12 100%

NCERT SOLUTIONS

ECONOMICS

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SYLLABUS ECONOMICS CLASS XII

Paper I Units

100 Marks 3 Hours Periods Marks

Part A Introductory Microeconomics 1.

Introduction

11

6

2.

Consumer’s Equilibrium and Demand

34

16

3.

Producer Behaviour and Supply

34

16

4.

Forms of Market and Price Determination under perfect competition with simple applications

31

12

110

50 15

TOTAL Part B Introductory Macroeconomics 5.

National Income and Related Aggregates

32

6.

Money and Banking

18

8

7.

Determination of Income and Employment

27

12

8.

Government Budget and the Economy

17

8

9.

Balance of Payments

16

7

110

50

TOTAL

PART A: INTRODUCTORY MICROECONOMICS Unit 1: Introduction 11 Periods Meaning of microeconomics and macroeconomics What is an economy? Central problems of an economy: what, how and for whom to produce; concepts of production possibility frontier and opportunity cost. Unit 2: Consumer’s Equilibrium and Demand 34 Periods Consumer’s equilibrium–meaning of utility, marginal utility, law of diminishing marginal utility, conditions of consumer’s equilibrium using marginal utility analysis. Indifference curve analysis of consumer’s equilibriumthe consumer’s budget (budget set and budget line), preferences of the consumer (indifference curve, indifference map) and conditions of consumer’s equilibrium. Demand, market demand, determinants of demand, demand schedule, demand curve, movement along and shifts in the demand curve; price elasticity of demand-factors affecting price elasticity of demand; measurement of price elasticity of demand–(a) percentage-change method and (b) geometric method (linear demand curve); relationship between price elasticity of demand and total expenditure. Unit 3: Producer Behaviour and Supply 34 Periods Production function: Total Product, Average Product and Marginal Product. Returns to a Factor. Cost and Revenue: Short run costs-total cost, total fixed cost, total variable cost; Average fixed cost, average variable cost and marginal cost-meaning and their relationship. Revenue-total, average and marginal revenue. Producer’s equilibrium-meaning and its conditions in terms of marginal revenue-marginal cost. Supply, market supply, determinants of supply, supply schedule, supply curve, movements along and shifts in supply curve, price elasticity of supply; measurement of price elasticity of supply–(a) percentage-change method and (b) geometric method.

Unit 4: Forms of Market and Price Determination under Perfect Competition with simple applications 31 Periods Perfect competition–Features; Determination of market equilibrium and effects of shifts in demand and supply. Other Market Forms-monopoly, monopolistic competition, oligopoly-their meaning and features. Simple Applications of Demands and Supply: Price ceiling, price floor PART B: INTRODUCTORY MACROECONOMICS Unit 5: National Income and Related Aggregates 32 Periods Some basic concepts: consumption goods, capital goods, final goods, intermediate goods; stocks and flows; gross investment and depreciation. Circular flow of income; Methods of calculating National Income–Value Added or Product method, Expenditure method, Income method. Aggregates related to National Income: Gross National Product (GNP), Net National Product (NNP), Gross and Net Domestic Product (GDP and NDP)–at market price, at factor cost; National Disposable Income (gross and net), Private Income, Personal Income and Personal Disposable Income; Real and Nominal GDP. GDP and Welfare Unit 6: Money and Banking 18 Periods Money–its meaning and functions. Supply of money–Currency held by the public and net demand deposits held by commercial banks. Money creation by the commercial banking system. Central bank and its functions (example of the Reserve Bank of India) : Bank of issue, Govt. Bank, Banker’s Bank, Controller of Credit through Bank Rate, CRR, SLR, Repo Rate and Reverse Repo Rate, Open Market Operations, Margin requirement. Unit 7: Determination of Income and Employment 27 Periods Aggregate demand and its components.

