# Bihar Board 12th Business Economics Important Questions Short Answer Type Part 5

BSEB Bihar Board 12th Business Economics Important Questions Short Answer Type Part 5 are the best resource for students which helps in revision.

## Bihar Board 12th Business Economics Important Questions Short Answer Type Part 5

Question 1.
State the ‘law of supply’. What is meant by the assumption ‘Other things remaining the same’ of which law is based?
The law of supply states that there is direct relation between price and supply of a commodity, other things remaining the same. The assumption ‘Other things remaining the same’ means that factors. Other than price of the good, determining supply remains unchanged.

Question 2.
What do you mean by complements? Give examples of two goods which are complements of each other.
Price Demand: Price demand refers to those quantities of goods which are demanded by a consumer at various prices during a particular time period. Ceteris paribus (i.e., other things being equal), when price of goods increases its demand decreases and vice-versa. ‘Ceteris Paribus means at the point of time when consumer demands goods, income, taste, interest and behaviour of consumer remains unchanged or constant. Due to inverse

relationship between price and demand, slope of price demand curve is negative i.e., it falls from left to right. Price demand curve has been represented in Fig. 4. DD curve falling from left to right is price demand curve and reveals that there is inverse relation between price and quantity demanded. At price OP, OQ quantity of good is demanded when price decreases to OP1, quantity demanded increases to OQ1.

Question 3.
Draw demand curves showing price elasticity of demand equal to (1) Zero (2) Infinity (3) One (Unity).
(1) Perfect Inelastic Demand

(2) Perfectly Elastic Demand

(3) Unitary Elastic Demand

Question 4.
Mention the factors of production.
Factors of production: There are five types of the Factor of Production:

1. Land
2. Labour
3. Capital
4. Organisation
5. Enterprise

Land, labour, capital, machines, tools, equipments and natural means are limited. Every demand of every individual in the economy cannot be satisfied, so the society has to decide what commodities are to be produced and to what extent. Goods produced in an economy can be classified as consumer goods and producer goods. These goods may be further classified as single use goods and durable goods.

It is undoubtedly the basic problem of the economy. If we produce one commodity, it will mean that we are neglecting the production of the other commodity. We assume that all the factors of production in the economy are fully absorbed, so if we want to increase the production of one commodity, we will have to withdraw resources from the production of the other commodity. On the basis of our requirements goods arc further classified as goods for necessaries, comforts and luxuries.

Question 5.
What is meant by Marginal Cost?
Marginal Cost (MC): Marginal means one additional. It is the addition made to the total cost by producing one more unit of output.
The marginal cost of the nth unit of output is the total cost of producing ‘n’ units minus the cost of producing ‘n – 1’ units (i.e., one less in the total ‘n’) of output.
Or, MCn = TCn – TC(n-1)
where, MCn = Marginal cost of nth unit
TCn = Total Cost of n units
TC(n-1) = Total cost of (n – 1) units

Question 6.
Distinguish between Balance of Trade and Balance of Payments.
Balance of Trade: It is defined as the difference between exports and imports of goods. It takes into account only those transactions arising out of exports and imports of goods (the visible items). It does not consider the exchange of services between the countries.

Symbolically,
BOT = Vx – Vm
where, Vx = value of exports, Vm = value of imports.

Balance of Payments: It is a much wider term than balance of trade. It is summary record of all economic transactions that take place between one country and the rest of the world during an year. It takes into account the exchange of both visible and invisible items and capital transfers.

Symbolically,
BOP = Rf – Pf
where, Rf = Receipts from foreigners for visible and invisible items,
Pf = Payment to foreigners for visible and invisible items.

Question 7.
Mention the features of Perfect Competition.
Characteristics or Features of Perfect Competition:
1. Large Number of Buyers and Sellers: Perfect competition market has a large number of buyers and sellers and hence, any buyer or seller cannot influence the market price. In other words, individual buyers or sellers cannot influence the demand and supply conditions of the market.

