1

SURYA GROUP OF INSTITUTIONS – SCHOOL OF MANAGEMENT STUDIES

BA 5101 ECONOMIC ANALYSIS FOR BUSINESS
IMPORTANT QUESTIONS & ANSWERS (13 Marks)

1. What are the fundamental economic problems?

a) What to produce?
Essential goods (food, cloth & Shelter) Or Luxury goods (Car, War tanks)

b) How to produce?
Manually, Semi-manually or using of Machines fully

c) For whom to produce?

The produced products or the fruits of economic development are to be distributed to the people
who need them most. Poor or Wealthy people?

2. List the types of Efficiency.

a) Economic efficiency
b) Productiveefficiency
c) Allocative efficiency
d) Distributive efficiency
e) X - efficiency

3. Explain the factors which influence the Economic growth.

a) Land,
b) Human Resource,
c) Capital,
d) Entrepreneurial spirit
e) Technological advancement

4. Discuss about the Micro and Macro Economics. Describe Macro economic
variables.
 Micro-Economics – (Micro means Small) it is the study of an economic behavior of a particular
individual, firm, or household, i.e. it studies a particular unit.

 Macro-Economics - (Macro means Large) is the study of the economy as a whole i.e., not a
single unit but the combination of all firms, households.

 Macro-economic variables:
a) GDP/ National Income,
b) Inflation,
c) Interest rate
d) Investment
e) Unemployment
f) Exchange rate
 2

5. Explain in detail the Production Possibility Frontier (PPF):

 Production Possibility Frontier (PPF): The production possibility frontier (PPF) is a curve
depicting all maximum output possibilities for two goods, given a set of inputs consisting of
resources and other factors.
 In simple words, a Production Possibility Frontier (PPF) shows the maximum possible output
combinations of two goods or services an economy can achieve when all resources are fully and
efficiently employed.

6. What is market equilibrium? Explain the determinants of demand and supply.

 Market equilibrium – it is a state of the market where the quantities supplied are equal to the
quantities demanded at a price level.
 Determinants of demand:
a) Price of the product,
b) Income of the people,
c) Prices of substitute products,
d) Prices of complementary products,
e) Other factors

 Determinants of supply:
a) Price of the product,
b) Production capabilities of producers,
c) Cost of production,
d) Technology available,
e) Availability of Resources, f) Others.

7. Explainin detail the different market structures.

 3

a) Perfect Competition
b) Imperfect Competition
i. Monopoly,
ii. Duopoly
iii. Oligopoly
iv. Monopolistic

8. What are economic Costs of Imperfect Competition? Explain the government

interventions.
 Economic Costs of Imperfect Competition:
i. Increased prices and reduced output
ii. Substandard quality and limited choices
iii. Abnormal profit and negligence of consumer welfare
 Government interventions:
Private Unregulated Imperfect Competition
By making compulsory registration of
Private Regulated Imperfect Competition Firms
By Government Operations or
Private Perfect Competition Government Ownership

9. How is price for factors determined? What is the interaction of Product and
Factor Market?

 Factors of production are: Land, Labour, Capital:

Factors Price Price Fixed based on:

Land Rent 1. Availability of land
2. Land demanded by the Firms
Labour Wage 1. Availability of Skilled labour
2. Requirement of skills by the Industry
3. Willingness of the labour
4. Hourly wage rate
Capital Interest 1. Prevailing Interest
2. Alternative source of investment
3. Funds required by the Firms
Entrepreneurs Profit 1. Business attractiveness
2. Demand for the products
3. Entry & Exit barriers
4. Market Competitiveness
 4

 The interaction of Product and Factor Market:

10. Explain the process, component and difficulties in computing of National Income.
 National Income: it refers to “the total of income earned by the people of a nation during a
particular period”

 Methods of Computing or Determining National Income:

i. Income Method:
NI (Y) = w + r + i + p

 ‘w’ for wages (salary) earned by Labour

 ‘r’ for rent received by the landlords by leasing their lands
 ‘i’ for interest received by the investors for the capital they invested in businesses
 ‘p’ for profit earned by the entrepreneurs who set up and run the business

ii. Expenditure Method:

NI (Y) = C + I + G + (X – M)
 ‘C’ for Consumption: people’s spending on durable & non-durable products
 ‘I’ for Investment: Companies’ purchases of Fixed assets (Machinery, equipments)
 ‘G’ for Government spending: Central/State government all expenditure
 ‘(X – M)’ Net export: Export of products minus Import of products

iii. Production (or) Output Method:

NI (Y) = vP (PS + SS + TS)