Propensity to consume and propensity to save (average and marginal). Short-run equilibrium output; investment multiplier and its mechanism. Meaning of full employment and involuntary unemployment. Problems of excess demand and deficient demand; measures to correct them-change in government spending; availability of credit. Unit 8: Government Budget and the Economy 17 Periods Government budget-meaning, objectives and components. Classification of receipts-revenue receipts and capital receipts, classification of expenditure-revenue expenditure and capital expenditure. Measures of government deficit-revenue deficit, fiscal deficit, primary deficit-their meaning. Unit 9: Balance of Payments 16 Periods Balance of payments account–meaning and components; balance of payments deficit–meaning. Foreign exchange rate–meaning of fixed and flexible rates and managed floating. Determination of exchange rate in a free market.

CONTENTS PART – A Introductory Microeconomics 1. Introduction...............................................................

9

2. Theory of Consumer Behaviour................................. 18 3. Production and Costs................................................ 38 4. The Theory of the Firm under Perfect Competition... 66 5. Market Equilibrium.................................................... 98 6. Non Competitive Markets........................................... 127

PART – B Introductory Macroeconomics 1. Introduction............................................................... 137 2. National Income Accounting...................................... 140 3. Money and Banking................................................... 161 4. Income Determination................................................ 177 5. The Government: Budget and the Economy.............. 200 6. Open Economy Macroeconomics................................ 212

DESIGN OF QUESTION PAPER S. No.

Typology of Questions

VSA/ SA II SA I LA MCQ 3 4 6 1 Mrks Mrks Mrks mark

Mrks

%

1. Remembering– (Knowledge based Simple recall questions, to know the specific facts, terms, concepts, principles, or theories; identify, define information)

—

2

1

2

22

25

2. Understanding– (Comprehension –to be familiar with meaning and to uderstand conceptually, interpret, compare, contrast, explain, paraphrase, or interpret information)

1

2

1

2

23

25

3. Application (Use abstract information in concrete situation, to apply knowledge to new situations; Use given content to interpret a situation, provide an example, or solve a problem)

2

2

1

1

18

20

4. High Order Thinking Skills (Analysis & Synthesis– Classify, compare, contrast, or differentiate between different pieces of information; Organize and/or integrate unique pieces of information from a variety of sources)

2

2

1

1

18

20

5. Evaluation and MultiDisciplinary–(Appraise, judge, and/ or justify the value or worth of a decision or outcome, or to predict outcomes based on values)

—

1

—

1

9

10

5×1 =5

9×3 =27

4×4 =16

7×6 =42

TOTAL

Theory 90 100 (25) + 10 Projects = 100 Mrks

Part-A : Introductory Microeconomics

1

Introduction Lesson at a glance

• Scarcity: Scarcity refers to the limitation of supply in relation to demand for a commodity. It refers to the situation, when wants exceed the available resources. As a result, goods are not readily available and society does not have enough resources to satisfy all the wants of its people. Scarcity is pervasive, i.e. each and every economy and individual faces scarcity of resources. A scare resource is the one, for which the demand at zero would exceed the available supply. • Central Problems: Economic problem is the problem of choice. The problem of choice has to be faced by every economy of the world, whether developed or developing. Human beings have wants which are unlimited. When these wants get satisfied, new wants multiply at a fast rate. The economic resources to satisfy these unlimited wants are limited. The three main causes of central problems are: 1. Human wants are unlimited: Human beings have wants which are unlimited. Human wants get satisfied by consuming goods and service, but new wants keep arising. 2. Economic resources are limited: These resources are limited in supply in relation to their demand. Scarcity is the basic feature of every economy. No economy can be self-sufficient in everything. Scarcity is a universal phenomenon which continues indefinitely. The scarcity of resources creates economic problems for every country in the world. 3. Resources have alternative uses: The resources are not only scarce in supply but they also have alternative use. For example, land can be used to produce wheat or rice or build a hospital or a school. A choice between the alternative uses of land has to be made. This problem of choice leads to economic problems.

