ECONOMICS

SOLUTION : PRACTICE PAPER 5

Q. 1. (A)
(1) (4) c and d
(2) (3) i – d; ii – c; iii – a; iv – b
(3) (3) a, b and c
(4) (3) c
(5) (3) a, b and c
Q. 1. (B)
(1) Constant level of income
(2) Internal trade
(3) Price theory
(4) Vegetables
(5) Illegal income
Q. 1. (C)
(1) Cross elasticity of demand
(2) Composite index
(3) Average Cost
(4) Gross National Product (GNP)
(5) Oligopoly
Q. 1. (D)
(1) GDP
(2) International trade
(3) Private finance
(4) Price falls
(5) Direct relation
Q. 2. (A)
(1) (A) Identified concept : Individual demand
(B) Explanation of concept : Individual demand is the demand by a single
consumer in a market for a given commodity at a given price and time.
(2) (A) Identified concept : Perishable goods
(B) Explanation of concept : To avoid losses, perishable commodities such as
vegetables, flowers, eggs, etc. are sold in greater quantities even at a lower
price after a certain period of time. These commodities are an exception to the
law of supply.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 1

 (3) (A) Identified concept : Special purpose index number.
(B) Explanation of concept : Special purpose index number is constructed with
some specific purpose. For example, import-export index numbers, labour
productivity index numbers, share price index number, etc.

(4) (A) Identified concept : Utility.

(B) Explanation of concept : Utility refers to the capacity of a commodity to
satisfy a human want.

(5) (A) Identified concept : Measure of national income by product method.

(B) Explanation of concept : Measurement of national income by summing the
economic values of all final goods and services produced in a particular
financial year is a measure of national income by product output / inventory
method.
Q. 2. (B)

(1) Money Market Capital Market

1. Meaning
A type of financial market in which short- A type of financial market in which the
term finance is provided is called the medium term and long-term finance is
money market. provided is called the capital market.
2. Constituents
The Reserve Bank of India, commercial Government securities market, industrial
banks, co-operative banks, development securities market, development financial
financial institutions, Discount and Finance institutions, financial intermediaries, etc.,
House of India, indigenous bankers, money are the constituents of capital market in
lenders, unregulated non-bank financial India.
intermediaries, etc., are the constituents of
money market in India.

(2) Net National Product Gross National Product

1. Meaning
Net National Product is the net value of all Gross National Product is the total measure
final goods and services at market value of flow of all final goods and services at
resulting from current production during a market value resulting from current
financial year in a country, including net production during a financial year in a
income from abroad. country, including net income from abroad.
2. Formula
NNP = C + I + G + (X − M) + (R − P) − D GNP = C + I + G + (X − M) + (R − P)

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

(3) Relatively Elastic Demand Relatively Inelastic Demand
1. Meaning
When the proportionate change in the price When the proportionate change in the price
of a commodity brings about greater than of a commodity brings about lesser than
proportionate change in its quantity proportionate change in its quantity
demanded, the demand is said to be demanded, the demand is said to be
relatively elastic. relatively inelastic.
2. Numerical Value
In the case of relatively elastic demand, In the case of relatively inelastic demand,
the numerical value of the elasticity of the numerical value of the elasticity of
demand is greater than one. demand is lesser than one.
(Ed >1) (Ed <1)

(4) Public Finance Private Finance

1. Meaning
The financial transactions carried out by The financial transactions carried out by
the government with the objective of an individual or a private enterprise to
providing maximum social advantage to fulfil private interest are called private
the society are called public finance. finance.
2. Elasticity
Public finance is comparatively more Private finance is comparatively less
elastic. There is much scope for changes in elastic. There is not much scope for
public finance. changes in private finance.