 ‘vP’ for value of Production
 ‘PS’ for Primary Sector: the value of output cultivated by the Agriculture Sector
 ‘SS’ for Secondary Sector: the value of goods produced by Manufacturing Sector
 ‘TS’ for Tertiary Sector: the value operations carried out by Service Sector
 Problems in Computing National Income:
 5

i. Owner occupied Houses

ii. Self-Consumption by Farmers
iii. Second-hand goods
iv. Services of housewives
v. Illegal goods
vi. Transfer payment (Old-age pensions, Allowances for unemployed youth)
 Importance of Computing national Income:
i. It is a summary of economic growth
ii. It reveals the structure of national income (stream of national income)
iii. It helps to measure the standard of living of the people
iv. It helps for comparison with other nations or year on year.
 Factors determining National Income:
i. Quantity & Quality of Factors of production
 Size of arable land
 Rainfall level
 Employment rate
 Education & skill level
 Interest rate
ii. Using of Advance Technology
 It enables best use of all availed resources
 Increases productivity of a nation thereby its income
iii. Political Stability
 A stable government may bring more reforms and accelerate economic growth.
11. What is Multiplier? Explain its leakages.
 Multiplier: “Each rupee of changes in expenditure leads to two rupees of changes in the GDP”

 Multiplier Formula: M

M = Multiplier
MPC = Marginal Propensity to Consume
E = Total Expenditure

 Leakages of Multiplier:

Income
Savings
Repayment of Debt
Tax
Inflation
Purchase of Old products
Hoardings

Consumption/Expenditure GDP
 6

12. Explain the theories of Fiscal Policy.

 Fiscal Policy: it is the programme of government to change in the expenditure, taxation and
borrowing in order to achieve intended economic goals”. It is also called as ‘Budget’ or ‘Statement
of Income and Expenditure’.

 Objectives of Fiscal Policy:

 More Employment generation
 Accelerating the Economic growth
 Distribution of Wealth
 Instruments of Fiscal Policy:
 Expenditure
 Taxation (Revenue)
 Deficit Financing
 Borrowing
a) Internal Borrowing
b) External Borrowing

13. What is unemployment? List the impacts of Unemployment.

 Unemployment: it is the state where a large number of potential persons who are willing to work
but cannot find jobs/ works at the prevailing wage rate” (Skilled people with wiliness to work yet
find no job).

 Types of unemployment:
 Frictional Unemployment: it is because of ignorance/ not aware of job opportunities or
because of shortage of raw materials & breakdown of machines.
 Cyclical Unemployment: it happens at the time of recession and depression in the economic
or business cycle. Whenever the economy downs, this kind of unemployment occurs.
 Structural Unemployment: it occurs in any one sector of the economy due to changes in
the structure or pattern of consumer demand/ change in the technology.
 Casual Unemployment: it happens at the completion of short-term contracts in some fields
such as Construction, Mining and Agriculture.

 Seasonal Unemployment: it arises because of seasonal characteristic of a product activity

like Sugarcane, Holiday resorts and Ice Factories.

 Voluntary Unemployment: it is because of the people who are – with enough skills –
unwilling to work at the prevailing wage rate or due to enormous wealth.

 Disguised Unemployment: it is a mass-underemployment where there are 4-5 persons

working against a required man-power of 2 persons. (Marginal Productivity of Labour is
Zero)

 Causes of Unemployment:
 7

 Defective Education System – mismatch between the skill-sets required by the Industry and
offered by the Educational Institutions.
 Slow pace of Industrialization – the pace of creating more factories is very slow in India &
also there is no an encouragement environment for
entrepreneurs.
 More participation in Labour force – women participation in labour-force is increasing as
never before. Moreover, educated \youth is more
interested to seeking jobs rather than creating.
 Jobless Growth – growth in economy is evident but that never leads to job creation due to
automation.
 Seasonal Occupation – today, the business people are only interested in hiring people
temporarily or for short period of time.
 Low Investment/FDI – low flow of investment domestically or globally in labour-intensive
factories shrink the employment opportunities.
 Strategies for Creating Employment opportunities:
 Growth – Oriented Strategies – Labour & Machines to be complementary inputs
 Labour – Intensive Strategies – more deployment of man-power than machine-power
 Price Stability – Deflation or high inflation leads to jobless state. So, control the prices.
 Rural Public Work Strategies – guaranteed manual works to be speeded up in rural areas.
14. Discuss about Okun’s Law and Philips Curve:
 Arthur Okun an economist was the first to bring out the relationship between output and
unemployment.
 Okun’s Law: He described that 1% increases in unemployment rate leads to 2% decline in
GDP of the nation (Output). Hence, he established a negative relationship between the
Unemployment and Output (GDP).
 A. W. Philip, an economist, analyzed annual wage inflation and unemployment rates in the UK for
the period 1860 – 1957, and then plotted them on a scatter diagram. The data appeared to
demonstrate an inverse and stable relationship between wage inflation and unemployment.
.

15. What is Money? What are methods of measuring Money Supply?

 Money: “Anything that can be commonly accepted as a medium of exchange is called as Money”
 Demand for Money Holding in hand:
 8

 Transaction purpose – for day to day household transactions, cash to be held in hand.
 Precautionary purpose – to meet any contingencies in future.
 Speculative purpose - when the interest rate is very low, people would hold money in hand.
On other hand, interest rate is high then they prefer to invest instead of
holding in hand.
 Form of Money Circulation in an Economy:
 Currencies & Coins with Public (C)
 Savings Bank Deposits (SBD)
 Other Deposits of the RBI (OD)
 Time/ Term Deposits (TD)
 Measurement of Money Supply:
 M1 = C + SBD (Banks) + OD (With RBI)
 M2 = M1 + SBD (Post Offices)
 M3 = M1 + TD (Banks)
 M4 = M3 + All Deposits with Post Offices.

