Economics : 2005 : CBSE : [ Delhi ] : Set III

Subsidies are treated as revenue expenditure because they do not lead to any creation of assets or reduction in the liabilities of the government.

Formulae used:

Marginal Propensity to Consume = Change in Consumption/Change in Income

                                                   =  Consumption/  Income

Marginal Propensity to save = Change in Saving/Change in Income

                                             =  Saving/  Income

Following are the factors that cause a rightward shift :

•    Income of the consumer: A rise in the income of the consumer results in an increase in the demand for a commodity. As a result, demand curve may have a rightward shift.
•    A rise in the price of substitute goods: When the price of good rises, the demand for its substitute goods rises and as a result, the demand curve of the commodity shifts to the right which implies increase in demand.
•    Fall in the price of complementary good: When the price of a good falls, the demand for complementary good rises leading to a rightward shift of demand curve.

According to geometric method, price elasticity of supply is measured by extending the straight line supply curve towards the x-axis .If supply curve intersects the x-axis in its positive range, the price elasticity is equal to one (Es =1)

 Commodity A                       Commodity B           Commodity C

Commodity A has elasticity of supply less than one

Es <1

Commodity B has elasticity of supply equal to one

Es = 1

Commodity C has elasticity of supply more than one
Es>1

The relationship between marginal cost and average variable cost can be discussed as under:
1) Marginal cost is less than average variable cost when average cost falls due to increase in output.
2) Marginal cost is equal to average variable cost when average cost is minimum. In this situation marginal cost curve intersect average cost curve at its minimum point.
3)Marginal cost is more than average variable cost when average cost rises.

The following are the three main characteristics of perfect competition :
(i)       Large number of buyers and sellers: In a perfectly competitive market there are large number of buyers and sellers. Each buyer or seller purchase or sale only a insignificant portion of the total output. Buyers and sellers both do not have any type of union.
(ii)      Homogeneous Product: The goods which are sold in the market are completely identical in all respect.
(iii)     Free entry and exit of the firm: In this market there is no restriction for firm to enter and exit. Any firm can enter into the market and can leave the market any time without any restriction.

Personal Disposable Income = Private Income – Net retained earnings of private enterprises –Corporation tax – Direct taxes paid  by households
= 3,000 – 600 - 350 – 300
=3,000-1,250
= Rs 1750 crores

National Income = Compensation of employees + Mixed income of self employed + Rent + Interest + Profit + Net factor income from abroad

= 800 + 900 + 350 + 450 + 600 + (-50)
= 3,100 - 50
= Rs 3,050 crores

Gross Value  added at FC = Sales+ Change in stock (closing stock – opening stock) – Purchase of intermediate product + Subsidies
=800 + (30-40) – 400 + 50

=800 – 10 – 400 + 50

When aggregate demand in an economy falls short of aggregate supply at the full employment level of income, it is termed as the situation of deficient demand. The difference between aggregate supply at full employment level and aggregate demand is called the deflationary gap. Deflationary gap in an economy exists when planned expenditure is less than the value of available output produced by making full use of available resources. Deficient Demand would result fall in prices. The diagram depicts the situation.

In the diagram OY_f level of income has been assumed to be full employment level of income. At this income level, aggregate demand AY_f   falls short of aggregate supply EY_f .This demand is deficient to the extent of the deflationary gap EA.