- 1. ECONOMICSFOR ENTREPRENEURSby :DR. T.K. JAIN AFTERSCHO
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2. What is an economic system ?It is a system of government
where the overall economic policies of the government are
synchronised around certain philosophy :economic system is based on
following ideas :1. the extent of government intervention /
regulation2. extent of private sector participation and freedom to
private sector3. level of involvement of private sector and public
sector in the economy 3. What are the features of capitalism?The
USA is an ideal model of capitalism : you can see it has following
characteristics :1. laissez faire almost complete freedom toprivate
sector2. very high inequality between rich and poor due to market
forces3. market forces determine production and condumption
producers produce what consumers demand 4. What is consumer
sovereignity ?Consumer is the kingin capitalism consumer is the
king here producers have to produce what consumers demand and they
will have to satisfy consumers 5. What is aggregative economics?The
meaning of aggregate is sum of different parts.Thus aggregative
economics is economics which study the phenomenon at the aggregate
level. It is also called Macro-economics.Here we study the
collectives like national income etc. As against this micro
economics studies only individual firm and studies variables like
pricing by firm 6. Is economics anormativescience ?Yes as per
scholars like Robbins etc.Normative means what is ideal so
economics suggests ideal means of economic system. It not only
studies the existing system but also suggests whatshouldbe done. 7.
What is utility ?The capacity of goods to satisfy a consumer is
called utilityit differs from consumer to consumer. Can it be
measured :as per cardinal utility approach yes it can be exactly
measured and quantified as per ordinal utility approach yes but it
can only be ranked you cant quantify it. 8. What is total, average
and marginal utility ?Suppose youeat 1 Roti and get satisfaction of
12 units, your total utility (TU), Marginal Utility (MU), and
average utility (AU) are all same = 12. Now suppose you eat one
more Roti and get satisfaction of 4 units from this. Now your TU is
16, and AU is 8 (average is obtained by dividing TU by number of
units). Now your MU is 4 (MU means utility from last unit
consumed). Now you eat one more Roti and get 0 unit of
satisfaction. Now your TU is 16, AU is 5.3 and MU is 0. Now you eat
one more Roti for -4 units of utility. Now you TU is 12, AU = 3, MU
= -4. (ideally a consumer will stop when it goes into negatives)TU
curve is always going up until MU is positive, AU& MUcurve are
falling. 9. Who said economics is study ofdistribution of wealth
Answer : Ricardo(Adam Smith only focussed on creation of wealth).
10. Who said economics is study of welfare aspects ?Pigou : where
welfare is related to money there is economics 11. Who said the
economics is not study of just wealth but study of well-being of
societyMarshall 12. What is law of supply ?Producerswill produce
and sell more when prices increase and will produce and sell less
when prices fall.(it is opposite of law of demand which says
consumerswill demand more when prices fall and vice versa). 13.
What is elasticity of supply ?Elasticmeans speedand direction of
response if you increase price and immediately there is increase is
supply, you can say that supply is elastic, if you decrease price
and immediately there is decrease in supply, you can say it is
elastic. But if there is no change in supply in response to change
in price, the supply is in-elastic. It is measured by the following
formula :% change in supply of quantity/ % change in price 14. What
is elasticity of demand?Elasticmeans speedand direction of response
if you increase price and immediately there is fall in demand, you
can say that demand is elastic, if you decrease price and
immediately there is increase in demand, you can say it is elastic.
But if there is no change in supply in response to change in price,
the demand is in-elastic. It is measured by the following formula
:% change in demand of quantity/ % change in price 15. What are
factors of production?All those things which are used in production
process are called factors of production.Some of the factors are :
land, labour, capital, technology, entrepreneurship etc.However,
for simplicity, we combine them into only two factors labour and
capital. 16. What is law of equi-marginal utility ?It is assumed
that consumer is rational (wise, and able to differentiate).
Consumer selects each item of consumption very carefully and tries
to ensure that the marginal utility of each item consumed is equal.
The consumer tries to ensure that the marginal utility of each item
is equal. This is a rational process. 17. What is the law of
variable proportions ?It is related to law of production in the
short term.There are two factors of production : Labour and
CapitalIt says that in the short term, one factor (Capital)is
constant and other factor (labour) is variable and different levels
of production combinations are possible due to change in labour. We
can have increasing, constant or decreasing returns (three types of
returns). Thus we can find an ideal combination of factors of
production.It can be possible in long term also when there is one
ideal combination- which give best production. But generally , we
talk about it in short term reference. 18. What is the law
regarding constant returns ?As against the law of variable
proportion, the law of constant returns assumes that there is same
return. It is related to long term. It assumes that in the long run
all the combination ofvarious production possibilities give you
same ideal point. In long term, variable returns is also possible
as per previous concept. 19. Define the concept of economies of
scale This is related to law of variable proportion. As per
variable proportion, we say that you can have different production
economies at different level. Why is it so ? It is due to some
factors some internal and some external. These factors either
facilitate or hinder productivity if they facilitate, there is
economy of scale if they hinder there is diseconomies of scale. 20.
