Economics Mock Test - 10

Explanation:

BOT/BOOT :

• Build operate transfer/ Build own operate transfer is the type of contract usually done by a government organization with private player.
• In this, private company builds the project, owns it for some predefined time, and later hands it to the government.

Additional Information

Cost-plus percentage contract: 

•  In this type of contract, the contractor is given a certain percentage over the actual cost of the construction as his profit
• .The contractor arranges materials and labor at his cost and keeps proper account and he is paid by the department or owner the whole cost together with a certain percentage, say 10% as his profit as agreed upon beforehand.
• Item rate contract: It is also known as a unit-price contract or schedule contract. For such contracts, contractors are required to quote rates for individual items of work on the basis of a schedule of quantities furnished by the department.
• This type of contract is followed by Central Public works and Railway departments.

Labor contract 

• It is an agreement with specific terms & conditions between two or more persons or entities or between the owner & the contractor 
• In which there is a promise to execute or do some work wherein all materials required for the construction are supplied by the owner.

Schedule contract: 

• It is a type of contract system where the contractor undertakes the execution of specific work with all its contingencies.

Lump-Sum or Fixed Price Contract:

• A lump sum or fixed-price contract is the type of contract where all construction-related activities are regulated with a total fixed price agreement.
• Lump-sum contracts are favored in situations when a clear scope and a defined schedule are negotiated and accepted.

Turnkey Contract :

• one under which the contractor is responsible for both the design and construction of a facility.
• The basic concept is that in a Turnkey Contract the contractor shall provide the works ready for use at the agreed price and by a fixed date.

Explanation:

Biotic:

• Biotic factors include all the living components present in an ecosystem.
• Examples of biotic resources include all flora and fauna.
• Biotic factors depend on abiotic factors for survival and reproduction.
• Biotic components originate from the biosphere.

Abiotic

• Abiotic factors refer to all the non-living, i.e. physical conditions and chemical factors that influence an ecosystem.​​
• Examples of abiotic factors include sunlight, water, air, humidity, pH, temperature, salinity,  precipitation, altitude, type of soil, minerals, wind, dissolved oxygen, mineral nutrients present in the soil, air and water, etc.
• Abiotic factors are completely independent of the biotic factor.
• Abiotic components originate from the lithosphere, hydrosphere, and atmosphere.
• Examples of abiotic factors include sunlight, water, wind, humidity, pH, temperature, salinity,  precipitation, altitude, type of soil, minerals, wind, dissolved oxygen, mineral nutrients present in the soil, air and water, etc.

• Environmental degradation is the deterioration of the environment through depletion of resources, the destruction of ecosystems, habitat destruction, the extinction of wildlife, and pollution. 
• Thus it means overall lowering of environmental qualities
• It also means adverse change brought by human activities
• And it causes ecological imbalance.

Key Points

Absorptive capacity:

• The rising population of the developing countries and the affluent consumption and production standards of the developed world have placed a huge stress on the environment.
• Many resources have become extinct and the wastes generated are beyond the absorptive capacity of the environment.
• Absorptive capacity means the ability of the environment to absorb degradation.
• It thus refers to the maximum amount of waste material that can be naturally absorbed by the environment on a sustainable basis, without causing environmental damage.
• The result is that we are today at the threshold of environmental crisis.

Thus, absorptive capacity means the ability of the environment to absorb degradation. 

Additional Information

Carrying capacity:

• The carrying capacity of an environment is the maximum population size of a biological species that can be sustained by that specific environment, given the food, habitat, water, and other resources available.
• The carrying capacity is defined as the environment's maximal load.

Ecological footprint:

• The ecological footprint is a method to measure human demand for nature.
• Which means the quantity of nature it takes to support people or an economy.
• It tracks this demand through an ecological accounting system.

Carbon footprint:

• A carbon footprint is the total greenhouse gas emissions caused by an individual, event, organization, service, place or product, expressed as carbon dioxide equivalent. 

Concept:

Greenhouse Effect: The solar energy trapped by the earth atmosphere and radiate it slowly so to cover our earth with a warm blanket. This is the natural process of the greenhouse effect on earth to maintain its temperature and makes the earth perfect for life.

Greenhouse gases are carbon dioxide, other greenhouse gases are methane, water vapour, nitrous oxide, CFCs and ozone. 

Values of radiation absorbed by the greenhouse gases are as follow:

Gas	Value of absorption in percentage
Ozone	10.2 %
Methane	16.3 %
Carbon Dioxide	56.4 %
Nitro Oxide	5.4 %

Explanation:

Global Warming

• An increase in the average temperature of the earth surface due to the greenhouse effect is called global warming
• It also refers to the increase in the average temperature of the air and sea at the earth's surface.
• The greenhouse gases combined increased the temperature of planet earth so the correct option is greenhouse gases.

Mistake Points

Global warming and the Greenhouse effect both are different things.

Global warming:

• It is the long-term heating of Earth's climate system observed since the pre-industrial period (between 1850 and 1900) due to human activities, primarily fossil fuel burning, which increases heat-trapping greenhouse gas levels in Earth's atmosphere. 
• Global warming is an aspect of climate change, referring to the long-term rise of the planet's temperatures.
• It is caused by increased concentrations of greenhouse gases in the atmosphere, mainly from human activities such as burning fossil fuels, deforestation, and farming. 
• Global warming stresses ecosystems through temperature rises, water shortages, increased fire threats, drought, weed and pest invasions, intense storm damage, and salt invasion, just to name a few. It has a harmful effect on living life as well.

Reduction in global warming is possible with Increased Plantation and Reduction In Use Of Fossil Fuel.

• When fossil fuels are burned, they release large amounts of carbon dioxide, a greenhouse gas, into the air. Greenhouse gases trap heat in our atmosphere, causing global warming. Thus, a reduction in the use of fossil fuels will contribute to reducing global warming.
• As trees grow, they help stop climate change by removing carbon dioxide from the air, storing carbon in the trees and soil, and releasing oxygen into the atmosphere. Trees provide many benefits to us, every day. They offer cooling shade, block cold winter winds, attract birds and wildlife, purify our air, prevent soil erosion, clean our water, and add grace and beauty to our homes and communities. Thus, increased plantation will help to reduce global warming.
• While conservation of wildlife is a healthy practice as it delivers various benefits for an effective mechanism of the ecosystem, it does not directly contribute to reducing global warming.

Thus, option 4 is the correct answer.

Concept:

Ozone Layer: 

• Ozone (O3) is a molecule formed by three atoms of oxygen. Ozone is a deadly poison.
• Ozone is found in the stratosphere layer of the atmosphere.
• However, at the higher levels of the atmosphere, ozone performs an essential function. It shields the surface of the earth from ultraviolet (UV) radiation from the Sun.
• This radiation is highly damaging to organisms, for example, it is known to cause skin cancer in human beings or can split the DNA.
• It is a pale blue gas with a distinctively pungent smell.
• Ozone is an excellent oxidizing agent as it breaks down into oxygen gas and nascent oxygen. { O3 → O2 + [O] }
• It is an allotrope of oxygen that is much less stable than the diatomic allotrope O2, breaking down in the lower atmosphere to O2 or di-oxygen

Its depletion:

• The amount of ozone in the atmosphere began to drop sharply in the 1980s.
• This decrease has been linked to synthetic chemicals like chlorofluorocarbons (CFCs) which are used as refrigerants and in fire extinguishers.
• The government bans those products which contain CFCs.

• Ozone is thermodynamically unstable and decomposes to molecular oxygen. Thus, a dynamic equilibrium exists between the production and decomposition of ozone molecules

Explanation:​

• In recent years, there have been reports of the depletion of this protective ozone layer because of the presence of certain chemicals in the stratosphere.
• The main reason for ozone layer depletion is believed to be the release of chlorofluorocarbon compounds (CFCs), also known as Freons.
• These compounds are non-reactive, non-flammable, non-toxic organic molecules and therefore used in refrigerators, air conditioners, in the production of plastic foam and by the electronic industry for cleaning computer parts etc.
• Once CFCs are released in the atmosphere, they mix with the normal atmospheric gases and eventually reach the stratosphere
• In the 1980s, for the first time, atmospheric scientists working in Antarctica reported about the depletion of the ozone layer commonly known as ozone hole over the South Pole.

Additional Information

• Greenhouse effect:
  • The greenhouse effect is a natural phenomenon that warms the surface of the Earth.
  •  As the Sun's energy enters the Earth's atmosphere, part of it is reflected back in space and the remainder is absorbed and re-radiated by greenhouse gases.  
  • The radiation consumed warms the atmosphere and the Earth's surface.
• Acid Rain:
  • As the name suggests, acid rain may be said to be the easiest way to precipitate acid in the form of rain.
  • This results in acid rain as air contaminants such as nitrogen oxides and sulphur react with rainwater and come down with the rain.
• Smog:
  • The term smog means a mixture of fog and smoke.
  • ​It is a type of air pollution that occurs in many cities worldwide.

The correct answer is All of the Above

Key Points

• In microeconomic theory, the opportunity cost, refers to the next cost best alternative use of resources.
• It is also known as alternative cost, is the value (not a benefit) of the choice in terms of the best alternative while making a decision.
• The Social Cost is the cost related to the working of the firm but is not explicitly borne by the firm instead it is the cost to the society due to the production of a commodity. 
• A transfer price generally has two parts: the outlay costs and the opportunity cost. The cost of making or obtaining the product is known as the outlay cost.
• The opportunity cost is the profit the division could make by selling the product in the marketplace, as opposed to selling the product internally.

Concept:

Climate change, ozone depletion, and greenhouse emissions are hard-hitting realities and a wake-up call for everyone to leave behind the prejudices and act on them. Various initiatives have been launched and international agreements have been signed for the said purpose.

The Montreal Protocol:

• The Montreal Protocol on Substances that Deplete the Ozone Layer (the Montreal Protocol) is an international agreement made in 1987.
• The Montreal Protocol is signed by 197 countries – the first treaty in the history of the United Nations to achieve universal ratification – and is considered by many the most successful environmental global action.
• It sits under the Vienna Convention for the Protection of the Ozone Layer (the Vienna Convention).
• It was designed to stop the production and import of ozone-depleting substances and reduce their concentration in the atmosphere to help protect the earth's ozone layer.
• It targets 96 ozone-depleting chemicals in thousands of applications across more than 240 industrial sectors.
• It has also produced other significant environmental benefits. Most notably, it has benefitted the global climate by reducing the amount of greenhouse gas going into the atmosphere.
• The Montreal Protocol is widely considered the most successful environmental protection agreement. It sets out a mandatory timetable for the phase-out of ozone-depleting substances.

The correct answer is Jharkhand and West Bengal.

Key Points 

• In order to control floods and other related problems, the Central Government, in consultation with the state governments plan for a development project for the Damodar Basin.
• The Damodar Valley Corporation (DVC) was established on 18th February 1948 to execute the Damodar Valley Project.
• Benefit from the Project:
  • Flood control in the flood-prone areas of Jharkhand and West Bengal.
  • Irrigation facilities to about 5.15 lakh hectares of land.
  • The installed capacity of 2, 60,000 KW of hydroelectricity at various dam sites, Etc.

Additional Information 

• The Damodar River is a tributary of the Hugli River flowing through Jharkhand and West Bengal.
• The Damodar River was termed as Sorrow of Bengal.
• This is because it has caused devastating floods in  years 1823, 1848, 1856, 1859, 1863 1882, 1890, 1898, 1901, 1905, 1907, 1913, 1916, 1923, 1935 and 1943.
• While minor floods are experienced almost every year.
• The sediments brought by the Damodar create the problem of sedimentation in the Hoogly which in turn endangers the Kolkata port.

The correct answer is Pandurang Hegde.

Key Points

• Appiko Movement:
  • Appiko Movement is one of the forest-based environmental movements in India.
  • The movement took place in the Uttara Kannada district of Karnataka in the Western Ghats.
  • The movement created awareness among the villagers throughout the Western Ghats about the ecological danger posed by the commercial and industrial interests to their forest which was the main source of sustenance.
  • “Appiko Movement” was led by Pandurang Hegde.
  • Panduranga Hegde is an environmentalist from Uttara Kannada district, Karnataka, India, and is known as the person who started the Appiko movement to protect trees in the Western Ghats.
  • Panduranga Hegde is inspired by Sundarlal Bahuguna in the area of environmental protection and is known as a disciple of the latter.
  • During the 1980s, Panduraga Hegde led people to protect trees in the forest by embracing the trees or Appiko (as in local language Kannada) when the contractors tried to fell trees.

Additional Information

• Sunderlal Bahuguna:
  • Sunderlal Bahuguna was an Indian environmentalist and Chipko movement leader.
  • The idea of the Chipko movement was his wife's.
  • He fought for the preservation of forests in the Himalayas, first as a member of the Chipko movement in the 1970s, and later spearheaded the anti-Tehri Dam movement from the 1980s to early 2004.
• Vandana Shiva:
  • Vandana Shiva is an Indian scholar, environmental activist, food sovereignty advocate, ecofeminist, and anti-globalization author.
  • She is often referred to as "Gandhi of grain" for her activism associated with the anti-GMO movement.
  • Shiva is one of the leaders and board members of the International Forum on Globalization (with Jerry Mander, Ralph Nader, and Jeremy Rifkin), and a figure of the anti-globalization movement.
• Amrita Devi:
  • Amrita Devi sacrificed her life along with her three daughters viz. Asu, Ratni, and Bhagu in the year 1730 to save green trees being felled by the Maharaja of Jodhpur at a place known as Khejarli in Marwar, Rajasthan.
  • Along with her more than 363 other Bishnois, died saving the Khejri trees.
  • Amrita Devi protested against King's men attempting to cut green trees as it was prohibited in the Bishnoi religion.
  • The malevolent feudal party told her that if she wanted the trees to be spared, she should give them money as a bribe.
  • She refused to acknowledge this demand and told them that she would consider it as an act of ignominy and insult to her religious faith.

Explanation:

Central Pollution Control Board (CPCB)

• The Central Pollution Control Board (CPCB), a statutory organisation, was constituted in September 1974 under the Water (Prevention and Control of Pollution) Act, 1974.
• Further, CPCB was entrusted with the powers and functions under the Air (Prevention and Control of Pollution) Act, 1981.
• It serves as a field formation and also provides technical services to the Ministry of Environment and Forests of the provisions of the Environment (Protection) Act, 1986.

Functions

• Principal Functions of the CPCB, as spelt out in the Water (Prevention and Control of Pollution) Act, 1974, and the Air (Prevention and Control of Pollution) Act, 1981,
  1. to promote cleanliness of streams and wells in different areas of the States by prevention, control and abatement of water pollution, and
  2. to improve the quality of air and to prevent, control or abate air pollution in the country.

Brundtland Commission Report:

• Formerly known as the World Life Issues on Environment and Development (WCED), the mission of the Brundtland Commission is to unite countries to pursue sustainable development together.
• To reunite countries to work and pursue sustainable development together, the UN decided to establish the Brundtland Commission.
• Gro Harlem Brundtland was the former Prime Minister of Norway and was chosen due to her strong background in the sciences and public health.
• The Brundtland Commission’s characterization of ‘sustainable development' is a development that satisfies the needs of the present without compromising the ability of future generations to meet their own needs.

​Thus, the term sustainable development was coined in the ‘Brundtland Commission Report’.

The correct answer is Butane and Propene.

Key Points

• LPG (cooking gas) is a mixture of Butane and propane.
• LPG (cooking gas) is a flammable mixture of hydrocarbon gases that include propane, butane, isobutene, and mixtures of the three LPG gases.
• LPG (cooking gas) is made up of carbon and hydrogen atoms forming propane and butane whilst natural gas is made up of lighter methane, the simplest carbon and hydrogen molecule.
• LPG (cooking gas) is stored in steel vessels ranging from small BBQ gas bottles to larger gas cylinders and tanks. They are commonly used for generating heat for the home. For example- heating, hot water, cooking including boilers, etc.

Additional Information

•  LPG is an abbreviation of “Liquefied Petroleum Gas”.
• The main source of obtaining LPG is the process of extracting natural gas from reservoirs.
• Liquid petroleum gases were discovered in 1912 by Dr. Walter Snelling.
• It is a non-renewable source of energy.

The correct answer is Methane.

Key Points

• CNG is an abbreviation of “Compressed Natural Gas”. The main component of CNG is Methane.
• It is composed mostly of methane but also composed of ethane and propane in smaller quantities.
• CNG is developed by compressing natural gas mainly methane, down to less than one per cent of its total volume.
• CNG is known to be an eco-friendly alternative option to gasoline which is harmful to nature.

Additional Information

Gas	Description
Butane	Butane is a petroleum-derived gaseous liquid. This is primarily used for camping, cooking in the backyard, and in cigarette lighters.
Ethane	It is in the alkanes substance group with the molecular formula CnH2n+2. Ethane is the main component of natural gas and is also found in marsh gas.
Propane	Propane is actually a byproduct of both petroleum refining and natural gas processing. Propane comes from natural gas and petroleum wells. About 69 per cent of the propane used in the United States is extracted from raw natural gas.

• Waste is unusable material. Waste comes in many forms.
• The term “energy recovery” often is applied only to a narrow number of methods for converting wastes into energy.
• It applies to a broad range of technologies used to create heat, electricity, or fuel.
• Energy recovery gives governments and businesses another way to reduce their waste streams.
• After recyclable materials have been removed, the remaining waste can be treated to release energy.
• There are two types of technologies used generally for converting waste streams into energy: thermal and biological.
• Thermal waste-to-energy is created by burning trash, while biological processes are typically centred on anaerobic digestion.

Key Points

Pelletization:

• Pelletization of municipal solid waste involves the processes of segregating, crushing, mixing high-and low-heat value organic waste material.
• It involves solidifying it to produce fuel pellets or briquettes, also referred to as refuse-derived fuel (RDF).
• The process condenses the waste or changes its physical form and enriches its organic content through the removal of inorganic materials and moisture.
• The calorific value of RDF pellets can be around 4000 kcal/ kg depending upon the percentage of organic matter in the waste.
• Pelletization enriches the organic content of the waste through the removal of inorganic materials and moisture.
• It can be a very effective method for preparing an enriched fuel feed for other thermochemical processes like pyrolysis/gasification, apart from incineration.
• Pellets can be used for heating plant boilers and for the generation of electricity.
• It is a waste to energy recovery method.

Biomethanation:

• Biomethanation is a process by which organic material is microbiologically converted under anaerobic conditions to biogas.
• Anaerobic digestion (AD) is a bacterial fermentation process that operates without free oxygen and results in biogas containing mostly methane (~60%), carbon dioxide (~40%) and other gases.
• Biomethanation has dual benefits. It gives biogas as well as manure as the end product.
• This technology can be conveniently employed in a decentralized manner for the biodegradation of segregated organic wet wastes such as wastes from kitchens, canteens, institutions, hotels, and slaughterhouses and vegetable markets. 
• The biogas generated from the Biomethanation process can be burned directly in a gas boiler/burner to produce heat for thermal application industries and cooking or burnt in a gas engine to produce electricity.
• Alternatively, the biogas can be cleaned to remove the carbon dioxide and other substances, to produce BioCNG.
• This can be injected into the national gas grid to be used in the same way as natural gas, or used as a vehicle fuel. 
• It is a waste to energy recovery method.

Pyrolysis:

• It is a process of chemically decomposing organic materials such as plastic and rubber at elevated temperatures in the absence of oxygen.
• In general, pyrolysis does not involve reactions with oxygen, water or any other reagents.
• It is a waste to energy recovery method.

Composting:

• Composting of refuse is a biological method of decomposing solid waste.
• If the organic materials excluding plastics, leather and rubber are separated from the solid wastes and are subjected to decomposition either aerobically or anaerobically, the remaining end product is called compost or humus.
• The entire process involving both the separation and bacterial conversion of the organic solid wastes is known as Composting.
• It is not a waste to energy recovery method.

​Thus, composting is not an energy recovery method of solid waste management.

The correct answer is Command Economy.

• A Command economy is one in which the economy is controlled by a centralized agency government.
• A command economy is a system where the government, rather than the free market, determines what goods should be produced, how much should be produced, and the price at which the goods are offered for sale. It also determines investments and incomes.
• The government decides the general direction and regulates the economy to suit it to its goals
• There is almost zero power given to private businesses in this type of economy

Type	Description
Traditional	An ancient type of economy based on traditions and beliefs
Market	Businesses look for their self-interest, no governmental intervention
Mixed	A mixture of any of the other types of economies

The correct answer is Mao Zedong (Mao Tse-tung).

Key Points

• Mao Tse-tung (also spelled Zedong) was the principal Chinese Marxist theorist, soldier, and statesman who led his nation's Cultural Revolution.
• Mao Tse-tung served as Chairman of the People's Republic of China from 1949 to 1959 and led the Chinese Communist Party from 1935 until his death.
• Mao's "Great Leap Forward" and the Cultural Revolution were ill-conceived and had disastrous consequences, but many of his goals, including stressing China's self-reliance, were generally laudable.

Additional Information

Nelson Mandela

• Nelson Mandela was the first President of South Africa.
• He was the 11^th President of the African National Congress.
• He was the country's first black head of state and the first elected in a fully representative democratic election.
• He received Bharat Ratna in 1990 and Nobel Prize for Peace in 1993.

Winston Churchill

• Winston Churchill was the former Prime Minister of the United Kingdom.
• Churchill sent Sir Stafford Cripps to India with the fresh proposal of constitutional reforms in March 1942.
• He received Nobel Prize for Literature in 1953.

Mahatma Gandhi 1869 -1948)

• Gandhiji is known as the Father of our Nation.
• He returned to India from South Africa on 9th January 1915 and celebrated it as Pravasi Bharatiya Divas (NRI Day).
• The first satyagraha of Gandhiji is Chamapran Satyagraha (1917) also known as the first civil disobedience movement.
• The first hunger strike of Gandhiji is Ahmedabad Mill Strike (1918).
• The first non-cooperation movement of Gandhiji is Kheda Satyagraha (1918).
• He was the president of the INC session in Belgaum (1924).
• In 1931, Gandhiji participated in the Second Round Table Conference in London.
• Gandhiji was assassinated on 30 January 1948 by Nathuram Godse and observed as 'Martyrs Day'.

The correct answer is Inflation.

Key Points

• Impacts of the Deficit Financing on the country:
  • An increase in inflation is due to the increase in the money supply in the economy.
  • The decrease in average consumption level is due to a result of higher inflation.
  • Increase in income disparities, as the rich get more opportunities due to higher money supply
  • Adverse Impact on Saving:- Deficit financing leads to inflation and inflation affects the habit of voluntary saving adversely. In fact, it is not possible for people to maintain the previous rate of saving due to rising prices.
  • Adverse Impact on Investment: - Deficit financing affects investment adversely. When there is inflation in the economy, trade unions/employees demand higher wages to survive.
  • In neutral fiscal policy, government works on no profit/no loss framework
  • In the contractionary fiscal policy, government revenue exceeds its expenditure.

Important Points

• Deficit financing:
  • Deficit financing means generating funds to finance the deficit which results from an excess of expenditure over revenue.
  • The gap is covered by borrowing from the public by the sale of bonds or by printing new money.
  • For developing countries like India, higher economic growth is a priority.
  • A higher economic growth requires finances.
  • With the private sector being shy of making a huge expenditure, the responsibility of drawing financial resources rests on the government.
  • Often both the tax and non-tax revenues fail to mobilize enough resources just through taxes.
  • The deficit is often funded through borrowings or printing new currency notes.
  • Deficit financing affects investment adversely.
  • When there is inflation in the economy employees demand higher wages to survive.
  • If their demands are accepted it increases the cost of production which de-motivates the investors.

From the National Income, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP). We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households. Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households. On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So we have to deduct the net interests paid by the households to the firms and government. The households receive transfer payments from government and firms (pensions, scholarship, prizes, for example) which have to be added to calculate the Personal Income of the households.

Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

• GK Trick: Trick to remember Direct & Indirect Taxes
  Trick –– "Wepro, co, in (Direct Taxes)"
  • We- Wealth Tax
  • Pro- Property Tax
  • Co- Corporate Tax
  • In-Income Tax
  Trick –– "Excuse Me (Indirect Taxes)"
  • Ex- Excise tax
  • Cu- Custom tax
  • Se- Service tax
  • M- Market tax/vat
  • E- Entertainment tax
• Indirect tax refers to the tax that is levied on goods and services.
• Excise duty is a type of indirect tax that is levied on locally produced goods, the company's revenue, and occupation.
• A direct tax is a type of tax that is levied on an individual or organization's income or profits.
• Capital Gains Tax, Wealth Tax, and Estate Duty are examples of direct tax.

Consumer Behavior is the action and decision process for people who purchase goods and services for personal consumption.

• Consumer behavior is the study of how individual customers, groups, or organizations select, buy, use, and dispose of ideas, goods, and services to satisfy their needs and wants.
• It refers to the actions of the consumers in the marketplace and the underlying motives for those actions.
• The study of consumer behavior assumes that the consumers are actors in the marketplace.
• The per­spective of role theory assumes that consumers play various roles in the marketplace.
• Starting from the information provider, from the user to the payer, and to the disposer, consumers play these roles in the decision process.
• According to Engel, Blackwell, and Mansard, ‘consumer behavior is the actions and decision processes of people who purchase goods and services for personal consumption.

Importants Points

1. Consumer Interest:

• Consumer interest refers to the intent of a particular individual to hear more about a company's product and eventually decide whether to buy it or not. 
• To create a successful business, company managers must be able to attract the interest of potential customers.
• If customers are not aware that a product exists or are not informed of its benefits, they are not likely to be interested enough to buy the product.

2. Consumer Satisfaction:

• Customer satisfaction is defined as a measurement that determines how happy customers are with a company's products, services, and capabilities.
• Customer satisfaction information, including surveys and ratings, can help a company determine how to best improve or changes its products and services.

Explanation:

Fast Moving Consumer Goods

• Fast-moving consumer goods are products that sell quickly at a relatively low cost. These goods are also called consumer packaged goods.
• FMCGs have a short shelf life because of high consumer demand (e.g., soft drinks and confections) or because they are perishable (e.g., meat, dairy products, and baked goods).
• These goods are purchased frequently, are consumed rapidly, are priced low, and are sold in large quantities.
• They also have a high turnover when they're on the shelf at the store.

Non-durable consumer goods:

• Non-durable goods are products consumers purchase with the plan to use for a short period of time. Also referred to as consumable goods.

• Most non-durable goods are expected to be consumed or used in three years or less. Because of this basic characteristic, non-durable goods can be a wide variety of products.

• There are essentially three types of non-durable goods. They may be literally consumed, as with food and drinks.

• They can also be utilized until they are gone, such as deodorant, toothpaste, or dish soap.

• The third type of non-durable good is a product that is used and no longer needed, intended for one use, or wears out from normal use, such as socks, paper plates, and light bulbs.

Perishable consumer goods:

• Perishable products lose their quality and value over a specified time even when handled correctly throughout the supply chain.

• They require special handling, storage techniques, and equipment to prevent damage, spoilage, and contamination.

• This handling includes washing, rinsing, grading, storing, packaging, temperature control, and daily or even hourly shelf-life quality testing. Disruptions of the integrity of the cold chain can wipe out an entire season's profits.

• Perishables include meats, fruits, vegetables, spices, grains, tobacco products, flowers and plants, and pharmaceuticals, including over-the-counter medications, supplements, and dietary aids.

• Certain chemicals, including those used for wildfire suppression, lose potency and become less stable over time, so they also fit the perishable category. Even the ice used to preserve the freshness and usability of goods during transport and store display qualifies as perishable.

• Vaccines, blood, blood products, and body organs for transplant have short windows of useful life, so they fit the definition of perishable goods, as well.

Single-use consumer goods:

• Single-use goods are those goods, which can be used only once.
• They are finished only in one use. For example bread, butter, egg, milk, etc are single-use consumer goods as they are consumed immediately and once for all.
• Similarly, single-use producer goods are exhausted in one production process. For example coal, raw material, seeds, manure, etc.

• They are the articles of direct consumption because they satisfy human wants directly. Similarly, the services of all types such as those of doctors, actors, lawyers, waiters, etc. are included under single-use goods.

The correct answer is Both 1 and 2.

Key Points

• Broad Money:
  • In economics, broad money is a measure of the money supply that includes more than just physical money such as currency and coins.
  • Broad money is the most inclusive method of calculating a given country’s money supply.
  • Central Bank tracks the growth of broad money to help forecast inflation. Hence, statement 1 is correct.
  • Broad money (M3) includes:
    • Currency and Coins
    • Deposits with an agreed maturity of up to two years, Deposits in checking accounts, savings accounts, and small-time deposits. Hence, statement 2 is correct.
    • Deposits redeemable at notice of up to three months and
    • Repurchase agreements,
    • Money market fund shares/units and
    • Debt securities up to two years

The correct answer is M3 = M1 + time deposits with the bank.Key Points

• The total stock of money in circulation among the public at a particular point of time is called money supply.
• Money supply, like money demand, is a stock variable.
  • A stock variable is a quantity that is measurable at a particular point in time.
• M1 = CU + DD 
  • CU = currency (notes plus coins) held by the public.
  • DD = net demand deposits held by commercial banks.
  • The word ‘net’ implies that only deposits of the public held by the banks are to be included in the money supply.
  • The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply.
• M2 = M1 + Savings deposits with Post Office savings banks
• M3 = M1 + Net time deposits of commercial banks
• M4 = M3 + Total deposits with Post Office savings organizations (excluding National Savings Certificates).

Additional Information 

• RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3, and M4.
• M1 and M2 are known as narrow money.
• M3 and M4 are known as broad money.
• These measures are in decreasing order of liquidity.
  • M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all.
  • M3 is the most commonly used measure of the money supply. It is also known as aggregate monetary resources.

The correct answer is Both options 1 and 2.

• On the recommendations of the High-Level Committee on Balance of Payments, the Liberalised Exchange Rate Management System(LERMS) involving the dual exchange rate mechanism was introduced in March 1992.
• The committee was chaired by Dr. C. Rangarajan.
• According to this system, all proceeds of export and import under current transactions were required to be surrendered to authorized dealers only.
• Forty percent of the proceeds were purchased at the official exchange rate by the Reserve Bank of India (RBI), while the remaining sixty percent of the proceeds would be concerted at the free-market rate quoted by the authorized dealers.
• It was followed by the ultimate convergence of the dual rates effective from March 1 (the unification of the exchange rates).
• This marked the beginning of the era of the market-determined exchange rate regime of the rupee, based on demand and supply in the forex market in India. 
• Finally, the rupee was made convertible on the current account under the acceptance of Article VIII of the Articles of Agreement of the IMF.
• All these were important steps in the establishment of the FOREX market of the kind that we see today.
• Basic Information about Reserve Bank of India (RBI):
  • It is the regulator of the entire banking system in India.
  • Governor: Shaktikanta Das (25th governor). 
  • Founded: 1 April 1935 in Kolkata.
  • Headquarter: Mumbai. 

The correct answer is World Bank and IMF.

 Key Points

• IMF and World Bank are the results of the Bretton Woods Conference.
• IMF and World Bank are known as the Bretton Woods twins.

Members of Bretton Woods 

• International Monetary Fund(IMF) – To maintain global financial stability through technical assistance, training, and loans to member states to tide over short term balance of payment crisis
• World Bank (WB) Group – Consisting of 5 agencies that provide vital financial and technical assistance to developing countries around the world to reduce global poverty

 Important Points

• The United Nations (UN) is an international organization founded in 1945.
• It is currently made up of 193 Member States.

League of Nations

• The League of Nations, abbreviated as LON, was the first worldwide intergovernmental organization whose principal mission was to maintain world peace.
• Founded on 10 January 1920 following the Paris Peace Conference that ended the First World War, it ceased operations on 20 April 1946.

The correct answer is legal tenders and Fiat money.

Key Points

Money Supply:

• Money Supply In an economy, money consists of mainly currency notes, coins, and deposits of the public in banks.
• In India, coins and currency notes are issued for circulation by the Reserve Bank of India (RBI), which is the monetary authority (or Central Bank) in India.
• One-rupee note and all coins and subsidiary coins, the magnitude of which is relatively small, are minted/printed by the Government of India, while all the other currency notes are printed by the RBI.
• All the currency notes and coins are put into circulation only through the RBI, which is the sole authority for the issue of currency and coins in India.
• The One Rupee note is signed by the finance secretary (and printed by Govt.) as a testimony that it is the base unit of the currency system.
• Coins and One Rupee note are minted/printed by the government of India and hence constitute the liability of the Government of India.
• As part of the circulation process, RBI buys the one rupee note and minted coins from the Government of India, and hence the coins and one rupee note come and sit under the asset section of RBI’s balance sheet.
• All banknotes (except one rupee note) issued by RBI are backed by assets such as gold, Government Securities, and Foreign Currency Assets, as defined in Section 33 of the RBI Act, 1934.

Important Points

• Currency notes and coins are called fiat money. They are also called legal tenders as they cannot be refused by any citizen of the country for payment/discharge of debt
• Currency = Notes + Coins

• A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver. The value of fiat money is largely based on the public’s faith in the currency’s issuer, which is normally that country’s government or central bank.

Key Points

 Qualitative Technique of credit control:

Bank Rate- 

• The bank rate or the discount rate is the rate at which a central bank is prepared to discount the first class bills of exchange. 
• The rate of interest which the central bank charges from the commercial banks for rediscounting the bills is called bank rate.
• Bank rate policy influences- (a) the cost and availability of credit to the commercial banks, (b) interest rates and money supply in the economy, and (c) the level of economic activity of the economy.
• A rise in the bank rate makes the credit costlier, reduces the volume of credit, discourages economic activity and brings down the price level in the economy.

Open Market Operations- 

• Open market operations refer to the deliberate and direct buying and selling of securities in the money market by the central bank.
• In the narrow sense, open market operations refer to the purchase and sale by the central bank of government securities in the money market. In the broad sense, open market operations imply the purchase and sale by the central bank of any kind of eligible paper, like, government securities, bills and securities of private concerns, etc.

Variable Cash Reserve Ratio-

• The method of variable cash reserve ratio or changing minimum cash reserves to be kept with the central bank by the commercial banks is comparatively new method of credit control used by the central banks.
• Changes in the cash reserve ratio are a powerful method for influencing not only the volume of excess reserves with the commercial banks, but also the credit multiplier of the banking system.
• The significance of this method lies in the fact that increase in the minimum cash reserve ratio, by reducing (or increasing) the base of the cash reserves of the commercial banks decreases their potential credit creation capacity.

Hence, both bank rate and open market operations are techniques of qualitative credit control.

The correct answer is Fiscal deficit and Current Account Deficit.

Key Points

• The twin deficit, or double deficit, occurs when a nation has both a current account deficit and a budget deficit.
• This means the country's economy is importing more than it is exporting, and the country's government is spending more money than it is generating.
• Fiscal Deficit - The fiscal deficit is the difference between the government's total expenditure and its total receipts.
• As per the technical definition - Fiscal deficit = Budgetary Deficit + Borrowings and other liabilities of the government.
• Current Account Deficit -  The current account measures the flow of goods, services, and investment into and out of the country.
• There is a deficit in current account if the value of goods and services imported exceeds the value of those exported.

The correct answer is total domestic spending on goods and services, both domestic and foreign.

• "Absorption" refers to the total level of spending that occurs in an economy.
• Absorption tells about the total amount of consumption by people in an economy regardless of the origin of the goods and services.
• Countries that have a high marginal propensity to consume tend to have a high absorption rate.
• The term absorption was first mentioned by Sidney Alexander in 1952 in a discussion of the Balance of payments.
• However, if absorption is greater than production then there will be a deterioration in the current account balance of payments.

Important Points

• As the absorption is equal to the sum of all domestically produced goods consumed locally and all imports, it is equal to national income [Y = C + I + G + (X - M)] minus the balance of trade.
  • C = household consumption expenditures / personal consumption expenditures
  • I = gross private domestic investment
  • G = government consumption and gross investment expenditures
  • X = gross exports of goods and services
  • M = gross imports of goods and services

The correct answer is Frankfurt.

The Central Administrative Office for Euro Currency is located in Frankfurt, Germany.

Key Points

• The European Central Bank (ECB) is the central bank of the 19 European Union countries which use the euro. 
• It was established by the Treaty of Amsterdam.
• The current President of the ECB is Christine Lagarde. 

Additional Information 

• London is the city capital of the United Kingdom. London is situated in southeastern England, lying astride the River Thames some 80 km upstream from its estuary on the North Sea. 
• Madrid is the city capital of Spain. Madrid’s status as the national capital reflects the centralizing policy of the 16th-century Spanish king Philip II and his successors.
• Zurich is the largest city of Switzerland and the capital of the canton of Zurich. It is located in an Alpine setting at the northwestern end of Lake Zurich.

The correct answer is European Union.

Key Points

• The Euro
  • Euro, monetary unit and currency of the European Union (EU).
  • It was introduced as a noncash monetary unit in 1999, and currency notes and coins appeared in participating countries on January 1, 2002.
  • After February 28, 2002, the euro became the sole currency of 12 EU member states, and their national currencies ceased to be legal tender.
  • Other states subsequently adopted the currency. The euro is represented by the symbol €.
  • The euro is the most tangible proof of European integration around 341 million people use it every day, making it the second most-used currency worldwide.
  • The benefits of the common currency are immediately obvious to anyone travelling abroad or shopping online on websites based in another EU country.
  • Currently, the euro (€) is the official currency of 19 out of 27 EU member countries which together constitute the Eurozone, officially called the euro area
  • Although all EU countries are part of the Economic and Monetary Union (EMU), 19 of them have replaced their national currencies with the single currency, the euro.
  • These EU countries form the euro area, also known as the eurozone.
  • The countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The correct answer is RBI.

Key Points

• The Reserve bank of India established in 1935 is the Bank of Banks as it is India’s Central bank under the Ministry of Finance.
• It is responsible for the regulation of the banking system in India and the issue and supply of the national currency.
• It was set up in accordance with the Reserve Bank of India Act, 1934.
• The panel of RBI consists of 21 members (central board of directors) – Governor, Deputy Governor (4), Finance Ministry Representatives (2), Government nominated Directors (10), Directors (4) representing boards for Mumbai, Kolkata, Chennai, and Delhi.
• It was nationalized on Jan 1, 1949.
• Member of Asian Clearing Union and Alliance for Financial Inclusion
• Present Governor – Shaktikanta Das
• Functions of RBI –

• Financial Supervision
• Regulator and Supervisor – Financial System, Payment and Settlement System
•  Banker and Debt Manager to the Government
• Foreign Exchange management
• Issue of Currency and Fake currency detection
• Central Securities Depository for Government Securities

Important Points

NABARD – National Bank for Agricultural and Rural Development

• Responsible for all credit operations in agriculture and economic activities in rural India
• Formation – 1982, HQ – Mumbai

SBI – State Bank of India

• Indian multinational and Public Sector bank
• Formation – 1955, HQ – Mumbai, Tagline – The Nation Banks on Us
• Formerly – Imperial Bank of India

Mistake Points

• RBI is also referred to as ‘Mint Street’.
• Rs. 1 note is issued by the Government of India that’s why it bears the sign of Finance Secretary unlike all other denomination notes have the sign of the Governor of RBI.

(Stamp released in 2010 to mark the 75^th anniversary of RBI)

The correct answer is All of the above.

Key Points

• International Monetary Fund (IMF), United Nations (UN) specialized agency, was founded at the Bretton Woods Conference in 1944 to secure international monetary cooperation, stabilize currency exchange rates, and expand international liquidity (access to hard currencies).
  • The IMF is headed by a board of governors, each of whom represents one of the organization’s approximately 180 member states.
  • It is located in Washington.
  • The governors, who are usually their countries’ finance ministers or central bank directors, attend annual meetings on IMF issues.
  • The fund’s day-to-day operations are administered by an executive board, which consists of 24 executive directors who meet at least three times a week.
• Eight directors represent individual countries (China, France, Germany, Japan, Russia, Saudi Arabia, the United Kingdom, and the United States), and the other 16 represent the fund’s remaining members, grouped by world regions.
  • Because it makes most decisions by consensus, the executive board rarely conducts formal voting. 
  • It finances member countries.
• The current IMF Chief is Managing Director, Kristalina Georgieva (As of April 2022).

The term "Special Drawing Rights" (SDR) is related to the International Monetary Fund(IMF).

•  Special Drawing Rights (SDR) is a supplementary international reserve asset which was created in the context of the Bretton Woods fixed exchange rate system.
• The SDR is neither a currency nor a claim on the IMF but it is a potential claim on the freely usable currencies of IMF members where SDRs can be exchanged for these currencies.
• The SDR is an international reserve asset which was created by the IMF in 1969 to supplement its member countries’ official reserves and the value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

The correct answer is Special Drawing Rights (SDRs) of the IMF.

Key Points

• Paper Gold is the term that represents the special drawing rights of IMF.
• Special Drawing Rights is a type of supplementary foreign exchange reserve asset. 

​Additional Information

• Currencies still on Gold Standard:- Gold won't be a currency today. But it possesses an intrinsic value and is free from any counterparty risk.
• Special accommodation facility of the World Bank:-   financial grant provided by the world bank for accommodation in underdeveloped, developing countries.

The correct answer is Both (A) and (R) are correct and (R) is the right explanation of (A).

Key Points

Analysing the statements:

Assertion (A): International Monetary Fund was a front for America to control the world monetary system during the late '60s.

• The International Monetary Fund (IMF) was created in the wake of the Great Depression to promote stability in global financial markets.
• America has dominated IMF and even World Bank since its founding.
• To give just a few examples:
  • in the 1940s, it was the United States bypassing these institutions through the Marshall Plan and regional aid schemes.
  • In the 1950s and 1960s, the United States used the IMF to bail out sterling, the currency of its close ally Great Britain, and the World Bank to promote its modernization schemes.

Reason (R): Bretton Woods System replaced the gold exchange standard so that the US could have the highest quota.

• Representation within the Bretton Woods institutions is established by the size of the financial contribution.
• America used this policy and contribution to controlling the world monetary system when the gold standard system was replaced. 

Important Points There is a direct relation between the two statements and the IMF was constructed in a way to bring out a system favorable to the strongest economy. 

Therefore, the correct answer is Option 1.

In economics, fractional-reserve banking is the near universal practise of banks in which banks keep a fraction of the total deposits managed by a bank as reserves that are not to be lent. The reserve ratios are periodically changed by the RBI. The reserve requirement is a bank regulation, that sets the minimum reserves each bank must hold as a part of the deposits. These reserves are designed to satisfy various needs like providing loans to the Government (SLR), safety of banking operations, regulation of liquidity, management of interest rates, checking speculation and inflation management (CRR). They are in the form of RBI approved securities (SLR) kept with themselves or cash that is kept with the RBI.

The correct answer is Transaction approach.

Key Points

• The Quantity Theory of Money
  • It seeks to explain the factors that determine the general price level in a country.
  • The theory states that the price level is directly determined by the supply of money.
• Transaction Approach :
  • The transactions version of the quantity theory of money was provided by the American economist Irving Fisher in his book- The Purchasing Power of Money (1911).
  • According to Fisher, Keeping other factors at constant, an increase or decrease in the price level would occur due to an increase or decrease in the quantity of money.
  • This approach may be explained with the following equation of exchange, MV = PT, where,

    • T = the total transactions in physical goods

    • P = the general price level

    • V = the velocity of circulation of money

    • M = the total supply of money

• According to the Transaction approach, If we consider the total transactions in physical goods (T) are constant then the velocity of circulation of money (V) could also remain constant. which suggests the total supply of money (M) is directly proportional to the general price level (P).

• Following assumptions can be drawn on the basis of Fisher’s transaction approach :

  • An increase in the total supply of money will increase the general price level.

  • This increase in the total supply of money decreases the value of money.

  • In an Economy Total expenditure (MV) means total sell (PT).

• Fisher’s Transaction Approach can explain the causes of hyperinflation that occurs during war or emergency. It can also explain certain long term trend in prices. But it cannot explain normal peacetime inflation. This shortcoming has been modified by the Cambridge version or the Cash-Balance Approach.

Important Points

• Cash Balance approach or Cambridge version : 
  • The cash balances approach is the modification of the transaction approach and is widely accepted in Europe.
  • According to Alfred Marshall, the value of money depends on the demand and supply of cash balances for a given period of time. 
  • This approach is based on the national income approach and considers the concept of liquidity.
  • The demand for money is not only dependent on the quantity of goods and services that would be exchanged, but also on the time period at which the transaction takes place.
  • According to the cash balance approach, the public likes to hold a proportion of nominal income in the form of money (i.e., cash balances).

A country's treasure means something which is of great value for that country, it could be wealth like money, gold or precious metal, and even a person esteemed as rare or precious.

There are different theories explained by different economists some of which are explained below:

1. Gold Theory: Gold theory states that paper money can be easily convertible into a fixed amount of gold. It means that in the monetary system, the amount of gold a country has will back the value of money of that nation i.e. the standard unit of currency is a fixed quantity of gold.
2. Ricardo Theory: This theory states that a country must concentrate on producing those commodities which they have a competitive advantage to produce or in which they specialize and can achieve higher standards of consumption and they should import other commodities from different countries so that international trade takes place on a continuous basis.
3. Mercantilism Theory: This theory states that a country's wealth can be measured by the amount of wealth it constitutes in the form of gold or precious metals it possesses. It also states that countries should export more as compared to their imports so that the Balance of Payment is favorable and that countries could acquire more such metals.
4. Hecksher Theory: This theory states that the countries in which capital is more as compared to labour that country must focus on producing and exporting capital-intensive products and import labor-intensive products and the countries which have labour more as compared to capital must focus on producing and exporting labour-intensive products and import capital intensive products.

Therefore, According to Mercantilism Theory, the holdings of a country’s treasure primarily in the form of gold constituted its wealth.

The correct answer is Bankruptcy.

Key Points

• Bankruptcy:
  • It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. Hence, Option 1 is correct.

Additional Information 

Currency crunch	A currency crisis is a situation in which serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate. The crisis is often accompanied by a speculative attack in the foreign exchange market.
Insolvency	Generally speaking, insolvency refers to situations where a debtor cannot pay the debts she owes. For instance, a troubled company may become insolvent when it is unable to repay its creditors' money owed on time, often leading to a bankruptcy filing.
Bad loans	A loan that will not be repaid.

The correct answer is unlimited wants and limited resources

Key Points

• Economics is a branch of social sciences that studies the choices individuals, households, businesses, and governments make when faced with scarcity.
• Scarcity occurs because the resources are limited and wants are unlimited. 
• Therefore, the center of economic activity revolves around studying how efficiently scarce resources can be allocated in the pursuit of satisfying human wants.
• Economics, thus, studies the ways to maximize human satisfaction with the use of limited resources.

Concept:

Resource scarcity:

• It is one fundamental idea in economics.
• It means a lack of availability of supplies to maintain quality of life.
• It is a perpetual problem for economic theory.
• By that one can assume that humans need a huge amount of resources but to full fill it, we have to find a way by using scarce resources.

Explanation:

Supply of resources < Demand for resources:

• Scarcity means limited resources.
• Scarcity leads to a choice because they are limited resources.
• We have to choose a purpose for which we must utilize the limited resources.
• On the other hand, there is a supply-side concept:
• Supply falls short of the market demand when there is a scarcity of resources for production. 
• So we can say that the scarce resources problem is reflected in the economy of the aggregate supply that is also limited, because of the limited source of input and unlimited demand of human wants.
• So it shows that when demand for resources is high then scarcity for the supply of resources happened.

Thus, the correct option is Supply of resources < Demand for resources.

The correct answer is by Walrus to measure cardinal utility

Key Points

• It is a hypothetical unit of measurement for cardinal utility that's used by Walrus and later by other economists to present hypothetical information about utility and consumer demand theory.
• Economists tend to make up hypothetical stuff, especially if it drives home an important economic notion.
• In this case, the term "utils" is a convenient way to discuss utility and the satisfaction of wants and needs that consumers obtain from consuming or using a good.

The correct answer is HH Gossen.

Key Points

• HH Gossen formulated the Law of Diminishing Marginal Utility (DMU).
  • He formulated this law in 1854.

Important Points

• Marginal Utility is the change in total utility due to a one-unit change in the level of consumption.
• Law of Diminishing Marginal Utility
  • It states that as a person consumes an item or a product, the satisfaction or utility that they derive from the product declines as they consume more and more of that product.
  • In other words, the additional utility gained from an increase in consumption decreases with each subsequent increase in the level of consumption.
• Demand curves are downward-sloping in microeconomic models since each additional unit of a good or service is put toward a less valuable use.
• Marketers use the law of diminishing marginal utility because they want to keep marginal utility high for products that they sell.

• The slope of the budget line measures the amount of change in good2 required per unit of change in good 1 along the line.
• The budget line is also termed as the budget constraint.
• All the combinations of two goods which can be bought by the consumer spending his given money income on the two goods at their given prices is depicted by the budget line.

The correct answer is Consumers are affected by demonstration effect.

• Law of Demand states that there is a negative or inverse relationship between the price and quantity demanded of a commodity over a period of time.
• Hence when we are determining demand's relationship to price, we keep other determinants of demand constant. These assumptions maintain the relationship constant:
  • The income of consumers remains constant.
  • No change in the size and composition of the population.
  • There are no changes in the price of substitute goods.
  • There are no changes in the taste and preferences of consumers.
  • No expectation of a price change in future.
  • There are no changes in the price of substitute goods.

The correct answer is Both 1 and 2

Key PointsThe demand curve always slopes downwards from left to right. This is due to the fact that demand increases when the price falls and decreases when the price rises. There are several causes for the downward slope of the demand curve. They are mentioned as follows:

1. New buyers: When the price is high, only a few people can buy a commodity.  When the price falls, people who could not buy up to now can also buy the commodity. A fall in the price of a commodity encourages new persons to buy it.  As a result demand for it increases.
2. Income effect: The demand curve slopes downwards due to the income effect. When the price of a commodity falls, the consumers get that commodity by paying less money. Their money is saved to some extent. As a result, they can get more units of the same commodity with the same amount. This is known as the income effect.
3. Substitution effect: Tea and coffee are substitute goods. If the price of tea rises, consumers will shift to coffee. This will decrease the demand for tea and increase the demand for coffee. Thus, the demand curve of tea will slope downwards.
4. Different uses: The demand curve slopes downwards because of the different uses of a commodity. Certain commodities like electricity, sugar, wheat, etc. have different uses.  
5. Law of diminishing the marginal utility: The law of diminishing marginal utility states that with each increasing quantity of the commodity, its marginal utility declines.

Important Points

• Veblen effect: Abnormal market behavior where consumers purchase the higher-priced goods whereas similar low-priced (but not identical) substitutes are available. Thus it does not satisfy the causes of demand curves moving downwards to the right.

"The measure of the difference in quantity demanded due to a change in price" is called the elasticity of demand.

Key Points

• The elasticity of demand is an important variation in the concept of demand.
• Demand can be classified as elastic, inelastic, or unitary.
• Elastic demand is one in which the change in quantity demanded due to a change in price is large.
• Inelastic demand is one in which the change in quantity demanded due to a change in price is small

Additional Information

1. Effective demand refers to the willingness and ability of consumers to purchase goods at different prices. It shows the number of goods that consumers are actually buying.
2. Income elasticity of demand refers to the sensitivity of the quantity demanded of a certain good to a change in real income of consumers who buy this good, keeping all other things constant.
3. The measure of the responsiveness of the demand for a good towards the change in the price of a related good is called cross-price elasticity of demand. 

The correct answer is inferior goods.

Key Points

• In exceptions to the Law of Demand, Sir Robert Giffen deals with Giffen goods.
• Giffen goods were conceptualized and presented by Sir Robert Giffin.
• Giffen goods are inferior goods whose demand increases with the increase in their prices.
• Whenever the price of the Giffen goods increases its quality demand also increases.
• This is because with an increase in the price, and the income remaining the same, people cut the consumption of superior substitutes and buy more quantities of Giffen goods to meet their basic needs.

 Thus, we can say that in exceptions to the Law of Demand, Sir Robert Giffen deals with inferior goods.