(5) Average Cost Average Revenue

1. Meaning
Average cost refers to the per unit cost of Average revenue refers to revenue per unit
production. of output sold.
2. Formula
Average cost is calculated with the help of Average revenue is calculated with the
the following formula : help of the following formula :
TC TR
AC = AR =
TQ TQ
Where, AC = Average Cost, TC = Total Where, AR = Average Revenue, TR = Total
Cost and TQ = Total Quantity of Output. Revenue and TQ = Total Quantity of
Output.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 3

Q. 3. (1) The importance of microeconomics can be explained with the help of the following
points :
(1) Helpful in explaining price determination : Microeconomics helps in
explaining the price determination of goods and services as well as factors of
production.
(2) Helpful to understand the working of free market economy : Microeconomics
helps to understand how free market economy works and gets regulated by
demand and supply principles. Microeconomics helps producers to take
business decisions about what to produce, how to produce, how much to
produce, etc. at individual levels. There is no intervention by government or
any other agency in this decision making process.
(3) Helpful in foreign trade : Microeconomics is useful in studying the aspects
related to foreign trade such as effects of tariff, determination of exchange rate,
gains from international trade, etc.
(4) Helpful in economic model building : Microeconomics helps in understanding
complex economic situations with its variety of models. Many terms, concepts,
terminologies, tools of economic analysis of microeconomics have valuably
contributed to the science of economics.
(5) Helpful to businessmen in taking business decisions : Microeconomics help
businessmen in formulating prices of products or services, minimizing the cost
of production, analysing profitability of investment, attainment of maximum
productivity, etc. It also helps businessmen in demand forecasting.
(6) Useful to government : Microeconomics is useful to government in framing
economic policies such as tax policy, public expenditure policy, price policy,
etc. Microeconomics also guides government in attaining the goal of efficient
allocation of resources and economic welfare of society.
(7) Basis of welfare economics : Microeconomics provides explanation for the
conditions of economic welfare. It explains how the maximum welfare of
people in society can be achieved by avoiding wastage of resources.
Thus, microeconomics has many theoretical and practical importance as well as
uses.
(Note : Write any four points in the answer.)

(2) The significance of index numbers in economics can be explained as follows :

(1) Helpful in framing suitable policies : Index numbers provide guidelines to
policy makers in framing suitable economic policies. Index numbers are helpful
in framing the economic policies such as agricultural policy and industrial
policy. Index numbers also help in the fixation of wages and dearness allowances
in accordance with the cost of living, etc.

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2) Helpful in studying trends and tendencies : Index numbers are widely used
to measure changes in various economic variables such as production, prices,
exports, imports, etc. over a period of time. For example, by examining the
index of industrial production for the last five years, important conclusions
about the trend of industrial production, i.e. whether the industrial production
shows an upward tendency or a downward tendency can be drawn.
(3) Helpful in forecasting future economic activity : Index numbers helps in
making predictions on the basis of analysis of the past and present trends in
the economic activities. For example, by examining the data pertaining to
exports of alphonso mangoes from the year 2009 to 2014 and from the year
2014 to 2019, if it is noticed that the export of alphonso mangoes has been
increasing, it can be predicted that an increase in export will continue in future.
(4) Helpful in measurement of inflation : Index numbers are also used to
measure changes in the price level from time to time. The measurement of
inflation enables the government to undertake appropriate anti-inflationary
measures. For example, there is a legal provision to pay the D.A. (dearness
allowance) to the employees in organised sector on the basis of changes in
Dearness Index. Thus, with the help of the Dearness Index, the government
can increase the D.A. from time to time.
(5) Useful to present financial data in real terms : Rise in money supply over
a period of time leads to inflation in an economy. Inflation has its effects on
various economic variables such as total production, national income, price
level, wage level, etc. Index numbers can exclude the effects of inflation by
deflating the values of these various economic variables on the basis of their
constant prices. Thus, index numbers can measure the changes in the values of
various economic variables in real terms.
(Note : Write any four points in the answer.)

(3) The determinants of supply are as follows :

(1) Price : Price is the most important factor influencing the supply of a commodity.
Price and supply are directly related to each other, i.e. more is supplied at a
higher price and less is supplied at a lower price.
(2) State of technology : Technological improvements reduce the cost of
production, which lead to an increase in production and supply. On the other
hand, traditional and outdated technology reduces the supply.
(3) Cost of production : Cost of production and supply have inverse relation. For
example, if the price of factors of production increases, the cost of production
also increases. This in turn decreases the profit margin of a supplier and this
in turn decreases the supply. On the other hand, fall in the cost of production
increases the supply.
SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 5
 (4) Infrastructural facilities : Infrastructure in the form of transport,
communication, power, etc. influences the production process as well as supply.
Inadequate infrastructural facilities decrease the supply and vice versa.
(5) Government policy : Government policies on taxation, subsidies, industrial
policies, etc. may encourage or discourage production and supply depending
upon government policy measures. For example, government subsidies tend to
increase the supply.
(6) Natural conditions : The supply of agricultural products depends on the
natural conditions. For example, a good monsoon and favourable climatic
condition will produce a good harvest, so the supply of agricultural products
will increase. On the other hand, unfavourable climatic conditions will lead to
poor harvest and thus, to a decrease in supply of agricultural goods.
(7) Future expectations about price : If the prices are expected to rise in the
near future, the producer may withhold the stock. This will reduce the supply
though the current prices are high. On the other hand, if the prices are expected
to fall in the near future, the producer sells more though current prices are low.
(8) Other factors : Other factors like nature of the market, relative prices of other
goods, export and imports, industrial relations, availability of factors of
production, etc. determine the supply of various goods. For example, adequate
availability of factors of production increases the supply. On the other hand,
shortage of factors of production decreases the supply.
(Note : Write any four points in the answer.)
(4) The following are the problems of capital market in India :
(1) Financial scams : Financial scams are on the rise in the Indian capital market.
Rising financial scandals have increased the distrust of the general public and
as a result, investors’ confidence in investing in the capital market has waned.
As a result, capital markets face irreparable losses in the form of declining
public confidence.
(2) Insider trading and price manipulation : Some individuals have access to
confidential information of companies. Such individuals, for personal gains,
buy and sell securities on the basis of the unpublished confidential information
of companies. Some individuals deliberately raise or lower the price of shares
by buying and selling shares of certain companies among themselves for
personal gain. Such illegal transactions are adversely affecting the smooth
functioning of the capital market of India.
(3) Inadequate debt instruments : In the capital market of India, debt instruments
include bonds, debentures, etc. Due to narrow investor base, high cost of
issuance, restrictions on entry of small and medium enterprises into the capital
market, etc., there is relatively lower trading in debt securities.
6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)
 (4) Decline in the volume of trade : Capital market investors can trade online.
As a result, capital market investors in various parts of the country prefer to
invest in securities listed in premier stock exchanges like in the Bombay Stock
Exchange and in the National Stock Exchange. As a result, there has been a
sharp decline in trade volume on regional stock exchanges in India.
(5) Lack of information efficiency : If the company’s current stock price
incorporates all the information about the company, then a market is said to be
informationally efficient. However, the efficiency of information in the Indian
stock market is relatively low compared to other developed countries. As a
result, investors do not get the expected return on investment and thus lose
faith in the capital market.
(Note : Write any four points in the answer.)

(5) The features of monopolistic competition are as follows :

(1) Fairly large number of sellers : Although the number of sellers in a
monopolistic competition is large, it is still smaller than that in a perfectly
competitive market. Since number of sellers is large, each seller has a limited
control over the market supply. However, each seller has monopoly over his
brand. Thus, in monopolistic competition, each producer enjoys an element of
monopoly on one hand and on the other, they have to face competition from
sellers selling close substitutes.
(2) Fairly large number of buyers : In monopolistic market, there are fairly
large number of buyers. Consequently, no single buyer can influence the price
of the product by changing his individual demand.
(3) Product differentiation : Product differentiation is the main feature of
monopolistic competition. In monopolistic competition, there are many firms
producing differentiated products. In this market, the product of each firm is
in some way differentiated from the product of every other firm in the market.
Product differentiation may take the form of brand names, trademarks,
peculiarity of package or container, shape, quality, cover, design, colour, etc.
This means that the product of each firm may find close substitutes and the
cross elasticity of demand for each firm’s product is very high. For example,
mobile handsets, soaps, toothpastes, two wheelers, etc.
(4) Free entry and exit : Under monopolistic competition, there is freedom of
entry and exit. The new firms are free to enter the market if there is opportunity
of earning profit. Similarly, existing firms can exit the market, if they find it
difficult to survive due to possibility of losses.
(5) Selling Cost : Selling cost is a peculiar feature of monopolistic competition.
Selling cost refers to the cost incurred by the firm to create more demand for
its product and thus increase the volume of sales. Selling cost includes

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 7

 expenditure on advertisements, radio and television broadcasts, hoardings,
exhibitions, window display, free gifts, free samples, etc.
(6) Close substitutes : In monopolistic competition, goods have close substitutes
to each other. For example, different brands of cold drinks, biscuits, tea, etc.
(7) Concept of group : Under monopolistic competition, Chamberlin introduced
the concept of ‘Group’ in place of industry. Industry means the number of
firms producing identical products. On the other hand, a ‘Group’ means a
number of firms producing differentiated products which are closely related to
each other. For example, group of firms producing medicines, automobiles, etc.
(Note : Write any four points in the answer.)

Q. 4. (1) I disagree with this statement.

Reasons :
(1) Index numbers measure changes in the price level as well as changes in stock
market prices, cost of living, industrial and agricultural production, exports and
imports, etc.
(2) For example, Labour Productivity Index Number measures the general changes
in the labour productivity over a period of time.
(3) Consumer Price Index Number, Wholesale Price Index Number, Index of
Service Production, Human Development Index Number, etc., are the special
purpose index numbers measuring the changes in various economic variables
over a period of time.
Thus, index numbers do not measure changes in the price level only, but also
measure changes in many other economic variables.

(2) I agree with this statement.

Reasons : The following are the types of monopoly :
(1) Private monopoly : Private monopoly refers to sole ownership of the supply
of goods or services by the private firm or individual. The main objective of
private monopoly is earning the maximum profit. For example, Tata Group.
(2) Public monopoly : Public monopoly refers to sole ownership of the supply of
goods or services by the government. The main objective of public monopoly
is not to earn the profit but to provide the maximum welfare to the society. For
example, Indian Railways.
(3) Legal monopoly : The monopoly that emerges on account of legal provisions
like patents, trade mark, copy rights, etc. is called legal monopoly. In a legal
monopoly, the law forbids the potential competitors to imitate the design, form
or shape of a product which is registered with a particular trade mark. If any
firm violates the rights of the trade mark, legal action is taken against them.
For example, Amul’s products.

8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (4) Natural monopoly : The monopoly created on the basis of natural conditions
like climate, rainfall, specific location, etc. is known as natural monopoly. For
example, monopoly created by the state of Punjab in the production of wheat
due to favourable climatic conditions and fertile soil.
(5) Simple monopoly : It is a type of monopoly, in which a monopolist charges
consumer wise, place wise, time wise and use wise uniform price for the same
product.
(6) Discriminating monopoly : It is a type of monopoly, in which a monopolist
charges consumer wise, place wise, time wise and use wise different prices for
the same product. For example, In India, the electricity charges are comparatively
less for its domestic use and high for its commercial use.
(7) Voluntary monopoly : It is a type of monopoly where some monopolists
voluntarily come together and form a group to avoid cut-throat competition.
This facilitates them to maximise the profit. For example, Organisation of
Petroleum Exporting Countries (OPEC).
(Note : Write any three points in the answer.)
(3) I disagree with this statement.
Reasons :
(1) Macroeconomics does not study the individual economic unit such as particular
consumer, individual demand, particular seller, individual supply, price
determination of particular good, etc.
(2) Microeconomics studies individual economic units and deals with how a
particular consumer attain maximum satisfaction and how a particular producer
attain maximum profit.
(3) Macroeconomics studies the economic behaviour of aggregates, their functional
relationship, their interdependence, their determination and causes of
fluctuations in them.
Thus, macroeconomics does not deal with the study of individual behaviour, rather
it deals with the study of behaviour of aggregates.

(4) I agree with this statement.

Reasons :
(1) Foreign trade earns foreign exchange. The foreign exchange received can be
used for various productive activities.
(2) Foreign trade provides an opportunity for domestic producers to sell goods and
services in the domestic market as well as export to the world market.
(3) Encouragement of production and market expansion of indigenous goods and
services encourages large scale investment in various industries in the country.
Large investments increase employment levels and national income, leading to
economic growth in the economy.
Thus, trade is an engine of growth for an economy.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 9

 (5) I agree with this statement.
Reasons : The assumptions of the Law of DMU are as follows :
(1) Rationality : The Law of DMU assumes that a consumer is a rational person
and his behaviour is normal. The law assumes that a rational consumer wants
to maximise his satisfaction.
(2) Cardinal measurement : The Law of DMU assumes that utility can be
measured in numbers. It also assumes that utility derived from each unit of a
commodity can be compared.
(3) Homogeneity : The Law of DMU assumes that units of a commodity consumed
by a consumer are identical. It means all units of consumption of a commodity
are perfectly uniform in respect of size, shape, taste, colour, quality, etc.
(4) Continuity : The Law of DMU assumes that all units of consumption are
consumed in quick succession, one after another. Thus law assumes that there
is no time gap between the consumption of any two units.
(5) Reasonability : The Law of DMU assumes that the size of unit of commodity
of consumption is neither too small nor too big. Thus the law assumes that the
size of unit of commodity of consumption is reasonable.
(6) Constancy : The law assumes that income, taste, habits, preferences, likings,
etc. of a consumer as well as the price of commodity remains constant.
(7) Divisibility : The law assumes that the commodity consumed by the consumer
is divisible.
(8) Single want : The Law of DMU assumes that the commodity is used to satisfy
only a single want, i.e. a want of consumption. Thus law assumes that a
commodity is not used for any other use except consumption.
(9) Constant marginal utility of money : The law assumes that when the
consumer spends his income on a commodity, the utility of remaining money
income remains the same as his total income.
(Note : Write any three points in the answer.)
Q. 5. (1)
(1) Initially, at the first unit of consumption, the total utility and marginal utility
are equal. From the second unit of consumption, the total utility increase with
the diminishing rate. When the marginal utility becomes zero, the total utility
is the maximum. When the marginal utility becomes negative, the total utility
also starts diminishing.
(2) When the marginal utility becomes zero, the total utility is the maximum. It is
called the point of satiety. A rational consumer stops the consumption of a
commodity at a point of satiety. Beyond a point of satiety, continuity in
consumption gives dissatisfaction to the consumer.

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 (2)
(1) GDP = C + I + G + (X − M)
= 800 + 700 + 400 = (−150) = 1900 + ( − 150)
= ` 1750 crores
(2) NDP = GDP − Depreciation (D)
= 1750 − 100
= ` 1650 crores

(3)
(1) The two sectors in a financial market are organised and unorganised sectors.
(2) The unorganised money market includes unregulated entities such as money
lenders, chit funds, and other informal financial intermediaries that carry out
transactions outside the purview of government and regulatory bodies.
(3) It is necessary to increase the presence of organised sector institutions in
remote and interior parts of the country to ensure inclusive growth and
development of the country.

Q. 6. (1) (A) Statement of the Law of Demand : According to Dr. Alfred Marshall,
“Other things being equal, the amount demanded rises with a fall in price; and
diminishes with a rise in price”.
(B) Assumptions : The following are the assumptions of the Law of Demand :
(1) Constant level of income : If there is rise in the income of a consumer,
demand for different goods and services tends to rise even at a higher
prices. In that case, the law becomes inapplicable. Therefore, to prove the
law, it is assumed that there is no change in consumer’s income.
(2) No change in the size of population : Due to a rise in the size of
population, the demand for all goods and services tends to rise at their
constant prices. In such a situation, the Law of Demand becomes
inapplicable. Therefore, to prove the validity of the law, it is assumed that
the size and the composition of population remain constant.
(3) No change in prices of substitute goods : Due to the availability of
cheaper substitute goods, the demand for a commodity in question tends to
fall at its existing price and vice versa. Therefore, the law assumes that there
is no change in the prices of substitute goods of a commodity in question.
(4) No change in prices of complementary goods : If the prices of
complementary goods rise, the demand for a commodity in question tends
to fall at its existing price and vice versa. Therefore, the law assumes that
there is no change in the prices of complementary goods of a commodity
in question.

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 (5) No expectations regarding future price : If a consumer anticipates a fall
in price of the commodity in the near future, the demand for the commodity
in question falls at the present price and vice versa. Therefore, the law
assumes that consumers do not have any expectations regarding rise or fall
in the price of a commodity in the near future.
(6) No change in tastes, habits, fashions : If consumer’s liking for a particular
commodity increases, then the demand for such a commodity tends to rise
even at a higher price and vice versa. In such circumstances, the Law of
Demand does not hold good. Therefore, to maintain the validity of the law,
it is assumed that there is no change in tastes, habits, preferences of the
consumer.
(7) No change in government policy : Rise in the taxes leads to decrease in
the disposable income of the consumer. This in turn decreases the demand
for goods and services at their current prices and vice versa. Therefore, to
prove the law, it is assumed that there is no change in government’s
taxation policy.
(Note : Write any six points in the answer.)

(2) (A) Ratio Method :

(1) Ratio Method of measuring elasticity of demand is developed by Dr. Alfred
Marshall. This method is also known as arithmetic method or percentage
method or proportional method of measuring elasticity of demand.
(2) In this method, the elasticity of demand is measured by dividing the
percentage change in the quantity demanded of a commodity by the
percentage change in its price.
(3) The formula used for the measurement of the elasticity of demand is as
follows :
ΔQ P
Ed = × . Where,
Q ΔP
(i) Δ Q = Change in the quantity demanded, i.e. Q1 − Q. (New
demand − Original demand) (ii) Q = Original demand. (iii) Δ P = Change
in the price, i.e. P1 − P. (New price − Original price) and (iv) P = Original
price.
(4) Ratio Method can be explained with the help of the following example :
Price and Demand of a
Original New Change
Commodity
Demand (per day in units) 10 (Q) 9 (Q1) 01(ΔQ) Q1 − Q

Price (`) 20 (P) 25 (P1) 05(ΔP) P1 − P

12 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 ΔQ P
Ed = ×
Q ΔP
1 20
∴ Ed = ×
10 5
∴ Ed = 0.4
∴ Ed<1.

As the numerical value of the elasticity of demand is less than one, the
demand is relatively inelastic in this example.

(B) Total Outlay Method :

(1) Dr. Alfred Marshall has explained the outlay method of measuring elasticity
of demand. This method is also called as total expenditure method or total
revenue method. Total expenditure means Price × Quantity demanded. In
this method, the elasticity of demand is measured by comparing the change
in the total expenditure on a commodity in response to a change in the
price of a commodity. This method can be explained with the help of the
following schedule :
Demand Total
Elasticity of
Commodity Price (`) (per day in Outlay
Demand
units) (`)
10 6 60 Ed < 1
‘A’
20 5 100 (Relatively inelastic)
30 4 120 Ed = 1
‘B’
40 3 120 (Unitary elastic)
50 2 100 Ed > 1
‘C’
60 1 60 (Relatively elastic)
(2) Relatively inelastic demand : When a fall in the price of a commodity
also leads to a fall in a total expenditure on a commodity and vice versa,
then the demand is said to be relatively inelastic. For example, in the
above schedule, in the case of commodity ‘A’, it can be seen that, as a
commodity’s price falls from ` 20 to ` 10, the total expenditure on it also
falls from ` 100 to ` 60. Similarly, as a commodity’s price rises from
` 10 to ` 20, the total expenditure on it also rises from ` 60 to ` 100. In
the case of relatively inelastic demand, the price of a commodity and the
total expenditure on a commodity are directly related to each other.
(3) Unitary elastic demand : When a fall or a rise in the price of a commodity
leads to no change in total expenditure on a commodity, then the demand
is said to be unitary elastic. For example, in the above schedule, in the
case of commodity ‘B’, it can be seen that, as a commodity’s price falls

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 13

 from ` 40 to ` 30, the total expenditure on it remains same i.e. ` 120.
Similarly, as a commodity’s price rises from ` 30 to ` 40, the total
expenditure on it remains same i.e. ` 120.

(4) Relatively elastic demand : When a fall in the price of a commodity

leads to a rise in a total expenditure on a commodity and vice versa, then
the demand is said to be relatively elastic. For example, in the above
schedule, in the case of commodity ‘C’, it can be seen that, as a commodity’s
price falls from ` 60 to ` 50, the total expenditure on it rises from ` 60 to
` 100. Similarly, as a commodity’s price rises from ` 50 to ` 60, the total
expenditure on it falls from ` 100 to ` 60. In the case of relatively elastic
demand, the price of a commodity and the total expenditure on a commodity
are inversely related to each other.

(3) Various sources of public revenue are as follows :

(A) Tax Revenue : Tax sources of revenue of the government are as follows :
(1) Direct Tax : A tax which is levied on the income or property of an individual
and so in which the impact and incidence of tax is on same head is called direct
tax. Income tax, property tax, etc. are the examples of direct tax.
(2) Indirect Tax : A tax which is levied on goods and services and so in which
the impact of tax is on one person (seller) and the incidence of tax is on
another person (buyer) is called indirect tax. Goods and Services Tax, Custom
Duty, etc. are the examples of indirect tax.

(B) Non-Tax Revenue : Non-tax sources of revenue of the government are as

follows :
(1) Fees : Fee is paid by citizens in return for certain specific services rendered
by the government. For example, education fee, registration fee, etc.
(2) Prices of public goods and services : Modern governments sell various types
of commodities and services to the citizens. A price is a payment made by the
citizens to the government for the goods and services sold to them. For example,
railway fares, postal charges, etc.
(3) Special assessment : The payment made by the citizens of a particular locality
in exchange for certain special facilities given to them by the authorities is
known as ‘special assessment’. For example, local bodies can levy a special
charge on the residents of a particular area where extra /special facilities of
roads, energy, water supply, etc., are provided.
(4) Fines and penalties : The government imposes fines and penalties on those
who violate the laws of the country. The objective of the imposition of fines

14 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 and penalties is not to earn income, but to discourage the citizens from violating
the laws framed by the government. For example, fines for violating traffic
rules. However, the revenue from this source is comparatively limited.
(5) Gifts, grants and donations : The government may also earn some income in
the form of gifts by the citizens and others. The government may also receive
grants from the foreign governments and institutions for general and specific
purposes. Foreign aid has become an important source of development finance
for a developing country like India. However, this source of revenue is uncertain
in nature.
(6) Special levies : The government levies duties on those commodities, the
consumption of which is harmful to the health and well-being of the citizens.
Like fines and penalties, the objective of special levies is not to earn income,
but to discourage citizens from the consumption of harmful commodities. For
example, duties levied on wine, opium and other intoxicants.
(7) Borrowings : The government borrows from the citizens in the form of
deposits, bonds, etc. Government also gets loans from foreign governments
and international organizations such as IMF, World Bank, etc. In modern times,
loans are becoming more and more popular source of revenue for the
governments.
(Note : Write any four points in the answer.)
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SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 15