fees on subjects like houses
and buildings, professions, trades, fees on registration of vehicles, fairs and melas,
sanitary arrangements, water tax, lighting tax, tax on sale of firewood, tax on slaughter
houses, private fisheries, license fee on tea stalls, hotels or restaurants, carts, carriages,
boats, rickshaws etc.
State Finance Commission (Article 243 I): State Government needs to appoint a finance
commission every five years, which shall review the financial position of the Panchayats and to
make recommendation on the following:
 The Distribution of the taxes, duties, tolls, fees etc. levied by the state which is to be
divided between the Panchayats.
 Allocation of proceeds between various tiers.
 Taxes, tolls, fees assigned to Panchayats
 Grant in aids.
50
Lecture 24
GROWTH AND DEVELOPMENT
Economic Growth
 Economic growth refers to an increase in the production of goods and services in an
economy over a particular period of time, usually one year.
 Expressed in two ways:-
i) A sustained annual increase in an economy’s real national income over a long
period of time.
ii) Annual increase in real per capita income of a country over a long period.
 Arthur Lewis, “Economic growth means the growth of output per head of population”.
 Objective:- To raise the standard of living of people.
 Rates of economic growth are measured in terms of an overall increase in national
income, real GDP and an increase in per capita income.
 However, per capita income and Real GDP are the most appropriate methods of
measuring economic growth.
Economic growth can occur in two ways:
a) Extensive Growth:- An economy can grow extensively i.e. by using more resources
such as physical, human, or natural resources.
b) Intensive Growth:- An economy can grow intensively by using the same amount of
resources more efficiently.
Important Indices of Economic Growth
Various indices are used to measure economic growth which are discussed as under:-
i) Physical Quality of life Index (PQLI):-

 Developed by David Morris in mid 1970s.
 Developed by Morris at the US Overseas Development Council.
 PQLI is the average of three values:-
a) Life expectancy at age one;
b) Basic Literacy Rate; and
c) Infant Mortality Rate.
 As of 2020, Denmark is the country holding rank 1 in terms of PQLI.
 India ranks at no. 58 as of 2020.
ii) Purchasing Power Parity (PPP):- Propounded by Gustav Cassel, a Swedish
Economist in 1918.
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 It is an economic theory that shows the comparison of the purchasing power of various
world currencies to one another. It compares various currencies in terms of US Dollar.
 Defined as no. Of units of a country’s currency required to buy the same amount of
goods and services in the domestic markets as one Dollar would buy in the US.
 Economic growth is a quantitative concept.
Theories of Economic Growth
1. Classical Theory or Steady State Theory:-

 The evolution of economic growth theories can be drawn back from Adam Smith’s book,
Wealth of Nation. In his book, he emphasized a view that the growth of an economy
depends on division of labor.
 After that, the view presented by Smith was further supported by classical economists,
such as Ricardo, Malthus, and Mill. The theory developed by these economists is known
as classical theory of economic growth.
 The theory states that every economy has a steady state of GDP and any deviation from
that steady state is temporary and will eventually return.
 This is based on the concept that when GDP rises, population will increase.
 The increase in population has thus an adverse effect on GDP due to the higher demand
on limited resources from a larger population. So, GDP will eventually lower back to the
steady state.
 When GDP declines below the steady state, population will decrease and thus, there will
be lower demand for resources. In turn, the GDP will rise back to its steady state.
 So Economic growth follows a “Rising Falling Trend”.
2. Neo-Classical Theory:-
 This theory was propounded by T.W. Swan and Robert Solow. Hence, it is known as
Solow-Swan model of growth.
 The theory focuses on three important factors that impact growth. i.e., labour, capital
and technology.
 The output per worker (growth per unit of labour) increases with the output per capita
(growth per unit of capital) but at a decreasing rate. This is referred as diminishing
marginal returns.
 Therefore, a point will reach where labour and capital can be set to reach an equilibrium
state.
 Since a nation can theoretically determine the amount of labour and capital necessary to
remain at the steady point, it is technological advances that really impact economic
growth.
 So, once an advance in technology has been made, then labour and capital should be
adjusted accordingly.
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LECTURE 25
Economic Development
 Economic development refers to the process by which the overall health, well-
being, and academic level of the general population of a nation improves.
 It also means improved production volume due to the advancements of
technology.
 It is the qualitative improvement in the life of citizens of a country and is most
appropriately determined by Human Development Index (HDI).
 The overall development of a country is based on many parameters such as
standard of living, technological advancements, living conditions, quality of life,
the creation of job opportunities, per capita income, infrastructural and
industrial development, GDP and much more.
Factors Affecting Economic development
1. Infrastructural improvement – Development in the infrastructure improves

the quality of life of people. Therefore, an increase in the rate of infrastructural
development will result in the economic development of a nation.
2. Education – Improvement in literacy and technical knowledge will result in a
better understanding of the usage of different equipment. This will increase
labour productivity and in turn, will result in the economic development of a
nation.
3. Increase in the capital – Increase in capital formation will result in more
productive output in an economy and this will affect the economic development
positively.
iii) Human Development Index (HDI):-

 As mentioned earlier, economic growth is measured in terms of an increase in
national income and per capita income. However, these two parameters are not
sufficient.
 Therefore, a need was felt to put forward an index which would truly and
correctly reflect the level of economic growth of a nation.
 Thus, the United Nations Development Programme (UNDP) introduced the HDI
in its first Human Development Report under the leadership of Dr. Mehboob ul
Haq and Prof. Amartya Sen.
 In order to measure the Human development Index, three criteria are
considered:-
a) Life Expectancy rate at the age of one;
53
b) Adult Literacy Rate;
c) Standard of living.
 As of 2020, Norway is the country holding rank 1 in terms of HDI.
 India holds 129th rank in terms of HDI as of 2020.
Difference between Economic Growth and Economic Development
Basis of Economic Growth Economic Development

Comparison
Definition Increase in the production of goods It refers to the overall development of the
and services in a nation for a quality of life in a nation which includes
particular period economic growth as well.
Span of Concept It is a narrower concept than It is a broader concept than Economic

Economic Development Growth
Scope It is a uni-dimensional approach It is a multi-dimensional approach that looks

which deals with the economic into the income as well as the quality of life
growth of the nation of the nation
Term Short-term process Long-term process
Measurement Quantitative Both Quantitative and Qualitative
Government It is an automatic process that may or It requires intervention from the

may not require intervention from government as all the developmental
Support the government policies are formed by the government
Kind of changes Quantitative changes Quantitative as well as qualitative changes
expected
Examples GDP, GNP HDI, Per capita Income, Industrial

Development etc.
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Models of Economic Development
1) Harrod-Domar Model:-
 Developed in 1930s
This model mainly depends on two factors:-
1. Savings; and
2. Investment
o In this model, the main strategy is a mobilisation of saving and to generate

investment to increase economic growth.
o It means investment leads to growth and it comes from saving.
o Higher income means higher savings.
o Economic growth measured by saving ratio and capital input-output ratio.
2) Lewis Structural Change Model
It is also called as DUEL-SECTOR model.

