Previous Year Question Paper

(2024)

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Part - A

 (a) What is Time Value of Money (TVM)?

The Time Value of Money (TVM) is the principle that a sum of money has greater value now than it will in the future due to its potential earning capacity. This concept underlies the basis for interest, investments, and financial planning.

 (b) How does technological advancement affect economic development?

Technological advancement accelerates economic development by improving productivity, creating new industries, reducing production costs, enhancing communication and transport, and increasing efficiency in resource utilization.

 (c) Define the Law of Demand and provide an example to illustrate it.

The Law of Demand states that, keeping other factors constant, when the price of a product falls, its demand increases, and when the price rises, its demand decreases.
Example: If the price of sugar decreases from ₹50/kg to ₹40/kg, people may buy more sugar, illustrating the law of demand.

 (d) Discuss the role of engineering in fostering economic development.

Engineering contributes to economic development by designing and building infrastructure, enhancing industrial processes, developing energy solutions, and driving technological innovations. These developments boost productivity and support sustainable growth.

 (e) What are the factors affecting the elasticity of demand of a product?

1. Availability of substitutes – More substitutes make demand more elastic.
2. Nature of the product – Necessities are inelastic; luxuries are elastic.
3. Proportion of income – Higher-priced items take more income and are more elastic.
4. Time period – Demand tends to be more elastic over a longer time.
5. Habitual consumption – Goods consumed out of habit tend to have inelastic demand.

 (f) What are the various factors of production?

Answer (1.5 marks):
The four main factors of production are:

1. Land – All natural resources used in the production process.
2. Labour – Human effort, both physical and mental, used in production.
3. Capital – Man-made tools, machines, and infrastructure used in producing goods and services.
4. Entrepreneurship – The ability to combine the other three factors, take risks, and innovate to produce goods and services.

 (g) Explain the concept of opportunity cost.

Answer (1.5 marks):
Opportunity cost is the value of the next best alternative foregone when a choice is made. It represents the benefits that could have been gained if the resources were used in the best alternative way. It helps in making rational economic decisions.

 (h) Describe the purpose of break-even analysis.

Answer (1.5 marks):
The purpose of break-even analysis is to determine the level of output or sales at which total revenue equals total costs (i.e., no profit or loss). It helps firms:

• Identify the minimum sales required to avoid losses.
• Make pricing and investment decisions.
• Analyze the impact of cost and revenue changes.

 (i) Define a market and list its two basic components.

Answer (1.5 marks):
A market is a system or arrangement where buyers and sellers interact to exchange goods, services, or information.
Two basic components of a market:

1. Demand – Buyers who are willing and able to purchase goods/services.
2. Supply – Sellers who are willing and able to offer goods/services.

 

(j) What distinguishes a central bank from commercial banks in India?
Answer (1.5 marks):
The central bank of India is the Reserve Bank of India (RBI), while commercial banks include institutions like SBI, HDFC, etc.
Key differences:

• Central Bank issues currency, controls monetary policy, and regulates commercial banks.
• Commercial Banks accept deposits, provide loans, and offer banking services to the public.
  The central bank does not deal with the public directly, unlike commercial banks.

                                                                              Part B:

 2. (a) Describe the Production Possibility Curve (PPC) and what does it illustrate about an economy's resource allocation?                                                                              (10 marks)

The Production Possibility Curve (PPC) is a graphical representation that shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently utilized.

Key Features of PPC:

• Concave shape due to increasing opportunity cost.
• Illustrates the concepts of scarcity, opportunity cost, efficiency, and economic growth.

What PPC Illustrates about Resource Allocation:

• Efficient allocation: Points on the curve show maximum efficiency.
• Inefficient allocation: Points inside the curve show underutilized resources.
• Unattainable allocation: Points outside the curve represent output levels that are not currently possible.
• Trade-offs and opportunity cost: Movement along the curve shows that increasing production of one good requires sacrificing some of the other.
• Economic growth: An outward shift in the PPC indicates improved resource availability or technology.

 2. (b) What is the difference between micro and macroeconomics?                           (5 marks)

Basis	Microeconomics	Macroeconomics
Scope	Studies individual units like consumers, firms	Studies the economy as a whole
Focus	Demand, supply, pricing, production	National income, inflation, unemployment
Decision-making	Consumer and producer choices	Government policy and aggregate behavior
Example	Price of a smartphone	National GDP growth rate

 3. (a) Explain the nature of economic laws.                                                                 (5 marks)

Economic laws are general principles or statements that describe how economic variables behave. They are:

• Conditional: Apply under certain assumptions.
• Qualitative: Indicate direction rather than magnitude.
• Less exact than natural laws due to human behavior involvement.
• Dynamic: Can change with economic conditions.
  Example: Law of Demand – "Other things being equal, when the price of a good falls, its demand increases."

 3. (b) Briefly explain the concept of demand forecasting and its significance for businesses.