What is internal economies ?The factors which are internal to the
organisation, are called internal factors. These factors facilitate
the productivity process and thus they contribute to economies of
scale. These factors are : 1. administration 2.advertising 3.
production scale 4. supervision 5. inventory management 6. training
and development, 7. research and development etc. 21. What are
external economies ?These factors are external to the organisation
and they may contribute to economies of the firm :they are : 1.
transportation cost 2. specialisation 3. information 4. market
share 5. access to new ideas, research, laboratoriesetc. 22. Why
does average variable cost curve have a U-shape both in the short
run and long run ? Variable cost = cost related to variable factors
of production like labourAccording to law of variable proportion,
with a given plant, returns to variable factors pass through three
phases of increasing, constant and diminishing returns.
Accordingly, AVC curve is a U-shaped one. In the initial stages, it
slopes downwards with an increase in output. Thus we can have an
ideal point where the cost is minimum. 23. Differentiatebetween
returns to scale and returns to a variable factor These are the two
laws of production, one refers to short term and the other refers
to long term. Returns to scale is related to long term (when all
the factors are variable). Returns to a variable factor (or law of
variable proportion is related to short term- when only one factor
is variable). 24. What is consumer equilibrium?It is a psycholocial
status about consumer the consumer tries to spend money wisely.
When the consumer is able to derive optimal satisfaction by
spending mony on two products this point is the point of our
attention. Consumer equilibrium refers to the point, where the
consumer is able to make a choice about combination of two
products. This point may change with change in income / price of
goods etc. 25. CONSUMER EQUILIBRIUM ... When consumers make choices
about the quantity of goods and services to consume, we assume that
their objective is to maximize total utility. In maximizing total
utility, the consumer faces a number of constraints, the most
important of which are the consumer's income and the prices of the
goods and services that the consumer wishes to consume. The
consumer's effort to maximize total utility, subject to these
constraints, is referred to as the consumer's problem. The solution
to the consumer's problem, which includes decisions about how much
the consumer will consume of a number of goods and services, is
referred to as consumer equilibrium. Thus it is a part of concept
of utility. 26. How does consumer equilibrium change ?Consumer
equilibrium changes with change in price, change in income of
consumer etcConsumer equilibrium is directly related to consumer
indifference curve. Consumer indifference curve shows that the
cosumer is indifferent between two products. Suppose Pawan is
indifferent between eating 4 Samosa or 4 Kachori and also between
3S+1K or1S+3K and derives equal satisfaction from these options,
then the combination of these points will give us Indifference
curve. 27. What is difference between cardinal and ordinal
utility?Cardinal theory : utility can be measured.Ordinal utility :
we can only give grading of utility but we cannot exactly quantify
utility. 28. What are the concepts of total revenue, average
revenue and marginal revenue of a firm. Suppose you sell 1 unit for
Rs. 12, your total revenue (TR), Marginal revenue (MR), and average
revenue (AR) are all same 12. Now suppose you sell one more unit in
Rs. 20, your TR is now 32, AR = (32/2)= 16, MR = 20. Now suppose
you sell 3 rdunit in Rs. 8. What is your TR, MR, AR TR=40,
AR=13.33, MR= 8TR curve is always going up with quantity, AR &
MR curve are constant in perfect market, but falling in imperfect
market 29. What are the salient features of a socialist
economyThere are three types of economic systems : 1. capitalism =
where market forces are allowed to play their role and there is
minimum government intervention and emphasis on private sector and
profit motive. 2. Socialism: where everything is regulated by
government and there is equality of distribution of resources.Only
public sector exists. 3. Mixed economy : both private sector and
public sector (govt) play important role 30. What do you understand
by market mechanismIn capitalism, market forces play their own
role. They decide about the prices and about other factors. Market
mechanism include forces like total demand, total supply etc. It is
not controlled by government in capitalism. In perfect market,
market forces decide prices. Thus price is a point of equilibrium
of demand and supply. 31. What is ISO-Product / isoquant?Suppose 3
units of labour and 30 units of capital give you same production as
you can get from 20 units of labour and 4 units of capital, these
two points can be put on a curve called ISOQUANT. Isoquant is a
combination of all such points, on which combination of different
factors of production give you same level of output.Iso =same,
quant = production in quantity 32. What is least cost combination
of factors of production?We can find a point where we can get
optimal production, this point is called least cost combination of
factors of production. You can find it on ISOQUANT also. 33. WHAT
IS DIFFERENCE BETWEEN MICRO AND MACRO ECONOMICS ?Micro focuses on
an individual, but macro focuses on the group of firms / group of
individuals or complete nation / world.Micro focuses on individual
problems, but macro focuses on major issues 34. What is the
difference between static and dynamic economics ?Static econmics
assumes that factors of production and resources are fixed, but
dynamic economics assumes that these are changing. 35. What is
cobweb theory?It is a part of dynamics, it assumes that the forces
of demand and supply decide the point of equilibrium and therefore
these forces play an importnat role. 36. Who says that the rules of
economics are not firm as the rules of gravitation?Marshall 37.
