IIIE SECTION A ECONOMICS NOTES Economics question papers

Define Economics from the view point of scarcity of resources
6 Marks
Economics can be defined as a body of knowledge or study that discusses how a society
tries to solve the human problems of unlimited wants and scarce resources. Because
economics is associated with human behavior, the study of economics is classified as a
social science. Because economics deals with human problems, it cannot be an exact
science and one can easily find differing views and descriptions of economics.
Economics is the study of the production and consumption of goods and the transfer of
wealth to produce and obtain those goods. Economics explains how people interact
within markets to get what they want or accomplish certain goals.
The main concern of economics is economic problem. The source of any economic
problem is scarcity. Scarcity of resources forces people to choose from
alternatives.Therfore economic problem can be said to be a problem of choice and
valuation of the alternatives. The problem of choice arises because limited resources with
alternative uses are to be utilized to satisfy unlimited wants, which are of various degrees
of importance. Had the resources such as human, natural and capital has not been scare,
there would be no problem of choice and hence no economic problem at all. Therefore
root cause of all economic problems is scarcity.
Resources:
Land
Labour ( Human Resources)
Capital
Enturprenurship
Scarcity is a relative concept. It can be defined as excess demand. i. e. demand more than
supply. For ex unemployment is essentially scarcity of jobs. Inflation is scarcity of goods.
Establish relationship between need, want and demand
6 Marks
Difference between Want and Need :
In economic terms, people have unlimited wants; however, resources are scarce. We
should not confuse wants and needs. Individuals often want what they don't need. If you

consider an automobile example, A person can decide between purchasing a new luxury
car or a low-priced pickup truck .Someone might want to drive a large luxury car, but a
small pickup truck may be more suited to the purchaser's needs if he or she must have a
vehicle for hauling furniture.
Consumers have unlimited wants but all the wants does not increase or decrease the
demand. For ex A consumer may need to have a crown put on a tooth but may not want
to have it done because of the high cost. But he goes for it when he actually needs it
irrespective of price .This increases the demand. But When he founds an alternative the
demand reduces.
Illustrate the concept of Utility and Value
8 Marks
Utility can be defined as the extent of satisfaction obtained by consumption of goods and
services preferred by consumers. Given the available resources the level of income and
the market prices of various goods,the ratinal consumer allocates his spending in such a
way that the preferred combination gives him highest utility.
There are two basic approaches that are followed for utility:
Cardinalist approach: Utility can be measured in subjective units
Ordinalist approach : Here utility cannot be measured but can be ranked according to the
order of preference.
Total utility received from a good is measured as the total satisfaction enjoyed from the
consumption of that good. The total utility increase as no. of goods consumed increase.
He eventually reaches a saturation point which is called as total utility. However it is
difficult to measure as it is subjective.
Marginal utility is the extra satisfaction a consumer can obtain over a given period by
consuming an extra unit of good.
Change in total Utility /1 unit change in quantity consumed = U’(Q))
U’ is he total utility to a consumer
Q is the qty consumed to get U level of total utility.
Utility is taken to be correlative to Desire or Want. It has been already argued that desires
cannot be measured directly, but only indirectly, by the outward phenomena to which
they give rise: and that in those cases with which economics is chiefly concerned the
measure is found in the price which a person is willing to pay for the fulfilment or
satisfaction of his desire.

Value: Value is the measure of benefit a consumer gets from a product or good. The
economic value is not the same as market price.If a consumer is willing to buy a good, it
implies that the customer places a higher value on the good than the market price.
It is seen that items of great value( eg ; Air water etc) are sold at negligible prices where
as items like diamonds are sold at very high prices although their value to man is not as
much as water air etc.
The difference between the value to the consumer( amount of money we are willing to
pay) and the market price ( The money we actually pay) is called "consumer surplus".
It is easy to see situations where the actual value is considerably larger than the market
price: purchase of drinking water is one example.
Briefly explain the 4 different market categories and highlight
the difference among their characteristics.
5 + 5 + 5 + 5 Marks
1. Perfect Competition: A theoretical market structure characterized by
complete absence of rivalry between individual firms,
Perfect competition describes markets such that no participants are large enough
to have the market power to set the price of a homogeneous product. Because
the conditions for perfect competition are strict, there are few if any perfectly
competitive markets. Still, buyers and sellers in some auction-type markets say
for commodities or some financial assets may approximate the concept. Perfect
competition serves as a benchmark against which to measure real-life and
imperfectly competitive markets.
Generally, a perfectly competitive market exists when every participant is a "price
taker", and no participant influences the price of the product it buys or sells
2. Monopoly : Where there is only one provider of a product or service.
Natural monopoly, a monopoly in which economies of scale cause efficiency
to increase continuously with the size of the firm. A firm is a natural monopoly if it
is able to serve the entire market demand at a lower cost than any combination
of two or more smaller, more specialized firms.

3. Monopolistic Competition: Monopolistic competition, also called
competitive market, where there is a large number of firms, each having a
small proportion of the market share and slightly differentiated products.
Monopolistic competition is a type of imperfect competition such that many
producers sell products that are differentiated from one another as goods but not
perfect substitutes (such as from branding, quality, or location). In monopolistic
competition, a firm takes the prices charged by its rivals as given and ignores the
impact of its own prices on the prices of other firms.[1]
4 . Oligopoly: In which a market is dominated by a small number of firms that
together control the majority of the market share.
Duopoly, a special case of an oligopoly with two firms.
Monopsony, when there is only one buyer in a market.
Oligopsony, a market where many sellers can be present but meet only a
few buyers.
An oligopoly is a market form in which a market or industry is dominated by a
small number of sellers (oligopolists). A general lack of competition can lead to
higher costs for consumers. Because there are few sellers, each oligopolist is
likely to be aware of the actions of the others. The decisions of one firm
influence, and are influenced by, the decisions of other firms. Strategic planning
by oligopolists needs to take into account the likely responses of the other market
participants.

CHARECTERSTICS :
Perfect Competition Monopoly Monopolistic
Competition
Oligopoly
Infinite buyers and
sellers who are willing
to supply and buy a
product at a ceratin
price.
Single seller There are many
producers and
many consumers
in the market,
and no business
has total control
over the market
price
An oligopoly
maximizes
profits by
producing where
marginal revenue
equals marginal
costs
Zero entry and exit
barriers – Easy to enter
or exit the market
High Barriers
to Entry
There are few barriers to
entry and exit. Entry and exit:
Barriers to entry
are high
Perfect factor mobility Price
Discriminatio
n
Consumers
perceive that
there are non-
price differences
among the
competitors'
products.
Oligopolies are
price setters
rather than price
takers
Perfect information Price Maker Producers have a
degree of control
over price
"Few" – a
"handful" of
sellers.[3]
There
are so few firms
that the actions
of one firm can
influence the
actions of the
other firms
Zero transaction costs Oligopolies can
retain long run
abnormal profits.
High barriers of
entry prevent
sideline firms
from entering
market to capture
excess profits

Profit maximization Profit
Maximizer
Homogenous products Product may be
homogeneous
(steel) or
differentiated
Non-increasing returns
to scale
The distinctive
feature of an
oligopoly is
interdependence
Property rights Non-Price
Competition
August 2010 Write notes Features of a MonoployMarket
10 Marks
Feb 2010 Discuss main features of Monopoly market
10 Marks
Monopoly is an extreme form of market structure. The word monopoly is derived from
two Greek words-Mono and Poly. Mono means single and Poly means 'seller'. Thus
monopoly means single seller. Monopoly is a firm of market organization for a
commodity in which there is only one single seller of the commodity.
In short monopoly is a form of market structure where there is a single seller producing a
commodity having no close substitute? Under monopoly there is no rival or competitors.
The degree of competition in monopoly is nil. Thus if the buyers is to purchase the
commodity, he can purchase it only from that seller. The seller dictates the price to
consumers. Unlike perfect competition a monopolist can fix up the price.
As monopoly is a form of imperfect market organization, there is no difference between
firm and industry. A monopoly firm is said to be an industry. Thus monopoly means the
absence of competition. There are strong barriers to entry into the industry. As a result,
seller has full control over the supply of the commodity.
Features of Monopoly:

1. One seller and large number of buyers:
Monopoly is a form of imperfect market structure where there is only one seller of a
product. A monopoly firm may be owned by a person, a few numbers of partners or a
joint stock company. The characteristic feature of single seller eliminates the distinction
between the firm and the industry. A monopolist firm is itself 'the industry. Under
monopoly there are large numbers of buyers although the seller is one. No buyer's
reaction can influence the price.
2. No close substitute:
Under monopoly a single producer produces single commodities which have no close
substitute. As the commodity in question has no close substitute, the monopolist is at
liberty to change a price according to his own whimsy. Monopoly can not exist when
there is competition.
A firm is said, to be monopolist only when it is the single producer and supplier of the
product which have no close substitute. Under monopoly the cross elasticity of demand is
zero. Cross elasticity of demand shows a change in the demand for a good as a result of
change in the price of another good.
3. Strong barriers to the entry into the industry exist:
In a monopoly market there is strong barrier on the entry of new firms. Monopolist faces
no competition. As there is one firm no other rival producers can enter the market of the
same product. Since the monopolist has absolute control over the production and sale of
the commodity certain economic barriers are imposed on the entry of potential rivals.
4. Nature of demand curve:
In case of monopoly one firm constitutes the whole industry. The entire demand of the
consumers for a product goes to the monopolist. Since the demand curve of the individual
consumers lopes downward, the monopolist faces a downward sloping demand curve.
A monopolist can sell more of his output only at a lower price and can reduce the sale at
a high price. The downward sloping demand curve expresses that the price (AR) goes on
falling ns sales are increased. In monopoly AR curve slopes downward mid MR curve
lies below AR curve. Demand curve under monopoly la otherwise known as average
revenue curve.
Febraury 2010 How is price – out put fixed under the
monopoly market ? 10 Marks

