SUGGESTION SOLVE OF ECONOMICS

BY SKTEC

1.define economics?Engineering economics?

Ans: The term Economics refers to the social science concerned with production, distribution & consumption of goods &
services. It studies how individuals, businesses, governments & nations make choices on allocating resources to satisfy
their wants & needs, trying to determine how these groups should organize & coordinate efforts to achieve maximum
output.
Engineering Economics is a subset of economics concerned with the use & application of economic principles in the
analysis of engineering decision. This subject helps one to understand the need for the knowledge of Economics for being
an effective manager and decision maker.
It studies the behavior of individuals & firms in making decisions regarding the allocation of limited resources. It is
pragmatic by nature, integrating economic theory with engineering practice. It draws upon the logical framework of
economics but adds to that the analytical power of mathematics and statistics

2.Why economics is essential in engineering or textile.

Ans:
a. Making Decision: The Economics theories are used to take decisions related to uncertain and changing business
environment. Economics theories deal with the principles of demand, pricing, cost, production, competition, trade cycles,
national income and so on.
b. Problem solving: Engineers seek solutions to problems & the economic viability of each potential solution is normally
considered along with the technical aspects. Engineering economics involves systematic evaluation of the economic
benefits of proposed solutions to engineering problems.
c. Industrial Economics: To be concern about the economics of the management, operation, growth & profitability of
engineering firms as well as the macro-level economic trends & issues.
d. Choosing alternatives: For each problem, there are usually many possible alternatives. Fundamentally, engineering
economics involves formulating, estimating and evaluating the economic outcomes when alternatives to accomplish a
defined purpose are available. The opportunity cost of making one choice over another must also be considered.
e. Attributes: There are also non-economic factors to be considered, as like- color, style, public image etc.; such factors
are termed attributes.
f. Marketing & Financing: To understand the engineering product markets & demand influences; the development,
marketing and financing of new engineering technologies and products.
g. Critical Path: The critical paths must be determined and closely monitored by engineers and managers alike.
Engineering economics helps provide the Gantt charts and activity-event networks to ascertain the correct use of time and
resources.
3.The fundamental economic problem.
Ans: Needs & Wants: A need is a basic requirement for survival, such as food, clothing & shelter. A want is something
we like to have but isn’t necessary for survival, such as delicious foods.
Scarcity: Scarcity is the condition that results from society not having enough resources to produce all the things people
would like to have. Scarcity affects almost every decision we make.
Why scarcity is a universal problem: Our wants & needs are unlimited, but there is a scarcity of resources. Societies
don’t have enough productive resources to satisfy everyone’s wants & needs. The fundamental economic problem facing
all societies is that of scarcity. It forces consumers and producers to use resources wisely. Economics is the study of how
people try to satisfy unlimited wants & needs with limited resources
4.The three basic economic question.
Ans: Scarcity forces every society to answer three basic questions of-
A. WHAT to produce
B. HOW to produce
C. For WHOM to produce
A.The first question is to decide what goods should be produced, in what quantity & quality, deciding at the same time
about the preferred use of the limited resources. Consumer goods i.e. food, clothes etc. increase the well-being of society
in the present, while productive goods i.e. tools, machinery, plantations, vehicles etc. facilitate higher outputs in the
future. The question should be answered not only at the level of the national economy, but by individual producers too.
For example, should a society direct most of its resources to the production of military equipment or to other items such as
food, clothing or housing? Suppose the decision is to produce housing. Should the limited resources be used to build low-
income, middle-income, or upper-income housing? A society cannot have everything its people want, so it must decide
‘WHAT to produce’.
B.The question of ‘how’ implies the choice of technology, i.e. to decide what combination of resources are used to
produce the desired goods. A country should decide how to employ its labor force (in agriculture, manufacturing, service,
trade, etc.), what energy sources to use (oil, coal, solar power), what materials to use in manufacturing (metals, plastics
etc.), and which technology option to apply (an environmentally damaging one or a less polluting one)? The individual
producer must also choose a technology option, keeping in mind the costs and the efficiency.
C.The question ‘for WHOM to produce’ implies the identification of the final users of the output. Who will get the
output? Will those who work harder receive a larger share of the products? For the economy as a whole the question refers
to the distribution of produced goods and generated incomes among the individuals and various groups of society. For the
individual producer the question refers to the targeted consumers. The question of ‘for WHOM to produce’ is closely
linked to ‘WHAT to produce’; the two questions cannot be answered separately.

5.micro and macro economics definition & comparison.

Ans. Microeconomics: It focuses on the behavior of individual consumers & producers, how they make decisions. These
individuals can be a single person, a household, a business/organization or a govt. agency.
Macroeconomics: It studies an overall economy on both national & international level. Its focus can include a distinct
region, country, continent or even the whole world.

Microeconomics Macroeconomics
1. Definition 1. The study of individual 1. The study of economy
economic units of an as a whole and its
economy. aggregates.
2. Area 2. Small segment of 2. Whole aggregate
economy. economy.
3. Analyzation 3. Individual consumer 3. Aggregated demand.
behavior.
4. Concern About 4. Individual market. 4. Whole economy.
5. Emphasis on 5. Empirical data. 5. Work from theory first.
6. Central problem 6. Price determination and 6. Determination of level
allocation of resources. of Income and
employment.
7. Main tools 7. Demand and supply of 7. Aggregate demand and
a particular commodity. aggregate supply of the
whole economy.
8. Determinant 8. Price. 8. Income.
9. Father 9. Adam Smith 9. John Maynard Keynes

6.Define economic system and it’s types?

Ans. Economic Systems are coordination of various mechanisms that the society uses to allocate scarce resources.
Different societies are organized through alternative economic systems, answering the questions of what, how & for
whom. There are 3 types of economics system, they are,
A. Market Economy/Capitalism:

Spontaneous market coordination as the market agents are guided by market prices.

– private firms and individuals – make major decisions about production and consumption, acting as
independent decision-makers.
 trict or control the actions of other individuals or firms.

Lassez-faire economy.
B. Command Economy:
ant economic decisions are made by the government.

labor and tell the workers how to do their jobs.

and income levels.

f the market is negligible.

derivatives of command economy is Socialism & Communism.

C. Mixed Economy:
ed economies, characterized by a mixture of market mechanisms and
government regulations.

revent the
emergence of situations that restrict market competition.

at is usually higher than the

market equilibrium, to provide higher incomes & better standard of living for workers.

D.Traditional Economic System

A traditional economic system focuses exclusively on goods and services that are directly related to its beliefs,
customs, and traditions. It relies heavily on individuals and doesn’t usually show a significant degree of
specialization and division of labor. In other words, traditional economic systems are the most basic and ancient
type of economies.
Large parts of the world still qualify as traditional economies, primarily rural areas of second- or third-world
countries, where most economic activity revolves around farming and other traditional activities. These
economies often suffer from a lack of resources. Either because those resources don’t naturally occur in the
region or because other, more powerful economies restrict access to them.
Hence, traditional economies are usually not capable of generating the same amount of output or surplus that
other types of economies can produce. However, the relatively primitive processes are often much more
sustainable, and the low output results in much less waste than we see in any command, market, or mixed
economy.
7.Capitalism vs socialism.
Ans:
Capitalism vs socialism
Capitalism Socialism
01. Capitalism is a system of production 01. In Socialism, workers collectively own the
whereby business owners produce goods for sale business, the tools of production, the finished
in order to make profit. product and share profits.
02. Market Economic System. 02. Command Economic System.
03. Rely on the concept of private property. 03. Rely on the concept of public property.
04. It emerged with the advent of 04. It emerged with the movement against the
industrialization. abuse of Capitalism.
05. Capitalists are the business owner. 05. All workers collectively own the business.
06. Workers are hired in return for wages. 06. Workers share the profits.
07. Example: The economic system of USA. 07. Example: The economic system of China.
8.Define Laissez-faire economy.
Ans: Laissez-faire is an economic philosophy of free-market capitalism that opposes government intervention. economic
success is inhibited when governments are involved in business and markets.Based on laissez-faire policy, it allowed
private businesses to make as much money as possible without intervention in the idea that this wealth would trickle down
to individuals. Tax cuts: When governments cut taxes to stimulate the market, this is based on laissez-faire theory as well.
9.Market economy vs command economy
Ans:

MARKET ECONOMY COMMAND ECONOMY

Market Economy is one in which the interest and Command economy alludes to a financial framework, where
supply powers choose the development of products every single monetary choice is taken by the public authority,
and services and their costs. and enterprises are publicly owned.

Individuals are answerable for their monetary The government ensures financial security.
security.

Individuals can unrestrainedly pick their work and Individuals can’t unrestrainedly pick their work or change
utilise their assets and capacities. occupations.

Chosen by consumers and factor markets. Chosen by central organisers.

In light of buyer interest or demand in the market. The state chooses the manufacturing.

Benefit objective. Social goal.

Income Inequality Indeed. No Income Inequality

The rate of financial development is high. The rate of financial development is low.

Owned by firms and private people. Owned by the public authority.

Price Mechanism Utilised. Price Mechanism Not utilised.

Managed by Consumers and manufacturers. Managed by Government.

10.Explain demand schedule and demand curve with hypothetical data.