II

10

Economics–X

• Opportunity Cost: Opportunity cost is defined as the cost of alternative opportunity given up or surrendered. For example, on a piece of land both wheat and sugarcane can be grown with the same resources. If wheat is grown then opportunity cost of producing wheat is the quantity of sugarcane given up. • Production Possibility Curve: Meaning: Production possibility set refers to different combinations of two goods that can be produced from a given amount of resource and a given stock of technological knowledge. Basic Properties/Shape of PPC: • Production possibility curve slopes downward to the left • Production possibility curve is concave to the point origin. Shift in PPC The PPC can shift either towards right or towards left, when there is change in resources or technology with respect to both the goods. (a) Rightward Shift in PPC: When there is advancement of technology or/and increase in availability of resources in respect to both the goods, then we can produce more of both the goods. Accordingly, PPC will shift to the right.

Good B Good A



(b) Leftward Shift in PPC: PPC will shift to the left when there is a technological degradation and/or decrease in resources with respect to both the goods. For example, destruction of resources in an earthquake will reduce

Introduction

11

the productive capacity and as a result, PPC will shift to the left.

Good A Good B

NCERT Textbook QUESTIONS SOLVED Q1. Discuss the central problems in an Economy. Ans. What to Produce: It is a standard knowledge that resources are scarce in relation of human needs. We cannot produce all goods as much as we wish to produce. Allocation of resources and the consequent problem of choice require that we decide what to produce and what not. It involves two-fold decisions: Firstly, the economy has to decide what goods and services are to be produced. For instance, which of the consumer goods like sugar, cloth, wheat, ghee, etc. are to be produced and which of the capital goods like machines, tractors etc. are to be produced. When an economy has taken a decision as to what goods or services are to be produced, then it has to decide about its quantity. How much of consumer goods and how much of capital goods are to be produced. Guiding Principle: Such a combination of goods should be produced which gives maximum aggregate utility. • How to Produce? How to produce means how to organize production. This problem is concerned with the choice of technique of production. Broadly, there are two techniques of production: 1. Labour Intensive Techniques: Under this technique, quantity of labour is used more than capital.

II

12

Economics–X

2. Capital Intensive Technique: Under this technique, quantity of capital is used more than labour. An economy must decide as to which technique is to be used in a given industry so that efficient production is obtained. Guiding Principle: That technique of production should be chosen which gives least cost combination. For Whom to Produce? This is the question of how to distribute the product among the various sections of the society. National product is the total output generated by the firms. The total output ultimately flows to the households in the form of income, i.e., their wages, rent profits or interest. There are millions of people in a society. Each one cannot get sufficient income to satisfy all his wants. This raises the problem of distribution of national product among different households. In economics, the problem of distribution of national product is studied under the Theory of Distribution. According to Karl Marx the distribution of national income should be on the basis of “from each according to one’s ability; to each according to one’s needs”. Guiding Principle: National Income should be distributed in such a way that no one can be made better off without making anyone else worse off. Q2. What do you mean by production possibility of an economy? Ans. Production possibility set refers to different combinations of two goods that can be produced from a given amount of resource and a given stock of technological knowledge. In other words, it refers to the possible combinations of production for an economy. Q3. What is production possibility frontier? Ans. Production possibility Curve (PPC) shows the various alternative combinations of goods and services that an economy can produce when the resources are all fully and efficiently employed. PPC shows the obtainable options. There is a maximum limit to the amount of goods and services which an economy can produce with the given resources and the sate of technology. The resources can be used to produce various alternative goods which are called production possibilities and the curve showing different production possibilities is called production possibility curve. Assumptions: Assumptions underlying production possibility curve are:

Introduction

13

1. Economy produces only two goods, X and Y. (Examples of goods X any Y can be gun and butter, wheat and sugarcane, cricket bats and tennis rackets or anything else.) 2. Amount of resource available in an economy are given and fixed. 3. Resources are not specific, i.e. they can be shifted from the production of one good to the other good. 4. Resources are fully employed, i.e., there is no wastage of Resources. Resources are not lying idle. 5. State of technology in an economy is given and remains unchanged. 6. Resources are efficiently employed. Example: Suppose an economy decides to produce only two goods, namely wheat and cloth, with its available resources and given technology. If all the resources are used for the production of wheat alone then 100 lakh tones of wheat can be produced. On the contrary, if all the resources are used for the production of cloth alone then 4,000 bales of cloth can be produced. If the economy produces both the goods, then within these limits, various combinations of two goods can be produced. The table given shows different possibilities of production of wheat and cloth. It is called Production possibility schedule. Basic Properties of PPC: Production possibility Curve Slopes Downward to the right: Production possibility Curve slopes downwards from left to right. It is because in a situation of fuller utilization of the given resources, production of both the goods cannot be increased. More of good-X can be produced only with less of good-Y. Production possibility Curve is Concave to the Point of Origin: Any curve is concave to the origin if it has an increasing slope. PPF has an increasing slope. The slope of PPF is Marginal Opportunity cost or MRTxy which keeps increasing. But the question arises why does MOC keep increasing? A simple answer to this question is that resources can be shifted from the production of one good to the production of other good but resources are not equally efficient in the production of both the goods. Initially those resources are transferred which are more efficient in production of good-2 but gradually even those resources have to be transferred which are more efficient in the production of good-1. Opportunity cost of producing every additional units of good-X tends to increase in terms of the loss of production of good-Y.

II

14

Economics–X Production Possibility Schedule Goods

Production Possibilities

Wheat (lakh tones) Cloth (‘000 bales)

A

B

C

D

E

100 0

90 1

70 2

40 3

0 4

Microeconomics and Macroeconomics The above schedule shows that if production is carried out under ‘A’ combination, then 100 lakh tones of wheat alone will be produced without any production of cloth. On the contrary, if production is obtained under ‘E’ combination then 4,000 bales of cloth alone will be produced without any production of wheat. Besides these extreme limits, there are many alternative possibilities of production of wheat and cloth. Representing these various production possibilities on a graph, we get production possibilities on a graph, we get Production possibility curve as in figure. The quantity of cloth is represented on X-axis (horizontal axis) and wheat on Y-axis (vertical axis). It is the Production possibility or transformation Curve. Point F represents unattainable combinations and point G inside the curve shows inefficient use of resources. Inefficient use of resources

A Good Y (Wheat)

B

Unattainable combination

•F C

•G

D

E Good X (Cloth)

Q4. Discuss the subject matter of economics. Ans. Subject matter of economics has been divided under two branches: 1. Microeconomics: Adam Smith is considered to be founder of the field of microeconomics. The term ‘micro’ has been derived from Greek word ‘Mikros’ which means ‘small’.

Introduction

15

Microeconomics deals with analysis of behaviour and economic actions of small and individual units of the economy, like a particular consumer, a firm or a small group of individual units. The concept of microeconomics is very important as it supplies the foundation for most of our understanding of the functioning of an economy. Microeconomics is that part of economic theory, which studies the behaviour of individual units of an economy. For example, Individual income, Individual output, price of a commodity, etc. Demand and supply are the main tools of Microeconomics. 2. Macroeconomics: The term ‘macro’ has been derived from the Greek word ‘macros’ which means ‘Large’. So, macroeconomics deals with overall performance of the economy. It is concerned with study of problems of the economy like inflation, unemployment, poverty, etc. Macroeconomics is that part of economic theory which studies the behaviour of aggregates of the economy as a whole. For example, National income, aggregate output, aggregate consumption, etc. Its main tools are aggregate demand and aggregate supply. Q5. Distinguish between a centrally planned economy and a market economy. Ans. Differences between a centrally planned economy and a market economy are summarized in the table given below: Basis

Centrally Planned Economy

Market Economy

Meaning

A centrally planned economy is quite the opposite with the government has control over the production of goods and the land they are produced on.

A free market economy is an economy which the government plays a small role in and private section plays the dominating role. Government takes care of administrative tasks only.

Motive

In this economy, I n t h i s e c o n o m y , m o t i v e i s s o c i a l motive is profit. welfare.

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