This model has two sectors:
Tradition sector
o It has surplus of labour for i.e. Agriculture sector

Modern sector
o Modern sector focuses on the transfer of surplus labour to the modern sector for
i.e. Industrial sector
3) Rostow's Model – the 5 Stages of Economic Development
The American Economist, W.W.Rostow developed this theory by saying that nation
passed through five stages of economic growth development.
o The traditional society

o The pre-conditions for off-take
o The takeoff
o The drive to maturity
o The age of high mass consumption
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4) Chenery's pattern of development
o Chenery along with his colleagues examined patterns of development for countries
at different per capita income levels.
o Shift from agriculture to industrial production.
o A steady accumulation of physical and human capital.
o Change in consumer demands.
o Increased urbanisation.
o A decline in family size.
o Demographic transition.
5) Neoclassical Dependence Model
This model is based on the condition, dependence is a condition by which one country's
economic development depends on others.
6) The International Dependence Revolution (IDR)
o This model opposes the tradition's emphasis on the GNP growth for the
development.
o It mainly emphasis on the international relations and policy reforms.
o IDR model stated that developing countries as intercept by institutional, political,
and economic rigidities in both domestic and international setup.
7) Traditional Neoclassical Growth Theory
o This theory mainly depend on these three Output growth results

o Increase in labor
o Increase in capital
o Changes in technology
56
Lecture 26
Production, Cost and Efficiency
Production: Production is a process of combining various factor inputs to produce goods
and services. Production is an outcome of economic activity.
 For making or producing something, we need some tangible and intangible materials.
These materials are the various factors of production. Let us understand what we mean
by the factors of production and their types.
Factors of Production:- Anything that helps in production of goods and services is the
factor of production. These are the various factors by means of which any resource is
transformed into a more useful commodity or service.
 Also known as factor inputs.

 They are the inputs for the process of production. They are the starting point of the
production process
Types of Factors of Production
Factors of production have been categorized into four types.
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1. Land:- It refers to all natural resources. All natural resources either on the surface
of the earth or below the surface of the earth or above the surface of the earth is
Land.
 One uses the land to produces goods. It is the primary and natural factor of
production. All gifts of nature such as rivers, oceans, land, climate, mountains,
mines, forests etc. are treated as land.
 The payment for land is rent.
2. Labour:- All human effort that assists in production is known as labour. This effort
can be mental or physical.
 It is a human factor of production. It is the worker who applies their efforts,
abilities, and skills to produce.
 The payment for labour is the wage.
3. Capital:- Capital refers to all manmade resources used in the production process. It
is a produced factor of production. It includes factories, machinery, tools,
equipment, raw materials, wealth etc.
 The payment for capital is interest.
4. Entrepreneur:- An entrepreneur is a person who brings other factors of

production in one place. He uses them for the production process. He is the person
who decides what to produce, where to produce and how to produce.
 A person who takes these decisions along with the associated risk is an
entrepreneur.
 The payment for entrepreneur is profit.
 Output needs inputs. Land, labour and capital are the common inputs for the
production of goods and services.
 As a producer you would always be interested to know how much labour and
capital are required to produce a given quantity of a commodity.
 You may find, for example that ten units of a capital and five units of labour are
required to produce hundred units of the commodity.
 It is this relationship between physical units (i.e., ten units of capital and five units
of labour) and physical output (100 units of the commodity) which is known as
production function.
 Production function thus is a functional relationship between physical inputs
and physical output of a commodity.
 Usually it is expressed in terms of the following equation
Qx = f(L, K)
 It says that Qx (production of commodity X) is the function of L (labour) and K

(capital) .
58
According to Watson, “Production Function is the relation between a firm’s
production (output) and the material factors of production (input)”.
 Fixed and variable factors:-

 Factors of production are classified as:-
1. Fixed factors; and
2. Variable factors
 Fixed factors are those the application of which does not change with the change in
output.
 In fact, fixed factors (like machines) are installed before output actually starts. Thus,
a machine is there even when output is zero.
 Let’s assume that a machine can produce maximum 1000 units of commodity-X. It
means that for any change in output ranging between 0-1000 units, input of
machine (fixed factor) remains constant.
 Variable factors are those the application of which varies with the change in
output. Labour is an example of variable factor.
 We need more labour to produce more units of a commodity, other things
remaining constant. Thus use of variable factor is zero when output is zero. It
increases when output increases.
Short-run production function
 Short run is a period of time when production can be increased only by increasing
the application of variable factors. Fixed factor, by definition, remains constant.
 Thus, production capacity remains constant during the short period
Long run production function
 Long Run is a period of time when the distinction between fixed factor and variable
factor vanishes. All factors are variable factors.
 Long period is long enough to increase production capacity of a firm, to change size
of the plant or to install more and more plants.
 Thus, what is fixed factor during the short period becomes variable factor over the
long period.
Total Product, Marginal Product and Average Product
 Total product:- TP is the sum total of output produced by all the units of a variable
factor along with some constant amount of the fixed factors used in the process of
production.
 Let’s consider L (labour) as the variable factor and K (capital) as the fixed factor
(say a machine), the producer is using 1 unit of fixed factor alongwith 6 units of the
variable factor.
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 The resultant output is 10,12,15,12,10,06 units of the commodity corresponding to
each unit of labour used. In such a situation,
TP = 10+12+15+12+10+06 = 65 units of the commodity
 TP is the sum total of output of each unit of the variable factor used in the process
of production. This is also called total return of the variable factor.
 Marginal product:- MP refers to change in TP when one more unit of the variable
factor is used(fixed factor remaining constant).
 For example, if output increase from 40 to 45 units when the input of labour is
increased from 5 to 6 units (input of capital remaining constant), then
MP = 45-40= 05
 MP = 5 is related to the 6th unit of labour.