What is the basic model of national income?Y = C+I+G+ (X-M)Y =
National Income C = consumptionI = InvestmentG=Government
expenditurex = Export M = Import 38. At consumption of 35 units,
your satisfaction is 900 units, at consumption of 36 units, your
satisfaction is 800 units, is it possibleYes under diniminishing
marginal utility it is possible that you can have negative marginal
utility so here there is negative marginal utility of -100Remember,
it is within the perview of Cardinal Utility theory (cardinal
utility theory says that utility can be measured). 39. You derive
equal satisfaction by eating 2 Kachori + 1 Malpua or alternatively:
2 Rosgulla + 2 Bikaneri Samosa. What economic theory is applicable
here?LAW OF EQUI-MARGINAL UTILITY 40. WHO TALKED ABOUT CONSUMER'S
RENT IN 1879?Marshall 41. Who talked about indifference curve for
the first time?Hickks 42. What is indifference curve ?When a
consumer is indifferent between two options, it is presented in the
form of a graph and it is called indifference curveEach point on
this curve shows combination of two commodities giving equal
satisfaction. For example at Point X, Pawan gets equal satisfaction
either he eats 10 Rosgulla or 10 Jalebi. 43. Example :In the above
graph, you can see that each curve on the graph shows a level of
satisfaction which is again a locus of points. 44. What is consumer
surplus?From 1 stunit, Pawan gets satisfaction of 10 unit, from
second unit : 6 units of satisfaction from 3 rdunit he gets
satisfaction of 2 units, but acually pays equal to 2 units for
each. Thus his surplus is :(10-2) + (6-2) + (2-2) = 12 units.Thus
Pawan has positive consumer surplus (difference between what he
gets and what he pays). 45. Who says that money has static marginal
utility ?Marshallbut Hickks says that money's marginal utility is
also changing 46. What are the exceptions of law of demand?As per
law of demand demand has inverse relation with price. Demand curve
is convex to origin..Exceptions are :1. emergency2. expectation of
further rise / fall in price 3.Inferior goods (Giffin goods)4.High
priced / luxury goods 5. Conspicuous goods 6. Necessities 7.
Ignorance 47. What are Giffin goods?These are inferior goods for
example Jawar isinferior goods for eating (in comparison to wheat),
similarly second hand cloths are giffin goods in comparison to
Ready Made Garments. 48. What is elasticity in demand ? % change in
demand in response to % change in price.Suppose demand change 10%
,when there is 5% chnge in price, we can say that elasticity is 2
times (highly elastic demand). 49. What factors influence
elasticity of demand ?Factors : 1. nature of commodity (necessities
have inelastic demand, but normal goods have elastic demand).2.
Substitute goods (if there is no substitute goods, the demand may
be inelastic), 3. possibility of postponement of consumption 4.
Price 5.income level of consumer etc. 50. What is difference
between positive and normative sciencePositive science : it states
the problem as it is without any suggestions Normative science : it
tries to solve the problems and give suggestion. It looks into the
ideal conditions and tries to tell you what should be the ideal.
51. Who says : Economics is the study of nature and causes of
wealth of nationsADAM SMITH 52. WHO SAYS : ECONOMICS IS THE SCIENCE
WHICH STUDIES WEALTH J.B. SAY 53. WHO SAYS : ECONOMIC WELFARE IS
THE SUBJECT OF STUDY OF ECONOMICS. ECONOMIC WELFARE IS THAT PART OF
SOCIAL WELFARE THAT CAN BE BROUGHT DIRECTLY OR INDIRECTLY INTO
RELATIONWITH THE MEASURING ROD OF MONEY 54. SOLUTIONPIGOU (well
known welfare economist) 55. Who says : economics is the study of
human behaviour as a relationship between ends and scarce means
which have alternate uses.Robinson 56. What are assumptions of
consumer's surplusDemand can be measured law of diminishing
marginal utilityperfect competitionstatic marginal utility of
moneyindependent goodsetc. (other things remain same. ) 57.
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