16. Discuss about Instruments of Money market.

 Money Market: it is a place where the short-term financial securities are trade. Simply, it is the
place for buying and selling of short-term securities maturing in from 1 day to 364 days.
 Instruments of Money Market
 Call Money (only for inter-bank transactions)
 Treasury Bills (T-Bills) – issued at discount to the public and redeemed at par.
 Certificate of Deposits (CDs) – mobilized from people at slightly higher interest.
 Commercial papers (CPs) - issued at discount to the public and redeemed at par.

17.Write about the roles of Monetary Policies.

 Monetary Policy: “Measures taken by the Reserve Bank of India to regulate the supply of money
with a view to stabilize the price level.”
 Objectives of Monetary Policy:
 Price Stability (controlling of inflation)
 Attaining high Economic growth
 Stability of Financial market.

 Instruments of Monetary Policy (also Controlling Mechanism of Inflation):

 Bank Rate Policy:
o Repo rate: it is the rate at which the RBI lends money to commercial banks.
(it is the interest rate charged by the RBI from Commercial Banks for the
money it lends)

o Reverse Repo rate: it is rate at which the RBI borrows money from
commercial banks. (it is the interest rate paid by the RBI to other banks for
the money it borrows)

 Open Market Operations:

 9

o Buying of Government Securities from public to infuse money to stem price-

falling.

o Selling of Government Securities to the Public to squeeze money to control

inflation.

 Reserve Ratio Changes:

o Cash Reserve Ratio (CRR): a stipulated percentage of total cash balances of
each commercial bank are to be maintained with the RBI as reserves.

o Statutory Liquidity Ratio (SLR): A portion of total deposits mobilized by the

Commercial bank to be parked with the RBI.

 Other measures:
o Selective Credit: by which the RBI instructs the commercial banks to lend
more or less credit to a particular sector, as the situation demands.

o Margin Requirement: it is the contribution to be made by the borrowers

towards the total loan amount. Banks may seek high/low contribution from
the borrowers as instructed by the RBI.

o Credit Limit: the RBI may restrict the maximum amount of loan to be given
to different category of borrowers – housing, vehicle, crop loans.

18. What is Inflation? Explain its types, and measures to control.

 Inflation: it is a situation of increase in the general price level of goods and services in an economy
over a period of time.

 Others terms associated with changes in Prices:

 Reflation: it is a situation of price rising deliberately undertaken to relieve a
depression (stagnant) in the economy.

 Disinflation: a situation of price-falling due to anti-inflationary measures taken by the

government with no corresponding decline in employment and output.

 Deflation: it is a situation of decreases in the general price level of goods & services
in the economy leading to unemployment”

 Measurement of Inflation:

 CPI/WPI = (P1 – P0)/ P0 x 100

Where: CPI = Consumer Price Index

WPI = Wholesale Price Index

 10

P1 = Price level in Current year

P0 = Price level in Base year

 WPI = Wholesale Price Index:

Measuring the changes in Price level of goods & services purchased by retailers
from the wholesalers.

Producer > Wholesaler > Retailer > Household (Consumer)

 CPI = Consumer Price Index:

Measuring the changes in the price level of consumer goods and services purchased
by households.

Producer > Wholesaler > Retailer > Household (Consumer)

 Types of Inflation:
 Creeping Inflation: it is of no danger as it is 1 – 2%
 Walking Inflation: it is normal revolving around 4 -6%
 Running Inflation: it is double-digit increases in price level signaling setback (<10%)
 Galloping Inflation: price increases in triple-digit (100 -999%) very dangerous
 Hyper Inflation: an unbearable state. If it happens, the nation will become insolvent.
(1000 – 1000000% of Inflation).
 Causes of Inflation:
 Demand-pull Inflation: high or more demand for goods & services leads to increases
in the prices of goods & services.
 Cost-push Inflation: increases in the cost of production due to high raw material &
labour costs will result in rise in the prices of goods & services.
 Cartel: producers may form an association themselves and restrict the output thereby
creating an artificial demand in the market for the product & it pressurizes the
prices to go up.
 Consequences of Inflation:
 To Households (People):
o Inflation reduces the purchasing power of the money.
o People get less for the same amount of money.
o Standard of living declines
o Fixed income households will suffer a lot
 To Borrowers & Lenders:
o Borrowers will become better off
o Lenders will be worse hit
 T o the Businesses:
o Increased demand for wage rise
o Increases in cost of resources make profit down
o Reduction in Production
 11

 To the Nation as a whole:

o Our goods & services relatively more expensive in the global market
o Reduction in exports.