price and output under a pure monopoly
THE MONOPOLISTS DEMAND CURVE- CONSTRAINTS ON MONOPOLY
Be careful of saying that "monopolies can charge any price they like" - this is wrong. It is
true that a firm with monopoly has price-setting power and will look to earn high levels
of profit. However the firm is constrained by the position of its demand curve. Ultimately
a monopoly cannot charge a price that the consumers in the market will not bear.
A pure monopolist is the sole supplier in an industry and, as a result, the monopolist can
take the market demand curve as its own demand curve. A monopolist therefore faces a
downward sloping AR curve with a MR curve with twice the gradient of AR. The firm is
a price maker and has some power over the setting of price or output. It cannot, however,
charge a price that the consumers in the market will not bear. In this sense, the position
and the elasticity of the demand curve acts as a constraint on the pricing behaviour of the
monopolist. Assuming that the firm aims to maximise profits (where MR=MC) we
establish a short run equilibrium as shown in the diagram below.
Assuming that the firm aims to maximise profits (where MR=MC) we establish a short
run equilibrium as shown in the diagram below.
The profit-maximising output can be sold at price P1 above the average cost AC at output
Q1. The firm is making abnormal "monopoly" profits (or economic profits) shown by the
yellow shaded area. The area beneath ATC1 shows the total cost of producing output
Qm. Total costs equals average total cost multiplied by the output.
A CHANGE IN DEMAND
A change in demand will cause a change in price, output and profits.

In the example below, there is an increase in the market demand for the monopoly
supplier. The demand curve shifts out from AR1 to AR2 causing a parallel outward shift
in the monopolist's marginal revenue curve (MR1 shifts to MR2). We assume that the
firm continues to operate with the same cost curves. At the new profit maximising
equilibrium the firm increases production and raises price.
Total monopoly profits have increased. The gain in profits compared to the original price
and output is shown by the light blue shaded area.
Not all monopolies are guaranteed profits - there can be occasions when the costs of
production are greater than the average revenue a monopolist can charge for their
products. This might occur for example when there is a sharp fall in market demand
(leading to an inward shift in the average revenue curve). In the diagram below notice
that ATC lies AR across the entire range of output. The monopolist will still choose an
output where MR=MC for this reduces their losses to the minimum amount.

How do monopolies continue to earn supernormal profits in the long run - revise barriers
to entry. See also the pages on price discrimination
Mobile Phone Operators and Supernormal Profits
In the first of its mobile market reviews, OFTEL, the telecommunications industry
regulators has found that mobile phone operators are making profits greater than would
be expected in a fully competitive market. Their research finds that mobile phone charges
have fallen by nearly a quarter since January 1999. And, the level of consumer
satisfaction with their mobile phone service continues to run high (at around 90%).
But the OFTEL review finds that consumers do not have sufficient information on the
range of prices available from the mobile phone networks and they are being over-
charged for calls between mobile networks. OFTEL have stated that some sectors of the
industry may require more intensive regulation unless there are improvements in pricing
in the coming months.
August 2011 : Describe the important variables that constitute
the subject matter of macroeconomics.
14 Marks

August 2010 :Discuss the salient features of macroeconomics
10 marks
Macro economics is an aggregate study of the economy of a country.
Economy means production, exchange, distribution and consumption activities of a
country combined together. Hence, the study of the aggregate behavior of an economy is
known as Macro economics. We study aggregate demand, aggregate supply, national
income, national output, aggregate consumption, aggregate saving, aggregate investment,
aggregate expenditure, general level of employment, business fluctuations, general price
level, foreign trade, balance of payments. Etc..in macro economics. Apart from that we
also study business fluctuations in the international market, free trade areas and other
forms of economic integration, world trade organisation, etc.
The 3 major macroeconomic variables are GDP, unemployment, and inflation.
GDP (Gross Domestic Product), the inflation rate and the unemployment are three widely
cited and watched macroeconomic variables of economic activity.
Gross domestic product (GDP) is the market value of all officially recognized final
goods and services produced within a country in a given period of time.
The gross domestic product (GDP) is one the primary indicators used to gauge the health
of a country's economy. It represents the total dollar value of all goods and services
produced over a specific time period - you can think of it as the size of the economy.
Usually, GDP is expressed as a comparison to the previous quarter or year. For example,
if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by
3% over the last year.
Measuring GDP is complicated, but at its most basic, the calculation can be done in one
of two ways: either by adding up what everyone earned in a year (income approach), or
by adding up what everyone spent (expenditure method). Logically, both measures
should arrive at roughly the same total.
The income approach, which is sometimes referred to as GDP(I), is calculated by adding
up total compensation to employees, gross profits for incorporated and non incorporated
firms, and taxes less any subsidies. The expenditure method is the more common
approach and is calculated by adding total consumption, investment, government
spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has a large
impact on nearly everyone within that economy. For example, when the economy is
healthy, you will typically see low unemployment and wage increases as businesses
demand labor to meet the growing economy. A significant change in GDP, whether up or
down, usually has a significant effect on the stock market. It's not hard to understand

why: a bad economy usually means lower profits for companies, which in turn means
lower stock prices. Investors really worry about negative GDP growth, which is one of
the factors economists use to determine whether an economy is in a recession.
Strengths:
• GDP is considered the broadest indicator of economic output and growth.
• Real GDP takes inflation into account, allowing for comparisons against other
historical time periods.
• The Bureau of Economic Analysis issues its own analysis document with each
GDP release, which is a great investor tool for analyzing figures and trends, and
reading highlights of the very lengthy full release
Weaknesses:
• Data is not very timely - it is only released quarterly.
• Revisions can change historical figures measurably (the difference between 3%
and 3.5% GDP growth is a big one in terms of monetary policy)
The Closing Line
While quarter-to-quarter figures can show some volatility, long-term trends in GDP
growth remain the single most conclusive piece of information on the economy as a
whole. This indicator is a must-know for investors in all asset classes.
Inflation:
In economics, inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the general price level rises, each unit of currency
buys fewer goods and services. Consequently, inflation also reflects an erosion in the
purchasing power of money – a loss of real value in the internal medium of exchange and
unit of account in the economy.A chief measure of price inflation is the inflation rate, the
annualized percentage change in a general price index (normally the Consumer Price
Index) over time.
Inflation's effects on an economy are various and can be simultaneously positive and
negative. Negative effects of inflation include an increase in the opportunity cost of
holding money, uncertainty over future inflation which may discourage investment and
savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding
out of concern that prices will increase in the future. Positive effects include ensuring that
central banks can adjust real interest rates (intended to mitigate recessions), and
encouraging investment in non-monetary capital projects.
Economists generally agree that high rates of inflation and hyperinflation are caused by
an excessive growth of the money supply. Views on which factors determine low to
moderate rates of inflation are more varied. Low or moderate inflation may be attributed
to fluctuations in real demand for goods and services, or changes in available supplies

such as during scarcities, as well as to growth in the money supply. However, the
consensus view is that a long sustained period of inflation is caused by money supply
growing faster than the rate of economic growth.
Today, most economists favor a low and steady rate of inflation. Low (as opposed to zero
or negative) inflation reduces the severity of economic recessions by enabling the labor
market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap
prevents monetary policy from stabilizing the economy. The task of keeping the rate of
inflation low and stable is usually given to monetary authorities. Generally, these
monetary authorities are the central banks that control monetary policy through the
setting of interest rates, through open market operations, and through the setting of
banking reserve requirements
 Inflation in an economy can be the result of an increase in aggregate demand that is
unaccompanied by an increase in aggregate supply. This is known as demand-pull
inflation. A rise in any component of aggregate demand can bring about demand-pull
inflation. One reason for a sudden, unanticipated rise in aggregate demand can be an
unanticipated rise in the supply of money. Inflation can also result from a decrease in
aggregate supply that occurs when businesses find that production inputs have risen in
price. Such occurs when labor costs and the price of raw materials such as crude oil have
risen. Decreases in productivity (the ratio of GDP to inputs) can also have a negative
impact on aggregate supply and, therefore, cause a rise in prices. This type of inflation is
known as cost-push inflation.
 Shifts in labor market that can create unemployment. Some of these shifts are
attributable changes in GDP caused by changes in aggregate demand or aggregate supply,
or both. Additionally, shifts in public policies affecting labor demand (such as minimum
wage, worker safety, and even foreign trade legislation) can create shifts in the
unemployment rate.
UN EMPLOYMENT :
The amount of unemployment in an economy is measured by the unemployment rate, the
percentage of workers without jobs in the labor force. The labor force only includes
workers actively looking for jobs. People who are retired, pursuing education, or
discouraged from seeking work by a lack of job prospects are excluded from the labor
force.
Unemployment can be generally broken down into several types that are related to
different causes. Classical unemployment occurs when wages are too high for employers
to be willing to hire more workers. Wages may be too high because of minimum wage
laws or union activity. Consistent with classical unemployment, frictional unemployment
occurs when appropriate job vacancies exist for a worker, but the length of time needed
to search for and find the job leads to a period of unemployment. Structural