Ans. In economics, a demand schedule is a table that shows the quantity demanded of a good or service at different
price levels. A demand schedule can be graphed as a continuous demand curve on a chart where the Y-axis represents
price and the X-axis represents quantity.
A demand schedule most commonly consists of two columns. The first column lists a price for a product in ascending or
descending order. The second column lists the quantity of the product desired or demanded at that price. The price is
determined based on research of the market.
When the data in the demand schedule is graphed to create the demand curve, it supplies a visual demonstration of the
relationship between price and demand, allowing easy
estimation of the demand for a product or service at any point
along the curve.
The demand curve is a graphical representation of the
relationship between the price of a good or service and the
quantity demanded for a given period of time. In a typical
representation, the price will appear on the left vertical axis, the
quantity demanded on the horizontal axis. Understanding the
Demand Curve :
The demand curve will move downward from the left to the right, which expresses the law of demand — as the price of a
given commodity increases, the quantity demanded decreases, all else being equal. Note that this formulation implies that
price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable
appears on the horizontal or x-axis, but economics is an exception to this rule. For example, if the price of corn rises,
consumers will have an incentive to buy less corn and substitute it for other foods, so the total quantity of corn consumers
demand will fall.

11.Explain supply schedule and supply curve with hypothetical data.

Ans: Supply schedule or supply function is a tabular statement that shows the different quantities of a commodity that
would be supplied at different prices. Supply schedule or supply function of an individual consumer is called individual
supply schedule or function, while the supply schedule representing the total demand in the market is called market
demand schedule.
Supply curve is the graph of supply schedule, in the coordinate system of price and supplied quantity. Supply curve is
upward-sloping, describing a positive relationship between price & supplied quantity. A supply schedule & a supply curve
is shown as below:

Let us assume that there are 03 producers—A, B & C. Their individual supply schedule is shown in 2nd, 3rd and 4th
columns respectively. Market supply the sum of the supply of A, B & C.
12.Factors of demand.
Ans: 1. Price of the good (Px): When price rises, consumers buy less & when prices fall, demand increases. Here, we
assume other things (factors) to be remaining constant, i.e, ceteris paribus. The reservation price is the maximum price an
individual buyer is willing to pay for one unit of the product. Reservation prices differ for each buyer.
2. Income of consumer (I):
Normal goods: More income means greater purchasing power. With higher incomes, the consumer is able & usually
willing to purchase larger amounts of the goods & vice versa.
Inferior goods: Demand for inferior goods, however, is different. When the consumer’s income rises, he no longer buys
these goods, turning to more expensive goods of better quality instead. Increasing income leads to decreasing demand for
inferior goods. Examples of inferior goods are cheap food or cheap clothing of poor quality.
3. Prices of related goods (Py): Related goods are of 02 types—substitute & complementary.
Substitute goods: Substitute goods can be interchangeably used. When price of a substitute good rises, the demand for
that good rises & vice versa. For example, tea and coffee are substitute goods. If the price of Tea is raised sharply, it may
be substituted by Coffee as both can satisfy nearly the same wants.
Complementary goods: Complementary goods are demanded together as car & petrol or mobile phone & SIM card.
When the goods are consumed together, the demand for one influences the demand for the other. An increased demand for
Mobile phone may lead to increased demand for SIM card or flexi-load.
4. Taste or utility of the good (T): The taste or utility of a product is its ability to satisfy some needs of the consumer. It
may depend on the quality of a product, its design, size, color etc. If tastes & utility are favorable, the demand for a good
will be large.
5. Fashion or consumer’s preferences (F): It express the consumer’s relationship towards the product, his opinion or
value judgement about the utility of the product. Even if the product has useful properties, the consumer may not be aware
of it or may simply dislike it. Advertising is aimed at changing fashion & consumer preferences.
6. Other factors: Number of buyers (the size of the market): The total market demand depends on the number of buyers.
With more consumers demand is usually higher & vice versa.
Market equilibrium
13.Define market equilibrium?
Ans: Market equilibrium refers to a situation where quantity demanded and quality supplied of a good are equal. In other
words, market equilibrium is a situation of zero excess demand and zero excess supply.
14.Describe market automatism/price is adjusted automatically explain it.
Ans: Market Automatism: Therefore, non-equilibrium prices create competition among consumers or producers,
initiating an automatic adjustment of the price towards the equilibrium. The final outcome of this automatic adjustmentis
the disappearance of excess demand or excess supply, and the market attains the equilibrium. The equilibrium price is
also called market-clearing price, because it clears both surpluses and shortages from the market. This self-regulating
feature of markets is called market automatism, or as Adam Smith called it the ‘invisible hand
15.Define price elasticity of demand?
Ans: Elasticity of demand measures the degree of responsiveness of demand to a change in price of the commodity. It is
defined as “the ratio of the percentage change in quantity demanded to the percentage change in price.”

16.Math(price elasticity of demand)

17.Describe category of price elasticity demand?
Ans: 1. Perfectly Inelastic Demand: Demand for a commodity will be said to
be perfectly inelastic, if the quantity demanded does not change at all in
response to a given change in price. If 10 percent change in price results in
zero percent change in demand, it is exactly inelastic demand. The demand
curve, in this case, is vertical straight line perpendicular to Y-axis
2. Inelastic or less than Unit Elastic Demand: Demand for commodity will
be said to be inelastic (or less than unit elastic) if the percentage change in
quantity demanded is less than the percentage change in price. If 10 percent
change in price results in 6 percent change in demand, it is inelastic demand.
3. Unitary Elastic Demand: Demand for a commodity will be said to be unit
elastic if the percentage change in quantity demanded equals the percentage
change in price. If 10 percent change in price results in 10 percent change in
demand, it is unit elastic demand. The demand curve in such case is called
rectangular hyperbola.
4. More than Unit Elastic: Demand for a commodity will be said to be more
than unit elastic if a change in price results in a significant change in demand
for this commodity. If 10 percent change in price results in 14 percent change
in demand, it is elastic demand.
5. Perfectly Elastic Demand: Demand for a commodity is said to be perfectly
elastic, when a small change in its price results in an infinite change in its
quantity demanded. If 10 percent change in price results in (α) percent change
in demand, it is exactly elastic demand. In this case, demand curve is horizontal
straight line parallel to X-axis. The first and the last cases are rare in real life.

18.Define income elasticity and cross elasticity of demand?

Ans: Income Elasticity of Demand: It is the ratio of the percentage change in
the amount spent on the commodity to a percentage change in the consumer’s
income, price remaining constant.

Cross Elasticity of Demand :The responsiveness of demand to a change in the

prices of related commodities (substitutes and complementary) is called cross
elasticity of demand. It is responsiveness of demand for commodity X to a
change in price of commodity Y
19.Determinant of price elasticity of demand?
Ans: 01. Substitute goods: A commodity will have elastic demand if there are good substitutes for it. This is because
when price of a good rises, a consumer will not buy the good but purchase its substitute.
02. Nature of commodity: All necessities like salt, rice etc. that have no substitutes/or less substitutes will have an
inelastic demand. People have to purchase such commodities for their sustenance. Therefore, there will be some demand
despite the changes in price. Demand for luxury goods, on the other hand, will be elastic. If prices of such commodities
rise even a little, consumers refrain to buy. At the same time a little lowering of price of such commodities attract a large
number of consumers.
03. Number of uses of commodity: The larger the number of uses to which a commodity can be put, the higher will be its
elasticity. Therefore the demand of such goods will have elastic demand
04. Possibility of postponement of consumption: If there is a possibility of postponement of consumption of a
commodity then demand will be elastic otherwise inelastic. Demand for certain goods can be postponed for some time
such as computers, printers, scanners etc. People may wait till they become cheaper. Therefore, their demand is elastic.
But the demand for food or electricity cannot be postponed. As such their demand is inelastic.
05. Percentage of income spent: The elasticity of demand is also influenced by the percentage of income spent on the
purchase of a commodity. If the percentage is very less then the demand will be inelastic. For instance, we spend a very
less amount of our total money income on things like matches, pens, pencils etc. If prices of such commodities rise also,
our demand is not reduced. Thus, demand of such goods is inelastic.
06. Fashion: Commodities, which are in fashion, will be inelastic. Fashion minded people don’t compromise with price.
Even if price is high, some people will demand more just because goods are in fashion.
07. Change in taste: A habitual commodity, for which consumers have developed a taste will have inelastic demand. A
chain smoker or a habitual paan (betel nut) chewer cannot leave his habit, in spite of rise in price. In such cases, therefore,
demand is inelastic.
08. Price of the commodity: Very high priced or very low priced goods have low elasticity whereas moderately priced
commodities are quite high-elastic. If a good is very expensive, demand will not increase much even if there is little fall in
its price. And demand will not increase even at very low prices, because people have already purchased their requirement
at low prices
20.Math (marginal utility)
21.Relation between total utility and marginal utility.
Ans: Total Utility It is the amount of utility (satisfaction); a consumer gets by consuming all the units of a commodity.
Marginal utility is defined as the change in the total utility due to a unit change in the consumption of a commodity per
unit of time. It can also be defined as the addition made to the total utility by consuming an additional unit of a
commodity
Unit of apple Total Utility Marginal When the consumer takes 1st apple, his total utility is 7
(TU) Utility (MU) and from the 2nd apple he gets 13 and so on. The third
1 7 7–0=7 column shows marginal utility, which diminishes as the
2 13 13 – 7 = 6 consumer increases units of apples. It is seen that when
3 18 18 – 13 = 5 total utility is maximum, marginal utility is zero at 8th
4 22 22 – 18 = 4 unit of apple. It is also seen that total utility is the sum of
5 25 25 – 22 = 3 the marginal utilities of the 1st, 2nd, 3rd, and so on.
6 27 27 – 25 = 2 Thus, at 8th unit of apple,
7 28 28 – 27 = 1 TU = MU1 + MU2 + MU3 + MU4 +…………..…+
8 28 28 – 28 = 0 MUn(8)
28 = 7 + 6 + 5 + 4 +…..…+ 0

22.Define indifference curve amd explain.