 Average product:- AP is output per-unit of the variable factor used in the process
of production. It is estimated as under:-
AP = TP /L
 (Where AP means Average Product, TP means Total Product and L means labour).
Example:- If TP = 40 when 5 units of L (labour) are used, then
AP = TP/L =40/5=8 units of output.
Law of Variable Proportions or Returns to a Factor

 The Law of Variable Proportions exhibits the short-run production functions in which
one factor varies while the others are fixed.
 The Law of Variable Proportions concerns itself with the way the output changes
when you increase the number of units of a variable factor. Hence, it refers to the effect
of the changing factor-ratio on the output.
 This is assuming that all other factors are constant. This relationship is also called
Returns to a Factor.
“The Law of Variable Proportions” or “Returns to a Factor” states that keeping other
factors constant, when you increase the variable factor, then the total product initially
increases at an increases rate, then increases at a diminishing rate, and eventually
starts declining.
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Assumptions of the Law

The law of variable proportions holds good under the following conditions:
1. Constant State of Technology: First, the state of technology is assumed to be given

and unchanged. If there is improvement in the technology, then the marginal product
may rise instead of diminishing.
2. Fixed Amount of Other Factors: Secondly, there must be some inputs whose
quantity is kept fixed. It is only in this way that we can alter the factor proportions
and know its effects on output. The law does not apply if all factors are
proportionately varied.
3. Possibility of Varying the Factor proportions: Thirdly, the law is based upon the
possibility of varying the proportions in which the various factors can be combined
to produce a product. The law does not apply if the factors must be used in fixed
proportions to yield a product.
 Let’s understand this law with the help of an example:
 In this example, the land is the fixed factor and labour is the variable factor. The table
shows the different amounts of output when you apply different units of labour to one
acre of land which needs fixing.
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Three Stages of the Law
The law has three stages as explained below:
1. Stage I – The TPP increases at an increasing rate and the MPP increases too. The MPP
increases with an increase in the units of the variable factor.
 Therefore, it is also called the stage of increasing returns. In this example, the Stage I
of the law runs up to three units of labour (between the points O and L).
2. Stage II – The TPP continues to increase but at a diminishing rate. However, the
increase is positive. Further, the MPP decreases with an increase in the number of
units of the variable factor.
 Hence, it is called the stage of diminishing returns. In this example, Stage II runs
between four to six units of labour (between the points L and M). This stage reaches
a point where TPP is maximum (18 in the above example) and MPP becomes zero
(point R).
3. Stage III – Now, the TPP starts declining, MPP decreases and becomes negative.
Therefore, it is called the stage of negative returns.
 In this example, Stage III runs between seven to eight units of labour (from the point
M onwards).
 Any rational producer avoids the first as well as third stages of production. Therefore,
producers prefer Stage II – the stage of diminishing returns. This stage is the most
relevant stage of operation for a producer according to the law of variable
proportions.
62
Lecture 27
Concept of Costs
Output needs inputs. Broadly, there are two types of inputs;
1. Factor Inputs (Land, labour, capital and entrepreneur); and

2. Non-factor inputs (raw-materials).
 Cost refers to the expenditure incurred by the producer (explicitly or implicitly)
on the factor as well as non-factor inputs for a given output of a commodity.
Explicit and Implicit Cost
 All inputs may not be purchased from the market. A producer may use self-
owned inputs.
 For Example: Instead of hired workers from the market, producer may use his
family labour. Likewise, a producer may use his own land instead of taking it on
lease.
 Expenditure incurred by the producer on the purchase of inputs from the market
is called explicit cost. Estimated expenditure on the use of self owned inputs is
called implicit cost.
 In economics, total cost is estimated considering both its elements, viz., explicit
cost and implicit cost.
Total Cost = Explicit Cost + Implicit Cost
Selling Cost and Production Cost
 Selling costs refer to the expenditure incurred by the producer to promote sale of
the commodity. E.g., Expenditure on advertisement.
 Production cost refers to the expenditure incurred by the producer on the inputs
for producing a given level of output.
Short Run Cost and Long Run Cost
Short run is a period of time during which some factors are fixed and some are variable.
Accordingly, short run costs have two components, viz., i) fixed costs, referring to
expenditure on fixed factors, and ii) variable costs, referring to expenditure on variable
factors. Thus, in short run;
Total Cost = Total Fixed Cost + Total Variable Cost
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i) Fixed Costs:- Costs related to the use of fixed factors of production are
known as fixed costs.
 Also known as supplementary costs, overhead costs or indirect costs.
 These costs don’t change with the change in output. Fixed costs are incurred
even when the output is zero.
 For example, expenditure on machine and plant, land and buildings, licence fee,
wages and salaries of permanent staff.
ii) Variable Costs:- Variable costs refer to the expenditure incurred by the
producer on the use of variable factors of production.
 These costs change with the change in level of output. As output increases, these
costs also increase and vice versa. When output is zero, these costs are also zero.
 These costs include cost of raw material, wages of casual workers, expenses on
electricity, wear and tear expenses (depreciation) etc.
Average Cost and marginal Cost

 Average Cost:- Cost per unit of output is known as average cost.
 AC = TC / Q (Where AC is Average Cost, TC is Total Cost and Q is Quantity
Produced).
 The most important components in average cost are fixed cost and Variable cost.
It is also called as Unit cost.
 Marginal Cost:- Marginal Cost is the change in total cost when an additional unit
of output is produced.
 It is an additional cost or extra cost as a result of an increase in the production of
one more unit of product.
 Formula: Change in Total Cost / Change in number of units Manufactured
64
Lecture 28
Gram Panchayat Development Plan
 Gram Panchayats have been mandated for the preparation of Gram

Panchayat Development Plan (GPDP) for economic development and social
justice utilizing the resources available to them.
 The GPDP planning process has to be comprehensive and based on
participatory process which involves the full convergence with Schemes of
all related Central Ministries / Line Departments related to 29 subjects
enlisted in the Eleventh Schedule of the Constitution.
 Panchayats have a significant role to play in the effective and efficient
implementation of flagship schemes on subjects of National Importance for
transformation of rural India.
 The People's Plan Campaign commenced from 1 st May to 15 th June, 2020 for
preparing GPDP for 2020-21.
 The campaign initiated under "Sabki Yojana Sabka Vikas" will be an
intensive and structured exercise for planning at Gram Sabha through
convergence between Panchayati Raj Institutions (PRIs) and concerned Line
Departments of the State
What is GPDP?
 The GDPD will be an intensive and structured exercise for planning at Gram Sabha
level through convergence between Panchayati Raj institutions and concerned
departments of the State.
 GPDP aims to strengthen the role of 31 lakh elected Panchayat leaders and 2.5 crore
SHG Women under DAY-NRLM in effective gram Sabha.
Features of GPDP
 The structured Gram Sabha meetings will have physical presence and presentation
by frontline workers/supervisors on 29 sectors of the 11th schedule. The campaign
is launched under ‘Sabki Yojana Sabka Vikas’. It is comprehensive and a
participatory process which involves the full convergence with Schemes of all
related Central Ministries / Line Departments.
 Advantages
 Community involvement leading to quality works and acceptance by local
inhabitants.
 Activates Panchayat Raj level bureaucracy.
 Strengthens bond between Government, Gram Panchayat & local inhabitants leading
to responsive government.
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 The Prime Minister launched the e-Gram Swaraj portal and app on occasion of
Panchayati Raj Day via video conference.
About the Portal

