Previous Year Questions: Economics- 1 - UPSC MCQ

The English term 'Economics' is derived from the Greek word 'Oikonomia'. Its meaning is 'household management'. Economics was first read in ancient Greece. Aristotle, the Greek Philosopher termed Economics as a science of 'household management'.

By definition, there are no fixed costs in the long run, because the long run is a sufficient period of time for all short-run fixed inputs to become variable.Under full (absorption) costing fixed costs will be included in both the cost of goods sold and in the operating expenses.

When the central bank wants increase the money supply in the economy it decreases the cash reserve ratio. Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. So central bank decreases the cash reserve ratio so that large amount of money is available with commercial banks for credit creation.

Phillips curve: A graph that shows the inverse relationship between the rate of unemployment and the rate of inflation in an economy. aggregate demand: The the total demand for final goods and services in the economy at a given time and price level.

Price discrimination is a pricing strategy that charges customers different prices for the same product or service. Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers.

Rents are the higher amount of the money or maximum payment of factor is rent. whereas minimum payment of factor of production is called wages.

Investment may be private investment or public investment, it may be induced or autonomous. Induced investment is that investment which changes with a change in income, that is why it is called income, elastic..

Monopolistic Competition refers to a market situation in which there are large numbers of firms which sell closely related but differentiated products. Markets of products like soap, toothpaste AC, etc. are examples of monopolistic competition.

This is the demand side of the economy. On the other side companies and businesses offer private households goods and services. They produce the goods that they think consumers will want to buy. In a capitalist society the prices of goods, services and labour are determined by supply and demand.

A want becomes a demand only when it is backed by the ability to purchase.

The theory of price, also known as price theory, is a microeconomic principle that uses the concept of supply and demand to determine the appropriate price point for a good or service. The goal is to achieve equilibrium in which the quantities of goods or services provided match the corresponding market's desire and ability to acquire the good or service. The concept allows for price adjustments as market conditions change.

According to Chamberlin, excess capacity arises when there is no active price competition despite free entry of firms in a monopolistic competitive market.

He gives the following reasons for such a situation:

(i) Firms may consider costs rather than demand in fixing prices.

(ii) They may aim at ordinary profits rather than maximum profits,

(iii) They may follow a policy of ‘live and let live’ and may not resort to price reduction.

(iv) They may have formal or tacit agreements, open price associations, trading association activities in building up an esprit de corps and price maintenance.

(v) There may be the imposition of uniform prices on dealers by manufacturers.

(vi) Firms may resort to excessive differentiation of the product in an attempt to turn attention away from price cutting.

(vii) Business or professional ethics prevent firms from resorting to active price competition.

Normative economics (as opposed to positive economics) is a part of economicsthat expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be.

Investment method is not a method of measuring a national income because factor income arises from production of goods and services , and since income are spent on goods and services produced , three alternative method of measuring a national income is possible which is value added method, expenditure method and income method.

Labour-intensive production

In Economics, labour is the all human efforts in the production. Labour does not only mean the labourers in an industrial site. If we take an example of a tourist resort, labour includes the receptionists, bell boys, bartenders, waiters, admin assistants, telephone operators etc. Labour-intensive production means that the way that a good or service is produced depends more heavily on labour than the other factors of production, such as capital.
Labour intensive method of production is usually used for individual or personalised products, or to produce on a small scale.

Examples of labour-intensive production are hotels, restaurants, small scale farming, pole-and-line fishing, mining etc.

The earnings from machines and instruments are termed as quasi-rent. The quasi-rent refers to the income produced when the demand for products increases suddenly.

The cross-price elasticity of demand measures the percentage change in the demand for one good that results from a one percent change in the quantity demanded of a second good. If two goods are very close complements, then the cross-price elasticity of demand between the two goods will be large and negative.

The opportunity cost of anything is the alternative that has been foregone. This implies that one commodity can be produced only at the cost of foregoing the production of another commodity.

Expenditures on agriculture, rural develop­ment, irrigation and flood control, energy, indus­try and mineral resources, science and technology, etc. are included in plan expenditure. In addition to these, grants for implementation of Five Year Plans to States and Union Territories are also included in plan expenditure.

It was argued that by offloading Government stake in profitable Public Sector Undertakings (PSUs) in the market, it will not only revive the capital market but also strengthen the financial position and liquidity of the public sector companies. Various public sector companies made public offer for sale of a part of government equity. As a result of this Rs. 15,547 crores were realised during 2003-04. 

A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve.

National income is measured by the output method by calculating the total value of goods and services produced in the country during the year. The money value of goods and services produced in an economy in an accounting year is called Gross National Product (GNP). It is defined by J. R. Hicks as “the collection of goods and services reduced to a common basis by being measured in terms of money.”

Most goods (and services) are economic goods, i.e. they are scarce. Scarce goods are those for which the demand would be greater than the supply if their price were zero. Because of this shortage, economic goods have a positive price in the market. That is, consumers have to pay to get them.

The law also implies that the income elasticity of food demand lies between zero and one. It means that increase in expenditures on food item by the consumers is less than the increase in income of the consumers (Timmer et al., 1983).

Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. 

Capital-output ratio is the relationship between investment and resulting output over a period of time. Average COR is obtained when total stock of capital is divided by total output. Thus COR is a measure of capital required for producing one unit of output.

The Perfect Competition is a market structure where a large number of buyers and sellers are present, and all are engaged in the buying and selling of the homogeneous products at a single price prevailing in the market.

It comprises of all direct materials, direct labour and direct expenses. It is also know as “flat cost”
Prime Cost = Direct Materials + Direct Labour + Direct Expenses.
This comes out to be : variable cost plus administrative cost.

A sunk cost is a cost that has already been incurred and cannot be recovered. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing. Sunk costs (past costs) are excluded from future business decisions because the cost will be the same regardless of the outcome of a decision.

A free goods is a goods that is not scarce, and therefore is available without limits. A free goods is available in as great a quantity as desired with zero opportunity cost to society. Seawater, fresh air, etc., are regarded in Economics as free goods.

Excise duty is a type of tax charged on goods produced within the country. In India, an excise tax is levied on the manufacturer of goods when those goods leave the place of manufacturer. Formerly called the Central Excise duty, this tax is now known as the Central Value Added Tax (CENVAT).