Ans:Indifference Curve:An indifference curve is a geometrical presentation of
a consumer in scale of preferences. It represents all combinations of two goods
which will provide equal satisfaction to a consumer. A consumer is indifferent
towards the different combinations located on such a curve. Since each
combination yields the same level of satisfaction, the total satisfaction derived
from any of these combinations remains constant.
Suppose the following schedule indicates different combinations of apples &
oranges namely A, B, C and D yield equal satisfaction to a consumer. In
combination A the consumer has 1 apple & 10 oranges, in combination B he
has 2 apples & 7 oranges, in combination C he has 3 apples & 5 oranges, and in
combination D he has 4 apples & 4 oranges. In order to have one more apple
the consumer sacrifice, some of the oranges in such a way that there is no
change in the level of his satisfaction out of, each combination.
Diagrammatic representation of indifference schedule is Indifference curve. In
this diagram, quantity of apples is shown on X-axis & oranges on Y-axis. AD
is an indifference curve. Different points A, B, C & D on it indicate those combinations of apples and oranges which yield
equal satisfaction to the consumer
23.Properties of indifference curve.
Ans:
1. Indifference curve slopes downward/negative slope: The downward slope of an indifference curve indicates that a
consumer will have to curtail the consumption of one commodity if he wants to consume large quantity of another
commodity to maintain the same level of satisfaction. An indifference curve cannot be upward sloping or parallel to X-
axis or parallel to Y-axis.
2. Indifference curve is convex to the point of origin: An indifference curve is convex to the point of origin. This
property is based on the law of diminishing marginal rate of substitution. A downward sloping straight line indifference
curve can be possible only in case of perfect substitutes which is not possible in real life.
3. Two Indifference Curves never cut each other: Each indifference curve represents different levels of satisfaction, so
their intersection is ruled out.
4. Higher Indifference Curve represent more satisfaction: In a diagram if any two indifference curve where one is
higher than another, it signifies that higher the indifference curve, greater the satisfaction it represents.
5. Indifference Curve touches neither x-axis nor y-axis: In case an indifference curve touches either axis it means that
the consumer wants only one commodity and his demand for the second commodity is zero. An indifference curve may
touch Y-axis if it represents money instead of a commodity.
6. Indifference curves need not be parallel to each other: Indifference curves may or may not be parallel to each other.
It all depends on the marginal rate of substitution on two curves shown in the indifference map. If marginal rate of
substitution of different points on two curves diminishes at constant rate, then these curves will be parallel to each other,
otherwise they will not be parallel.
7. Indifference curves become complex in case of more than two commodities: When a consumer desires to have
combinations of more than two commodities, say, three commodities, we will have to draw three dimensional indifference
curves which are quite complex.
24.Define price line or budget line and explain.
Ans: A price line or budget line represents all possible combinations of two goods, that consumer can purchase with his
given income at the given prices of two goods.
Suppose a consumer has income of BDT 4.00 to be spent on apples & oranges.
Price of orange is BDT 0.5 per orange & apples BDT 1.00 per apple. The
different combinations that a consumer can get of these goods with his given
income are shown below:
If the consumer wants to buy oranges only, he can get a maximum 8 oranges
with his entire income of BDT 4.00. On the other hand, if he wants to buy
apples only, he can get a maximum 4 apples with his entire income.
Within these two extreme limits, the other possible combinations that a consumer can
get are 1 apple + 6 oranges, 2 apples + 4 oranges, 3 apples + 2 oranges.
In this diagram different combinations of two goods have been shown by AB Line. It
is called Price Line. It is presumed that the consumer spends his entire income on the
consumption of these two goods, so AB price line is the limit line of the consumer.
Slope of the price line refers to the price ratio of two goods, apples and oranges.
25.Factors of consumers equilibrium.
Ans: Consumer’s equilibrium is affected by change in his income, change in the price of substitutes & change in the price
of good consumed.
1. Income Effect: The income effect may be defined as the effect on the purchases & consumptions by the consumer
caused by change in income, if price remains constant. Income effect indicates that, other things being equal, increase in
income increases the satisfaction of the consumer. As a result, equilibrium point shifts upward to the right. On the
contrary, decrease in income decrease the satisfaction of the consumer and his equilibrium point shifts downwards to the
left.
2. Price Effect: Price effect means change in the consumption of goods when the price of one good changes, while the
price of other good & the income of the consumer remain constant
3. Substitution Effect: Substitution effect shows the change in the quantity of the goods purchased due to change in the
relative prices alone while real income remains constant. With the change in the prices of goods, if the money income of
the consumer changes in such a way that his real income remains constant; the consumer will substitute cheaper good for
the dearer ones. Consequently, it will effect on the quantity purchased of both the goods. This effect is known as
substitution effect.
26.Price effect is the sum of substitution effect & income effect.
Ans: Supposing the original indifference curve is IC, the original price line is
AB & consumer’s equilibrium at E. When the price of apple falls, price line
will shift towards the right on X-axis from AB to AC and be tangent to higher
indifference curve IC1 at the new equilibrium point E1. Movement from E to
E1 signifies the Price Effect (MT).
Fall in price of apples means increase in the real income of the consumer. If
the monetary income of the consumer is reduced to such an extent that the
real income remains the same as before. In that case the new price line will be
GH and new equilibrium point E2. The movement from E to E2 reflects the
Substitution Effect (MN).
If due to fall in price of apples, the money income of the consumer is not
reduced, the consumer will move from equilibrium point E2 to E1, which shows the Income Effect (NT).
Here, MT = MN + NT
So, Price Effect = Substitution Effect + Income Effect
27.Define opportunity cost.
Ans: Opportunity cost is a term which means the cost of the most valuable foregone alternative. In other words, the
opportunity cost of a forgiven commodity having the next best alternative cost.
28.Define national income.
Ans: National Income: National income is generally defined as the value of final goods and services produced in a country
in an accounting year. However, it can be defined in terms of total output, total factor income or total expenditure.
29.Define national income at current and constant price.
Ans: National income at current prices is the money value of all goods and services produced in a country estimated at the
prevailing prices.
National income at constant prices is the
national income estimated at a base year,
which is an earlier year to the current
year. National income at constant prices is
used for making comparisons of national
income and related data.

Assume that the economy produces rice,

cars, steel & provides services during
2000 & 2005. The year 2000 is taken as
base year. Prices in 2 years are given in
columns 3 & 5. Quantity of goods
produced and units of services provided in
both years are assumed to be same.
National income at current price is BDT
740 & at constant prices is BDT 600.

30. Circular flow of income- 2 models

31.Short Note-
GDP, GNP, NDP,NNP,PRIVATE INCOME,PERSONAL INCOME,PERSONAL DISPOSABEL INCOME.
Ans: Gross Domestic Product (GDP):
 GDP is the monetary value of all finished goods and services produced in the domestic territory of a country in a year’s
time.
 While calculating GDP, only the value of final goods & services are included and not include the intermediate goods.
Final goods are those goods which are being purchased for final use and not for resale or further processing.
 The value of factor income from abroad which is earned by the residents of a country is not included in the calculation
of GDP.
 GDP = Value of all finished goods & services within country boarder in a year.
Gross National Product (GNP):
 Gross national product is the total market value of all finished goods & services produced by the nationals of a country
during a year.
 It is a monetary measure of the current output of economic activity in an economy.
 The value of factor income earned from abroad by the residents of a country is included in the calculation of GNP.
 GNP = GDP + Net factor income from abroad
Net Domestic Product (NDP):
 NDP is the monetary value of all finished goods & services produced in the domestic territory of a country in a year’s
time after allowing for depreciation.
 To get the real increase in availability of goods in the economy, deducting of depreciation value is necessary.
 NDP = GDP – Depreciation
NDP = GNP – Net factor income from abroad – Depreciation
Net National Product (NNP):
 Gross national product is the total market value of all finished goods & services produced by the nationals of a country
during a year after allowing for depreciation.
 NNP is a more accurate measure of the true output of the economy than GNP.
 NNP = GNP – Depreciation
NNP = NDP + Net income from abroad
Private Income:
 Private income is the sum of the current incomes earned from all sources of private sector within the domestic territory
of a country and abroad.
 It does not include the income accruing to the government.
 Transfer income & interest on public debt received by the private sector are added to the private income.
 Private Income = National income – Govt. income + Interest on national debt + Net current transfers from govt. &
abroad
Personal Income:
 Personal income refers to the sum of all current incomes received by the individuals or households from all sources
within the domestic territory of a country during a year.
 Income earned by an individual may not be actually received. Undistributed profits, corporate taxes & retained earnings
is not actually received by the persons.
 Moreover, personal income also includes transfer earnings.
 Personal income = Private income – (Undistributed profits + Corporate taxes + Net retained earnings + Contributions
for social security)
Personal Disposable Income:
 Personal disposable income refers to that part of personal income which is actually available to households for
consumption and saving.
 It is the income of a person which he can spend as he desires.
 After deducting the amount of compulsory payments i.e. income tax, property tax & other receipts of the govt., one has
the income to be spent at own wish.
 Personal disposable income = Personal income – (Income tax + Other govt. receipts)
Personal disposable income = Consumption + Saving

32.Measurements of national income.