unemployment covers a variety of possible causes of unemployment including a
mismatch between workers' skills and the skills required for open jobs. Large amounts of
structural unemployment can occur when an economy is transitioning industries and
workers find their previous set of skills are no longer in demand. Structural
unemployment is similar to frictional unemployment since both reflect the problem of
matching workers with job vacancies, but structural unemployment covers the time
needed to acquire new skills not just the short term search process. While some types of
unemployment may occur regardless of the condition of the economy, cyclical
unemployment occurs when growth stagnates. Okun's law represents the empirical
relationship between unemployment and economic growth. The original version of
Okun's law states that a 3% increase in output would lead to a 1% decrease in
unemployment.
August 2011 How does Microeconomics differ from macro
economics? 6 Marks
Feb 2010 Distingusih between Microeconomics and macro
economics? 10 Marks
Micro Economics Macro Economics
1 The evolution took place earlier than
macro economics.
2. It has a very narrow scope i. e. an
indivisual, a market etc.
3. Demand, supply market forms etc relate
to macro economics
4. Micro Economics studies the problems
of individual economic units such as a
firm, an industry, a consumer etc.
5. Micro Economic studies the problems of
price determination, resource allocation etc.
6. While formulating economic theories,
Micro Economics assumes that other things
remain constant.
7. The main determinant of Micro
Economics is price
1 Its evolution took place only after
publication of kaynes book
2. It has a very wide scope i. e. a country
3. Aggregate demand, aggregate supply and
price level etc relate to macro economics
4. Macro Economics studies economic
problems relating to an economy viz.,
National Income, Total Savings etc.
5. Macro Economics studies the problems
of economic growth, employment and
income determination etc.
6. In Micro Economics economic variables
are mutually inter-related independently.
7. In Micro Economics economic variables
are mutually inter-related independently.

8. It adopts Bottoms up approach 8. It adopts Tops down approach
Define the tem GDP 2 Marks
GDP: The monetary value of all the finished goods and services produced within a
country's borders in a specific time period, though GDP is usually calculated on an
annual basis. It includes all of private and public consumption, government outlays,
investments and exports less imports that occur within a defined territory.
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports.
(NX = Exports - Imports)
What is the difference between GDP and GNP
4 Marks
GDP GNP
Definition: An estimated value of the
total worth of a country’s
production and services,
on its land, by its nationals
and foreigners, calculated
over the course on one
year
An estimated value of the
total worth of production
and services, by citizens
of a country, on its land or
on foreign land, calculated
over the course on one
year
Formula for calculation GDP = consumption +
investment + (government
spending) + (exports −
imports)
GNP = GDP + NR (Net
income inflow from assets
abroad or Net Income
Receipts) - NP (Net
payment outflow to foreign
assets)
Uses Business economic
forecasting
Business economic
forecasting
Application (Context in
which these terms are
used):
To see the strength of a
country’s local economy
To see how the nationals
of a country are doing
economically

Layman Usage Total value of products &
Services produced within
the territorial boundary of a
country
Total value of Goods and
Services produced by all
nationals of a country
(whether within or outside
the country)
Define the term National income
2 Marks
National income is a measure of the total value of the goods and services (output)
produced by an economy over a period of time (normally a year). It also represents the
total value of the primary incomes receivable within an economy less the total of the
primary incomes payable by resident units .
The Importance of National Income
Measuring national income is crucial for various purposes. It allows to:
1. measure the size of the economy and level of country’s economic performance;
2. trace the trend or the speed of the economic growth in relation to previous year(s)
also in other countries;
3. know the composition and structure of the national income in terms of various
sectors and the periodical variations in them.
4. make projection about the future development trend of the economy.
5. help government formulate suitable development plans and policies to increase
growth rates.
6. fix various development targets for different sectors of the economy on the basis
of the earlier performance.
7. help business firms in forecasting future demand for their products.
8. make international comparison of people’s living standards.
August 2011 How is National Income determined?
8 Marks
August 2010 Explain main determinants of national
Income
10 Marks

Output or Product Method
This method is based on the total production of a country during a year. The measures of
GDP are calculated by adding the total value of the output (of goods and services)
produced by all activities during any time period, such as a year. The major challenge of
this method is the problem of double-counting. All production units are classified into
primary, secondary and tertiary sectors. Then, the various units are identified under these
sectors and the goods and services, produced in each of these sectors, will be estimated.
The sum total of products generated in these three sectors is the total output of the nation.
The next step is to find out the value of these products in terms of money. This method
helps to find out contributions of various sectors to national income.
The agriculture and extractive industries 10
PLUS Manufacturing industries 40
PLUS Service and Construction 40
EQUALS GROSS DOMESTIC PRODUCT at Factor Cost 90
PLUS Net factor income from abroad ( =Income received from
abroad – Income paid abroad)
10
EQUALS GROSS NATIONAL PRODUCT at Factor Cost 100
LESS Capital Consumption or depreceation 20
EQUALS NETT NATIONAL PRODUCT at factor cost or NATIONAL
INCOME
80
Income Method
In the income method, the measures of GDP are calculated by adding all the income
earned by various factors of production which are engaged in the production of output.
The various incomes included to compute the gross national income are: wages and
salaries, income of self-employed, profits and dividends of business corporations,
interest, rent, surplus of government enterprises and net flow of income from abroad.
Factors of production together produce output and income and the sum will be equal to
the income of the nation. In other words, total (national) income is equal to the reward
given to various factors of production. See data about GDP measure using the income
approach
Income from Employment 50

PLUS Income from Self employment 10
PLUS Gross trading profits of the companies 10
PLUS Gross trading Surplus of public corporations 10
PLUS Rent 10
EQUALS GROSS Domestic PRODUCT at Factor Cost 90
PLUS Nett factor income from abroad 10
EQUALS Gross National product at factor cost. 100
Expenditure Method
National income can also be calculated by adding up the expenditure incurred for goods
and services. Government as well as private individuals spend money for consumption
and production purposes. The sum total of expenditure incurred in a country during a
year will be equal to national income.
Another important aspect concerning the computation of national income is the
difference between a measurement at “current price” and /or at “constant price”. The
measure based on current price uses the ongoing market prices to compute the value of
output. It is quite possible that the current price may always be higher than real value due
to many factors like taxes and inflation (or rising prices). Hence, national income arrived
at ‘current price’ includes such influences as inflation and taxes. With inflation as a
common feature in almost all the economies, it is necessary to measure the national
income after deducting any such increase in the value of any output or income. National
income at ‘constant price’ measures the national income after making necessary
adjustment to eliminate the effect of inflation. Thus it is based on unchanged price of
output. As the national income at ‘constant price’ is computed, based on the real worth of
the purchasing power of income, it is also called as ‘real national income’ or national
income in ‘real’ terms.
Consumer’s Expenditure 70
Plus Govt Current expenditure on goods and services 20
Plus Gross domestic fixed capital formation 20
Plus Value of physical increase in stocks and Work in progress 10

Equals Total domestic expenditure at market prices 120
Plus Exports and factor income from abroad 20
Less Imports and factor income paid abroad -30
Equals GNP 110
Less Indirect Taxes -20
Plus Subsidies 10
Equals Gross National product at factor cost. 100
How is National income not equal to GNP?
4 marks
National income is a measure of the total value of the goods and services (output)
produced by an economy over a period of time (normally a year). It also represents the
total value of the primary incomes receivable within an economy less the total of the
primary incomes payable by resident units.
An estimated value of the total worth of production and services, by citizens of a country,
on its land or on foreign land, calculated over the course on one year
GNP is one measure of national income, but a more precise measure of national income
is GNP adjusted for following:
Depreciation of physical capital results in a loss of income to capital owners, so the
amount of depreciation is subtracted from GNP.
Unilateral transfers to and from other countries can change national income: payments
of expatriate workers sent to their home countries, foreign aid and pension payments sent
to expatriate retirees
GNP-capital depreciation+Unilateral transfers = National Income
What are the objectives of economic planning in
India? Discuss the achievements of these
objectives in the various 5 yr plans implemented
so far.
10 + 10 marks

Planning without an objective is like driving without any destination. There are generally
two sets of objectives for planning, namely the short-term objectives and the long-term
objectives. While the short-term objectives vary from plan to plan, depending on the
immediate problems faced by the economy, the process of planning is inspired by certain
long term objectives. In case of our Five Year plans, the long-term objectives are:
(i) A high rate of growth with a view to improvement in standard of living.
(ii) Economic self-reliance;
(iii) Social justice and
(iv) Modernization of the economy
(v) Economic stability
(i) High Rate of Growth
All the Indian Five Year Plans have given primary importance to higher growth of real
national income. During the British rule, Indian economy was stagnant and the people
were living in a state of abject poverty. The Britishers exploited the economy both
through foreign trade and colonial administration. While the European industries
flourished, the Indian economy was caught in a vicious circle of poverty. The pervasive
poverty and misery were the most important problem that has to be tackled through Five
Year Plan.
During the first three decades of planning, the rate of economic growth was not so
encouraging in our economy Till 1980, the average annual growth rate of Gross Domestic
Product was 3.73 percent against the average annual growth rate of population at 2.5
percent. Hence the per-capita income grew only around 1 percent. But from the 6th
plan
onwards, there has been considerable change in the Indian economy. In the Sixth,
Seventh and Eight plan the growth rate was 5.4 percent, 5.8 percent and 6.8 percent
respectively. The Ninth Plan, started in 1997 targeted a growth rate of 6.5 percent per
annum and the actual growth rate was 6.8 percent in 1998 - 99 and 6.4 percent in 1999 -
2000. This high rate of growth is considered a significant achievement of the Indian
planning against the concept of a Hindu rate of growth.
(ii) Economic Self Reliance
Self reliance means to stand on one’s own legs. In the Indian context, it implies that
dependence on foreign aid should be as minimum as possible. At the beginning of
planning, we had to import food grains from USA to meet our domestic demand.
Similarly, for accelerating the process of industrialization, we had to import, capital
goods in the form of heavy machinery and technical know-how. For improving
infrastructure facilities like roads, railways, power, we had to depend on foreign aid to
raise the rate of our investment.