 The e-Gram Swaraj portal was launched under the Union Ministry of Panchayati
Raj. It is a single interface which will provide details about development projects
under Village Panchayats- from the planning to implementation stage.
 The e-Gram Swaraj portal will list works being carried out under the Gram
Panchayat Development Plan.
 The government mandates all the Gram Panchayats to formulate a GPDP for
economic development and social justice. A campaign initiated under the ‘Sabki
Yojana Sabka Vikas’ called People’s Plan Campaign was launched for preparing
the GPDP.
66
Objective Type Questions

Based on General Economics
1. Who used the terms “microeconomics” and “Macroeconomics for first time?
a) Adam Smith
b) Ragnar Frisch
c) Alfred Marshall
d) Lionel Robbins
2. Which of the following market types has all firms selling products so identical that buyers
do not care from which firm they buy?
A) Perfect competition
B) oligopoly
C) monopolistic competition
D) Monopoly
3. Perfect competition is characterized by all of the following EXCEPT
A) Well-informed buyers and sellers with respect to prices.
B) A large number of buyers and sellers.
C) No restrictions on entry into or exit from the industry.
D) Considerable advertising by individual firms.
4. Which of the following market types has the fewest number of firms?
A) perfect competition
B) Monopoly
C) Monopolistic competition
D) Oligopoly
5. A price-taking firm
A) Cannot influence the price of the product it sells.
B) Talks to rival firms to determine the best price for all of them to charge.
C) Sets the product's price to whatever level the owner decides upon.
D) Asks the government to set the price of its product.
6. Perfectly competitive firms are price takers because
A) Each firm is very large.
B) There are no good substitutes for their goods.
C) Many other firms produce identical products.
D) Their demand curves are downward sloping.
7. A monopoly is a market with
A) No barriers to entry.
B) Many substitutes.
C) Many suppliers.
D) One supplier.
8. Patents:-
A) Stimulate innovation.
B) Encourage the invention of new products and production methods.
C) Are exclusive rights granted to the inventor of a product or service.
D) All of the above answers are correct.
9. In which of the following types of Markets a firm is a price taker?
a) Perfect Competition
b) Monopoly
c) Monopolistic Competition
d) Oligopoly
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10. In case of perfect competition:
a) A firm is able to charge higher prices
b) A firms is able to charge uniform prices
c) A firm is able to sell any amount at prevailing price
d) Both B and C
12. A firm’s demand curve under monopoly shows:
a) No relationship between price and demand
b) Inverse Relationship between Price and Demand
c) Positive relation between the two
d) None of these.
13. Normally a demand curve will have the shape:

A. Horizontal B. Vertical
C. Downward sloping D. Upward sloping
14. Law of demand shows relation between:

A. Income and price of commodity B. Price and quantity of a commodity
Quantity demanded and quantity supplied

C. Income and quantity demand D.
15. Which is an assumption of law of demand:

A. Price of the commodity should not change B. Quantity should not change
C. Supply should not change D. Income of consumer should not change

16. According to the law of diminishing marginal utility:
a) Utility is at a maximum with the first unit
b) Increasing units of consumption increase the marginal utility
c) Marginal product will fall as more units are consumed
d) Total utility will rise at a falling rate as more units are consumed
17. If a product is an inferior good:
a) Demand is inversely related to income
b) Demand is inversely related to price
c) Demand is directly related to price
d) Demand is directly related to the price of substitutes
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18. Which one is the assumption of law of demand?
A. Price of the commodity should not change B. Quantity demanded should not change
C. Prices of substitutes should not change D. Demand curve must be linear
19. Price and demand are positively correlated in case of:

A. Necessities B. Comforts
C. Giffen goods D. Luxuries
20. Demand is a function of:

A. Price B. Quantity
C. Supply D. None of these

C. Income of the consumer should not change D. None of these

C. Income of the consumer should not change D. None of these
23. Which of the following pairs of commodities is an example of substitutes?

A. Tea and sugar B. Tea and coffee
C. Pen and ink D. Shirt and trousers
24. The Law of Demand, assuming other things to remain constant, establishes the relationship
between:
Income of the consumer and the quantity of a Price of a commodity and the quantity
A. B.
commodity demanded by him demanded
Price of a commodity and the demand for its Quantity demanded of a commodity and the
C. D.
substitute relative prices of its complementary goods
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25. In the case of an inferior good, the income elasticity of demand is:
A. Positive B. Zero
Infinite
C. Negative D.
26. What is the shape of the demand curve faced by a firm under perfect competition?
Negatively sloped
C. Positively sloped D.
27. Inflation is the state in which ..............................

(a) The value of money decreases
(b) The value of money increases
(c) The value of the money increases first and then decreases
(d) The value of money decreases first and increases later
28. Which of the following class will not be negatively affected by the higher inflation?
(a) The consumer class
(b) The debtor class
(c) Pensioner class
(d) Business class
29. Which of the following concept is just opposite to deflation?

(a) Stagflation
(b) Inflation
(c) Recession
(d) Disinflation
30. The Phillips curve shows the relationship between inflation and what?
a) The balance of trade
b) The rate of growth in an economy
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c) The rate of price increases
d) Unemployment
31. When too much money chases too few goods, the resulting Inflation is called:
(a) Deflation
(b) Demand-pull Inflation
(c) Cost push inflation
(d) Stagflation
32. When price increases due to increase in factor prices it is ______.
(a) Demand pull inflation
(b) Cost pull inflation
(c) Stagflation
(a) None of the above
33. Match the following:

