Economics : 2006 : CBSE : [ All India ] : Set I

Investment multiplier is defined as the ratio of change in income to change in investment. Symbolically
Multiplier (k) =

 

For example: If in an economy, investment increases by Rs 10 crores and income increases by Rs 50 crores multiplier will be

= 5

The value of multiplier is in fact determined by the marginal propensity to consume’. Higher the marginal propensity to consume greater is the size of multiplier and vice versa. In other words, there is a direct relationship between multiplier and marginal propensity to consume. Symbolically,

K=1/1-MPC

The knowledge of MPC enables as to find out the value of multiplier.

Suppose, MPC = 0.5, the multiplier will be as follows,

K=1/1-MPC

=1/1-0.5

=1/0.5

=2

The basis of classifying government receipts into revenue receipts and capital receipts is whether receipts create liability or reduce financial assets. Accordingly revenue receipts are the receipts which create liabilities or cause reduction in assets. Whereas capital receipts are the government receipts which create liabilities and reduces assets.
 Examples of revenue receipt are tax revenue and non-tax revenue. While examples of capital receipt is recovery of loans from public and disinvestment.

 

Average propensity to save is the ratio of total savings to total income.
APS =

Marginal Propensity to save: is the ratio of change in saving to change in income

MPS= 

The value of APS can only be negative when consumption expenditure exceeds income. At lower level of income, consumption is more than the income and saving is negative .For example, If income is Rs 1,000 and consumption expenditure is Rs 1,200 then savings is Rs -200

It means that APS =-0.2 (-200/1000)

Gross value added at factor Cost

 = Sales + Change in stock – Net Indirect tax

-Purchase of Intermediate products

=250+30-20-120

= 280-140

= Rs 140 Lakhs

Returns to scale refers to a situation in which all factors are varied in the same proportion.
Reasons for increasing returns to scale-

The law of increasing returns to scale  arises due to economy of large-scale production. It includes the following. 

1.  Internal Economies – It is obtained by those firms which increase their scale of production through technical economy, managerial economy, labour economy and market economy etc.

2.  External Economies - These economies of production are available to those firms who are working on a large scale. These may include the following-  

•  Development of the means of transport and communication
•  Post and telegraph services
•  Expansion of credit facilities through banks
•  Facilities for advertising, insurance etc.

Following are the main factors which determine the price elasticity of demand for a commodity:

1) Availability of close substitutes for the commodity: A commodity will have elastic demand if there are good substitute available. A commodity having no substitute will have inelastic demand.

2) Uses of the commodity: If commodity has only a few uses, its demand is likely to be elastic.

3) Total expenditure on the commodity: The demand for such commodities where a small part of income spent is generally inelastic such as commodities like needle, match box, button etc.

 

 

Marginal Utility:  Marginal utility is the addition made to total utility by consuming one more unit of the commodity.

Law of diminishing marginal utility states that as more and more units of a commodity are continuously consumed, marginal utility derived from every additional unit must decline. Finally a stage will come when the want is completely satisfied and the marginal utility becomes zero. After this it may become negative or it will provide disutility. This law applies to all goods and services. That’s why it is also called the fundamental law.

 

                    MU  = ∆TU / ∆n

 

Quantity	Marginal Utility
1	10
2	8
3	6
4	4
5	2

The schedule shows that as the consumer consumes more and more units of a commodity, the marginal utility goes on diminishing.

Following are the causes of a leftward shift of supply curve:

• Rise in the prices of all other goods: If the prices of all other goods rise, these goods will become more attractive to produce and to supply. As a result the supply of this good will decline and the supply curve will shift to the left.
• Rise in the prices of factors of production: A rise in the prices of factors of production used in the production of a good will make the production of that good less profitable. As a result supply curve will shift to the left.
• Use of less productive technology: If the firm uses less productive technology, the per unit cost of production will rise. As a result supply of the good may decline leading to leftward shift of supply curve..

It is the rate at which currency of one country can be exchanged for currency of another country. Currency which is used for making international payments is called Foreign Exchange.
When the price falls the demand for foreign exchange rises because the shape of demand curve for foreign exchange is downward sloping. This means that the quantity of foreign exchange demanded varies inversely with foreign exchange price. If foreign exchange rate falls demand increases and vice-versa.

(i) Fiscal Deficit = Primary Deficit – Interest payment

 =10,000 – 8,000

=Rs 2,000 crores.

(ii) Two examples of macro economic variables are as under:

1.          National Income
2.         Level of Employment

(iii) Macro economics is the branch of economics which deals with the behavior of aggregates such as national income, employment, inflation, savings etc.

(iv) Balance of trade will show a surplus when exports exceeds imports.

i.e. V_X > V_M