As excessive dependence on foreign sector may lead to economic colonialism, the
planners rightly mentioned the objective of self-reliance from the third Plan onwards. In
the Fourth Plan much emphasis was given to self-reliance, more specially in the
production of food grains. In the Fifth Plan, our objective was to earn sufficient foreign
exchange through export promotion and important substitution.
By the end of the fifth plan, Indian became self-sufficient in food-grain production. In
1999-2000, our food grain production reached a record of 205.91 million tons. Further, in
the field of industrialization, now we have strong capital industries based on
infrastructure. In case of science and technology, our achievements are no less
remarkable. The proportion of foreign aid in our plan outlays have declined from 28.1
percent in the Second Plan to 5.5 percent in the Eighth Plan. However, in spite of all
these achievements, we have to remember that hike in price of petroleum products in the
inter national market has made self-reliance a distant possibility in the near future.
(iii) Social Justice:
Social justice means to equitably distribute the wealth and income of the country among
different sections of the society. In India, we find that a large number of people are poor;
while few lead a luxurious life. Therefore, another objective of development is to ensure
social justice and to take care of the poor and weaker sections of the society. The Five-
Year Plans have highlighted four aspects of social justice. They are:
(i) Application of democratic principles in the political structure of the country;
(ii) Establishment of social and economic equity and removal of regional disparity;
(iii) Putting an end to the process of centralization of economic power; and
(iv) Efforts to raise the condition of backward and depressed classes.
Thus the Five Year Plans have targeted to uplift the economic condition of socio-
economically weaker sections like scheduled caste and tribes through a number of target
oriented programmes. In order to reduce the inequality in the distribution of landed
assets, land reforms have been adopted. Further, to reduce regional inequality specific
programmes have been adopted for the backward areas of the country.
In spite of various efforts undertaken by the authorities, the problem of inequality
remains as great as ever. According to World Development Report (1994) in India the top
20 percent of household enjoy 39.3 percent of the national income while the lowest 20
percent enjoy only 9.2 percent of it. Similarly, another study points out that the lowest 40
percent of rural household own only 1.58 percent of total landed asset while the top 5.44
percent own around 40 percent of land. Thus the progress in the field of attaining social
justice has been slow and not satisfactory.
(iv) Modernization of the Economy:

Before independence, our economy was backward and feudal in character. After
attainment of independence, the planners and policy makers tried to modernize the
economy by changing the structural and institutional set up of the country. Modernization
aims at improving the standard of living of the people by adopting a better scientific
technique of production, by replacing the traditional backward ideas by logical
reasoning's and bringing about changes in the rural structure and institutions.
These changes aim at increasing the share of industrial output in the national income,
upgrading the quality of products and diversifying the Indian industries. Further, it also
includes expansion of banking and non-banking financial institutions to agriculture and
industry. It envisages modernization of agriculture including land reforms.
(v) Economic Stability:
Economic stability means to control inflation and unemployment. After the Second Plan,
the price level started increasing for a long period of time. Therefore, the planners have
tried to stabilize the economy by properly controlling the rising trend of the price level.
However, the progress in this direction has been far from satisfactory.
Thus the broad objective of Indian plans has been a non-inflationary self-reliant growth
with social justice.
August 2011 Relate the growth of infrastructure on the
development of Indian economy 20 Marks
Febraury 2010 Writes notes on development of
infrastructure in India 10 Marks
India’s rise in recent years is a most prominent development in the world economy.
India has re-emerged as one of the fastest growing economies in the world. India’s
growth, particularly in manufacturing and services, has boosted the sentiments, both
within country and abroad. With an upsurge in investment and robust macroeconomic
fundamentals, the future outlook for India is distinctly upbeat. According to many
commentators, India could unleash its full potentials, provided it improves the
infrastructure facilities, which are at present not sufficient to meet the growing demand
of the economy. Failing to improve the country’s infrastructure will slow down India’s
growth process. Therefore, Indian government’s first priority is rising to the challenge
of maintaining and managing high growth through investment in infrastructure sector,
among others.
The provision of quality and efficient infrastructure services is essential to realize the
full potential of the growth impulses surging through the economy. India, while stepping
up public investment in infrastructure, has been actively engaged in involving private

sector to meet the growing demand. The demand for infrastructure investment during
the 11th Five Year Plan (2007-2011) has been estimated to be US$ 492.5 billion
(Planning Commission, 2007). To meet this growing demand, Government of India has
planned to raise the investment in infrastructure from the present 4.7 percent of GDP to
around 7.5 to 8 percent of GDP in the 11th Five Year Plan. In general, efforts towards
infrastructure development is continued to focus on the key areas of physical and social
infrastructure.
Profile of India’s physical infrasturctre :
Performance of physical infrastructure in Indian economy in last one and half decades
has been mixed and uneven. Performance of physical infrastructure in Indian economy in
last one and half decades has been mixed and uneven. Over years, India’s soft
infrastructure grew much faster than the hard infrastructure.For example the port traffic
has been increased where as hard infrastructure like rail, road and air traffic grew little.
The performance of soft infrastructure like telecom and port helped in the development of
country’s economy , but the little growth of road network negated this development.
Transport
The govt has taken various measures to improve the roads. India’s road network is the
largest network in the world. Govt has set up National Highway Authority of India which
has implemented NHDP .The flovers and roads are built in cities and in highways with
the help of some private companies on Build – Operate - Trasfer models.
The management and operation of delhi and Mumbai airports were handed
to the joint venture companies,like GMR.Airports regulatory authority has been
set up to work out the procedures for JV.Airports authority of India
has been set up to maintain and upgrade certain airports.
Railways is the world second largest network managed by single authority. It
caters the need of passenger and freight movement. Metro rail commites
has been set up in various cities which are building the intracitiy rails which
are helping in faster transport .
Special Economic Zones :
SEZs are designated duty-free enclaves with developed industrial infrastructure.
These zones are regarded as foreign territory for the purpose of duties and taxes, and are
excluded from the domain of the custom authorities to enjoy full freedom for the in and
outflow of goods. SEZ units enjoy a tax exemption for seven years: 100 percent
exemption in first 5 years, and 50 percent in the remaining 2 years. They have the
facility to retain 100 percent foreign exchange earnings in Export Earners Foreign
Currency Exchange accounts. All SEZ units are free to sell goods in the domestic tariff
area (DTA) on payment of applicable duties.
Provision of quality and efficient infrastructure services is essential to realize the full
potential of the emerging Indian economy. Indian government’s first priority is therefore

rising to the challenge of maintaining and managing high growth through investment in
infrastructure sector, among others. To sustain 9 percent growth, the Government of
India has estimated that an investment of over US$ 492.5 billion during the 11th Five
Year Plan (2007-2012) is required. Therefore, there is substantial infrastructure needs in
infrastructure sector in India, which, in other words, also offers large investment
opportunities. Public-Private–Partnership (PPP) is emerging as the preferred instrument,
where the private sector gets its normal financial rates of return while the public sector
partner provides concessional funding based on the long-term direct and indirect
benefits to the economy. New instruments such as Viability Gap Funding (VGF)
through a special purpose vehicle (SPV) set up recently by the Government of India to
fund mega infrastructure projects may be relevant for other Asian countries as well.
The cross-border infrastructure component is an important determinant of regional
integration. If countries are not inter-linked each other through improved transportation
network, regional integration process will not move ahead at a desired pace. In India,
development of cross-border infrastructure, especially transportation linkages and
energy pipelines with neighbouring countries is underway and expected to contribute to
the regional integration in Asia by reducing transportation costs and facilitating
intra-regional trade and services. Nevertheless, there are many challenges. It is
important for India to enhance its overland connectivity with East Asia in order to
effectively facilitate the Asian regional integration.
Distinguish between the roles played by the public and
private sectors in Indian industrial development.
10 Marks
How does government promote small scale industries in
India 10 Marks
Keeping in view the contribution of small business to employment generation, balanced
regional development of the country, and promotion of exports, the Government of
India’s policy thrust has been on establishing, promoting and developing the small
business sector, particularly the rural industries and the cottage and village industries in
backward areas. Governments both at the central and state level have been actively
participating in promoting selfemployment opportunities in rural areas by providing
assistance in respect of infrastructure, finance, technology, training, raw-materials, and
marketing. The various policies and schemes of Government assistance for the
development of rural industries insist on the utilization of local resources and raw
materials and locally available manpower. These are translated into action through
various agencies, departments, corporations, etc., all coming under the purview of the
industries department. All these are primarily concerned with the promotion of small and
rural industries.