2. Homogeneous Product: The units sold in the market by all sellers are homogeneous (or identical) in nature.

3. Free Entry and Exit of Firms: In perfect competition, any new firm may join the industry or any old firm many quit the industry. Hence, there is no restriction on free entry or exit of firms into/from the industry.

4. Perfect Knowledge of the Market: In perfect competition, every buyer has the perfect knowledge of market conditions. None of the buyers will buy the commodity at higher price than the prevailing price in the market. I fence, only one price prevails in the market.

5. Perfect Mobility of Factors: In perfect competition, the factors of production are perfectly mobile. Factors can easily be mobile from one industry to other industry (or from one firm to other firm) without any difficulty.

6. No Transportation Cost: Transportation cost remains zero in perfect competition due to which one price prevails in the market.

Question 8.
What are the characteristics of a perfectly competitive market.
Characteristics of the market: Main characteristics (or features) of the market are as follows:
1. One Area: The term ‘market’ in Economics does not refers to any fixed place but indicates that area where buyers and sellers are present and compete with each other.

2. Presence of both Buyers and Sellers: An area is called the market where both buyers and sellers are present. Absence of anyone creates hindrance in converting the area into market.

3. One commodity: In Economics, every commodity has different market, e.g. market of wheat, market of sugar etc.

4. One price of the commodity: Market contains one single price of the commodity due to competition between buyers and sellers.

Hence, on the basis of above features the market can be defined as:
“In economics market signifies the presence of such groups of buyers and sellers of a commodity who freely compete with each other and as a result one price prevails in the market.

Question 9.
Distinguish between Perfect Competition and Monopoly.
Distinction between Perfect Competition and Monopoly:

 Perfect Competition Monopoly 1. Average revenue and marginal revenue are equal. AR = MR 1. Average revenue is greater than marginal revenue. AR > MR 2. Price (AR) is equal to marginal cost (MC). AR = MC 2. Price (AR) is greater than marginal cost (MC). AR > MC 3. Long-run production is possible only in constant cost conditions. 3. Long-run production is possible in all cost conditions: decreasing, constant and rising. 4. Normal profit is the only possibility in long-run. 4. Profit is obtained in long-run under all the three cost conditions. 5. Higher production quantity and lower price arc obtained. 5. Higher price and lower production quantity are obtained.

Question 10.
Briefly explain the concept of the cost function.
Meaning of production cost and cost function: Every firm or producer has to arrange various factors of production for the production. The expenditure made for using these factors in the production process is termed as ‘Cost of Production’. Production cost mainly depends upon the quantity of production. Generally, cost of production rises with increase in production.

A cost function shows the functional relationship between output and cost of production.
Hence, C = f(O)
“Cost is the Function of output.”

Question 11.
What is meant by Supply?
Meaning of Supply: Supply of goods refers to those quantities which a seller is ready to sell at various prices at a certain point of time. Like demand, supply is also related with a certain time and price.

Definitions:
(1) According to Thomas, “The supply of goods is the quantity offered for sale in a given market at a given time at various prices.”

(2) According to Mayers, “We may define supply as a schedule of the amount of goods that would be offered for sale at all possible prices at any one instant of time, or during any one period of time (e.g., a day, a week and so on) in which conditions of supply remain the same.”

Question 12.
How is the supply of a commodity affected by changes in the prices of their commodities? Explain.
Price of other commodities are related to substitutes and that of complementary goods. Their effect on supply can be explained as:

1. Price of substitute good: When price of a substitute good increases, it will load to a fall in supply of related good because producer shift their resources to the production of high priced goods.

2. Price of Complementary good: When price of a complementary good increase, it will raise its supply and also that of related good.
For example: When price of cotton increases, it will raise the supply of cotton as well as cotton seed.

Question 13.
What are the characteristics of a perfectly competitive market?
Characteristics of the Market: Main characteristics (or features) of the market are as follows:
1. One Area: The term market in Economics does not refer to any fixed place but indicates that area where buyers and sellers are present and compete with each other.

2. Presence of both Buyers and Sellers: An area is called the market where both buyers and sellers are present. Absence of any one creates hindrance in converting the area into market.

3. One Commodity: In Economics, every commodity has different market, e.g., market of wheat, market of sugar, etc.

4. One Price of the Commodity: Market contains one single price of the commodity due to competition between buyers and sellers.

Hence, on the basis of above features the market can be defined as:
“In economics market signifies the presence of such groups of buyers and sellers of a commodity who freely compete with each other and as a result one price prevails in the market.”

Question 14.
Will a profit maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than minimum in the short run if the market price is less than minimum of AVC? Give explanation.
In the short run, if a firm shut down its output, it has to bear a loss equal to its fixed cost. It will produce the output till price covers at least its AVC though it may be less than its minimum AC. By doing so, it will cover not only its fixed cost but also a part of its variable cost and thereby, its loss will be smaller than the amount of fixed firm will shut down its output because now it will incur loss greater than the amount of fixed costs.

Question 15.
What are the consequences for floor price?
1. Buffers Stock: Under this scheme government purchases the surplus stocks available with the producers at a minimum support price. In India Food Corporation of India and State govt. Agencies performs this job. They store the excess supply and sell it at a reasonable prices in different states in case of shortages.

2. Subsidies: Govt. of India procures surplus of wheat and rice production at a minimum support price and keeps it in its warehouses. The food surpluses are then used for distribution through public distribution system at a lower rate than its cost of procurement. It is commonly known as food subsidy. It is provided mainly to help the poor segment of the society.

3. Procurement of food grains: The surplus food under minimum support. Price scheme is brought by the center govt. Through FCI for other states where there is shortage of food items it helps in transporting surplus food from rich states to food scarce states.

Question 16.
What is Equilibrium Price?
Commodity Price: Demand Supply Equilibrium: Buyer wants to gave the least price while the seller wants to take the maximum price of the commodity. Bargaining takes place between both the parties and at last, the price of commodity is determined at the price where both demand for and supply of the commodity become equal. This price is called ‘equilibrium price’.

In following fig., price determination of the commodity by demand and supply forces has been shown. Demand Curve DD and Supply Curve SS cut each other at point E where price OP is determined. This price OP (or EQ) shows the equilibrium price.

Question 17.
Distinguish between Money Flow and Real Flows.
Real Flow: Real flow of income implies the flow of factor services (like land, labour, capital, etc.) from the household sector to the producing sector and the corresponding flow of goods and services from the producing sector to the household sector.

Above fig. explains that household sector being the owners of factors of production supply factor service to the producers and in return producers supply goods and services to the household sector.

In other words, flow of producer refers to the flow of goods and services and this flow of product is termed as ‘real flow’.

Money Flow: Flow of income refers to money flow. Household gets income from commercial firms for their services and firms get income from household which they spend in attaining goods and services. This cycle showing income flow is referred as money flow.

Above fig., money flow model shows that household get factor income (rent, wage, interest, etc.) for providing their services and in return household sector incurs expenditure for acquiring goods and services.

Question 18.
What is Net National Product?
Net National Product: Net National Product at Factor Cost (NNPFC) or national income is the sum total of factor incomes (Rent + Interest + Profit + Wages) generated within the domestic territory of a country, along with net sector income from abroad during a year.

NNPFC is the sum total of sector incomes earned by normal residents of a country during a year.
NNPFC = NDPFC + Net Factor Income from Abroad
NNPFC is a domestic variable and hence, for converting it into NNPFC, net factor income from abroad is added in it.

Question 19.
Give the meaning of nominal GDP and Real GDP. Which of these is the indicator of economic welfare?

1. Nominal GDP value the current year’s output in an economy at current year prices.
2. Read GDP values the current year’s output in an economy at base year prices.
3. Real GDP is the indicator of economic welfare.

Question 20.
Distinguish between National Income at Current Price and Constant Price.
The main differences between the two are:
(i) National income at current prices is the sum total of market value of all final goods and services produced by an economy during a year estimated at current prices of that year. On the other hand, national income at constant prices is the sum total of market value of all final goods and services produced by an economy during the year but estimated at the price of same base year.

(ii) National income at current prices can increase even when there is no flow of goods and services in the economy but only the current prices increase. But national income at constant prices will increase only when there is an increase in the flow of goods and services. Thus national income at constant prices is more appropriate index of growth.

Question 21.
Distinguish betwen GDP and GNP.
Distinction between GDP and GNP follows as:

 Gross Domestic Product (GDP) Gross National Product (GNP) 1. GDP refers to the money value of all the final goods and services produced within the domestic territory of a country. 1. GNP refers to market value or final goods and services produced by normal residents of a country. 2. GDP is a territorial concept as it is confined to domestic territory of a country. 2. GNP is a national concept as it is related to normal residents of a country. 3. It does not include net factor earning from abroad. GNP = GDP + NFYA (NFYA indicates Net Factor Income from Abroad) 3. It does include the income from net factor earning from rest of the world. GNP = GDP + NFYA 4. GDP is a smaller concept, limited to domestic territory. 4. GNP is a wider concept as it includes factor income received from abroad.

Question 22.
Giving reason explain how should the following he treated in estimating national income:
(i) Expenditure on fertilizers by a farmer.
(ii) Purchase of tractor by a farmer.
(i) It is not included in national income because it is a intermediate good.
(ii) It is included in national income because it is final good.

Question 23.
What is National Income?
National Income: Net National Product at Factor Cost (NNPFC) is known as National Income. NNPFC is the sum total of net domestic product at factor cost and net factor income from abroad.
NI = Rent + Wages + Salary + Interest + Profit

Question 24.
Machine purchased is always a final good. Do you agree? Give reason for your answer.
Whether ‘Machine’ is a final goods or not depends on how it is being used:
If the machine is bought by a household, then it is a final goods.
If the machine is bought by a firm for its own use then also it is a final goods.
If the machine is bought by a firm for resale then an intermediate goods.

Question 25.
Define Commercial Hank.
Commercial Bank: Definitions: Commercial banks perform general banking functions. A commercial bank is an institution which deals with money and credit. It accepts deposits from the public, makes the funds available to those who need them and helps in remittance of money from one place to another.

1. According to Banking Regulation Act, “Banking means the accepting for the purpose of lending and investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”

2. According to Horace White, “Bank is a manufacturer of credit and a machine for facilitating exchanges.”

3. According to Crowther, “A banker is a dealer in debts his own and other people’s. The banker’s business is then to take the debts of other people, to offer his own in exchange and thereby to create money.”

4. According to Webster’s Dictionary, “An institution with trades in money, establishment for the deposit, custody and issue of money as also for making loans and discount and facilitating the transmission of remittance from one place to another.”

Question 26.
What are Primary Functions of Money?
Primary Functions of Money: Primary functions of money are also called prime functions. These functions are of prime importance and common to all countries during all the periods. Money has two prime functions:

1. Medium of Exchange: Money acts as a medium of exchange. In modern days, exchange is the basis of entire economy and money makes this exchange possible. At present, money is the most liquid means of exchange. In old age, barter system was in practice in which goods were exchanged for goods but due to lack of double coincidence, exchange was difficult. But the use of money has removed this difficulty. In modern times, money performs all functions of exchange in the economy.

2. Measure of Value: Money acts as a unit of measure of value. In other words, it acts as a yardstick of standard measure of value of which all other things can be measured. In barter system, the general measurement of value was absent and consequently it was difficult to measure the value of exchange.

In modern times, the value of every commodity can be measured in money. With the use of money, economic calculations for measuring value have become simplified.

Question 27.
Explain the ‘standard of deferred payment’ function of money.
Standard of Deferred Payment: Deferred payments are those payments which are to be made in future. Money performs the function of being the unit in terms of which deferred or future payments are made. If a loan in taken today it would be paid back after a period of time. A big number of credit transactions which involve future payments are made daily. The value of money remains more or less stable.

Question 28.
How does money solve the problem of double coincidence of wants?
Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person wants to buy and sell. It was very difficult that such confidence of wants may take place. Money has removed this difficulty. You can sell your goods for money to whosoever wants it and with this money you can buy what you want from whosoever wants to sell that.

Question 29.
Explain the significance of the store of value function of money.
Store of value implies store of wealth. Storing of wealth has become considerably easy with the introduction of money. It was not government to store value in the barter system of exchange because goods tends to wear up or perish. Stored wealth is a reserve for future investment.

Question 30.
Explain the functions of a Central Bank as a banker to the governments.
The Central Bank acts as a banker to the Central government and State government. It carries out all the banking business of the government. It accepts receipts and makes payments for the government. It provides short term credit to the government. It also advises the government on banking and financial matters.

Question 31.
Explain the ‘lender of last resort’ function of the Central Bank.
Lender of the last resort. As a supreme bank of the country and the bankers banks the Central Bank act as lender of the last resort. In other words, whether times of difficulties, commercial banks are not able to meet their financial requirements from other sources, they can act as a lender of last resorts approach the central bank for financial accommodation. The central bank provides financial accommodation to the commercial banks by discounting their eligible securities and exchange bills.

Question 32.
Explain Banker’s Bank function of Central Bank.
Commercial Bank have same relation with Central Bank and customer have dealings with Commercial Banks. Central Bank helps them, at the time of financial crisis therefore known as lender of last-resort. With this function, it inspires confidence in Commercial Banks. Central Bank Provides additional funds to Commercial Banks at the time of difficulty.

Question 33.
Can an economy be in equilibrium when there is unemployment in the economy. Explain.
An economy is in equilibrium when aggregate demand and aggregate supply are equal. Aggregate demand may not be sufficient for aggregate supply at full employment. This means aggregate demand is only sufficient to support aggregate supply at less than full employment leave. So the would be equal at less than full employment. Thus the economy can be in equilibrium.

Question 34.
What is meant by Aggregate Demand?
Aggregate Demand: The total demand of goods and services in an economy is termed as ‘aggregate demand’ which is expressed in terms of total expenditure made in the economy. Thus, aggregate demand in an economy is measured in terms of total expenditure on goods and services.

In other words, aggregate demand refers to total expenditure that the residents of a country are ready to incur on the purchase of goods and services at given level of income.

Aggregate Demand = Consumption Expenditure + Investment Expenditure

Question 35.
What are the main components of the Capital Budget?
1. Recovery of Loans: The Central Government offers loans to the state governments, union territories, local bodies, etc., to cope with their financial requirements. The loans are recovered by the Central Government from the borrowers and they form a part of capital receipts. These recoveries reduce financial assets of the government.

2. Loans and Borrowings: Sometimes the government borrows funds from different sources to meet its financial requirements. These borrowings create liabilities for the government. The government may borrow funds from general public, Reserve Bank of India, foreign governments and other bodies.

3. Disinvestment of Equity Holding in Public Sector Enterprise: Disinvestment is means the funds received by the government from the sale of the part of the whole of equity shares of the public enterprises to others. Such receipts are called capital receipts because it causes reduction in assets of the government.

Question 36.
Define Characteristics of Tax.
Characteristics of Tax:

1. A tax is a compulsory contribution. Everyone has to pay a tax upon whom it is levied by the state. Refusal to pay a tax is subject to punishment.
2. It is the duty of the tax payer to pay the tax if he is liable to pay it.
3. Revenue received from tax payers may not be incurred for their benefit alone, but for the general and common benefit.
4. Since public expenditure is done for the common benefit and the benefit may not be in proportion of payment of tax.
5. A tax may be imposed on an individual or property or commodities, but it is actually paid by individuals.
6. It is a legal collection.

Question 37.
Are fiscal deficits necessarily inflationary?
All fiscal deficits are not necessarily inflationary. If the fiscal deficit results in higher demand and. greater output, the fiscal deficit will not be inflationary. But in opposite circumstances, it becomes inflationary.

Question 38.
Explain the concept of fiscal deficit in a government budget. What does it indicate?
Fiscal deficit: It refers to the excess of total budget expenditure (Revenue exp. + Capital exp.) over total budget receipt excluding borrowing. In this way it indicates borrowing requirements of the government during the current year.

Question 39.
Distinguish between revenue expenditure and capital expenditure with one example of each.
Distinguish between Revenue expenditure and Capital expenditure

Question 40.
Discuss the issue of deficit reduction.
The deficit in a government budget can be reduced (or contained), through the following steps:

• Taxes should be increased: Government can make a plan for raising direct taxes to increase its receipts. The government receipts can also be raised by increasing rates of taxes or by imposing new taxes.
• Reduction in government expenditure: It can be done through making government activities more efficient through better planning of programmes and better administration.
• The government can raise receipts through the sale of shares in PSUs.
• Changing the scope and role of government by withdrawing from some areas where it operated before.
• The government can encourage the private sector to undertake capital projects to reduce its expenditure.

Question 41.
Explain the term ‘Development’ and ‘Non-development’ Expenditure of government. Give two examples of each.
Public expenditure may be classified as development expenditure and non-development expenditure.

Development Expenditure: This type of expenditure increase the economic growth of the country. It includes expenditure mostly on productive and welfare activities and schemes like education, public health, social security, agriculture, irrigation, industries, tourism and foreign trade, etc. Loans and grants given to states and union territories are also examples of development expenditure.

Non-development Expenditure: This type of expenditure is not concerned with the economic development activity. This type of expenditure includes the expenditure on general services like administration of state, collection of taxes, minting of coins and printing of notes, etc. Expenses on debt repayment like interest payment, pension and defence services, etc. are also examples of non-development expenditure.

Question 42.
Distinguish between revenue expenditure and capital expenditure in a government budget. Give two examples of each.
Revenue expenditure is the expenditure which does not lead to any creation of assets or reduction in liabilities.
Examples: Expenditures on salaries, interest etc.

Capital expenditure is the expenditure that leads to creation of assets or leads to production in liabilities.
Examples: Expenditure on buildings, shares etc.

Question 43.
Balance of payments is always Balanced. Why?
Balance of Payments is always Balanced: Balance of payments of a country is always balanced because entries in BOP account arc done on the basis of Credit (or Receipt) and Debit (or Payment) in dual entry system. After filling all the entries in the record, total credit and debit become equal to each other because both the sides are equal in transactions and recorded opposite direction. That is why, BOP is always balanced.

Question 44.
Explain the effect of depreciation of domestic currency on exports.
Depreciation of domestic currency mean a fall in the price of domestic currency (say ₹) in terms of a foreign currency (say $). It means one$ can be exchanged for more rupees. So with the same amount of dollars more of goods can be purchased from India. It means exports to USA have become cheaper: They may result in increase of exports of USA.

Question 45.
Explain the effect of appreciation of domestic currency on imports.
Appreciation of domestic currency means a rise in the price of domestic currency (say ₹) in terms of a foreign currency (say \$). It means one ₹ can be exchange for more can be purchased from USA. If means imports from USA have become cheaper. They may result in increase of imports (from USA).

Question 46.
What is demand?
Demand refers to the quantities of a commodity that the consumers are able and willing to buy at each possible price of the commodity during a given period of time.

Question 47.
Distinguish between fixed costs and variable cost.
Fixed costs:

• Fixed costs do not change with change in quantity of output.
• Fixed costs remain the some whether output is zero or maximum.
• Examples are (a) rent (b) wages of permanent staff, (c) licenced fee, (d) cost of plant and machinery etc.

Variable cost:

• Variable costs change with change in quantity of output
• Variables costs are zero when output is zero. These costs increase when output increases and decreases when output decreases.
• Examples are (a) cost of raw material (b) wages of casual labour, expenses, on electricity etc.

Question 48.
Define Net National Product.