(i) Deflation (a) Reduction of Rate of Inlfation
(ii) Stagflation (b) When there is general fall in the level of prices.
(iii) Disinflation (c) combination of inflation and rising unemployment.
1. Which of the following is not a type of market structure?
a. Competitive monopoly
b. Oligopoly
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c. Perfect competition
d. All of the above are types of market structures.
2. If the market demand curve for a commodity has a negative slope then the market
structure must be
a. perfect competition.
b. monopoly.
c. imperfect competition.
d. The market structure cannot be determined from the information given.
3. If a firm sells its output on a market that is characterized by many sellers and buyers, a
homogeneous product, unlimited long-run resource mobility, and perfect knowledge, then
the firm is a
a. a monopolist.
b. an oligopolist.
c. a perfect competitor.
d. a monopolistic competitor.
4. If a firm sells its output on a market that is characterized by a single seller and many
buyers of a homogeneous product for which there are no close substitutes and barriers to
long-run resource mobility, then the firm is
a. a monopolist.
b. an oligopolist.
5. If a firm sells its output on a market that is characterized by many sellers and buyers, a
differentiated product, and unlimited long-run resource mobility, then the firm is
a. a monopolist.
b. an oligopolist.
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6. If a firm sells its output on a market that is characterized by few sellers and many buyers
and limited long-run resource mobility, then the firm is
a. a monopolist.
b. an oligopolist.
7. If one perfectly competitive firm increases its level of output, market supply
a. will increase and market price will fall.
b. will increase and market price will rise.
c. and market price will both remain constant.
d. will decrease and market price will rise.
8. Which of the following markets comes close to satisfying the assumptions of a perfectly
competitive market structure?
a. The stock market.
b. The market for agricultural commodities such as wheat or corn.
c. The market for petroleum and natural gas.
d. All of the above come close to satisfying the assumptions of perfect competition.
9. A perfectly competitive firm should reduce output or shut down in the short run if market
price is equal to marginal cost and price is
a. greater than average total cost.
b. less than average total cost.
c. greater than average variable cost.
d. less than average variable cost.
10. Which of the following is a barrier to entry that typically results in monopoly?
a. The firm controls the entire supply of a raw material.
b. Production of the industry's product is subject to economies of scale over a broad

range of output.
c. Production of the industry's product requires a large initial capital investment.
d. The firm holds an exclusive government franchise.
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11. In the short run, a monopolist will shut down if it is producing a level of output where
marginal revenue is equal to short-run marginal cost and price is
a. greater than average total cost.
b. less than average total cost.
c. greater than average variable cost.
d. less than average variable cost.
12. A natural monopoly refers to a monopoly that is defended from direct competition by
a. economies of scale over a broad range of output.
b. a government franchise.
c. control over a vital input.
d. a patent or copyright.
13. When a perfectly competitive industry is in long-run equilibrium, all firms in the industry
a. earn zero economic profits.
b. produce a level of output where short-run marginal cost is equal to short-run

average total cost.
c. produce a level of output where long-run marginal cost is equal to long-run

average cost.
d. All of the above are correct.
14. The short-run supply curve of a perfectly competitive firm
a. is equal to that portion of the short-run marginal cost curve that is above the
average variable cost curve.
b. is equal to that portion of the short-run marginal cost curve that is above the
average total cost curve.
c. is equal to that portion of the short-run average total cost curve that is above the
average variable cost curve.
d. None of the above is correct.
15. The long-run supply curve of a perfectly competitive firm
a. is equal to that portion of the long-run marginal cost curve that is above the
relevant short-run average variable cost curve.
b. is equal to that portion of the long-run marginal cost curve that is above the
relevant short-run average total cost curve.
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c. is equal to that portion of the long-run average total cost curve that is above the
relevant short-run average variable cost curve.
16. A depreciation of the U.S. dollar relative to foreign currencies will make
a. foreign imports less expensive in the United States.
b. U.S. exports less expensive in foreign countries.
c. the demand for U.S. exports decrease.
17. The value of the U.S. dollar on the foreign exchange market will tend to
a. increase if there is an increase in the demand for U.S. exports by foreign

countries.
b. decrease if there is an increase in the demand for foreign imports by the United
States.
c. decrease if monetary authorities intervene on the foreign exchange market by

selling U.S. dollars for foreign currencies.
18. A monopolized market is in long-run equilibrium when
a. zero economic profit is earned by the monopolist.
b. production takes place where price is equal to long-run marginal cost and long-
run average cost.
c. production takes place where long-run marginal cost is equal to marginal

revenue and price is not below long-run average cost.
19. Which of the following types of firms is likely to be a monopolistic competitor?
a. A local telephone company.
b. An automobile manufacturer.
c. A restaurant.
d. All of the above are likely to be monopolistic competitors.
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20. Which of the following is a characteristic of monopolistic competition?
a. Few sellers.
b. A differentiated product.
c. Easy entry into and exit from the industry.
d. All of the above are characteristics of monopolistic competition.
21. The demand curve faced by a monopolistically competitive firm is
a. perfectly elastic.
b. elastic.
c. unit elastic.
d. inelastic.
22. If an imperfectly competitive firm is producing a level of output where marginal cost is
equal to marginal revenue, marginal revenue is below average variable cost, and price is
equal to average total cost, then the firm
a. should shut down.
b. should decrease output, but should not shut down.
c. should increase output.
23. If an imperfectly competitive firm is producing a level of output where marginal cost is
equal to marginal revenue, marginal revenue is below average variable cost, and price is
equal to average total cost, then the firm is
a. in long-run equilibrium.
b. in short-run equilibrium.
c. minimizing short-run average total cost.
d. breaking even.
24. Which of the following industries is most likely to be monopolistically competitive?
a. The automobile industry
b. The steel industry
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c. The car repair industry
d. The electrical generating industry
25. Marginal revenue is equal to price for which one of the following types of market
structure?
a. Monopoly
b. Perfect competition
c. Monopolistic competition
d. Oligopoly
28. Which of the following is not an essential condition of pure competition?
(a) Large number of buyers and sellers
(b) Homogeneous product
(c) Freedom of entry
(d) Absence of transport cost
29. Under which of the following forms of market structure does a firm have no control over the
price of its product:
(a) Monopoly
(b) Oligopoly
(c) Monopolistic competition
(d) Perfect competition
1. Normally a demand curve will have the shape:

Upward sloping
C. Downward sloping D.
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2. Law of demand shows relation between:
A. Income and price of commodity B. Price and quantity of a commodity
Quantity demanded and quantity

C. Income and quantity demand D.
supplied
3. This is an assumption of law of demand:

Price of the commodity should not
A. B. Quantity should not change
change
C. Supply should not change D. Income of consumer should not change

4. Price and demand are positively correlated in case of:
A. Necessities B. Comforts
C. Giffen goods D. Luxuries

5. Income elasticity of demand for normal good is always:
A. 1 B. More than one
C. Negative D. Positive
6. Demand is a function of:

A. Price B. Quantity
C. Supply D. None of these

Price of the commodity should not
A. B. Quantity demanded should not change
change
Income of the consumer should not

C. D. None of these
change
8. Who defined Economics as a 'Science which studies human behaviour as a relationship
between ends and means which have alternative uses?
A. L. Robbins B. Alfred Marshall
C. Joan Robinson D. Paul A. Samuelson
9. A mixed economy is characterised by the co-existence of:

A. Modern and traditional industries B. Public and private sectors
Commercial and subsistence farming

C. Foreign and domestic investments D.
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10. Which is not an essential feature of a socialist economy?
Social ownership of the means of
A. B. Freedom of enterprise
production
C. Use of centralized planning D. Government decisions
11. Which of the following is incorrect?