Some of the support measures and programmers meant for the promotion of small and
rural industries are discussed below:
National Bank for Agriculture and Rural Development (NABARD)
NABARD was setup in 1982 to promote integrated rural development. Since then, it has
been adopting a multi-pronged, multi-purpose strategy for the promotion of rural business
enterprises in the country. Apart from agriculture, it supports small industries, cottage
and village industries, and rural artisans using credit and non-credit approaches. It offers
counselling and consultancy services and organises training and development
programmes for rural entrepreneurs.
The Rural Small Business Development Centre (RSBDC)
It is the first of its kind set up by the world association for small and medium enterprises
and is sponsored by NABARD. It works for the benefit of socially and economically
disadvantaged individuals and groups. It aims at providing management and technical
support to current and prospective micro and small entrepreneurs in rural areas. Since its
inception, RSBDC has organised several programmes on rural entrepreneurship, skill
upgradation workshops, mobile clinics and trainers training programmes, awareness and
counselling camps in various villages of Noida, Greater Noida and Ghaziabad. Through
these programmes it covers a large number of rural unemployed youth and women in
several trades, which includes food processing, soft toys making, ready-made garments,
candle making, incense stick making, two-wheeler repairing and servicing,
vermicomposting, and non conventional building materials.
National Small Industries Corporation (NSIC)
This was set up in1955 with a view to promote, aid and foster the growth of small
business units in the country. This focuses on the commercial aspects of these functions.
• Supply indigenous and imported machines on easy hire-purchase terms.
• Procure, supply and distribute indigenous and imported raw materials.
• Export the products of small business units and develop export-worthiness.
• Mentoring and advisory services. • Serve as technology business incubators.
• Creating awareness on technological upgradation.
• Developing software technology parks and technology transfer centres.
A new scheme of ‘performance and credit rating’ of small businesses is implemented
through National Small Industries Corporation (NSIC) with the twin objectives of (i)
sensitising the small industries about the need for credit rating and (ii) encouraging the
small business units to maintain good financial track record. This is to ensure that they
score higher rating for their credit requirements as and when they approach the financial
institutions for their working capital and investment requirements.
Small Industries Development Bank of India (SIDBI)

• Set up as an apex bank to provide direct/indirect financial assistance under
different schemes, to meet credit needs of small business organisations.
• To coordinate the functions of other institutions in similar activities.
The National Commission for Enterprises in the Unorganised Sector (NCEUS)
The NCEUS was constituted in September, 2004, with the following objectives:
• To recommend measures considered necessary for improving the productivity of
small enterprises in the informal sector.
• To generate more employment opportunities on a sustainable basis, particularly in
the rural areas.
• To enhance the competitiveness of the sector in the emerging global environment.
• To develop linkages of the sector with other institutions in the areas of credit, raw
materials, infrastructure, technology up gradation, marketing and formulation of
suitable arrangements for skill development. The commission has identified the
following issues for detailed consideration:
o Growth poles for the informal sector in the form of clusters/ hubs, in order
to get external economic aid.
o Potential for public-private partnerships in imparting the skills required by
the informal sector.
o Provision of micro-finance and related services to the informal sector.
o Providing social security for the workers in the informal sector.
Rural and Women Entrepreneurship Development (RWED)
The Rural and Women Entrepreneurship Development programme aims at promoting a
conducive business environment and at building institutional and human capacities that
will encourage and support the entrepreneurial initiatives of rural people and women.
RWE provides the following services:
• Creating a business environment that encourages initiatives of rural and women
entrepreneurs.
• Enhancing the human and institutional capacities required to foster
entrepreneurial dynamism and enhance productivity.
• Providing training manuals for women entrepreneurs and training them.
• Rendering any other advisory services.
World Association for Small and Medium Enterprises (WASME)
It is the only International NonGovernmental Organisation of micro, small and medium
enterprises based in India, which set up an International Committee for Rural
Industrialisation. Its aim is to develop an action plan model for sustained growth of rural
enterprises.

Apart from these, there are several schemes to promote the non-farm sector, mostly
initiated by the Government of India. For instance, there are schemes for
entrepreneurship through subsidised loans like Integrated Rural Development Programme
(IRDP), Prime Minister Rojgar Yojana (PMRY), schemes to provide skills like Training
of Rural Youth for Self Employment (TRYSEM), and schemes to strengthen the gender
component like Development of Women and Children in Rural Areas (DWCRA).
There are schemes to provide wage employment like Jawahar Rojgar Yojana (JRY), food
for work etc., on rural works programmes to achieve the twin objectives of creation of
rural infrastructure and generation of additional income for the rural poor, particularly
during the lean agricultural season. Last, but not the least, there are schemes for specific
groups of industries such as khadi, handlooms and handicrafts.
Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
To make the traditional industries more productive and competitive and to facilitate their
sustainable development, the Central Government set up this fund with Rs. 100 crores
allocation to begin within the year 2005. This has to be implemented by the Ministry of
Agro and Rural Industries in collaboration with State Governments. The main objectives
of the scheme are as follows:
• To develop clusters of traditional industries in various parts of the country;
• To build innovative and traditional skills, improve technologies and encourage
public-private partnerships, develop market intelligence etc., to make them
competitive, profitable and sustainable; and
• To create sustained employment opportunities in traditional industries. 9. The
District Industries Centers (DICs)
The District Industries Centers Programme was launched on May 1, 1978, with a view to
providing an integrated administrative framework at the district level, which would look
at the problems of industrialisation in the district, in a composite manner. In other words
District Industries Centers is the institution at the district level which provides all the
services and support facilities to the entrepreneurs for setting up small and village
industries.
Identification of suitable schemes, preparation of feasibility reports, arranging for credit,
machinery and equipment, provision of raw materials and other extension services are the
main activities undertaken by these centers.
Broadly DICs are trying to bring change in the attitude of the rural entrepreneurs and all
other connected with economic development in the rural areas. Even within the narrow
spectrum, an attempt is being made to look at some of the neglected factors such as the
rural artisan, the skilled craftsman and the handloom operator and to tune up these
activities with the general process of rural development being taken up through other
national programmes. The DIC is thus emerging as the focal point for economic and
industrial growth at the district level.

August 2010 Write Notes on Diminishing Marginal utility
10 Marks
LAW IS BASED UPON THREE FACTS:
Total wants of a man are unlimited but each single want can be satisfied. As a The law of
diminishing marginal utility describes a familiar and fundamental tendency of human
behavior. The law of diminishing marginal utility states that:
“As a consumer consumes more and more units of a specific commodity, the utility from
the successive units goes on diminishing”.
Mr. H. Gossen, a German economist, was first to explain this law in 1854. Alfred
Marshal later on restated this law in the following words:
“The additional benefit which a person derives from an increase of his stock of a thing
diminishes with every increase in the stock that already has”.
1. Total wants of a man are unlimited but each single wants can be
satisfied. As a man gets more and more units of a commodity, the
desire of his for that good goes on falling. A point is reached when the
consumer no longer wants any more units of that good.
2. Different goods are not perfect substitutes for each other in the
satisfaction of various particular wants. As such the marginal utility
will decline as the consumer gets additional units of a specific good.
3. The marginal utility of money is constant given the consumer’s
wealth.
The basis of this law is a fundamental feature of wants. If people goes to the market to
get some commodidity, They do not attach equal importance to all the commodities they
buy. In case of some of commodities, they are willing to pay more and in some less.
There are two main reasons for this difference in demand. (1) The linking of the
consumer for the commodity and (2) The quantity of the commodity which the consumer
has with himself. The more one has of a thing, the less he wants the additional units of it.
In other words, the marginal utility of a commodity diminishing as the consumer gets
larger quantities of it.
Example for the law :
This law can be explained by taking a very simple example. Suppose, a man is very
thirsty. He goes to the market and buys one glass of sweet water. The glass of water gives
him immense pleasure or we say the first glass of water has great utiltility for him. If he
takes second glass of water after that, the utility will be less than that of the first one. It is
because the edge of his thirst has been blunted to a great extent. If he drinks third glass of
water, the utility of the third glass will be less than that of second and so on.
The utility goes on diminishing with the consumption of every successive glass water till
it drops down to zero. This is the point of satiety. It is the position of consumer’s

equilibrium or maximum satisfaction. If the consumer is forced further to take a glass of
water, it leads to disutility causing total utility to decline. The marginal utility will
become negative. A rational consumer will stop taking water at the point at which
marginal utility becomes negative even if the good is free. In short, the more we have of a
thing, ceteris paribus, the less we want still more of that, or to be more precise.
“In given span of time, the more of a specific product a consumer obtains, the less
anxious he is to get more units of that product” or we can say that as more units of a good
are consumed, additional units will provide less additional satisfaction than previous
units.
In the figure (2.2), along OX we measure units of a commodity consumed and along OY
is shown the marginal utility derived from them. The marginal utility of the first glass of
water is called initial utility. It is equal to 20 units. The MU of the 5th glass of water is
zero. It is called satiety point. The MU of the 6th
glass of water is negative (-3). The MU
curve here lies below the OX axis. The utility curve MM/ falls left from left down to the
right showing that the marginal utility of the success units of glasses of water is falling.
PRACTICAL IMPORTANCE OF LAW OF DIMINISHING MARGINAL
UTILITY:
The law of diminishing utility has great practical importance in economics. The law of
demand, the theory of consumer’s surplus, and the equilibrium in the distribution of
expenditure are derived from the law of diminishing marginal utility.
(i) Basis of the law of demand: The law of marginal diminishing utility and the law of
demand are very closely related to each other. In fact they law of diminishing marginal
utility, the more we have of a thing and the less we want additional increment of it. In

other words, we can say that as a person gets more and more of a particular commodity,
the marginal utility of the successive units begins to diminish. So every consumer while
buying a particular commodity compares the marginal utility of the commodity and the
price of the commodity which he has to pay.
If the marginal utility of the commodity is higher than that of price, he purchases that
commodity. As he buys more and more, the marginal utilility of the successive units
begins to diminish. Then he pays fewer amounts for the successive units. He tries to
equate at every step the marginal utility and the price of the commodity, he must lower its
price so that the consumers are induced to buy large uantities and this is what is explained
in the law of demand. From this, we conclude that the law of demand and the law of
diminishing are very closely inter-related.
(ii) Consumer’s surplus concept: The theory of consumer’s surplus is also based on the
law of diminishing marginal utility. A consumer while purchasing the commodity
compares the utility of the commodity with that of the price which he has to pay. In most
of the cases, he is willing to pay more than what he actually pays. The excess of the price
which he would be willing to pay rather than to go without the thing over that which he
actually does pay is the economic measure of this surplus satisfaction. It is in fact
difference between the total utility and the actually money spent.
(iii) Importance to the consumer: A consumer in order to get the maximum satisfaction
from his relatively scare resources distributes his income on commodities and services in
such a way that the marginal utility from all the uses are the same. Here again the concept
of marginal utility helps the
consumer in arranging his scale of preference for the commodities and services.
(iv) Importance to finance minister: Some times it is pointed out that the law of
diminishing marginal utility does not apply on money. As a person collects money, the
desires to accumulate more money increases. This view is superficial. It is true that
wealth is acquired for the procurement of goods and services and man is always anxious
in getting more and more of money. But what about the utility of money to him? Is it not
a fact that as a person gets more and more wealth, its utility progressively decreases,
though it does not reach to zero?
For example, a person who earns $90,000 per month attaches less importance to $10. But
a man who gets $1000 per month, the value of $10 to him is very high. A finance
minister knowing this fact that the utility of money to a rich man is high and to poor man
low bases the system of taxation in such a way that the rich perso
ns are taxed at a progressive rate. The system of modern taxation is therefore, based on
the law of diminishing marginal utility.
Write Notes on Law of demand and supply
10 Marks

For a market economy to function, producers must supply the goods that consumers
want. This is known as the law of supply and demand. “Supply” refers to the amount of
goods a market can produce, while “demand” refers to the amount of goods consumers
are willing to buy. Together, these two powerful market forces form the main principle
that underlies all economic theory.
The law of supply and demand explains how prices are set for the sale of goods. The
process starts with consumers demanding goods. When demand is high, producers can
charge high prices for goods. The promise of earning large profits from high prices
inspires producers to manufacture goods to meet the demand. However, the law of
demand states that if prices are too high, only a few consumers will purchase the goods
and demand will go unmet. To fully meet demand, producers must charge a price that
will result in the required amount of sales while still generating profits for themselves.
For example, assume that a cell phone manufacturing company perceives demand for
new cell phones. The company invests in market research to produce the exact cell phone
that consumers want. The company then produces 5,000 units and puts them up for sale
at $300 each. Consumers who find the phone to be valuable pay the full $300, and half of
the units are soon sold.
Because of the high price, however, sales gradually begin to drop off. Many consumers
still want the phone, but are unwilling or unable to pay $300 for one. Because the cell
phone company loses money on unsold products, it reduces the phone’s price to $250 in
hopes of increasing sales. Consumers begin buying again. The process continues until a
price is reached that will both meet demand and maximize the company’s profits. That
price is known as the “market-clearing price.”
When supply becomes balanced with demand, the market is said to have reached
equilibrium. At equilibrium, resources are used at their maximum efficiency. The study
of economics is largely a study in how market economies can best achieve equilibrium,
which is why economists spend a great deal of time analyzing the relationship between
supply and demand.
The law of supply and demand explains why people behave in certain ways within a
market economy, and can even be used to predict behavior and, thereby, economic
outcomes. Manufacturers, who want the highest price possible for their products, utilize
inventory management protocols and invest in advertising to encourage consumers to
buy. Consumers who value a low price over the quality or popularity of a product shop at
outlets and discount stores, while those who favor popularity over price purchase goods
from retail stores at the height of the market.
The law of supply and demand is not just limited to the sale of products, however. It can
be used to explain almost any economic phenomenon, such as a rise or drop in
employment, increased or decreased enrollment in colleges, the expansion or shrinking of
government programs, and increases or reductions in available resources. Therefore, the

law of supply and demand is not only vital to economic theory, it is the foundation of
economics itself.
Review of the Laws of Supply and Demand
The Law of Supply
states that at higher prices, producers
are willing to offer more products for
sale than at lower prices
states that the supply increases as
prices increase and decreases as prices
decrease
states that those already in business
will try to increase productions as a
way of increasing profits
The Law of Demand
states that people will buy more of a product
at a lower price than at a higher price, if
nothing changes
states that at a lower price, more people can
afford to buy more goods and more of an
item more frequently, than they can at a
higher price
states that at lower prices, people tend to buy
some goods as a substitute for others more
expensive
August 2011 Write notes on Price elasticity demand 10 Marks
Price elasticity of demand (PED or Ed) is a measure used in economics to show the
responsiveness, or elasticity, of the quantity demanded of a good or service to a change in
its price. More precisely, it gives the percentage change in quantity demanded in response
to a one percent change in price (ceteris paribus, i.e. holding constant all the other
determinants of demand, such as income). It was devised by Alfred Marshall.
Price elasticities are almost always negative, although analysts tend to ignore the sign
even though this can lead to ambiguity. Only goods which do not conform to the law of
demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand
for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in
absolute value): that is, changes in price have a relatively small effect on the quantity of

the good demanded. The demand for a good is said to be elastic (or relatively elastic)
when its PED is greater than one (in absolute value): that is, changes in price have a
relatively large effect on the quantity of a good demanded.
Revenue is maximized when price is set so that the PED is exactly one. The PED of a
good can also be used to predict the incidence (or "burden") of a tax on that good.
Various research methods are used to determine price elasticity, including test markets,
analysis of historical sales data and conjoint analysis.
Definition
It is a measure of responsiveness of the quantity of a good or service demanded to
changes in its price. The formula for the coefficient of price elasticity of demand for a
good is:
The above formula usually yields a negative value, due to the inverse nature of the
relationship between price and quantity demanded, as described by the "law of demand".
For example, if the price increases by 5% and quantity demanded decreases by 5%, then
the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods
which have a PED of greater than 0 are Veblen and Giffen goods. Because the PED is
negative for the vast majority of goods and services, however, economists often refer to
price elasticity of demand as a positive value (i.e., in absolute value terms).
This measure of elasticity is sometimes referred to as the own-price elasticity of demand
for a good, i.e., the elasticity of demand with respect to the good's own price, in order to
distinguish it from the elasticity of demand for that good with respect to the change in the
price of some other good, i.e., a complementary or substitute good. The latter type of
elasticity measure is called a cross-price elasticity of demand.
As the difference between the two prices or quantities increases, the accuracy of the PED
given by the formula above decreases for a combination of two reasons. First, the PED
for a good is not necessarily constant; as explained below, PED can vary at different
points along the demand curve, due to its percentage nature. Elasticity is not the same
thing as the slope of the demand curve, which is dependent on the units used for both
price and quantity. Second, percentage changes are not symmetric; instead, the
percentage change between any two values depends on which one is chosen as the
starting value and which as the ending value. For example, if quantity demanded
increases from 10 units to 15 units, the percentage change is 50%, i.e., (15 − 10) ÷ 10
(converted to a percentage). But if quantity demanded decreases from 15 units to 10 units,
the percentage change is −33.3%, i.e., (10 − 15) ÷ 15.

Febraury 2010 Factors influencing elasticity of demand. 10
Marks
1. Nature of goods:
Elasticity of demand depends on the nature of goods. The elasticity of demand for a
commodity depends upon the necessity of it for a human life. Goods may be necessary
for human life, comfort or luxurious. Necessary goods are extremely essential so the
demand for these goods-is inelastic.
But the consumption of comfort and luxury goods enhances man's efficiency and social
prestige. So their consumption is less important and can be very well postponed. Thus the
elasticity of demand for such commodities is elastic.
2. Availability of substitutes:
The demand for a commodity having perfect substitute is relatively more elastic. If a
flood gives the same pleasure and satisfaction in place of the consumption of another
commodity, it is called a substitute commodity. A substitute may be close and remote.
Close substitute has got more elastic demand and remote substitute has less elastic
demand. Tea and coffee are substitute commodities. Both can be used in absence of
another. Thus the demand for tea and coffee is elastic.
3. Alternative use:
The demand for those goods having more than one use is said to be elastic. In other
words goods having alternative uses are elastic. All the uses are not of same importance.
As the commodities are put to certain less urgent needs or uses as a result of fall in price
their demand raises. People use those commodities for certain urgent use in response to a
rise in price.
For example electricity can be used for a number of purposes like heating, lighting,
cooking, cooling etc. If the electricity hill increases people utilise electricity for certain
important urgent purpose and if the bill falls people use electricity for a number of other
unimportant uses. Thus the demand for electricity is elastic.
4. Possibility of postponing consumption:
The demand for those goods whose consumption can be postponed for sometime is said
to be elastic. On the other hand if the commodities cannot be postponed and need to be
fulfilled the demand for them is in elastic.