Ans: Measurements of national income are,
1) Value added method/Net output method/ Product method
2) Income method
3) Expenditure method
Value Added Method/Net Output Method/Product Method: This method measures national income as the sum
of net final output produced or net value added by all the firms of a country in a year.
Income Method: The income method measures national income at the point of factor payments made to primary
factors for the use of their services in the production process. In other words, national income is measured by taking
sum total of all the incomes arising
to primary factors of production. Thus, national income is the sum of rent, wages, interest and profits.
 Expenditure Method: Expenditure method measures national income at the disposition stage/spending point. It
measures national income by computing final expenditure on gross domestic product by households, government
and private sector.
33.Difficulties of measurements of National income.
Ans: National income can be measured by three ways. They are;
1) Value added method/Net output method/ Product method
2) Income method
3) Expenditure method

Difficulties of Value added method/Net output method/ Product method Method:

 Prices are not stable. These change frequently. In such situations, finding value of inventories becomes quite difficult.
 It is difficult to determine the prices of goods which do not enter market and are kept for self-consumption. For instance,
the value of owner-occupied buildings or imputed rent cannot be easily determined.
 A clear cut distinction between the intermediate goods and the final goods is always not possible. Final goods for some
may be intermediate goods for others.
 In case the value of a capital good rises or falls due to changes in market conditions, it becomes difficult to estimate the
depreciation.
 It is still not clear whether services should be included in national income or not.
 Lack of adequate and reliable data particularly in the unorganized and unincorporated enterprises is also a major
problem in measurement of national income by value added method.
Difficulties of the Income Method:
 To estimate mixed income of self employed people is not an easy task. It is difficult to get reliable information from
unincorporated sector/unorganized sector.
 Some economists opine that interest on national debt is used for productive purposes and therefore its value should be
included. Thus, there is controversy whether to include it or not.
 Income tax returns (account of incomes of an individual) are the basis of calculation of income received in the country.
In underdeveloped countries a very small proportion of income earners actually pay taxes. Therefore, income method may
be of limited use in such countries.
Difficulties of Expenditure method
 Since the production value of final goods is included, the expenses for any intermediate goods are not considered.
Otherwise, a single expense will be counted twice, causing the national income to inflate inaccurately.
 The transfer payments do not add value to the economy of a nation; hence, they should not be included.
 The purchase of second-hand goods is not included since they do not affect the total value of produced goods and
services. However, if the purchase of second-hand goods involves brokerage, the brokerage paid is included in the
expense calculation.
 When assets such as bonds and shares are procured, it signifies a change in ownership and does not affect the value of
goods and services; hence, the transactions are not involved in expense calculation. However, the brokerage paid for the
transfer of shares is considered while using the expenditure method.
 Services provided by the government and non-profit organizations and the expenses incurred for the production of any
good that is used for self-consumption are considered in the national income calculation.
34.Math only
35.Break even math
36.what is aggregate demand and supply.
Ans: Aggregate demand is a measurement of the total
amount of demand for all finished goods and services
produced in an economy. Aggregate demand is commonly
expressed as the total amount of money exchanged for those
goods and services at a specific price level and point in time.
Aggregate demand is a macroeconomic term and can be
compared with the gross domestic product (GDP). GDP
represents the total amount of goods and services produced in
an economy while aggregate demand is the demand or desire
for those goods. Aggregate demand and GDP commonly
increase or decrease together.
Aggregate supply, also known as total output, is the total
supply of goods and services produced within an economy at
a given overall price in a given period. It is represented by the
aggregate supply curve, which describes the relationship
between price levels and the quantity of output that firms are
willing to provide. Typically, there is a positive relationship
between aggregate supply and the price level.
Rising prices are typically an indicator that businesses should
expand production to meet a higher level of aggregate
demand. When demand increases amid constant supply,
consumers compete for the goods available and, therefore, pay higher prices. This dynamic induces firms to
increase output to sell more goods. The resulting supply increase causes prices to normalize and output to remain
elevated.
37.Four components
Ans: Aggregate demand or aggregate expenditure consists of the following four components:
1. Household consumption demand: The total demand of goods and services for consumption purposes, by all
households of the country is the household consumption demand. The level of consumption demand depends on the level
of disposable income of household. If a households’ disposable income increases, the total amount spent on consumption
also increases. But consumption does not increase as fast as income. Saving also increases as result of increase in income
of the household.
2. Private investment demand: Investment is the money spent on the creation of new capital assets. Private investment
depends upon rate of interest and marginal efficiency of capital (expected rate of return of an additional unit of capital
goods). An entrepreneur will continue to invest up to the point where rate of interest is equal to marginal efficiency of
capital (MEC).
3. Government demand for goods and services: Today, government has become a prominent buyer of goods and
services. Government demand these for meeting public needs such as roads, schools, health, irrigation, power and
infrastructure, maintenance of law and order etc.
4. Net export demand: Net exports (exports minus imports) refer to foreign demand for goods and services produced by
an economy. It is affected by many factors such as trade policy of the trading partners, relative prices of goods, incomes
of the nations, foreign exchange rates etc.
Aggregate demand is, thus, composed of consumption expenditure/demand and investment expenditure/demand.
In short, Y = C + I.Where, Y = Income or aggregate demand; C = consumption demand and I = investment demand. The
aggregate demand
schedule which shows
levels of consumption
and investment is
shown as under:
38.Unemployment: define- Cyclic,frictional,structural,classical,marxian.half
Ans: Cyclical unemployment exists due to inadequate effective aggregate demand. It gets its
name because it varies with the business cycle. though it can also be persistent.
Gross Domestic Product is not as high as potential output because of demand failure, due to (say) pessimistic business
expectations which discourages private fixed investment spending. Low government spending or high taxes, under
consumption, or low exports net of imports may also have this result.
Frictional unemployment is a situation when a worker is unemployed because he lacks the required skills or placed in
wrong jobs. This type of unemployment is caused by immobility of labour, seasonal nature of work, short-term scarcity
of raw materials, collapse of machinery etc. In other words, it involves people being temporarily between jobs, searching
for new ones; it is compatible with full employment. (It is sometimes called search unemployment and is seen as largely
voluntary.) It arises because either employers remove workers or workers quit, usually because the individual
characteristics of the workers do not fit the individual characteristics of the job. This type of unemployment coincides
with an equal number of vacancies and cannot be solved using aggregate demand stimulation. The best way to lower this
kind of unemployment is to provide more and better information to job-seekers and employers.
Structural unemployment is said to exist when large number of persons are unemployed because the co-operant factors
of production which engage them fully are not sufficiently available. There may be scarcity of land, capital, in the
economy causing structural unemployment. In other words, it involves a mismatch between the workers looking for jobs
and the vacancies available.Even though the number of vacancies may be equal to the number of the unemployed, the
unemployed workers lack the skills needed for the jobs — or are in the wrong part of the country or world to take the jobs
offered. That is, it is very expensive to unite the workers with jobs.
Marxian unemployment: with Marxian unemployment, the number of jobless exceeds the availability of vacancies. (It’s the scarcity of jobs
that gives unemployment such a motivational effect.) However, simple demand stimulus in the face of the capitalists’ refusal to hire or invest simply
encourages inflation: if profits are being squeezed, the only way to maintain high production is via rising prices.

39.Determination of income and employment.

Ans: The equilibrium level of income in an economy is determined at the point where aggregate demand (AD) is equal to
aggregate supply (AS).
The following table describes the determination of equilibrium level of income and employment in the economy

It is seen in the table that the aggregate demand is equal to aggregate supply when the level of income in the economy is
Rs. 40 crore. This is the equilibrium level of income and employment. It is also known as the level of effective demand.
There may be cases when aggregate demand is more or less than the aggregate supply. In either case, there is imbalance
and this needs to be corrected by adopting various measures under the hands of monetary authority of the country.
The equilibrium level of income and employment is illustrated in the Fig. 19.2. AS and AD are the aggregate supply and
aggregate demand curve respectively. Because the sum of all income received corresponds to the sum of all production,
AS is drawn as a 45 degree line. Both these curves intersect each other at point E, which is the equilibrium point. At this
point of equilibrium, income, the aggregate demand and aggregate supply-all amounts to Rs. 40 crore.
The movement toward equilibrium is mostly via changes in inventories inducing changes in production and income. If
current output exceeds the equilibrium, inventories accumulate, encouraging businesses to cut back on production,
moving the economy toward equilibrium. Similarly, if the level of production is below the equilibrium, then inventories
run down, encouraging an increase in production and thus a move toward equilibrium. This equilibration process occurs
when the equilibrium is stable, i.e., at point E.
It may be noted that the economy is no doubt in equilibrium at point E because the producers have no tendency to either
increase or decrease employment, but this may not be the point of full employment. Aggregate demand and aggregate
supply might be equal to full employment. This is so when investment happens to equal the gap between aggregate supply
price and the amount spent on consumption. According to Keynes, investment is never sufficient to fill up such gap. Thus,
there is every likelihood that aggregate demand and aggregate supply meet each other at a point less than full employment
level, which is called underemployment equilibrium. If any of the components of aggregate demand rises at each level of
income, for example because business becomes more optimistic about future profitability, that shifts the entire AD line
upward. This raises equilibrium income and output. Similarly, if the elements of AD fall, that shifts the line downward
and lowers equilibrium output.
40.Explain excess demand amd deficient demand.
Ans: Excess demand: Excess demand is a situation when aggregate demand exceeds
aggregate supply at the full employment level of income. The difference between aggregate
demand and supply at the level of full employment is called the ‘inflationary gap’.
Inflationary gap in the economy exists when planned expenditure is greater than the value of
available output produced by making full use of resources. It is to note that an increase in
demand beyond the equilibrium level of full employment does not increase the output and
employment but only prices. Fig. 22.1 illustrates excess demand in the economy. It is seen
that aggregate demand exceeds aggregate supply at full employment level OY by AB length.
This gap is called inflationary gap, where aggregate demand is AY and aggregate supply is
BY. Aggregate demand AY > aggregate supply BY. Therefore, AY – BY = AB (inflationary
gap).

