IGNOU| ECONOMIC THEORY (ECO - 06)| SOLVED PAPER – (DEC - 2022)| (BDP)| ENGLISH MEDIUM
BACHELOR'S DEGREE PROGRAMME
(BDP)
Term-End Examination
December - 2022
(Elective Course: Commerce)
ECO-06
ECONOMIC THEORY
Time: 2 Hours
Maximum Marks: 50
Note: This paper contains three Sections A, B and C.
Instructions are given in each Section along with marks.
Section-A
Note: Answer any two of the following questions from
this Section.
1. (a) What are the various forms of economic system? 6
Ans:- An economic system is a framework that
organizes and distributes goods, services, and resources across a geographic
region or country. It controls the factors of production including land,
capital, labor and material resources.
Economic systems
control five factors of production, including: labor, capital, entrepreneurs,
material resources, information resources.
The main types
of economic systems seen around the world are: traditional, command, mixed,
market.
India is
considered a mixed economy. In a mixed economy, private and public sectors
co-exist and the country takes advantage of international trade.
There are many
types of economic systems, which include:-
(i)
Traditional economies: The oldest type of economy based on customs and
beliefs. In these self-sufficient economies, communities grow crops and manage
farms using traditional methods.
(ii)
Command economies: Also known as planned economies, in these systems the
government or other centralized group sets wages, sets prices and distributes
resources and products.
(iii)
Market economies: Also known as capitalism or laissez-faire economies,
these systems are characterized by private ownership, competition, and minimal
or no government intervention.
(iv) Mixed
economies: These systems combine elements of both market economy and
command economy. In a mixed economy, some resources and businesses are
privately owned while others are owned by the government.
(v) Socialism:
In these systems, the government owns the goods and their production, as well
as encourages equal sharing of work and wealth among the members of the
society.
Other types
of economic systems include:-
(i) Planned
economy
(ii) Centrally
planned economy
(iii)
Communist economies
(b) Describe
the features of a mixed economy in detail. 6
Ans:- A
mixed economy is an economic system that combines elements of both capitalism
and socialism. It accepts both private businesses and nationalized government
services such as public utilities, security, military, welfare, and education.
A mixed
economic system is a system that combines aspects of both capitalism and
socialism. A mixed economic system protects private property and allows a level
of economic freedom in the use of capital, but also allows governments to
intervene in economic activities to achieve social goals.
Some
characteristics of mixed economy are as follows:-
(i) Protects
private property
(ii) Allows
prices to be determined by the free market and the principles of supply and
demand
(iii) Is
motivated by people's selfishness
(iv) Enables
the government to protect both the people and the market
(v) Allows
governments to intervene in economic activities to achieve social goals
(vi) Allows
the government to intervene in certain economic activities and industries
(vii) The
government has the right to intervene in a mixed economy to assist citizens
with health care, unemployment, social security, child care, food stamps, etc.
Other
characteristics of a mixed economy include:-
(i) Allows
people to hold assets, earn profits and engage in market transactions
(ii) Allows a
level of economic freedom in the use of capital
(iii) Allows
the private sector to decide the use of capital and seek profits
(iv) The
components of the mix may include government subsidies, duties, taxes,
prescribed programs and regulations, state-owned enterprises
2. Explain the concept of consumer's surplus with the
help of a diagram. What are its limitations? 8+4
Ans:- Concept of consumer surplus:-
Introduction
Consumer surplus was introduced into economics by Alfred Marshall, although use
of the concept dates back at least to the writings of the French economist
Dupuit in the first half of the nineteenth century.
The two Nobel
laureates in economics fundamentally disagree about the usefulness of the
concept; John Hicks sees great use of this concept as a cornerstone of welfare
economics, while Paul Samuelson believes that we can abandon the concept
without any harm. There is also the question of whether we can talk about
consumer surplus or only about consumer surplus – whether we can use this
concept for the entire group of consumers of a product or only for an
individual household. Can do for.
The principle
of consumer surplus is a deduction from the law of diminishing marginal
utility. The price we pay for something measures only marginal utility, not
total utility. Only at the marginal unit that a person is motivated to buy is
the price exactly equal to the satisfaction received from that unit. But, he
gets some additional satisfaction on other units purchased.
He will be
willing to pay more for these units than the actual price. The difference
between the amount of satisfaction a consumer gets from purchasing a good and
what he actually has to pay for it is the economic measure of consumer surplus.
It shows the
excess of satisfaction he gets, this excess is equal to the difference between
the utility of the goods acquired and the utility of the money sacrificed. If
he were deprived of that item, he would be forced to spend money on purchasing
other items, which would not give him the same satisfaction, but less
satisfaction.
Alfred
Marshall introduced the term 'consumer surplus' into economic theory to show
that, in various situations, a consumer receives more from a good than he paid
for it.
Marshall
explained consumer surplus as follows:-
“The price a
man pays for a thing can never be high and rarely reaches the price he would be
willing to pay rather than live without it – hence the satisfaction he gets
from its purchase That is usually more than the price he is left paying for it:
and thus he gets additional satisfaction from the purchase.
The price he
is willing to pay in excess of what he actually pays, rather than being
deprived of the good, is the economic measure of this surplus satisfaction. In
short, the benefit that a person gets from purchasing a commodity at a lower
price for which he is willing to pay a higher price rather than going without
it can be called his consumer's surplus.
Sometimes, we
find that a consumer's willingness to pay for an item may be higher than the
price he actually pays for it. The price he is willing to pay for a commodity
is his personal demand price and the price he actually pays for it is the
market price. According to Paul Samuelson, consumer surplus is nothing but the
excess of individual demand price (or, the positive difference between the
potential price and actual price of a good) over the market price of a good.
Example:-
To give
concrete shape to our idea, let us take the example of shoes. Suppose, from the
first pair of shoes a man expects to get a satisfaction of at least Rs. 500,
from the other he expects additional satisfaction of Rs. 400, from the third he
expects additional satisfaction of Rs. 300. Suppose, he is induced to buy only
three pairs and not more.
Since there
cannot be more than one price in the market, the price he pays for each pair is
measured by the price of the marginal pair, i.e. by Rs. 300. He will pay (Rs.
300 x 3) or Rs. Total Rs 900 for all three pairs. But, according to the
hypothesis, the amount of satisfaction he gets from three pairs is (Rs. 500 +
Rs. 400 + Rs. 300) = Rs. Is. Enjoying. 1200.
Therefore, his
purchase price (Rs. 1200 – Rs. 900) = Rs. Additional satisfaction is obtained
from. 300. Consumer surplus is measured by the difference between total utility
and the total expenditure made by the consumer on a good (shoes). It is the
difference between the individual asking price and the market price.
Therefore,
consumer surplus can be shown in another way:-
Consumer
surplus = Total utility – (Total units purchased x Marginal utility or price).
In short, consumer surplus is the positive difference between the total utility
of a good and the total payment made for it.
The concept of
consumer surplus can also be illustrated with the help of Figure 3:
In Figure 3, the
quality of a particular good is measured on the horizontal axis and its
marginal utility or production is measured on the vertical axis. Here DD' is
the demand price for it. If a consumer buys all the units (OR) at price per
unit RS, he gets total satisfaction equal to area DORS. But, he spends only the
ORST amount, so his surplus satisfaction is DTS (i.e., shaded region). If the
price falls to 'R', he will buy 'OR' and his surplus will increase to 'DTS'.
Therefore,
consumer surplus is measured by the area below the demand curve but above the
market price. One difficulty is that as price falls, demand increases,
increasing the consumer's real income. To obtain a more accurate measure of the
profit of surplus; Therefore, an adjustment must be made to offset the effect
of the difference in real income at the higher price (RS) and lower price
(R'S').
The limits of
consumer surplus are:-
It is often
argued that this concept is imaginary and misleading. Surplus satisfaction cannot
be measured precisely.
(i) Consumer
surplus cannot be measured accurately – because it is difficult to measure the
marginal utilities of different units of a commodity consumed by an individual.
(ii) In case
of wants, marginal utilities of previous units are infinitely large. In such a
case consumer surplus is always infinite.
(iii) Consumer
surplus derived from a good is affected by the availability of substitutes.
(iv) For goods
that are used for their prestige value (e.g., diamonds), there is no simple
rule for deriving a utility scale.
(v) Consumer
surplus cannot be measured in terms of money because marginal utility of money
changes with purchases and the stock of money with the consumer decreases.
(Marshall assumed that the marginal utility of money remains constant. But this
assumption is unrealistic).
(vi) This
concept can be accepted only if it is assumed that utility can be measured in
terms of money or otherwise. Many modern economists believe that this cannot be
done.
3. Describe the laws of variable proportions. Elaborate
with the help of an example the areas in which the laws of diminishing marginal
returns are applicable. 7+5
Ans:- The Law of Variable Proportions (LVP) describes
the relationship between inputs and outputs. It states that when one production
element increases while all other elements remain constant, production will
first increase, then decrease and ultimately lead to negative output.
LVP works
under the following assumptions:-
(i) Production
technology remains the same
(ii) fixed
inputs are present
(iii)
Efficiency of variable input is equal to
(iv) The ratio
of inputs can be changed
(v) Factor
inputs are not close or perfect substitutes
LVP is
applicable in the following areas:-
(i) Law of
diminishing marginal utility: The marginal utility of each additional
backpack diminishes, so the business must reduce the cost per unit to entice
buyers to buy more units.
(ii) Law of
Diminishing Returns: If you increase the time you spend studying every day
from one hour to two hours, you will see a big improvement in your learning and
your grades. But, if you go from five hours to six hours, the improvement is
likely to be much less.
The law of
variable proportions is as follows:
“If a producer
increases the units of a variable factor while keeping other factors constant,
the total product initially increases at an increasing rate, then increases at
a decreasing rate and finally begins to decrease.”
The law of
variable proportions states that when only one production element is allowed to
increase while keeping all other elements constant, first production will
increase, then production will decrease and finally negative production will
occur.
The law of
variable proportions is also called the law of equality.
The law of
variable proportions applies only in the short run. In the short run, the
enterprise cannot change all the factors to increase production because it is
still struggling. Only a few factors can be changed.
The law of variable
proportions examines the consequences of changes in factor proportions on the
quantity of production.
The law of
diminishing marginal returns states that as the variable factor increases,
output will decline. Here are some examples of the law of diminishing marginal
returns:-
(i) Farmer
uses fertilizer: Firstly, fertilizer can increase crop production. However,
after the third unit of fertilizer, marginal returns diminish.
(ii) The
factory hires workers: At some point, a factory will operate at the optimum
level. Adding additional employees beyond this level will make operations less
efficient.
(iii) Bombing
of a factory: The first bombing attack on a factory causes some damage. A
second and third attack could have even bigger consequences. Ultimately,
further attacks do little additional damage.
(iv) Eating
banana: The satisfaction received from the first banana is more than that
from the second banana. The same is true for later bananas.
(v) Purchase
of backpack: The first backpack has the highest price. After that, the
marginal utility of each additional backpack decreases. The business must
reduce the cost per unit to entice buyers to purchase more units.
4. Explain the marginal and average revenues of a firm in
both perfect and imperfect competition. Give suitable examples. 12
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