Medicine for a patient, books for a student and milk for a child cannot be postponed.
They are to be satisfied first. That is why the demand for those commodities is in elastic.
5. Proportion of income spent:
Elasticity of demand also depends on the proportion of income spent on different goods.
The demand for those goods on which a negligible amount of the total income of the
consumer is spent is said to be inelastic.
Salt, edible oil, match box, soap etc account for a very negligible amount of the consumer
income. That is why their demand is inelastic.
6. Price-level:
The demand for high priced commodities is elastic. On the other hand the low priced
goods is said to have inelastic demand. High priced commodities are luxurious goods and
low priced goods are necessaries. Luxurious goods are mainly consumed by the people of
high income brackets. For example if the price of a colour TV falls from Rs 15000 to Rs
5000 the price comes to the reach of the people who were unable to buy at the old price.
Now they rush to buy colour TV. Thus with a rise or fall in price the amount demanded
of colour TV remarkably falls or rise. But if the price of salt raises from Rs 2.00 to Rs
5.00 it account for no such remarkable fall in the quantity demanded of salt.
7. Force of habit:
A repeated and constant use of a commodity by a person forms habit. A habit can't be
avoided. Thus in such a case the consumption of the commodity can't be abstained in
spite of the rise in price.
The consumer has to satisfy his habit regardless of change in price. Thus the demand for
habitual commodities is fairly inelastic.
8. Durability of Commodities:
The demand for durable commodities is elastic whereas the demand for less durable
commodity is inelastic. Durable commodity is used over a long period of time. The utility
of a durable good is destroyed continuously. Once a durable good is bought the buyer
feels no want of it for a long period of time. Thus the change (rise or fall) in price can't
influence the demand.
Thus the demand becomes elastic. On the other hand less durable or perishable goods are
consumed repeatedly. Any change in price affects the demand. Thus the demand for
perishable goods is less elastic.
9. Income level:

Elasticity of demand depends on income level. The rich and the poor are not equally
affected at the change in price. Poor people are more affected than the rich. Because of
high income rich people buy the same amount of an expensive commodity in response to
a rise in price.
For example with a rise in price of Horlicks, poor people by other milk powder relatively
cheaper than Horlicks. Thus for rich people the demand for Horlicks is inelastic whereas
for poor people the demand for the Horlicks is elastic.
What are the types of price elasticity of demand. –
August 2010 5 marks / 10 Marks ( Feb 2010)
The price elasticity demand is defined as the ratio of percentage change in quantity
demanded to a percentage change in price. Thus elasticity of demand can be expressed in
form of the following as price and quantity demanded move opposite.
Five cases of Elasticity of Demand:
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Relatively elastic demand
4. Relatively inelastic demand
5. Unitary elastic demand
1. Perfectly elastic demand:
The demand is said to be perfectly .elastic when a very insignificant change in price leads
to an infinite change in quantity demanded. A very small fall in price causes demand to
rise infinitely. Likewise a very insignificant rise in price reduces the demand to zero. This
case is theoretical which is never found in real life.
2. Perfectly inelastic demand:
The demand is said to be perfectly inelastic when a change in price produces no change
in the quantity demanded of a commodity. In such a case quantity demanded remains
constant regardless of change in price. The amount demanded is totally unresponsive of
change in price. The elasticity of demand is said to be zero.

3. Relatively more elastic demand:
The demand is relatively more elastic when a small change in price causes a greater
change in quantity demanded. In such a case a proportionate change in price of a
commodity causes more than proportionate change in quantity demanded. If price
changes by 10% the quantity demanded of the commodity change by more than 10% i.e.
25%. The demand curve in such a situation is relatively flatter.
4. Relatively inelastic demand:
It is a situation where a greater change in price leads to smaller change in quantity
demanded. The demand is said to be relatively inelastic when a proportionate change in
price is greater than the proportionate change in quantity demanded. For example If price
falls by 20% quantity demanded rises by less than 20% i.e 15%.
5. Unitary elastic demand:
The demand is said to be unit when a change in price produces exactly the same
percentage change in the quantity demanded of a commodity. In such a situation the
percentage change in both the price and quantity demanded is the same. For example if
the price falls by 25% the quantity demanded rises by the same 25%. It takes the shape of
a rectangular hyperbola. Numerically elasticity of demand is said to be equal to 1.(ed =
1).
Write Notes on Measurement of price elasticity of
demand August 2011/10 Marks
August 2010 Describe the various methods of
measurement of price elasticity of demand
15 Marks
Elasticity of demand is known as price-elasticity of demand. Because elasticity of
demand is the degree of change in amount demanded of a commodity in response to a
change in price. Price elasticity of demand can be measured through three popular
methods. These methods are:
1. Percentage method or Arithmetic method
2. Total Expenditure method

3. Graphic method or point method.
1. Percentage method:-
According to this method price elasticity is estimated by dividing the percentage change
in amount demanded by the percentage change in price of the commodity. Thus given the
percentage change of both amount demanded and price we can derive elasticity of
demand. If the percentage charge in amount demanded is greater that the percentage
change in price, the coefficient thus derived will be greater than one.
If percentage change in amount demanded is less than percentage change in price, the
elasticity is said to be less than one. But if percentage change of both amount demanded
and price is same, elasticity of demand is said to be unit.
2. Total expenditure method
Total expenditure method was formulated by Alfred Marshall. The elasticity of demand
can be measured on the basis of change in total expenditure in response to a change in
price. It is worth noting that unlike percentage method a precise mathematical coefficient
cannot be determined to know the elasticity of demand.
By the help of total expenditure method we can know whether the price elasticity is equal
to one, greater than one, less than one. In such a method the initial expenditure before the
change in price and the expenditure after the fall in price are compared. By such
comparison, if it is found that the expenditure remains the same, elasticity of demand is
One (ed=I).
If the total expenditure increases the elasticity of demand is greater than one (ed>l). If the
total expenditure diminished with the change in price elasticity of demand is less than one
(ed<I). The total expenditure method is illustrated by the following diagram.
3. Graphic method:
Graphic method is otherwise known as point method or Geometric method. According to
this method elasticity of demand is measured on different points on a straight line
demand curve. The price elasticity of demand at a point on a straight line is equal to the
lower segment of the demand curve divided by upper segment of the demand curve.
Thus at mid point on a straight-line demand curve, elasticity will be equal to unity; at
higher points on the same demand curve, but to the left of the mid-point, elasticity will be
greater than unity, at lower points on the demand curve, but to the right of the midpoint,
elasticity will be less than unity.

Write notes on role of aggregate demand in determining
output and employment 10 marks
In macroeconomics, aggregate demand (AD) is the total demand for final goods and
services in the economy (Y) at a given time and price level. It is the amount of goods and
services in the economy that will be purchased at all possible price levels. This is the
demand for the gross domestic product of a country when inventory levels are static. It is
often called effective demand, though at other times this term is distinguished.
It is often cited that the aggregate demand curve is downward sloping because at lower
price levels a greater quantity is demanded. While this is correct at the microeconomic,
single good level, at the aggregate level this is incorrect
The aggregate demand curve is in fact downward sloping as a result of three distinct
effects: Pigou's wealth effect, the Keynes' interest rate effect and the Mundell-Fleming
exchange-rate effect.
An aggregate demand curve is the sum of individual demand curves for different sectors
of the economy. The aggregate demand is usually described as a linear sum of four
separable demand sources.
where
• is consumption (may also be known as consumer spending) =
,
• is Investment,
• is Government spending,
• is Net export,
o is total exports, and
o is total imports = .
These four major parts, which can be stated in either 'nominal' or 'real' terms, are:
• personal consumption expenditures (C) or "consumption," demand by households
and unattached individuals; its determination is described by the consumption
function. The consumption function is C= a + (mpc)(Y-T)
o a is autonomous consumption, mpc is the marginal propensity to consume,
(Y-T) is the disposable income.
• gross private domestic investment (I), such as spending by business firms on
factory construction. This includes all private sector spending aimed at the
production of some future consumable.

o In Keynesian economics, not all of gross private domestic investment
counts as part of aggregate demand. Much or most of the investment in
inventories can be due to a short-fall in demand (unplanned inventory
accumulation or "general over-production"). The Keynesian model
forecasts a decrease in national output and income when there is unplanned
investment. (Inventory accumulation would correspond to an excess supply
of products; in the National Income and Product Accounts, it is treated as a
purchase by its producer.) Thus, only the planned or intended or desired
part of investment (Ip) is counted as part of aggregate demand. (So, I does
not include the 'investment' in running up or depleting inventory levels.)
o Investment is affected by the output and the interest rate (i). Consequently,
we can write it as I(Y,i). Investment has positive relationship with the
output and negative relationship with the interest rate. For example, an
increase in the interest rate will cause aggregate demand to decline. Interest
costs are part of the cost of borrowing and as they rise, both firms and
households will cut back on spending. This shifts the aggregate demand
curve to the left. This lowers equilibrium GDP below potential GDP. As
production falls for many firms, they begin to lay off workers, and
unemployment rises. The declining demand also lowers the price level.
The economy is in recession.
•
The logical starting point of Keynes’s theory of employment is the principle of effective
demand. In a entrepreneurial economy, the level of employment is based on effective
demand. Thus employment results from a deficiency of effective demand and the level of
employment can be raised by increasing the level of effective demand.
Aggregate Demand Price
“The aggregate demand price for the output of any given amount of employment is
the total sum of money or proceeds which is expected from the sale of the output
produced when that amount of labour is employed.” Thus the aggregate demand price is
the amount of money which the entrepreneurs expect to get by selling the output
produced by the number of men employed. In other words it refers to the expected
revenue from the sale of output produced at a particular level of employment. Different
aggregate demand prices relate to different levels of employment in the economy.
A statement showing the various aggregate demand prices at different levels of
employment is called the aggregate demand price schedule or aggregate demand
function. “The aggregate demand function.” according to Keynes, “relates any given
level of employment to the expected proceeds from that level of employment.”

The below tablet represents the aggregate demand schedule where it reveals that,
with the increase in the level of employment proceeds, expected rise and at lower levels
of employment decline. When 900 thousand people are provided employment the
aggregate demand price is $560 million and when 250 thousand people are provided jobs,
it is $480 million.
According to Keynes the aggregate demand function is an increasing function of the
level of employment and is expressed as D = F (N), where D is the proceeds which
entrepreneurs expect from the employment of N men.
Level of Employment
In 100 thousands
Aggregate Demand Price (D)
In Million $
4 460
5 480
6 500
7 520
8 540
9 560
10 580
The aggregate demand curve can be drawn on the basis of the above schedule. It
inclines upward from the left to right for the reason that the level of employment
increases aggregate demand price also rises, shown as AD curve in the upcoming
diagram 1.