Deficient demand: Deficient demand is a situation when aggregate demand is less than
aggregate supply of goods and services at the full employment level of income. It is also
termed as the ‘deflationary gap’. Deflationary gap in the economy causes large scale
unemployment. It comes to exist in the economy when demand for goods and services do
not match the level of good and services available. It falls short rather. The adjacent Fig.
22.2 explains deficient demand in the economy. It is seen that aggregate demand falls short
of aggregate supply at full employment level OY by CD length. This gap CD is called
deflationary gap, where aggregate demand is DY and aggregate supply is CY. Aggregate
demand DY < aggregate supply CY. Therefore, CY – DY = CD (deflationary gap).

41.Measure of correct excess and deficient demand.

Ans: There are generally the following ways to come out of excess or deficient demand:
1. Fiscal Policy
2. Monetary Policy
3. Foreign Trade Policy

1. Fiscal Policy :This is referred to as government expenditure and taxation policy. Fiscal policy influences aggregate
demand significantly. In a situation of excess demand, it may help if there is cut in the government expenditure — to
reduce budgetary deficit — and rise in incomes/revenues through ways that are not inflationary such as progressive
taxation and borrowing. Government may reduce expenditure on public works programmes such as road building, rural
electrification etc; investment in public health and education, defence, internal administration and maintenance of
state.Deficient demand can be corrected by increasing government expenditure and increased budgetary deficit met
through the creation of more money and other inflationary ways. Taxes, particularly the corporate and income taxes may
be cut down to increase effective demand by encouraging private investment.
2.Monetary Policy:Monetary policy refers to the policy through which the monetary authority expands or contracts the
money supply in the economy. In other words, it relates to changes in the rate of interest and the availability of credit in
the economy. Higher rate of interest means costlier credit, which discourage effective demand. Investors get discouraged
as borrowing becomes costlier. As a result excess demand gets reduced. A lowering rate of interest, on the other hand,
makes borrowing cheaper. Investors are encouraged to borrow more. If marginal efficiency of capital remains constant,
the low rate of interest will increase the level of investment. Thus, deficient demand in the economy tends tobe corrected.
3. Foreign Trade Policy: Foreign trade generally relates to exports and imports of a country. Excess and deficient
demand can be influenced substantially by adopting a favourable foreign trade policy. Additional exports increase
incomes directly and enlarge spending. But additional incomes also create demand for imports. Thus, income generated in
the economy is partly spent on goods produced by other economies and imported into the country. To this extent the
excess demand will be reduced. To correct excess demand i.e., to reduce inflationary gap, an economy can create and
increase the size of its imports surplus (excess of imports over exports). Import surplus can be created or increased by
selling a country’s holdings of foreign assets; raising loans from foreign governments or other international institutions
such as IMF, World Bank etc., and through receipt aid from other countries in the form of grants.
42.Define taka with classification.
Ans: The Bangladeshi taka (Bengali: টাকা, sign: ৳, code: BDT, short form: Tk) is the currency of the People's Republic of
Bangladesh.

Freq. used ৳5, ৳10, ৳20, ৳50, ৳100, ৳200, ৳500 and ৳1000

Rarely used ৳1, ৳2

Coins ৳1, ৳2 ৳5

43.Limitations of Barter system

Ans: Barter system is beset with many difficulties which are explained as under:
1. Lack of double coincidence of wants: The most serious problem in barter system is the lack of double coincidence of
wants. Thus, a seller of a commodity must not find some person who is willing to purchase and sell his goods to him. In
other words, double coincidence of wants means that a person who owns goods and services, must find some person, who
not only wants this commodity but who also possesses the good and service which the first person wants. If a person
wants to sell his cow in exchange with rice, he must find a person who is willing to sell rice and buy cow.
2. Absence of common unit of measure: There was no common unit of measuring the values of different goods and
services. As such the value of each commodity in the market does not remain as same and constant. It had to be
determined in as many separate quantities as there were kinds and qualities of other goods and services meant for
bartering in the market.
3. Lack of store of value: There is lack of any good method to store the generalized purchasing power or wealth. People
can store wealth in terms of specific commodities. The stored commodities may lose its value due to damage with passage
of time. Moreover, the method of storing goods is somewhat expensive.
4. Problem of future payments: A barter system suffered from the disadvantages of lack of any satisfactory unit in terms
of which deferred payments for any future contracts can be made. Contracts concerning payments in future period are
important feature of an exchange economy. Agreements relating to payments of wages, rent, interest, salaries etc extend
over a period of time. These payments have to be made in future. Barter system is unable to undertake such transactions.
The reason are controversy regarding the quality of goods and services accepted for payment; disapproval in regard to
exchange of specified commodity and risk involved in the contract due to fall or rise of value of commodity accepted for
payment.
44.Function of money.
Ans: The important functions of money can be discussed under the following heads:
1. Primary Functions
(i) Medium of exchange: Money serves as a medium of exchange. It facilitates the buying and selling of goods.
(ii) Measure of Value: Money acts as a common and uniform measure of value. The values of various commodities are
measured in terms of money..
2. Secondary Functions
(i) Store of value: Money also serves as a store of value. It means people can keep wealth in the form of money. In other
words, storing money means holding of purchasing power
(ii) Standard of deferred/delayed payments: Standard of deferred payment means that future payments of any transaction
can be made in terms of money. It means payment can be spread over a period of time. A person who borrows a certain
sum of money in the present may make payment in the future, and the amount of money to be paid is definite.
(iii) Transfer of value: Money helps to transfer value from one person to another. For example, when we purchase a good
from a seller, we actually transfer value to the seller by making payment in terms of money equal to the price of the good.

3. Contingent Functions This refers to the use of money in assisting various economic entities, such as consumers,
producers etc in taking important decisions.
(i) Distribution of income: Money helps in the distribution of
national income.
(ii) Maximization of utility: A rational consumer or a producer
always tries to maximize utility (satisfaction). For instance, a
consumer equalizes his total utility by equalizing the ratios of
marginal utilities of different goods with the price ratio of different
goods in terms of money.
(iii) Basis of credit system: Credit plays important role in the modern economy. Commercial and business activities are
highly dependent upon the credit system. All credit instruments like cheques, bills of exchange etc., cannot be used in
absence of money.
45.Define bank with classification.
Ans: A bank is a financial institution which lend and accepts money. According to Banking Regulation Act “accepting for
the purpose of lending or investing of deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheques, draft, order or otherwise”, is called a
bank.
Commercial banks in India are classified mainly into two
categories.
1) Scheduled commercial banks
2) Non-scheduled commercial banks
Scheduled commercial banks are those which are entered in the
Second Schedule of RBI Act, 1934. Such banks have a paid-up
capital and reserves of an aggregate value of not less than Rs.5
lakhs and which carry out their operations in the interest of
depositors.
Non-scheduled commercial banks are those which are not
entered in the list of the Second Schedule of RBI Act, 1934.
Schedule commercial banks consist of – twenty seven public sector banks, thirty private sector banks of which twenty two
are old private banks and eight are new, forty foreign banks and one hundred ninety six regional rural banks. Public sector
commercial banks include the State Bank of India and its seven subsidiaries and other nineteen nationalized banks.

46.Function of commecial bank amd central bank.