Normative Economics studies how the
A function shows the relationship
A. B. economic problems facing society should
between two or more variables
be solved
Equilibrium refers to the market

A market necessarily refers to a meeting
C. D. conditions which once achieved, tend to
place between buyers and sellers
persist
12. Microeconomics deals with the:

Allocation of resources of the economy as
Determination of prices of goods and
A. between production of different goods B.
services
and services
C. Behaviour of industrial decision makers D. All of the above
13. Which of the following is Microeconomics concerned with?

A. The size of national output B. The levelof employment
C. Changes in the general level of prices D. None of the above

14. Demand for a commodity refers to a:
A. Desire for the commodity B. Need for the commodity
Quantity of the commodity demanded at

C. Quantity demanded of that commodity D. a certain price during any praticular
period of time
15. Which of the following pairs of commodities is an example of substitutes?
A. Tea and sugar B. Tea and coffee
C. Pen and ink D. Shirt and trousers

16. The Law of Demand, assuming other things to remain constant, establishes the
relationship between:
Income of the consumer and the quantity Price of a commodity and the quantity
A. B.
of a commodity demanded by him demanded
Quantity demanded of a commodity and

Price of a commodity and the demand for
C. D. the relative prices of its complementary
its substitute
goods
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17. In the case of an inferior good, the income elasticity of demand is:
A. Positive B. Zero
C. Negative D. Infinite
18. If regardless of changes in its price, the quantity demanded of a commodity remains
unchanged, then the demand curve for the commodity will be:
C. Positively sloped D. Negatively sloped

19. In the case of a Giffen good, the demand curve will be:
A. Horizontal B. Downward-slping to the right
C. Backward falling to the left D. Upward-slopping to the right

20. Which one is not a assumption of the theory of demand based on analysis of indifference
curves?
Given scale of preferences as between
A. B. Diminishing marginal rate of substitution
different combinations of two goods
Consumers would always prefer more of a

C. Constant marginal utility of money D. particular good to less of it, other things
remaining the same
21.The consumer is in equilibrium at a point where the budget line:
A. Is above an indifference curve B. Is below an indifference curve
C. Is tangent to an indifference curve D. Cuts an indifference curve

22. An indifference curve slopes down towards right since more of one commodity and less of
another result in:
A. Same satisfaction B. Greater satisfaction
C. Maximum satisfaction D. Decreasing Expenditure

23. Which of the following statements is incorrect?
Convexity of a curve implies that the slope
An indifference curve must be downward
A. B. of the curve diminishes as one moves from
sloping to the right
left to right
The total effect of a change in the price of a

The elasticity of substitution between two
C. D. good on its quantity demanded is called the
goods to a consumer is zero
price effect
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1. Fiscal policy refers to the:-
a) Government's ability to regulate the functioning of financial markets.
b) Spending and taxing policies used by the government to influence the

level of economic activity.
c) Techniques used by firms to reduce its tax liability
2. To help fight a recession, the government could

a) Lower interest rates by decreasing the cash rate.
b) Decrease taxes to increase aggregate demand.
c) Conduct contractionary fiscal policy by raising taxes.
d) Decrease government spending to balance the budget.
3. In India, fiscal policy is formulated by:-

a) The Reserve bank of India
b) The Finance Ministry
c) The govt of India
d) The Planning Commission (Now NITI Aayog)
4. Which of the following is not a part of fiscal policy?

a) Income Tax; b) Corporate tax; c) Borrowings from IMF d) Interest
rates
5. Which of the following is/are components of public debt?

1. Public borrowing
2. Treasury bills
3. Securities issued by RBI
Select the correct answer using the codes given below:
a) 1 only
b) 1 and 2
c) 2 only
d) 1, 2 and 3
6. Which Ministry is responsible for calculating GDP in India?

(A) Ministry of Finance
(B) Ministry of Commerce and Industry
(C) Ministry of Central Statistical and Program Implementation
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(D) Ministry of consumer Affairs
7. Consider the following statements and identify the right ones.
i. While calculating GDP, income generated by foreigners in a country residing for more than one year is
taken into consideration
ii. While calculating GDP, income generated by nationals of a country outside the country is taken into
account.
a. I only b. ii only c. Both d. None
8. The average income of the country is
a. Per capita income

b. Disposable income
c. Inflation rate
d. Real national income
9. Which statement is correct for nominal GDP?

i. Nominal GDP is calculated based on current prices.
ii. Nominal GDP is calculated based on the base prices.
iii. Data on Nominal GDP shows an accurate picture of the economy as compared to real GDP.
(a) Only ii, iii

(b) only ii
(c) only i
(d) i, iii
10. Who releases data of national income in India?

(a) NSSO
(b) CSO
(c) NITI Aayog
(d) none of the following
11. Moving along an indifference curve the

A.Consumers prefer some of the consumption points to others.
B.Marginal rate of substitution for a good increases as more of the good is consumed.
C.Marginal rate of substitution is constant.
D.Consumers do not prefer one consumption point to another.
12.The slope indifference curve is equal to:
A. One
B. Marginal utility
C.Marginal rate of substitution
D. None of these
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13. Why is the indifference curve convex to origin?
A.Due to continuous decline of marginal rate of substitution
B.Due to law of diminishing marginal utility
C.Due to monotonic preferences
D.Both a and b
14.Which of the following is not the property of indifference curve:
A.Higher the indifference curves higher the level of satisfaction
B.Indifference curve is downward sloping
C.Indifference curve is concave to origin
D.Two indifference curves cannot intersect each other
15. As we move down the indifference curve left to right, the slope of indifference curve tends to:
A.Unity
B.Zero
C.Decline
D.Rise
16. In indifference map, higher IC indicates:
A.Lower level of satisfaction
B.Higher level of satisfaction
C.Same level of satisfaction
D.Either higher or same level of satisfaction
17. Two indifference curves cannot cut each other because:
A. They represent those combinations of two goods that give the same satisfaction
B. They slope downwards.
C. Each indifference curve represents a different level of satisfaction
D. They are convex to origin
18. An indifference curve is related to:
A.Choices and preferences of consumer
B.Prices of goods X and Y
C.Consumer’s income
D.Total utility from goods X and Y
19. An Indifference curve slope down towards right since more of one commodity and less of
another result in:
A.Decreasing expenditure
B.Maximum satisfaction
C.Greater satisfaction
D.Same satisfaction
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20. The government budget is an
A. Half yearly statement