Aggregate Supply Price
When an entrepreneur gives employment to a definite amount of labour, it
requires certain quantities of co-operant factors like land, capital, raw materials etc.
which will be paid remuneration along with labour. Thus each level of employment
involves certain money costs of production including normal profits which the
entrepreneur must cover. “At any given level of employment of labour aggregate supply
price is the total amount of money which all the entrepreneurs in the economy, taken
together must expect to receive from the sale of the output produced by that given
number of men, if it is to be just worth employing them.”
In brief, the aggregate supply price refers to the proceeds necessary from the sale
of output at a particular level of employment. Thus each level of employment in the
economy is related to a particular aggregate supply price and these are different aggregate
supply prices for different levels of employment.
A statement showing the various aggregate supply prices at different levels of
employment is called aggregate supply price schedule or aggregate supply function. In
the words of Prof. Dillard, “The aggregate supply function is a schedule of the minimum
amounts of proceeds required to induce varying quantities of employment.” The below
tablet reveals the aggregate supply schedule,
Level of Employment (N)
in 100 Thousands
Aggregate Supply Prize (Z)
In Million $
4 430
5 460

6 490
7 520
8 550
9 580
10 610
The above table reveals that the aggregate supply prices rise with the hike in the
level of employment. If entrepreneurs are to provide employment to 400 thousand
workers, they must receive $430 millions from the sale of output produced by them. It is
only when they expect to receive minimum amounts of proceeds ($460 millions, $490
million and $520 million) that they will provide employment to more workers (5, 6 and 7
hundred thousand dollars respectively).
But when the economy reaches the level of full employment (at 800 thousand
workers, the aggregate supply price ($550 million, $580 million and $610 millions)
continues to increase but there is no further is an increasing function of the level of
employment and is expressed as Z = ɸ N, Z is the aggregate supply price of the output
level from employing N men.
The aggregate supply curve can be drawn on the basis of the schedule. It inclines
upward from left ro right for the reason that the necessary expected proceeds hikes; the
level of employment also rises. But when the economy reaches the level of full
employment, the aggregate supply curve becomes vertical. Even with the hike in the
aggregate supply price, it is not possible to provide more employment as the economy
has attained the level of full employment.

August 2011 Write Notes on Agro based industries in India
10 Marks

Agro Industry Scenario
An Introduction
The agro industry is regarded as an extended arm of agriculture.
The development of the agro industry can help stabilise and
make agriculture more lucrative and create employment
opportunities both at the production and marketing stages. The
broad-based development of the agro-products industry will
improve both the social and physical infrastructure of India.
Since it would cause diversification and commercialization of
agriculture, it will thus enhance the incomes of farmers and
create food surpluses.
The agro-industry mainly comprises of the post-harvest
activities of processing and preserving agricultural products for
intermediate or final consumption. It is a well-recognized fact
across the world, particularly in the context of industrial
development, that the importance of agro-industries is relative to
agriculture increases as economies develop. It should be
emphasized that ‘food’ is not just produce. Food also
encompasses a wide variety of processed products. It is in this
sense that the agro-industry is an important and vital part of the
manufacturing sector in developing countries and the means for
building industrial capacities.
The agro Industry is broadly
categorised in the following
types:
(i) Village Industries owned and
run by rural households with
very little capital investment and
a high level of manual labour;
products include pickles, papad,
etc.
(ii) Small scale industry
characterized by medium
investment and semi-automation;
products include edible oil, rice
mills, etc.
(iii) Large scale industry
involving large investment and a
high level of automation;
products include sugar, jute,
cotton mills, etc.
The development of agro-based industries commenced during
pre-independence days. Cotton mills, sugar mills, jute mills

An Introduction
The agro industry is regarded as an extended arm of agriculture. The development of the
agro industry can help stabilise and make agriculture more lucrative and create
employment opportunities both at the production and marketing stages. The broad-based
development of the agro-products industry will improve both the social and physical
infrastructure of India. Since it would cause diversification and commercialization of
agriculture, it will thus enhance the incomes of farmers and create food surpluses.
The agro-industry mainly comprises of the post-harvest activities of processing and
preserving agricultural products for intermediate or final consumption. It is a well-
recognized fact across the world, particularly in the context of industrial development,
that the importance of agro-industries is relative to agriculture increases as economies
develop. It should be emphasized that ‘food’ is not just produce. Food also encompasses
a wide variety of processed products. It is in this sense that the agro-industry is an
important and vital part of the manufacturing sector in developing countries and the
means for building industrial capacities.
The agro Industry is broadly categorised in the following types:
(i) Village Industries owned and run by rural households with very little capital
investment and a high level of manual labour; products include pickles, papad, etc.
(ii) Small scale industry characterized by medium investment and semi-automation;
products include edible oil, rice mills, etc.
(iii) Large scale industry involving large investment and a high level of automation;
products include sugar, jute, cotton mills, etc.
The development of agro-based industries commenced during pre-independence days.
Cotton mills, sugar mills, jute mills were fostered in the corporate sector. During the
post-Independence days, with a view to rendering more employment and using local
resources, small scale and village industries were favored.
The increasing environmental concerns will give further stimulus to agro based
industries. Jute and cotton bags, which have begun to be replaced by plastic bags, have
made a comeback. It is the right time to engage in mass production of low cost
jute/cotton bags to replace plastic bags.
The agro industry helps in processing agricultural products such as field crops, tree crops,
livestock and fisheries and converting them to edible and other usable forms. The private
sector is yet to actualize the full potential of the agro industry. The global market is
mammoth for sugar, coffee, tea and processed foods such as sauce, jelly, honey, etc. The
market for processed meat, spices and fruits is equally gigantic. Only with mass
production coupled with modern technology and intensive marketing can the domestic
market as well as the export market be exploited to the fullest extent. It is therefore
imperative that food manufacturers understand changing consumer preferences,

technology,With modernization, innovation and incorporation of latest trends and
technology in the entire food chain as well as agro-production, the total
production capacity of agro products in India and the world is likely to
double by the next decade.
India is the second largest producer of food in the world. Whether it is canned food,
processed food, food grains, dairy products, frozen food, fish, meat, poultry, the Indian
agro industry has a huge potential, the significance and growth of which will never cease.
Sea fishing, aqua culture, milk and milk products, meat and poultry are some of the agro
sectors that have shown marked growth over the years. linkages between members of the
food supply chains and prevailing policies and business environments to take advantage
of the global market.
Processed Food Segment
The processing level of the agro industry may be at the primary, secondary or tertiary
stage. In the case of hides and skins, India exports largely semi-processed items whereas
in coffee/tea, the exports are mostly in secondary stage by way of fully processed bulk
shipments without branding/packing. Exports at the tertiary stage mean branding and
packaging the product that are ready for use by the consumer.
A few years ago, companies struggled to sell packaged foods. But now it is much easier
to break into the Indian market because of a younger population, higher incomes, new
technologies and a growing middle class, estimated at 50 million households. An average
Indian spends around 53 per cent of his/her income on food. The domestic market for
processed foods is not only huge but is growing fast in tandem with the economy. It is
estimated to be worth $90 billion. Processed Food Manufacturing companies are required
to be persistent and must adapt products to the Indian cultural preferences.
Many big companies like ITC, HLL, Nestle entered the Indian market a long time ago
and have made a deep penetration in the market. From these success stories we can learn
some lessons in order to capture the higher end of the local market and get a fair share of
the export market. The model is structured around the following:-
* Large scale investment and adoption of the latest technologies
* Intensive marketing efforts
* Perhaps, a foreign tie-up can be beneficial
* Brand name.
The levels of processing and manufacturing can be classified into three groups, namely
manual, mechanical and chemical or a combination thereof. In choosing the process, the
main considerations are the nature of the raw materials, technology of processing, and
packing.
Other Segments

Dairy product is another area where there is enormous
potential. No doubt the country has made tremendous strides
in the last 20 years in production and processing of milk and
milk products. But the fact remains that only 15 per cent of
all the milk produced is processed. Today, a large number of
people suffer from diabetic or cardiac ailments and
availability of fat free milk, fat free curd and sugar free food
is poor. A simple product like soya milk is not produced in
adequate quantity.
Fish and shrimp have good export potential but there is an immense lack of cold storage
and modern processing facilities. For instance fish production is around six million
tonnes a year and the frozen storage capacity spread over 500 units is only one lakh
tonnes.
Another area is herbal medicine. It is being increasingly realized the world over that
herbal drugs do not have any side effects. India has a good number of tried and tested
herbal products in use and what is required is rigorous quality control, proper packaging
and a brand name.
The government and modern retailers are addressing these issues with new laws on
packaging and labeling as well as greater investment in the supply chain.
The Progress Ahead*
With modernization, innovation and incorporation of latest trends and technology in the
entire food chain as well as agro-production, the total production capacity of agro
products in India and the world is likely to double by the next decade.
India is the second largest producer of food in the world. Whether it is canned food,
processed food, food grains, dairy products, frozen food, fish, meat, poultry, the Indian
agro industry has a huge potential, the significance and growth of which will never cease.
Sea fishing, aqua culture, milk and milk products, meat and poultry are some of the agro
sectors that have shown marked growth over the years.
August 2010 : What is equilibrium price ? 5 marks
Discuss the relative significance of demand and supply in
determining the equilibrium price. 15 Marks

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