Ans: The main functions of commercial banks are accepting deposits from the public and advancing them loans.
However, besides these functions there are many other functions which these banks perform. All these functions can be
divided under the following heads:
1. Accepting deposits
2. Giving loans
3. Overdraft
4. Discounting of Bills of Exchange
5. Investment of Funds
6. Agency Functions
7. Miscellaneous Functions
FUNCTIONS OF A CENTRAL BANK: A central bank performs a number of important functions, which are discussed
as under:
1. Bank of Note Issue: A central bank has been empowered to issue currency notes in the country. Currency notes issued
by the central bank are the legal tender.
2. Banker and Adviser to the Government: A Central bank acts as banker, agent and adviser to the government. As
banker to the government, it receives the deposits of cash, cheques and drafts, etc., from the governments.
3. Banker to Banks:It acts as custodian of cash reserves of commercial and other banks.
4. Custodian of Foreign Reserves: A central bank is the custodian of foreign exchange reserves of a country. All the
foreign exchange transactions of a country are done through the central bank.
5. Lender of the last Resort: The central bank acts as the lender of the last resort. It provides ultimate need of finance to
all banks by discounting approved securities and collateral loans and advances.
6. Clearing House for Transfer and Settlement: A central bank acts as a clearing house for transfer and settlement of
mutual claims of the commercial banks
7. Controller of Credit: The most important function of the central bank is to control credit creation by the commercial
banks. Supply of credit must be regulated so as to ensure the smooth functioning of the economy. Central bank adopts
quantitative and qualitative methods to control credit in the economy.
8. Promotional and Developmental Functions: It assists in the development of financial institutions like developmental
banks to provide investible funds for the development of agriculture, industry and other sectors of the economy. It helps in
the development of money and capital market in the country
47.Component of budget.
Ans: The budget is presented in two parts –
 I. revenue budget
II. capital budget.
Revenue budget: Revenue budget shows receipts of the government and the expenditures met from these revenues. Thus,
it consists of revenue receipts and revenue expenditure. Revenue budget consists of revenue receipts and revenue
expenditure.
Revenue receipts of the government are all those receipts which are non-redeemable. These comprise tax revenue and
non-tax revenue.
Tax revenue is an important source of revenue receipts of the government. The three important sources of tax revenue
are—
I. income tax: two categories—agricultural tax income and non- agricultural tax income.
II. custom duties: mainly composed of import duties
III. excise duties: imposed by the central government on the goods produced within the country.
Revenue expenditures relate to the normal running of the government and interest payment on government debts.
Revenue expenditure are of two types:
a) Plan revenue expenditure: Plan revenue expenditure pertains to Central Plan and Central assistance provided for
state and union territory plans.
b) non-plan revenue expenditure: Non-plan revenue expenditure comprises of a wide range of general, social and
economic services of the government.
Capital budget: Capital budget shows capital requirements of the government and various ways of financing these
expenditures. It comprises capital receipts and capital expenditures of the government.
The main components of such receipts are borrowings of different types and repayment of loans and advances by other
parties. Important capital receipts are – market loans, special deposits, external assistance, recovery of loans and advances,
small savings and provident funds.

2. Characteristics of engineering economics ?

Ans: The engineering economics involves technical analysing with emphasis on the economic aspects and has the
objective of assisting decisions.
1. Engineering Economics is closely aligned with Conventional Micro-Economics.
2. Engineering Economics is devoted to the problem solving and decision making at the operations level.
3. Engineering Economics can lead to sub-optimisation of conditions in which a solution satisfies tactical objectives at
the expense of strategic effectiveness.
4. Engineering Economics is useful to identify alternative uses of limited resources and to select the preferred course of
action.
5. Engineering Economics is pragmatic in nature. It removes complicated abstract issues of economic theory.
6. Engineering Economics mainly uses the body of economic concepts and principles.
7. Engineering Economics integrates economic theory with engineering practice.
7.GDP vs GNP
Ans:
9.what types of economic system used in Bangladesh,USA,china
Ans: in Bangladesh,-Mixed Economic System
A mixed economic system refers to any mixture of a market and a command economic system. It is sometimes
also referred to as a dual economy. Although there is no clear-cut definition of a mixed economic system, in
most cases the term is used to describe market economies with strong regulatory oversight and government
control in specific areas (e.g., public goods and services).
Most western economies nowadays are considered mixed economies. Most industries in those systems are privately
owned, whereas a small number of public utilities and services remain in government control. Thus, neither the private
nor the government sector alone can maintain the economy; both play a critical part in the success of the system
In USA-Market Economic System
A market economic system relies on free markets and does not allow any government involvement in the
economy. In this system, the government does not control any resources or other relevant economic segments.
Instead, the entire system is regulated by the people and the law of supply and demand. Therefore, this system is
sometimes also referred to as laissez-faire capitalism.
The market economic system is a theoretical concept. That means, there is no real example of a pure market
economy in the real world. The reason for this is that all economies we know of show characteristics of at least
some kind of government intervention. For example, many governments pass laws to regulate monopolies or to
ensure fair trade, and so on.
In theory, a free market economy enables an economy to experience a high amount of growth. Arguably the
highest among all four economic systems. In addition to that, it also ensures that the economy and the
government remain separate. At the same time, however, a market economy allows private actors to become
extremely powerful, especially those who own valuable resources. Thus, the distribution of wealth and other
positive aspects of the high economic output may not always be beneficial for society as a whole.
In China-Command Economic System
A command economic system is characterized by a dominant centralized power (usually the government) that
controls a large part of all economic activity. This type of economy is most commonly found in communist
countries. It is sometimes also referred to as a planned economic system because most production decisions are
made by the government (i.e., planned), and there is no free market at play.
Economies that have access to large amounts of valuable resources are especially prone to establish a command
economic system. In those cases, the government steps in to regulate the resources and most processes
surrounding them. In practice, the centralized control aspect usually only covers the most valuable resources
within the economy (e.g., oil, gold). Other parts, such as agriculture are often left to be regulated by the general
population.
A command economic system can work well in theory, as long as the government uses its power in the best
interest of society. However, this is, unfortunately, not always the case. In addition to that, command economies
are less flexible than the other systems and react slower to changes, because of their centralized nature.
10.Definition: Accounting cost, Economic cost, Opportunity cost, Direct cost, Indirect cost, Fixed cost, Variable cost
Ans: Accounting cost: Accounting costs measure the monetary value of taking an action. They are the explicit costs
involved with the business. For example, if a company wants to open a satellite office in a new market, they must make
investments, such as new hires, computer equipment, software systems, rent, and inventory.
Economic cost: The economic cost is the total expenditure a firm faces when using economic resources to produce goods
and services.
Opportunity Costs:The Opportunity Cost is the Return Expected from the Second Best use of the
Resources, which is Foregone for availing the Gains from the Best use of the Resources. It is not recorded in the
Books of Accounts.It is very useful in Long Term Cost Calculations e.g. In calculating the Cost of
Higher Education, it is not the Tuition Fee & Books but the earning foregone that should be taken into account.
Direct cost: Direct costs are expenses that a company can easily connect to a specific “cost object,” which may be a
product, department or project. This category can include software, equipment and raw materials. It can also include
labor, assuming the labor is specific to the product, department or project.
Indirect cost: Indirect costs extend beyond the expenses you incur when creating a product; they include the costs
involved with maintaining and running a company. These overhead costs are the ones left over after direct costs have been
computed.
Fixed cost: In economics, fixed costs are business expenses that are not dependent on the level of goods or services
produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often
referred to as overhead costs.Fixed costs are not permanently fixed; they will change over time, but are fixed in relation to
thequantity of production for the relevant period. For example, a company may have unexpected and unpredictable
expenses unrelated to production, and warehouse costs and the like are fixed only over the time period of the lease.
Variable Cost
Variable costs are costs that change in proportion to the good or service that a business produces.
Variable costs are also the sum of marginal costs over all units produced.
They can also be considered normal costs. Fixed costs and variable costs make up the two
components of total cost.
For example, variable manufacturing overhead costs are variable costs that are indirect costs, not
direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of
units produced.
11.Macro economics concept (Define + classification), Inflation, hyperinflation, deflation
Ans: Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a
whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product
and inflation.
Inflation and Deflation
The study of inflation and deflation is another important aspect of macroeconomics. The term inflation refers to an increase in
the prices of goods and services across the country. And the term deflation refers to a decrease in the prices of goods and
services. Economists measure inflation and deflation by studying price indexes. A price index is the weighted average of price
for a class of products and services.
Inflation occurs when an economy grows too quickly. Deflation, on the other hand, occurs when an economy declines over a
period of time. By studying the inflation and deflation trends, economists can help curb inflation rates by taking appropriate
measures. Too much inflation can lead to negative consequences and continuous deflation can cause low economic output.
Hyperflation: In economics, hyperinflation is used to describe situations where the prices of all goods and services rise
uncontrollably over a defined time period. In other words, hyperinflation is extremely rapid inflation.
Generally, inflation is termed hyperinflation when the rate of inflation grows at more than 50% a month. American
economics professor Phillip Cagan first studied the economic concept in his book, “The Monetary Dynamics of
Hyperinflation.”
12. List down key micro variable
13. Short note :( Unemployment, inflation, monetary and fiscal, business cycle, exchange rate , Balance of permanent
Ans:UnemploymentAnother important component of macroeconomics is unemployment. Economists measure the
unemployment rate in an economy by calculating the percentage of individuals without jobs. Unemployment categories
include classic unemployment, frictional unemployment, and structural unemployment.
Classical unemployment is when wages are too high for employers to consider hiring more workers. Frictional unemployment
occurs when the time taken to search for an appropriate employee is too long. Structural unemployment occurs when there is a
mismatch between a worker’s skills and the actual skill required for a job. Another important category of unemployment is
cyclical unemployment that occurs when an economy’s growth is stagnant.
Inflation and Deflation
The study of inflation and deflation is another important aspect of macroeconomics. The term inflation refers to an increase in
the prices of goods and services across the country. And the term deflation refers to a decrease in the prices of goods and
services. Economists measure inflation and deflation by studying price indexes. A price index is the weighted average of price
for a class of products and services.
Inflation occurs when an economy grows too quickly. Deflation, on the other hand, occurs when an economy declines over a
period of time. By studying the inflation and deflation trends, economists can help curb inflation rates by taking appropriate
measures. Too much inflation can lead to negative consequences and continuous deflation can cause low economic output.
Monetary Policy
The monetary policy is an important process, which is under the control of the monetary authority of a country. This monetary
authority is usually the central bank or the currency board. The monetary policy is usually implemented by the central bank to
stabilize prices and to increase the strength of a country’s currency.
The monetary policy also aims to reduce unemployment rates and stabilize GDP. It also controls the supply of money in an
economy. For example, the central bank of a country can pump money into an economy by issuing money to buy bonds and
other assets. On the other hand, the central bank of a country can also sell bonds and take money out of circulation.
Fiscal Policy
The fiscal policy is a process that makes use of a government’s revenue generation and expenditure as tools to control
economic windfalls. The government uses the fiscal policy to stabilize the economy during a business cycle. For instance, if
production in an economy does not match the required output, the government can spend on idle resources and help in
increasing output.
Usually, economists prefer the monetary policy over the fiscal policy. This is because the monetary policy is under the control
of the central bank of a country, which is an independent organization. The fiscal policy is under the control of the
government, which can be affected by political intentions.
Business cycle: Business cycles are a type of fluctuation found in the aggregate economic activity of a nation -- a
cycle that consists of expansions occurring at about the same time in many economic activities, followed by similarly
general contractions (recessions). This sequence of changes is recurrent but not periodic. A business cycle is the periodic
growth and decline of a nation's economy, measured mainly by its GDP. Governments try to manage business cycles
by spending, raising or lowering taxes, and adjusting interest rates. The purpose of a business cycle is to track economic
activity. In practical terms, the business cycle tracks the state of an economy from expansion to contraction and recession.
It can affect how you spend, how you invest, and how you access credit.
Exchange rate: An exchange rate is a rate at which one currency will be exchanged for another currency. Most
exchange rates are defined as floating and will rise or fall based on the supply and demand in the market. Some exchange
rates are pegged or fixed to the value of a specific country's currency. For example, if the exchange rate between the U.S.
dollar (USD) and the Japanese yen (JPY) is 120 yen per dollar, one U.S. dollar can be exchanged for 120 yen in foreign
currency markets. The formula is: Starting Amount (Original Currency) / Ending Amount (New Currency) =
Exchange Rate.