B. Weekly statement
C. Five yearly statement
D. Annual statement
21) The government budget shows the government’s
A. Actual receipts and expenditure

B. Estimated receipts only
C. Estimated expenditure only
D. Estimated receipts and expenditure
22) One of the objectives of the government budget is
A. Regeneration of income and wealth

B. Reallocation of income and wealth
C. Redistribution of income only
D. Redistribution of income and wealth
23) One of the two components of government budget are
A. Revenue budget
B. Investment budget
C. Income budget
D. Expenditure budget
24) One more of the two components of government budget are
A. Expenditure budget
B. Capital budget
C. Investment budget
D. Income budget
25) One of the two components of Revenue budget are
A. Investment receipts
B. Expenditure receipts
C. Income receipts
D. Revenue receipts
26) One of the other two components of Revenue budget are
A. Income budget
B. Investment Expenditure
C. Revenue expenditure
D. Budget Expenditure
27) One of the two components of Capital budget are
A. Investment receipts
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B. Capital receipts
C. Expenditure receipts
D. Revenue receipts
28) One of the other two components of Capital budget are
A. Capital expenditure
B. Investment Expenditure
C. Income budget
D. Budget Expenditure
29) One of the two components of government Revenue in the budget are
A. Revenue Expenditure
B. Budget receipts
C. Revenue receipts
D. Expenditure receipts
30) One of the other two components of government Revenue in the budget are
A. Expenditure receipts
B. Budget receipts
C. Revenue Expenditure
D. Capital receipts
31) One of the two components of government expenditure in the budget are
A. Expenditure receipts
B. Budget receipts
C. Revenue Expenditure
D. Revenue receipts
32) One of the other two components of government expenditure in the budget are
A. Budget receipts
B. Revenue Expenditure
C. Expenditure receipts
D. Capital Expenditure
33) The major source of Revenue receipts for the government is
A. Interest
B. Tax Revenue
C. Profits
D. Non Tax Revenue
34) Direct tax is a tax whose
A. The liability to pay and incidence do not lie on the same person
B. The liability to pay lies on one and incidence lies on the other person
C. The liability to pay and incidence do lie on the same person
D. The liability to pay and incidence do lie on the government
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35. A direct tax is a tax which is imposed on,
 Corporations only
 None of these
 Individuals only
 Individuals and corporations
36. Budgetary policies are implemented by the,
 Foreign sector
 Finance ministry
 Government
 Private sector
37. What are direct and indirect taxes? Explain with the examples.
Answer: Direct Taxes are the taxes that are undeviatingly paid to the government by the taxpayer
(citizens). It is a tax applied to individuals and establishments straight by the government.
Examples: Income tax, corporation tax, wealth tax etc.,
Indirect Taxes are applied to the production or sale of goods and services. These are originally paid to the
government by an agent, who then adds the amount of the tax-funded to the value of the goods/services
and passes on the total amount to the end-user.
Examples: Sales tax, service tax, excise duty etc.,
38. Inflation is the state in which ..............................

(a) The value of money decreases
(b) The value of money increases
(c) The value of the money increases first and then decreases
(d) The value of money decreases first and increases later
39. How inflation affects the price of the commodities?

(a) Price of the commodities decreases
(b) Price of the commodities increases
(c) No effect
(d) First the price decreases later on increases
40. When there is high inflation in the economy, how will it affect the supply of money in the
economy?
(a) No effect on the money supply
(b) Supply of money decreases
(c) Supply of money increases
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(d) None of the above
41. Which of the following class will not be negatively affected by the higher inflation?
(a) The consumer class
(b) The debtor class
(c) Pensioner class
(d) Business class
42. What is a stagflation?

(a) A situation in which the economy experiences recession.
(b) A situation in which the economy have inflation and recession altogether
(c) An economy where unemployment is high
(d) Both b and c
43. Who compared the inflation with the robbers?

(a) Professor Keynes
(b) Professor Jagdish Bhagwati
(c) Professor Brahmand and Wakeel
(d) Amartya Sen and JK Mehta
44. Who wrote the book "How to pay for Money"?

(a) Amartya Sen
(b) Adam Smith
(c) Karl Marx
(d) Professor Keynes
45. Which of the following concept is just opposite to deflation?

(a) Stagflation
(b) Inflation
(c) Recession
(d) Disinflation
46. Which of the following measure is adopted to reduce inflation?

(a) Reduction in bank rate
(b) Reduction in Repo rate
(c) Increase in government expenditure
87
(d) Cuts in government spending
47. What is the base year for measuring inflation at wholesale Prices Index (WPI) in India?
(a) 2004-05
(b) 2001-02
(c) 2011-12
(d) 2014-15
48. Which of the following explains the term economic growth?
a. Increase in per capita production

b. Increase in per capita real income
c. structural change in the economy
d. all the above are right
49. Economic development is characterized by
a. Structural change in the economy

b. Change in the occupational structure
c. Both a and b
d. None of the above
50. Which of the following explains the term economic development?
a. Improvement in the technology involved

b. Improvement in production
c. Improvement in distribution system
d. All the above
51. An underdeveloped economy is characterized by
a. High per capita real income

b. Large proportion of labor force in the tertiary sector
c. State of deprivation of large proportion of population
d. All the above
52. Scarcity of capital , technological backwardness and unemployment are generally found in
a. Developed countries
b. Underdeveloped countries
c. Both
d. None of the above
53. Which of the following denotes an underdeveloped economy?
a. High level of inequalities

b. Low level of capital productivity
c. A relatively closed economy
d. All the above
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54. The concept of economic growth is:
Identical with the concept of economic Narrower than the concept of economic
A. B.
development development
Wider as compared to that of economic Unrelated to the concept of economic

C. D.
development development
55. Which of the following is not an indicator of economically underdeveloped countries?
A. Low per capita income B. High death-rate
Low proportion of labour force in the

C. D. High level of illiteracy
primary sector
56. The rate of growth of an economy mainly depends upon:
The proportion of national income saved