                                                                                                                                         (10 marks)
Demand forecasting is the process of estimating future demand for a product or service based on past data, market trends, and other variables.

Significance for Businesses:

• Production planning: Helps avoid overproduction or shortages.
• Inventory management: Optimizes stock levels.
• Financial planning: Forecasts revenue and budget needs.
• Marketing strategy: Aligns promotional activities with demand cycles.
• Capacity planning: Ensures optimal resource utilization.
  Accurate demand forecasting leads to better decision-making and enhances profitability.

 4. What is the Law of Variable Proportions, and how does it apply to the short-run production process?                                                                                                       (15 marks)

The Law of Variable Proportions states that as the quantity of one variable input increases, keeping other inputs fixed, the marginal product of that input will eventually decline.

Phases of the Law:

1. Increasing Returns: Marginal product rises.
2. Diminishing Returns: Marginal product starts to fall.
3. Negative Returns: Marginal product becomes negative.

Application to Short-Run Production:

• In the short run, some inputs (like capital) are fixed, while others (like labor) can vary.
• Initially, adding more labor increases output due to better utilization of fixed inputs.
• Beyond a point, additional labor adds less to output, and too much can even reduce output due to overcrowding or inefficiencies.
  This law helps firms decide the optimal level of variable input to maximize efficiency.

 5. (a) What is the Accounting Rate of Return (ARR) and how is it calculated?       (5 marks)

The Accounting Rate of Return (ARR) is a financial metric used to assess the profitability of an investment.

Formula:

Explanation:

• Accounting profit includes revenues minus all accounting expenses, including depreciation.
• ARR is expressed as a percentage and is used to compare investment opportunities.

Example:

If a machine yields ₹20,000 annual profit and cost ₹1,00,000:

ARR helps businesses evaluate the return on investment and supports decision-making in capital budgeting.

 5 (b). What are the primary objectives of fiscal and monetary policies in managing the Indian economy?                                                                                                         (10 marks)

Fiscal Policy Objectives:

1. Economic Stability – Reduce inflation and recession by controlling government spending and taxation.
2. Resource Allocation – Direct public expenditure to key sectors like infrastructure, health, and education.
3. Income Redistribution – Reduce inequality through progressive taxation and subsidies.
4. Employment Generation – Create jobs through investment in public works and welfare schemes.
5. Promoting Economic Growth – Stimulate investment and consumption.

Monetary Policy Objectives:

1. Price Stability – Control inflation through interest rates and money supply.
2. Control of Credit – Regulate the availability and cost of credit in the economy.
3. Exchange Rate Stability – Manage foreign exchange markets and ensure currency stability.
4. Promoting Growth – Ensure sufficient credit flow to productive sectors.
5. Financial Inclusion – Encourage access to banking services.

Together, fiscal and monetary policies aim for sustainable growth, low inflation, and financial stability in India.

 6 (a). What distinguishes a monopoly from monopolistic competition?                 (10 marks)

Basis	Monopoly	Monopolistic Competition
Number of Sellers	Single seller	Many sellers
Product Type	Unique product without close substitutes	Differentiated products
Entry Barriers	High barriers to entry	Low or no barriers
Price Control	Firm is a price maker	Firms have limited price control
Demand Curve	Downward sloping	More elastic due to substitutes
Examples	Indian Railways	Local restaurants, clothing brands

 6 (b). How do demand and supply determine the price of a good or service in a market?

    (5 marks)

The price of a good or service in a competitive market is determined by the interaction of demand and supply.

• Demand represents consumers' willingness to buy at various prices.
• Supply represents producers’ willingness to sell at various prices.
• The equilibrium price is where the quantity demanded equals the quantity supplied.
• If demand increases, price tends to rise. If supply increases, price tends to fall.
• Any shift in demand or supply curves leads to a new equilibrium.

This mechanism ensures efficient allocation of resources based on consumer preferences and producer capabilities.

 7. Describe the key components of LPG reforms in the context of the Indian economy.

     (15 marks)

The LPG reforms refer to the Liberalisation, Privatisation, and Globalisation policies introduced in 1991 to revive the Indian economy.

1. Liberalisation:

·        Reduced government control on industries and foreign trade.

·        Deregulation of sectors and de-licensing of industries.

·        Removal of price controls and easing of import-export restrictions.

2. Privatisation:

·        Disinvestment in public sector units (PSUs).

·        Encouragement to private enterprises in core sectors.

·        Introduction of Public-Private Partnerships (PPPs).

3. Globalisation:

·        Integration with the global economy.

·        Encouraged foreign direct investment (FDI) and foreign technology.

·        Participation in WTO and opening Indian markets to global trade.

Impact:

·        Boost in GDP growth and industrial production.

·        Expansion of service sector, especially IT and telecom.

·        Greater competition and efficiency.

·        Rise in exports and foreign reserves.

LPG reforms marked a significant shift from a closed, regulated economy to a more open, market-oriented system, helping India emerge as a global economic player.