14. Importance of macro economics.

Ans: the importance of macroeconomics. 2020
1. It helps to understand the functioning of a complicated modern economic system. It describes how the
economy as a whole functions and how the level of national income and employment is determined on the basis
of aggregate demand and aggregate supply.
2. It helps to achieve the goal of economic growth, higher level of GDP and higher level of employment. It
analyses the forces which determine economic growth of a country and explains how to reach the highest state
of economic growth and sustain it.
3. It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy
measures to control Inflation and deflation.
4. It explains factors which determine balance of payment. At the same time, it identifies causes of deficit in
balance of payment and suggests remedial measures.
5. It helps to solve economic problems like poverty, unemployment, business cycles, etc., whose solution is
possible at macro level only, i.e., at the level of whole economy.
6. With detailed knowledge of functioning of an economy at macro level, it has been possible to formulate
correct economic policies and also coordinate international economic policies.
7. Last but not the least, is that macroeconomic theory has saved us from the dangers of application of
microeconomic theory to the problems of the economy as a whole.
15. Limitation of macro economics.
Ans: Though macroeconomics have various advantages and its quite popular, its not free of its limitations. Lets
have a look,
1. Dependencies on Individual events:It is not necessary that what is right for a group, would also right for
other groups or individuals.
2. Heterogenous units:It is very difficult to measure the aggregates for heterogenous units.Though units are
measured in terms of money, its not a true measure of value in use, it is very difficult to measure the
aggregates for heterogenous units.
3. Structure of the aggregate is more important than aggregate itself:The composition of the structure of
aggregate influences the economy is more complex than the aggregate itself
4. Different effects of aggregates:It does not study different effect of an aggregate on different sectors of
economy.Aggregates does not have uniform effect on all sectors of an economy
5. Limited application:Most of models available in macroeconomics does only have theoretical significance
6. Ignores contribution of individual units:As compare to individual units, a group of units is given more
importance in Macroeconomics.It is not necessary that what is right for individual person, would also right
for a group.
7. Difficulty in Measuring Aggregates:Under macro economics, measurement of aggregates becomes very
difficult. The reason is that there are numerous items in a group, which are sometimes not possible to
measure separately.
8. Danger in Ignorance of Individual Units:When we study a group under macro economics, there is always
a danger that we may ignore the numerous individual units which form the group
16. Define production. 3 aspects of production.
Ans: A production process can be defined as any activity that increases the similarity between the pattern of demand for
goods and services, and the quantity, form, shape, size, length and distribution of these goods and services available to
the market place.
Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make
something for consumption (the output). It is the act of creating output, a good or service which has value and
contributes to the utility of individuals. There are three aspects to production processes:
1. The quantity of the good or service produced.
2. The form of the good or service created.
3. The temporal and spatial distribution of the good or service produced.
17. Factors of production.
Ans: Factors of production
Economic resources are the goods or services available to individuals and businesses used to produce valuable
consumer products.
The classic economic resources include land, labor and capital. Entrepreneurship is also considered an economic
resource because individuals are responsible for creating businesses and moving economic resources in the business
environment.
These economic resources are also called the factors of production. The factors of production describe the function that
each resource performs in the business environment.
18. Law of variable proportion- explain
Ans: The law of variable proportions
If one input is variable and all other inputs are fixed the firm’s production function exhibits the law of variable
proportions.
If the number of units of a variable factor is increased, keeping other factors constant, how output changes is the
concern of this law.
Suppose land, plant and equipment are the fixed factors, and labour the variable factor.
When the number of labors is increased successively to have larger output, the proportion between fixed and variable
factors is altered and the law of variable proportions sets in.
ased by equal doses keeping the quantities of other inputs
constant, total product will increase, but after a point at a diminishing rate.
ble proportions (or the law of non-proportional returns) is also known as the law of diminishing
returns.
s is only one phase of the more comprehensive law of variable
proportions.
19. Break even chart analysis + Math
Ans: The intersection point of the total sales revenue line and the
total cost line is called the break-even point
 On X-axis volume of production at BEP is called break-
even sales quantity and on Y-axis at BEP we get break-
even sales.
 At break-even point revenue is equals to total cost and so
it is also called No profits No loss situation.
 Quantity less then break-even quantity will put firm in loss
as total cost is more than total revenue. Similarly quantity greater than break-even quantity will make profit.
  Profit is calculated as follows:
Profit = Sales − (Fixed cost + Variable costs)
Profit = s ∗ Q − (FC + v ∗ Q)
 Break even quantity = Fixed CostSelling price/unit -Variable cost/unit
Or, Break even quantity = FCS -V (in units)
 Break even sales = Fixed CostSelling price/unit -Variable cost/unit × Selling Price
Or, Break even sales = FCS -V × s (in Rs)
20. Define marginal safety.
Ans:
21. Define:, NI, PCI
Ni: National income is generally defined as the value of final goods and services produced in a country in an accounting
year. However, it can be defined in terms of total output, total factor income or total expenditure.
Pci: Per Capita Income (PCI): Is calculated by dividing the national income of the country by the total population of a
country.Thus, PCI=Total National Income/Total National Population
23. Difficulties in estimating NI (any 5)
Ans: The following points highlight the eight major difficulties in the measurement of national income.
Difficulties in Estimating National Income :
1. The first difficulty regarding the concept of national income relates to the treatment of non-monetary transactions.
Example: Services of Housewife,Services of house- maid. The services of house-maid are part of national
income, but if suppose the master marries the hose- maid, although she still performs the same services, her contribution
to the national income becomes zero. This is because now these services do not contribute to the economic activity.
2. Second conceptual difficulty arises with regard to the treatment of output produced by the foreign firms in the country
It is generally agreed that the income of such firm should be taken into account in the national income of the country in
which the firm is located However, the profit earned by such firms will be sent to their own country,and hence, would
form apart of that country’s income.
3.The national income accounts involves inventory adjustments
❑ The unused stock of the previous year may be sold in the current year, but the income will be included in the previous
years account.
❑ This adjustment is not at all logical and creates problem in the calculation of national income of the current year
4. Another difficulty in national income arises with regard to the Govt. sector
❑ How should we treat govt. functions like civil administration ofmaintenance of law and those regarding the defense of
the country?
❑ It is difficult to account the wages and salaries paid the workers who are in service
6. Illiteracy: A large majority of people in the underdeveloped countries being illiterate , do not keep any accounts of the
actual quantity of goods they have produced.
❑ No record of such transactions is available and the majority of the people do not have any idea about their income and
expenditure
❑ Which again leads the inaccurate estimation of national income
7. More than one Jobs: in the underdeveloped countries, there is no clear-cut demarcation of the occupations from which
people derive their income
❑ Many people are simultaneously engaged in more than one occupation and thus derive their income from many source
of livelihood. Example: A“farmer” in “Slack season”, take up jobs in industries in some casual jobs like washing and
painting etc. Therefore, it becomes difficult to place a worker under particular occupation.
9. Inadequate Information: information regarding small agriculturists, household industries, and other unorganized
enterprises is generally notavailable.
10. Biasness in statistical process: the national income accounting is a statistical process and it involves huge time, energy
and money costs.
24. Define CPI+ Market Busket + Math
Ans: The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of
consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for
each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes
associated with the cost of living; the CPI is one of the most frequently used statistics for identifying periods of inflation
or deflation.
Market busket:
25.short note stock flow,optimization, value and price.
Ans: Stocks and Flows:Distinction may be made here between a stock variable and a flow variable. A stock variable has
no time dimension. Its value is ascertained at some point in time. A stock variable does not involve the specification of
any particular length of time. On the other hand, a flow variable has a time dimension. It is related to a specified period of
time. So national income is a flow and national wealth is a stock. Change in any variable which can be measured over a
period of time relates to a flow. In this sense, in venturis are stocks but change in inventories in a flow A number of other
examples of stocks and flows can also be given. Money is a stock but the spending of money is flow. Government debt is
stock. Saving and investment and operating surplus during a year are flows but if they relate to the past year, they are
stocks.
Optimization: Optimization means the most efficient use of resources subject to certain constraints it is the choice from
all possible uses of resources which gives the best results, it is the task of maximization or minimization of an objective
function it is a technique which is used by a consumer and a producer as decision-maker. A consumer wants to buy the
best combination of a consumer good when his objective function is to maximize his utility, given his fixed income as the
constraints. Similarly, a producer wants to produce the most suitable level of output to maximize his profit, given the raw
materials, capital, etc. as constraints.
value & price :In common language, the terms ‘value’ and ‘price’ are used as synonyms (i.e. the
same). But in economics, the meaning of price is different from that of value. Price is value expressed in terms of money.
Value is expressed in terms of other goods. If one pen is equal to two pencils and one pen can be had for Rs.10.
Then the price of one pen is Rs.10 and the price of one pencil is Rs.5. Value is a relative concept in comparison to the
concept of price. It means thatthere cannot be a general rise or fall in values, but there can be a general rise or
fall in prices. Suppose 1 pen = 2 pencils. If the value of pen increases it means that one pen can buy more pencils in
exchange. Let it be 1 pen= 4 pencils. It means that the value of pencils has fallen. So when the value of one commodity
raises that of the other good in exchange falls. Thus there cannot be a general rise or fall in values. On the other hand,
when prices of goods start rising or falling, they rise or fall together. It is another thing that prices of some goods may rise
or fall slowly or swiftly than others. Thus there can be a general rise or fall in prices.
26. Definition and classification of wealth
Ans: Wealth:In common use, the term ‘wealth’ means money, property, gold, etc. But in economics it is used to describe
all things that have value. For a commodity to be called wealth, it must possess utility, scarcity and transferability. If it
lacks even one quality, it cannot be termed as wealth.
Wealth may be of the following types:
1. Individual Wealth:Wealth owned by an individual is called private or individual wealth such as a car, house,
company, etc.
2. Social Wealth:Goods which are owned by the society are called social or collective wealth,such as schools, colleges,
roads, canals, mines, forests, etc.
3. National or Real Wealth:National wealth includes all individual and social wealth. It consists of material assets
possessed by the society. National wealth is real wealth.
4. International Wealth:The United Nations Organization and its various agencies like the World Bank,IMF, WHO, etc.
are international wealth because all countries contribute towards their operations.
5. Financial Wealth:Financial wealth is the holding of money, stocks, bonds, etc. by individuals in the society. Financial
wealth is excluded from national wealth. This is because money, stocks, bonds, etc. which individuals hold as wealth are
claims against one another.
27. Wealth vs capital, wealth vs income, wealth vs money
Ans: Wealth and Capital:Goods which have value are termed as wealth. But capital is that part of wealth which is used
for further production of wealth. Furniture used in the home is wealth but given on rent is capital. Thus all capital is
wealth but all wealth is not capital.
Wealth and Income:Wealth is a stock and income is a flow. Income is the earning from wealth. The shares of a company
are wealth but the dividend received on them is income.
Wealth and Money: Money consists of coins and currency notes. Money is the liquid form of wealth. All money is
wealth but all wealth is not money.
29. Exception to demand curve- explain
Ans: There are some exceptions to rules that apply to the relationship that exists between prices of goods and
demand. They are,
- Giffen good
- Veblen Goods
- The expectation of Price Change
- Necessary Goods and Services
- Change in Income

1.giffen good: This is one that is considered a staple food, like bread or rice, for which there is no viable
substitute. In short, the demand will increase for a Giffen good when the price increases, and it will fall when
the prices drops. The demand for these goods are on an upward-slope, which goes against the laws of demand.
2.Veblen Goods:The second exception to the law of demand is the concept of Veblen goods. According to Veblen, there
are certain goods that become more valuable as their price increases. If a product is expensive, then its value and utility
are perceived to be more, and hence the demand for that product increases.This happens mostly with precious metals and
stones such as gold and diamonds.
The expectation of Price Change:In addition to Giffen and Veblen goods, another exception to the law of demand is the
expectation of price change. There are times when the price of a product increases and market conditions are such that the
product may get more expensive. In such cases, consumers may buy more of these products before the price increases any
further. Consequently, when the price drops or may be expected to drop further, consumers might postpone the purchase to
avail the benefits of a lower price.
For instance, in recent times, the price of onions had increased to quite an extent. Consumers started buying and storing more
onions fearing further price rise, which resulted in increased demand.
Necessary Goods and Services:Another exception to the law of demand is necessary or basic goods. People will continue to
buy necessities such as medicines or basic staples such as sugar or salt even if the price increases. The prices of these
products do not affect their associated demand.
Change in Income:Sometimes the demand for a product may change according to the change in income. If a household’s
income increases, they may purchase more products irrespective of the increase in their price, thereby increasing the
demand for the product. Similarly, they might postpone buying a product even if its price reduces if their income has
reduced. Hence, change in a consumer’s income pattern may also be an exception to the law of demand.

30. Market equilibrium – explain

Ans:It is the function of a market to equate demand and supply through the price mechanism. If buyers wish to purchase
more of a good than is available at the prevailing price, they will tend to bid the price up. If they wish to purchase less
than is available at the prevailing price, suppliers will bid prices down. Thus,there is a tendency to move toward the
equilibrium price. That tendency is known as the market mechanism, and the resulting balance between supply and
demand is called a market equilibrium.As the price rises, the quantity offered usually increases, and the willingness of
consumers to buy a good normally declines, but those changes are not
necessarily proportional.
31. Elasticity of supply and demand (Explain + Math)
Ans: Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a
curve is more elastic, then small changes in price will cause large changes in quantity consumed. If a curve is
less elastic, then it will take large changes in price to effect a change in quantity consumed. Graphically,
elasticity can be represented by the appearance of the supply or demand curve.

Price elasticity of demand, also called the elasticity of demand, refers to the
degree of responsiveness in demand quantity with respect to price. Consider a
case in the figure below where demand is very elastic, that is, when the curve
is almost flat. You can see that if the price changes from $.75 to $1, the
quantity decreases by a lot. There are many possible reasons for this
phenomenon. Buyers might be able to easily substitute away from the good, so
that when the price increases, they have little tolerance for the price change.
Maybe the buyers don't want the good that much, so a small change in price
has a large effect on their demand for the good
Like demand, supply also has varying degrees of responsiveness to
price, which we refer to as price elasticity of supply, or the elasticity
of supply. An inelastic supplier (one with a steeper supply curve)
will always supply the same amount of goods, regardless of the
price, and an elastic supplier (one with a flatter supply curve) will
change quantity supplied in response to changes in price.

32. Example of economic problem.

Ans: Examples of the economic problem:
Consumers:Households have limited income and they need to decide how to spend their finite income. For example, with
an annual income of £20,000, a household may need to spend £10,000 a year on rent, council tax and utility bills. This
leaves £10,000 for deciding which other food, clothes, transport and other goods to purchase.
Workers:Householders will also face decisions on how much to work. For example,working overtime at the weekend
will give them extra income to spend, but less.leisure time to enjoy it. A worker may also wish to spend more time in
learning new skills and qualifications. This may limit their earning power in the short-term, but enable a greater earning
power in the long-term. For example,at 18 a student could go straight into work or they could go to university wherethey
will hope to gain a degree and more earning power in the long-term.
Producers:A producer needs to remain profitable (revenue higher than costs). So it will need to produce the goods which
are in high demand and respond to changing demands and buying habits of consumers – for example, switching to online
sales as the high street declines. Producers will need to constantly ask the best way of producing goods. For example,
purchasing new machines can increase productivity and enable the firms to produce the goods at a lower cost. This is
important for fast-changing industries where new technology is frequently reducing costs of production. Without firms
adapting to how they produce, they can become unprofitable. Firms may also need to make long-term investment
decisions to invest in newproducts and new means of production.
Government:The government has finite resources and its spending power is limited by the amount of tax that they can
collect. The government needs to decide how they collect tax and then they need to decide whom they spend money on.
For example, the government may wish to cut benefits to those on low income to increase incentives to work. However,
cutting benefits will increase inequality and relative poverty.