A. The rate of growth of the labour force B.
and invested
C. The rate of technological improvements D. All of the above
57. Among the following determinants of growth, which is a non-economic factor?
A. Natural resources B. Population growth
C. Favourable legislation D. Capital accumulation
58. Besides increase in output, economic development is concerned with:
A. Inputs and their efficiency B. Equitable distribution of income
Life sustenance, self-esteem and freedom

C. D. All of the above
from want, ignorance and squalor
59. The steady state as envisaged by Adam Smith, is marked by:
A. Low rate of profit B. Subsistence level wages
C. High rents D. All of the above
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60. Which of the following is inconsistent with Adam Smith's theory of development?
Development process is cumulative in

A. B. There is no limit to the growth process
nature
Capital accumulation and market There should be no government

C. extension are two prerequisites for D. interference in the working of the
output expansion economy
61. The division of labour, according to Adam Smith, is limited by:
A. The extent of the market B. The quantity of capital available
C. Both (a) and (b) D. The size of labour force
62. Among the various determinants of the growth of national wealth Adam Smith accorded central
place to:
A. Division of labour B. Capital
C. Natural resources D. Technology
63. Labour is hirable but you cannot hire:
A. Capital B. Land
C. Manager D. Entrepreneur
64. The three broad types of productive resources are:
A. Money profit and interest B. Capital, labour and natural resources
C. Bond, stock shares and deposits D. Technology, human capital and markets
65. Land means:
A. Sea B. Surface of earth
C. Natural forests D. All natural resources
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66. Economic development of a country requires:
A. Skilled labour B. Diplomacy
C. Abundant natural resources D. (a) and (c) of above
67. Productivity of land can be raised by:
A. Extensive cultivation B. Intensive cultivation
C. Better marketing D. (a) and (b) of above
68. Land :
A. Is a free gift of nature B. Lacks geographical mobility
C. Is not hirable D. (a) and (b) of above
69. Which of the following is NOT and input:
A. Labour B. Entrepreneurship
C. Natural resources D. Production
70. Which of the following input factor takes risk innovtes and coordinates:
A. Capital B. Labour
C. Productivity D. Entrepreneur
71. Which of the following is correct with respect to resources:
A. Money is a capital good B. Human skills are a labour input
C. Entrepreneur is part of the labour input D. Natural resources include human input
72. The transformation of resources into economic goods and series is called:
91
A. Technical efficiency B. Input
C. Production D. Increasing returns
73. Economic goods produced by firms are called:
A. Productivity B. Innovation
C. Technological progress D. Output
74. Land is:
A. Hirable B. Not hirable
C. Homogeneous D. A form of capital
75. Geographical mobility is not possible for:
A. Land B. Labour
C. Capital D. Wealth
76. The following is NOT a factor of production:
A. Labour B. Entrepreneurship
C. Land D. Money
77. Which of the following factors takes risk, innovates and coordinates:
A. Capital B. Labour
C. Bank D. Entrepreneur
78. The transformation of resources into economic goods and services is:
A. Inpur B. Production
C. Increasing returns D. Output
92
79. For production of goods we need factors:
A. Few B. Two
C. Four D. Unlimited
80. Standard of living of a country can be raised if it increases:
A. Labour force B. Production
C. Money supply D. Exports
81. Productivity of land can be raised by:
A. Extensive cultivation B. Intensive cultivation
C. Better marketing D. Increasing money supply
82. Natural environment that can be used for the production of goods and services is:
A. Labour B. Money
C. Capital D. Natural resources
93

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Assalamu alaikum dear aspirants

 Economics is a branch of social science which deals with the rational

1. Wealth Definition:- Given by Adam Smith, Father of Economics, in his

2. Welfare Definition:- Put forward by Alfred Marshall in his book “Principles of

a. Human wants are unlimited.

Major Classification of Economics:-

 Economics is generally classified into Micro-economics and Macro-

3. Utility:- Ultimate goal of a consumer is always assumed to be the satisfaction of his

a) Cardinal Utility Approach:- Given by Alfred Marshall.

Law Of Diminishing Marginal Utility:- Intensity of wants tends to decrease

4. Demand:- Demand is defined as the desire to by a commodity backed by sufficient

 A market is defined as a system or an arrangement that brings the buyers

 No individual buyer or seller has any control over its price.

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2. Homogeneous Product:- Under perfect competition, each firm sells a homogeneous

Important Conclusions regarding perfect competition:-

1. Firm is a price taker, not a price maker.

2. Demand curve of the firm is perfectly elastic:-

Firms Demand Curve under Perfect Competition

Demand curve of a Monopoly Firm

Features of Monopolistic Competition:

Large number of firms leads to competition in the market.

Implication of ‘Product differentiation’ is that buyers of a product differentiate between the

6. Some examples of Product Differentiation:

i) Cycles: Atlas, Hero, Avon, etc.

iii) Soaps: Lux, Hamam, Lifebuoy, Pears, etc.

4. Freedom of Entry and Exit:

5. Lack of Perfect Knowledge:

Demand and Quantity Demanded:- Demand refers to different possible quantities to

It is a table showing the relation between different quantities of a commodity to be

1. Individual Demand Schedule; and

Individual demand Schedule

2. Market Demand Schedule:- In every market, there are several buyers/

Market Demand Schedule

1. Individual Demand Curve; and

3 Individual Demand Curve

2. Market Demand Curve:- Market demand curve is the horizontal summation of

4. Tastes and Preferences:- Tastes and preferences of the consumer are

Exceptions of the Law:-

Indifference Curve TechniqueOf Consumer’s

1. Use of Ordinal Utility approach.

 IC is an indifference curve. Each point on the curve shows a combination of two

3. ICs do not touch or intersect each other:-

4. IC does not touch X-axis or Y-axis:-

1. A consumer has a budget of Rs. 60 to be spent on two substitute goods, Good-X

Accordingly, the following budget set can be formed.

 Diagrammatic presentation of budget Set.

Budget Line or Price Line

Marginal Rate of Substitution

 The Marginal Rate of Substitution is used to analyze the indifference curve.

5. Skewflation:- A price rise in one or a small number of commodities is known as

6. Disinflation:- Disinflation is used to describe the slowing of price inflation. In other

7. Inflation targeting:- The announcement of an official target range for inflation is

9. Inflationary Gap:- An inflationary gap is a macroeconomic concept that describes the

1. Creditors and debtors:

2. Producers and workers:

4. Traders, businessmen and black-marketers:

 A mild inflation promotes economic growth, but a runaway inflation obstructs

ii. Discretionary Fiscal Policy:

Objectives of Fiscal Policy: