CBSE Sample Papers II for Class 11 Economics with Solutions 2023-2024

For the CBSE Sample Papers II for Class 11 Economics with solutions for the academic year 2023-2024, you can find comprehensive materials and solved papers to help in your exam preparation. These resources are designed to give you a clear understanding of the pattern of questions asked in the board exam and cover important concepts you need to prepare for scoring higher marks.

The sample papers are structured according to the latest CBSE exam pattern, including various types of questions like MCQs, short answer questions, and long answer questions. They cover both parts of the curriculum: Statistics for Economics and Introductory Microeconomics, along with project work.

CBSE Sample Papers for Class 11 Economics with Solutions 2023-2024

Time : 3 Hours Maximum Marks: 80

1. Read the following Assertion (A) and Reason (R) and choose the correct alternative: [1]

Assertion (A): Diagrammatic representation of data makes the data very simple and intelligible.
Reason (R): It helps in the proper analysis of the data and helps in the comparative study of the data.
Alternative:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A)
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.

Option (A) is correct

2. Airways publish data regarding the progress of airways. What type of data is this for an investigator? [1]

(A) Primary
(B) Secondary
(C) Tertiary
(D) None of these

Option (B) is correct

3. Wealth oriented definition of Economics was given by: [1]

(A) Adam Smith
(B) Marshall
(C) Robinson
(D) None of the these

Option (A) is correct

4. There are two statements given below, marked as Statement (I) and Statement (II). Read the statements and choose the correct option: [1]

Statement -I: Microeconomics studies the economic behaviour of individual economic units.

Statement – II: Estimation of national income can be learning in microeconomics studies.
(A) Only I is true
(B) Only II is true
(C) Both I & II are true
(D) Both I & II are false.

Option (A) is correct

5. Statistics is a science as well as ………………….. . [1]

(A) Art
(B) Philosophy
(C) Psychology
(D) Mathematics

Option (A) is correct

6. Identify the following diagram:

(A) Pie Diagrams
(B) Deviation Bar Diagram
(C) Percentage Bar Diagram
(D) Sub-divide Bar Diagram

Option (D) is correct

7. Identify the correct pair of terms with their common symbols from the following Columns I and II: [1]

Column I	Column II
A. Frequency of the given variables	1. A
B. Assumed Mean	2. f
C. Deviations from the assumed mean	3. d
D. Mean	4. d’

(A) A – 1
(B) B – 2
(C) C – 3
(D) D – 4

Option (C) is correct.

8. Which of the following statements is true about the significance of Economics: [1]

(A) Economics helps in the study of the laws of motion.
(B) Economics helps in the study of man and environment.
(C) Economics helps in saving the mankind.
(D) Economics helps in solving the problem of distribution.

Option (D) is correct

9. There are two statements given below, marked as Statement (I) and Statement (II). Read the statements and choose the correct option: [1]

Statement (I) – Consumer Price Index is used in calculating purchasing power of money.
Statement (II) – CPI also known as cost of living index:
(A) Statement I is true and statement II is false
(B) Statement I is false and statement II is true
(C) Both statements I and II are true
(D) Both statements I and II are false

Option (C) is correct

10. With the help of an ogive curve, we find: [1]

(A) Arithmetic Mean
(B) Median
(C) Mode
(D) All of these

Option (B) is correct.

11. Distinguish between random sampling and systematic sampling. Give suitable examples. [3]

Random sampling and systematic sampling are two commonly used methods for selecting a sample from a population in research and surveys. Here’s how they differ:

1. Random Sampling:
   • Random sampling involves selecting individuals from a population in a manner where each member of the population has an equal chance of being selected. This is typically achieved through methods like lottery sampling or using random number generators.
   • In random sampling, every unit or element in the population has an equal probability of being included in the sample, ensuring that the sample is representative of the entire population.
   • Example: Suppose you want to conduct a survey to estimate the average income of households in a city. You could assign each household in the city a number and then use a random number generator to select a sample of households for your survey.
2. Systematic Sampling:
   • Systematic sampling involves selecting individuals from a population by systematically choosing every kth individual from a list or sequence. The value of k is determined by dividing the population size by the desired sample size.
   • In systematic sampling, the first unit is selected randomly, and subsequent units are selected at regular intervals based on the sampling interval (k).
   • Example: Suppose you want to conduct a survey of customer satisfaction at a shopping mall. If there are 1,000 shoppers in the mall during the survey period, and you want a sample of 100 shoppers, you would select every 10th shopper (k = 1000/100 = 10) as they exit the mall.

12. Calculate median from the following series: [3]

Item | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18

Frequency | 1 | 9 | 26 | 59 | 72 | 52 | 29 | 7 | 1

Item	Frequency (f)	Cumulative frequency (CF)
10	1	1
11	9	10
12	26	36
13	59	95
14	72	167
15	52	219
16	29	248
17	7	255
18	1	256

M = Size of (N2)+(N2+1)2 item
Size of (2562)+(2562+1)2 item
Size of (128.5) item = 14

OR

If the arithmetic mean of the data given below is 28, then find out the missing frequency:

X	Frequency (f)
0-10	12
10 – 20	18
20 – 30	27
30 – 40	f
40 – 50	17
50 – 60	6
	Σf = 80 + f

X	Frequency (f)	Mid Value (m)	fm
0 – 10	12	5	60
10 – 20	18	15	270
20 – 30	27	25	675
30 – 40	f	35	35(f)
40 – 50	17	45	765
50 – 60	6	55	330
	Σf = 80 + f		Σfm = 2100 + 35f

Mean value = ∑fm∑f
28 = 2100+35f80+f
28 (80 + f) = 2100 + 35f
⇒ 2240 + 28f = 2100 + 35f
⇒ 140 = 7f
⇒ f = 140/7
= 20
Hence, the missing frequency is 20.

13. Explain any three merits of a statistical table. [4]

Statistical tables are vital tools in the organization and presentation of data. They offer several merits, and here are three key advantages:

1. Clarity and Precision: Statistical tables present data in a clear, precise, and systematic manner. By organizing data into rows and columns, tables enable the reader to quickly understand the information being conveyed. This structured format helps in avoiding ambiguities and confusion, making the data easily interpretable.
2. Time-saving: Tables summarize large amounts of data into a condensed form, saving time for both the presenter and the audience. Instead of going through lengthy descriptions or raw data sets, a well-prepared table allows the viewer to grasp the trends and patterns at a glance. This is particularly useful when dealing with complex data sets or when one needs to extract specific information without going through all the data.
3. Facilitates Comparison: Statistical tables often facilitate comparison between different data sets. By placing data in columns and rows, it becomes easier to compare figures and identify relationships or discrepancies between them. For instance, a table can display data across different time periods, various geographical locations, or among distinct categories, making comparative analysis straightforward.

OR

Explain the definition of Economics given by Robbins?

Lionel Robbins, a British economist, provided a seminal definition of economics in his book “An Essay on the Nature and Significance of Economic Science” (1932). Robbins defined economics as the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

This definition emphasizes three key elements:

1. Human Behavior: Economics is concerned with how people make decisions and act upon them. It’s not just about money or markets; it’s about the choices individuals make to satisfy their needs and wants.
2. Scarcity: Robbins highlights that resources (time, money, materials, etc.) are limited compared to the wants and needs they could satisfy. This scarcity means that choices must be made about how these resources are allocated.
3. Alternative Uses: Since resources are scarce, the use of a resource for one purpose precludes its use for another. Economics studies how these resources are allocated among competing ends.

Robbins’ definition shifted the focus of economics from a study of wealth or human welfare to a study of choice under scarcity and competition for resources. It is a broad definition that can apply to all types of economic activity and is not confined to market transactions, which has had a lasting impact on the field of economics.

14. Calculate the median from the following data: [4]

Marks	No. of students
More than 0	50
More than 10	42
More than 20	38
More than 30	28
More than 40	16
More than 50	3

Given data is cumulative frequencies distribution, so firstly we convert them into simple frequencies.

Marks	Number of Students (f)	Cumulative Frequency (CF)
0 – 10	8	8
10 – 20	4	12
20 – 30	10	22
30 – 40	12	34
40 – 50	13	47
50 – 60	3	50

Calculation of Median
Median value = Size of (N2)th Item
= Size of (502)th  Item
= Size of 25^th item (which lies in 30 – 40 marks group)
By Interpolation:
Median = L1+N2−C⋅Ff×i
Where,
L₁ = 30, C.F = 22 f = 12 i = 10
Thus, put the above value in formula
Median = 30 + 25−2212 × 10
= 30 + 2.5
= 32.5

15. “Different index numbers are constructed to fulfill different objectives and before setting to construct a particular index number, one must clearly define one’s object of study.” Elaborate the problems which are faced in construction of Index number of prices. [4]

The construction of price index numbers involves a number of challenges and considerations. Here are some of the key problems faced in constructing a price index:

1. Selection of Base Year: One of the primary problems is choosing an appropriate base year. The base year should be a normal year without any anomalies such as economic booms or depressions. It should also be recent enough to be relevant. An inappropriate base year can lead to misleading index numbers.
2. Choice of Items: Deciding which items to include in the index number is critical. The selected items must be representative of the changes in the prices and must be significant for the population whose cost of living the index is meant to reflect. This is often a complex task as the consumption patterns may change over time.
3. Weight Assignment: Assigning appropriate weights to different items is another challenge. Weights should reflect the relative importance of items in the overall expenditures of consumers. Inaccurate weighting can distort the index number, overstating or understating the impact of price changes.
4. Collection of Data: Gathering accurate and consistent price data for the items in the index can be problematic. Prices must be collected at regular intervals and from the same outlets to ensure consistency. Changes in quality or the introduction of new products can also complicate price comparisons over time.
5. Formula Selection: There are various formulas that can be used to construct index numbers, such as Laspeyres, Paasche, and Fisher indexes. Each formula has its own advantages and biases, and the choice of formula can significantly affect the resulting index number.
6. Time and Resource Constraints: Compiling index numbers can be time-consuming and resource-intensive. Ensuring up-to-date and comprehensive data collection requires a substantial investment, which may be challenging, especially for developing economies.
7. Substitution Bias: Consumers may change their consumption patterns in response to price changes, substituting cheaper goods for more expensive ones. Traditional index numbers may not adequately account for this substitution, leading to a bias in the measurement of price changes.
8. Quality Changes: Improvements or reductions in the quality of goods and services can alter their value. Adjusting for quality changes is complex and may not always be adequately reflected in price index numbers.

OR

Statistics are figures, but all figures are not statistics’. Justify the statement.

The statement “Statistics are figures, but all figures are not statistics” captures a fundamental principle of the field of statistics: not every numerical value or figure qualifies as ‘statistics’ in the sense that statisticians use the term. To understand this statement, it’s important to distinguish between raw numerical data and statistics that are used for analysis.

Here’s why the statement holds true:

1. Contextual Relevance: Statistics are not just numbers; they are numbers with context and purpose. They are collected, analyzed, interpreted, and presented to serve a specific objective, like measuring, understanding, or forecasting phenomena. Simply put, statistics are figures that have been processed to provide meaningful information. A number becomes a statistic only when it is part of a data set that can be used for analysis or to infer conclusions about a larger population or phenomenon.
2. Collection Method: Statistics are the result of systematic collection, organization, and analysis of data. Random numbers or figures without a systematic method of collection do not constitute statistics. For example, a list of random phone numbers is not statistics, but if these numbers represent a survey’s results about a particular question, they become statistics.
3. Purpose of Data: A figure is just a standalone number without any implied meaning until it is used with a purpose. A statistic, on the other hand, is used to represent a fact or a data point in a study, and it serves a specific analytical purpose to support decision-making or to test hypotheses.
4. Representativeness: Statistics are often expected to be representative of a larger group or set from which they are drawn. They are typically used to make inferences about populations or trends. On the other hand, a figure by itself may not represent anything beyond its own value.
5. Analysis and Interpretation: A figure becomes a statistic when it is subjected to analysis and interpretation. Through statistical methods, we can derive meaning, trends, probabilities, and correlations from data. A figure without such analysis does not provide this level of insight and, therefore, is not a statistic.

16. (a) Why do we need an index number? [3]

Index numbers are vital tools in the field of economics and statistics due to several reasons:

1. Measure of Change: Index numbers provide a quantitative measure of changes in a group of related variables. They simplify the vast amounts of data into a single figure, which makes it easier to discern patterns, trends, and differences over time or between different geographical locations. For instance, the Consumer Price Index (CPI) measures changes in the general level of prices of goods and services that households buy for consumption, reflecting the cost of living over time.
2. Economic Policy and Decision-Making: Index numbers are crucial for policymakers and businesses. They inform economic policy by indicating inflation rates, cost of living adjustments, wage settlements, and other economic metrics that require regular and reliable measurement. Governments might use index numbers to adjust pensions and benefits, while businesses might use them to make decisions about pricing, investment, and strategy.
3. Comparison: Index numbers allow for the comparison of data between different periods, locations, or other variables. For example, they enable us to compare the economic performance of different countries by using index numbers like the GDP Deflator or Purchasing Power Parity (PPP). Without index numbers, making such comparisons would be complex and less reliable, as they standardize information, allowing for meaningful comparisons across diverse data sets.

(b) What are the desirable properties of the base period? [3]

The base period for an index number is the time frame or period with which other periods are compared. It serves as a reference point, and the choice of the base period is critical for the relevance and accuracy of the index number. Here are some desirable properties of the base period:

1. Normalcy: The base period should be a normal or typical time period without any abnormal conditions such as wars, economic crises, or natural disasters that could distort the data. It should be representative of usual economic conditions so that it provides a stable point of comparison.
2. Recentness: The base period should be relatively recent to ensure that the index remains relevant and reflects current economic structures and consumption patterns. If the base period is too far in the past, the index may not accurately represent current realities due to changes in technology, consumer preferences, and market conditions.
3. Stability: The base period should be a time of economic stability with no significant fluctuations in prices or quantities. This stability ensures that the index number is not influenced by short-term volatility, which could render year-to-year comparisons unreliable.

OR

(a) Discuss the characteristics and limitations of Index Numbers.

Index numbers are statistical measures designed to show changes in a variable or a group of variables over time. They are widely used in economics to track economic indicators such as inflation, cost of living, industrial production, and trade. Here are some of their characteristics and limitations:

Characteristics of Index Numbers:

1. Comparative: Index numbers compare the level of a variable or group of variables at one time with the level at another time, which is typically taken as the base period.
2. Relative: They show relative changes rather than absolute changes. An index number of 110, for instance, indicates a 10% increase from the base period.
3. Scaled: Index numbers are usually expressed as a percentage of the base period figure, which is conventionally set at 100.
4. Selective: They are based on a selected basket of goods, services, or other elements that are considered representative of the broader category being measured.
5. Purpose-Driven: Index numbers are constructed for specific purposes, such as measuring inflation (Consumer Price Index), cost of living (Cost of Living Index), economic performance (Gross Domestic Product Index), etc.

(b) What is meant by Consumer Price Index? Explain any two uses of CPI. [3]

The Consumer Price Index (CPI) is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. It is intended to measure the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Uses of CPI:

1. Measuring Inflation: CPI is commonly used as a measure of inflation. By tracking changes in the cost of the basket of goods and services from one period to another, it reflects the changes in the cost of living. Policymakers, economists, and central banks use the CPI to assess the effectiveness of their policies and to make adjustments to interest rates, taxes, and welfare benefits.
2. Indexation: CPI is used for indexation purposes, where payments or contractual amounts are adjusted according to the change in CPI. This could include salaries, pensions, and rent. For example, many governments adjust social security payments annually to maintain purchasing power by compensating for inflation as measured by the CPI.

The CPI is a crucial indicator for economic policy and is closely watched by all sectors of the economy. It influences decisions not just at the governmental level but also for businesses in terms of strategy, pricing, and wage negotiations.

17. (a) The following table shows the estimated sector real growth rates (percentage change over the previous year)
in GDP at factor cost. [3]

Year	Agriculture and Allied Sectors	Industry	Services
1994 – 95	5.0	9.2	7.0
1995 – 96	0.9	11.8	10.3
1996 – 97	9.6	6.0	7.1
1997 – 98	1.9	5.9	9.0
1998 – 99	7.2	4.0	8.3
1999 – 2000	0.8	6.9	8.2

Represent the data as multiple series graph.
(b) Distinguish between a Bar diagram and a Histogram. [3]
Answer:
(a) Graph showing estimated real growth rates in agriculture sector, industry and service sector is given below:

(b) Differences between Bar Diagram and Histogram:

1. The spacing and the width or the area of bars are all arbitrary. It is the height and not the width or the area of the bar that really matters. But the width in a histogram is as important as its height.
2. Bar diagram can be drawn both for discrete and continuous variables but histogram is drawn only for continuous variables.
3. In bar diagram some space must be left between consecutive bars; but in histogram no space is, left between two rectangles.

Section – B

18. Identify the complimentary goods from following: [1]

(A) Tea and Coffee
(B) Butter and margarine
(C) Computer hardware and software
(D) Milk and cold drinks

Option (C) is correct.

Computer hardware and software are paired demand. Demand for hardware will also create demand for software. Complementary goods are positively related with each other. Rise in quantity demanded of one good also brings the increment in quantity demanded of paired goods.

19. Identify the false statement regarding price elasticity of demand: [1]

(A) Estimation of price elasticity of demand is useful for trade union.
(B) Giffen goods have a positive price elasticity of demand.
(C) Necessities and medical treatments tend to be inelastic.
(D) Price elasticity is the ratio between income and quantity demanded.

Option (D) is correct.

Explanation: Price elasticity of demand is the ratio between percentage change in quantity demanded of a product to the percentage change in price of commodity.

20. “There are legal barriers to the entry of new firm”. [1] Identify the above form of market.

(A) Perfectly competitive markets
(B) Monopoly markets
(C) Monopolistic form of market
(D) Oligopoly markets

Option (B) is correct.

Explanation: Monopoly is a form of market in which single seller is found in the market because there are legal barriers to the entry of new firm.

21. Identify the under – utilisation of resources in production possibility curve [1]

A) Point – A
(B) Point – B
(C) Point – F
(D) Point – G

Option (C) is correct.

Explanation: At point F, the resources are underutilised or inefficiently utilized.

22. Which of the following is cause of an increase in quantity demanded: [1]

(A) Decrease in the price of the product
(B) Increase in consumer’s income
(C) Increase in price of substitute goods
(D) All of these

Option (D) is correct.

23. There are two statements given below, marked as Assertion (A) and Reason (R). Read the statements and choose the correct option: [1]

Assertion (A): MC should cut MR from below.
Reason (R): After equilibrium point MC should be greater than MR or MC is rising.

Alternatives
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.

Option (B) is correct.

Explanation: MC should cut the MR from below at the point of equilibrium as beyond that point MR will be less than MC and so the producer will incur losses after this point.

24. There are two statements given below, marked as Statement (I) and Statement (II). Read the statements and choose the correct option: [1]

Statement – I: Explicit and implicit are examples of selling cost of goods and services.
Statement – II: Imputed interest on self-finance is implicit cost.
Alternatives
(A) Statement I is true and Statement II is false
(B) Statement I is false and Statement II is true
(C) Both statements I and II are true
(D) Both statements I and II are false

Option (B) is correct.
Explanation: Both implicit and explicit cost refers to the expenditure occurred by the producer for the production of goods and services. Imputed interest on self-finance is implicit cost because owner actually does not pay but it is a cost.

25. Which of the following statement is incorrect regarding law of demand? [1]

(A) Price and quantity demanded have inverse relation.
(B) A consumer buy less of a commodity when his tastes shifts against the commodity.
(C) When price of a commodity increases, the demand of inferior goods decreases.
(D) None of the above

Option (C) is correct.
Explanation: Giffen goods are the exceptions of law of demand. When income of a consumer increases, the demand of inferior goods decreases.

26. There are two statements given below, marked as Statement (I) and Statement (II). Read the statements and choose the correct option: [1]

Statement -1: An economy can never operate outside the PPF with the given resources and technology. Statement – II: The PPF represents the concepts of scarcity.
Alternatives
(A) Statement I is true and Statement II is false
(B) Statement I is false and Statement II is true
(C) Both statements I and II are true
(D) Both statements I and II are false

Option (C) is correct.
Explanation: Both the statements are correct. Production possibility frontier diagrammatically represents the different combination of production when available resources are limited or scarce, as all points outside the PPF are unattainable.

27. Identify the correctly matched examples from Column I to that of Column II [1]

Column I	Column II
A. Characteristic of PPC	1. All the resources are fully and efficiently employed.
B  Assumption of PPC	2. No change in technology.
C. Property of PPC	3. Upward rising.
D. Definition of PPC	4. Device used to solve the problem of the economy

(A) A – 1
(B) B – 2
(C) C – 3
(D) D – 4

Option (B) is correct.

28. Comment on the statement – “There is perfect knowledge of everything in a perfectly competitive market – both buyer and seller have perfect knowledge about market of goods and inputs used in production.” [3]

The statement that “There is perfect knowledge of everything in a perfectly competitive market – both buyer and seller have perfect knowledge about the market of goods and inputs used in production” reflects one of the theoretical assumptions underlying the concept of perfect competition in economics. Perfect competition is an idealized market structure that assumes several conditions are met, including perfect information. Here’s a comment on this assumption:

Idealization vs. Reality: The assumption of perfect knowledge is an idealization and does not reflect real-world market conditions. In reality, information asymmetry is common, where one party (either the buyer or the seller) has more or better information than the other. Perfect knowledge implies that all participants have equal and complete information about prices, product quality, production techniques, and available technology, which is highly unlikely in actual markets.

Implications of Perfect Knowledge:

• Efficient Market Outcomes: Under perfect knowledge, both buyers and sellers make fully informed decisions, leading to the efficient allocation of resources. Prices in the market reflect the true value of goods and services, and there are no opportunities for arbitrage.
• Elimination of Uncertainty: Perfect information eliminates uncertainty, allowing for optimal production and consumption decisions. Producers know exactly what to produce and in what quantities, while consumers know precisely what they’re buying.
• Competitive Pricing: Since everyone has the same information about production costs and market demand, sellers compete by offering the lowest possible prices, leading to minimal profits that are just enough to keep firms in the business. This benefits consumers through lower prices and high-quality products.

Critique: While the assumption of perfect knowledge simplifies theoretical models and helps economists understand certain aspects of market behavior, it is one of the least realistic assumptions of perfect competition. Information gaps, imperfect information, and the costs associated with acquiring information are significant factors in real markets. These factors can lead to market failures, power imbalances, and the need for regulatory intervention.

In summary, while the concept of perfect knowledge is useful for theoretical models, it diverges significantly from the complexities and imperfections of real-world markets. The assumption serves as a benchmark to measure deviations in actual market conditions, highlighting the importance of information in economic decisions and market dynamics.

29. “In the long run a perfect competitive firm can never earn super-normal profits.” Justify. [3]

The statement that “In the long run, a perfectly competitive firm can never earn supernormal profits” is justified by the characteristics of a perfectly competitive market and the dynamics of market entry and exit. Here’s an explanation of why this holds true:

1. Free Entry and Exit: One of the defining features of perfect competition is the absence of barriers to entry and exit from the market. This means that new firms can enter the market freely if existing firms are earning supernormal (or abnormal) profits, and firms can exit the market if they are incurring losses.
2. Supernormal Profits Attract New Entrants: When firms in a perfectly competitive market earn supernormal profits, this signals new firms to enter the market. The motivation for new firms to enter is the opportunity to also earn these higher profits.
3. Increased Supply Lowers Prices: The entry of new firms increases the total supply of the product in the market. According to the law of supply and demand, an increase in supply, ceteris paribus (all else being equal), leads to a decrease in price.
4. Return to Normal Profits: As the price falls due to increased supply, the profit margins of all firms in the market decrease. This process continues until the price drops to a level where firms are only making normal profits, which are the minimum level of profit necessary for a firm to remain in the market. Normal profits are considered a cost of doing business, as they represent the opportunity cost of the capital employed in the firm.

OR

Explain the effects of ‘maximum price ceiling’ on the market of a good. Use diagram.

A maximum price ceiling is a government-imposed limit on the price that can be charged for a product, set below the market equilibrium price. The intention behind implementing a price ceiling is often to make essential goods more affordable to the general population. However, this intervention can lead to several unintended effects on the market.

Effects of a Maximum Price Ceiling:

1. Shortage: When the price is set below the market equilibrium, the quantity demanded exceeds the quantity supplied, leading to a shortage. Consumers want to buy more at the lower price, but producers are unwilling or unable to supply enough due to reduced profitability.
2. Quality Reduction: Suppliers may respond to the reduced profitability by decreasing the quality of the goods supplied. This allows them to cut costs in an effort to maintain some level of profit under the price constraints.
3. Black Markets: The shortage can lead to the emergence of black markets, where the good is sold illegally at prices higher than the price ceiling. This undermines the intention of the policy and can lead to inequitable outcomes.
4. Non-Price Rationing: In the face of shortages, mechanisms other than price come into play to ration the limited supply of the good. These can include long queues, favoritism, and other forms of discrimination.
5. Reduced Supply in the Long Run: In the longer term, the price ceiling can discourage investment in the production of the good, leading to a decrease in supply. Producers may shift their resources to more profitable alternatives.

30. Price elasticity of demand of a good is -1. At a price of ₹10 per unit its demand is 500 units. At what price will its demand increase by 20 percent? [4]

Price Elasticity of Demand (E_d) = (-) ΔQΔP×PQ
Given, Ed = (-)1, P = ₹10, Q = 500, P₁ = ?, Q₁ = Increase by 20%
Q = 500, Q₁ = 20% of 500 or 100 + 500 = 600
∴ ΔQ = 600 – 500 = 100
Now – (1) = 100ΔP×10500
(-) 500 × ΔP = 1,000 or
ΔP = (-) 2
New price = P + ΔP = (-) 2 + 10 = ₹8

31. Calculate Average Variable Cost at each level of output: [4]

Output (Units)	Marginal Cost (₹)
1	24
2	20
3	16
4	12
5	18
6	30

Calculation of AVC

Output (Units)	MC	TVC	AVC
1	24	24	24
2	20	44	22
3	16	60	20
4	12	72	18
5	18	90	18
6	30	120	20

OR

Distinguish between positive economics and normative economics. Give an example of each.

Positive economics and normative economics represent two fundamental approaches within the field of economics, focusing on what is and what ought to be, respectively. Here’s a distinction between them, along with examples for each:

Positive Economics:

• Definition: Positive economics deals with objective analysis and describes economic behavior and phenomena as they actually are. It focuses on facts and cause-and-effect relationships and avoids value judgments. The statements in positive economics can be tested and validated through observation.
• Nature: Empirical and factual.
• Purpose: To establish scientific explanations for economic behavior that can inform predictions about the consequences of economic actions.
• Example: “A rise in consumer taxes will decrease disposable income.” This statement is based on observation and can be tested by analyzing data on taxes and consumer spending.

Normative Economics:

• Definition: Normative economics involves subjective analysis and focuses on what should be. It incorporates value judgments and opinions about what is desirable in the economy, based on personal or societal preferences.
• Nature: Subjective and value-based.
• Purpose: To recommend economic policies and actions based on ethical, moral, or political criteria rather than purely objective analysis.
• Example: “The government should increase taxes on the wealthy to reduce income inequality.” This statement reflects a value judgment about fairness and the role of government in redistributing income.

Key Distinctions:

• Objectivity vs. Subjectivity: Positive economics is objective and seeks to describe how the economy works without making judgments. Normative economics is subjective and focuses on how the economy should work according to specific ideals or goals.
• Testability: Statements in positive economics can be tested and validated through empirical observation, whereas normative economic statements are based on values and cannot be empirically tested in the same way.
• Role in Policy: Positive economics provides the data and analysis necessary to understand economic outcomes, while normative economics guides policy decisions based on societal goals and values.

32. Explain the change that will take place in the market when market price of goods is greater than its equilibrium price. Use diagram. [4]

When the market price of a good is greater than its equilibrium price, it leads to a surplus in the market. This situation is described and analyzed below, along with a diagrammatic representation:

Explanation:

1. Surplus: A surplus occurs when the quantity supplied of a good exceeds the quantity demanded at the current price level. This happens because producers are willing and able to supply more of the good at the higher price than consumers are willing to buy.
2. Price Adjustment: In response to the surplus, producers may start lowering their prices to stimulate demand and reduce their excess inventory. This price reduction continues until the market price reaches the equilibrium level.
3. Restoration of Equilibrium: As the price decreases, the quantity demanded by consumers increases, and the quantity supplied by producers decreases. This adjustment process continues until the quantity supplied equals the quantity demanded, restoring the market to its equilibrium condition.
4. Market Forces: The process of adjustment demonstrates the self-correcting nature of markets. The forces of supply and demand automatically adjust the price and quantity to eliminate the surplus and return the market to equilibrium.

Diagrammatic Representation:

The diagram will show a supply curve (S) and a demand curve (D), with the initial market price (P1) set above the equilibrium price (Pe). This creates a surplus represented by the distance between the quantity supplied (Qs) and the quantity demanded (Qd) at P1. The adjustment process will be illustrated by a movement along the supply and demand curves towards the equilibrium price (Pe) and quantity (Qe).

33. (a) Distinguish between a centrally planned economy and a market economy.

Key Distinctions:

• Control and Ownership: The main difference lies in who makes the economic decisions and owns the means of production— the government in a centrally planned economy versus private individuals and businesses in a market economy.
• Price Mechanism: In centrally planned economies, prices are often set by the government, while in market economies, prices emerge from the interaction of supply and demand.
• Economic Efficiency: Market economies tend to be more efficient in allocating resources and responding to consumer demands, thanks to the price mechanism and competition. Centrally planned economies, due to the lack of these mechanisms, often struggle with inefficiencies and misallocations of resources.

Each system has its advantages and disadvantages, and in practice, many economies exhibit characteristics of both systems to varying degrees, known as mixed economies.

(b) What do you understand by positive economic analysis?

Positive economic analysis refers to the branch of economics that deals with the objective description and explanation of economic phenomena. It focuses on factual statements about the world that can be tested against real data, thus aiming to establish cause-and-effect relationships without resorting to value judgments about what ought to be. Positive economics strives to understand how the economy works by analyzing data, using models, and applying statistical tests to infer patterns, trends, and causal links.

Key Features of Positive Economic Analysis:

1. Empirical and Testable: Positive economic statements are based on empirical evidence that can be observed and measured. These statements can be tested for validity by comparing them against real-world data.
2. Objective: Positive economics seeks to remain neutral and objective, avoiding any bias or subjective opinions. It deals with “what is” rather than “what should be.”
3. Descriptive and Explanatory: It involves describing economic realities and explaining how different aspects of the economy function. For example, it might analyze the impact of interest rate changes on consumer spending or the relationship between inflation and unemployment.
4. Predictive: Although primarily descriptive, positive economic analysis often aims to predict future economic outcomes based on current trends and historical data.
5. Policy Evaluation: While it does not prescribe policies, positive economic analysis is crucial for evaluating the potential and actual impacts of economic policies and interventions, based on objective criteria.

(a) What do you mean by the production possibilities of an economy?

The production possibilities of an economy refer to the different combinations of goods and services that can be produced in a given time period, given the available resources and technology. This concept is often illustrated through a production possibilities frontier (PPF) or curve, which shows the maximum potential output combinations of two goods or services that an economy can achieve when all resources are fully and efficiently utilized.

Key Aspects of Production Possibilities:

1. Resource Utilization: It assumes that the economy’s resources (land, labor, capital, and entrepreneurship) are used efficiently. Any point on the PPF represents full employment and efficient allocation of resources.
2. Trade-offs: The concept highlights the trade-offs in production. Producing more of one good requires producing less of another because resources are limited. This is represented by the negative slope of the PPF.
3. Opportunity Cost: Moving along the PPF illustrates the concept of opportunity cost, which is the cost of foregone alternatives. When an economy decides to increase production of one good, the opportunity cost is the amount of the other good that must be given up.
4. Economic Growth: Shifts in the PPF represent changes in an economy’s ability to produce goods and services. Outward shifts of the PPF indicate economic growth, which can occur due to increases in resource quantity or quality, or improvements in technology.
5. Efficiency and Feasibility: Points on the PPF are efficient and feasible given the current resources and technology. Points inside the PPF are feasible but inefficient (not all resources are being used), while points outside the PPF are not feasible with the current resources and technology.

(b) Differentiate between Cardinal Utility and Ordinal Utility.

Key Differences:

• Measurement: Cardinal utility measures utility in numerical terms, whereas ordinal utility involves ranking preferences without assigning specific numbers.
• Comparison of Utility: Cardinal utility allows for exact comparisons of utility amounts, while ordinal utility only allows for ranking preferences without quantifying the differences in satisfaction.
• Economic Theories: Cardinal utility is foundational to classical utility theory, whereas ordinal utility underpins modern consumer theory, particularly through the use of indifference curves.

In summary, while cardinal utility provides a more precise but less realistic approach to measuring consumer satisfaction, ordinal utility offers a more realistic but less precise approach that focuses on the ranking of consumer preferences.

34. Read the passage given below and answer the questions that are followed: [6]

A price floor is the lowest legal price that can be paid in a market for goods and services, labour, or financial capital. Perhaps the best-known example of a price floor is the minimum wage, which is based on the normative view that
someone working full time ought to be able to afford a basic standard of living.

(a) Define Price Floor. What is the common purpose of fixation of floor price by the government? Explain any one likely consequence of this nature of intervention by the government. [3]

(b) Discuss “surplus amount of production as a direct consequence of price flooring”.

A price floor is a government-imposed minimum price that can be charged for a good or service in the market. This regulatory intervention sets a limit below which the price of a good cannot legally fall. The most common examples of price floors include minimum wages (the minimum price for labor) and agricultural price supports.

Common Purpose of Fixation of Floor Price by the Government:

The primary purpose of establishing a price floor is to ensure that producers receive a minimum price that covers their costs and sustains their livelihood. This is particularly important in markets where there is a concern that market forces alone would drive prices too low for producers to maintain viable operations. In the case of agriculture, price floors aim to stabilize farmers’ incomes, which can be highly volatile due to factors like weather conditions and changes in global supply and demand. For labor markets, the minimum wage aims to ensure workers earn a living wage.

Likely Consequence of Price Floor Intervention:

One likely consequence of implementing a price floor is the creation of a surplus. When the government sets the price floor above the equilibrium price (the price at which the quantity supplied equals the quantity demanded), it leads to excess supply. Producers are willing and able to supply more of the good at the higher price, but consumers are not willing to buy as much at this price, resulting in unsold goods.

Surplus Example:

In the case of agricultural products, a price floor set above the market equilibrium can lead to overproduction of crops such as wheat or corn. Farmers increase production to take advantage of the higher guaranteed prices, but consumption does not increase correspondingly because the price is too high for consumers. The government may then have to purchase the surplus production to maintain the price floor, leading to inefficiencies and potentially significant costs to taxpayers. Additionally, the surplus goods may be stored or destroyed, or sold at lower prices on the international market, which can disrupt global trade patterns.

This type of intervention can protect producers’ incomes but also leads to inefficiencies in the market, misallocation of resources, and additional costs for governments and, ultimately, taxpayers.

(b) Discuss “surplus amount of production as a direct consequence of price flooring”.

The implementation of a price floor, when set above the market equilibrium price, can lead to a surplus amount of production. This surplus occurs because the minimum price established by the government encourages producers to increase their output, anticipating higher returns, while simultaneously, the higher price decreases the quantity of the good that consumers are willing to buy. This discrepancy between the quantity supplied and the quantity demanded at the price floor results in an excess supply, or surplus, of the product.

Mechanics of Surplus Due to Price Flooring:

1. Increased Production: Producers are incentivized by the higher price to produce more of the good. This is because the price floor ensures that they will receive a minimum price for their product that is likely above what the market would otherwise offer, covering their costs and potentially offering higher profits.
2. Reduced Consumption: At the same time, the higher price makes the good less attractive to consumers, leading to a decrease in the quantity demanded. Consumers may substitute the more expensive good with cheaper alternatives or simply reduce consumption.
3. Accumulation of Surplus: The natural outcome of increased production and reduced consumption is an accumulation of surplus goods. This surplus represents the difference between the quantity of the good that producers are willing and able to sell at the price floor and the quantity that consumers are willing to buy.

Consequences of Surplus Production:

1. Government Intervention: Often, the government must intervene to purchase the surplus in order to maintain the price floor, leading to significant costs for the government and, ultimately, taxpayers.
2. Storage Costs and Waste: The surplus goods need to be stored, which incurs costs. In the case of perishable goods, such as agricultural products, there might also be significant waste, as not all surplus can be consumed or sold before it spoils.
3. Market Distortions: Price floors can distort market signals that would normally inform producers about consumer preferences and efficient allocation of resources. This can lead to sustained overproduction of certain goods, misallocation of resources, and reduced economic welfare.
4. Impacts on Global Trade: Surpluses generated by price floors in one country can affect global markets if the surplus is exported. This can lead to lower global prices, harming producers in countries without such price supports.
5. Barriers to Market Entry: High price floors can act as a barrier to market entry for new producers who might find the cost of production too high compared to the artificially inflated price. This can reduce competition in the market over time.