BCA Applied Economics BCA Sixth Semester TU

Applied Economics Concepts Quiz

---

 Syllabus

Course Title: Applied Economics (3 Cr.)
Course Code: CAEC353
Year/ Semester: III/VI
Class Load: 3 Hrs./Week (Theory: 3 Hrs.; Tutorial: 1Hr.)

Course Description

This course of Applied Economics consists of the introduction to economic theories and application. It consists of theory of demand and supply, theory of consumer’s behavior, theory of production, cost and revenue curves,

Theory of product pricing and factor pricing as well as contemporary macroeconomics like national income accounting, money banking and international trade with reference to Nepal.

Course Objective

This course of Applied Economics aims to enhance understanding of the economic theories and application to develop skills of students in personal and professional decision making related to business, IT and management.

Unit 1: Introduction [6 Hrs.]

– Concept and types of microeconomics and macroeconomics
– Distinction between microeconomics and macroeconomics
– Goals and instruments of macroeconomics

Unit 2: Elasticity of Demand and Supply [6 Hrs.]

– Concept and types of price, income and cross elasticity of demand
– Measurement of price, income and cross elasticity of demand: Total outlay method and Point method
– Uses of price, income and cross elasticity
– Concept of elasticity of supply and its measurement
(Numerical exercise using excel)

Unit 3: Theory of Consumer Behavior 6 Hrs.

– Concept of cardinal and ordinal utility analysis
– Cardinal utility analysis: assumptions, consumer’s equilibrium, criticisms and derivation of demand curve
– Ordinal utility Analysis: Concept, properties of Indifference curve, marginal rate of substitution, Price Line and consumer’s equilibrium, Price effect: Derivation of PCC, Income effect: Derivation of ICC, Substitution effect, Decomposition of price effect into income and substitution effect, Derivation of demand curve (Hicksian approach)(Numerical exercise)

Unit 4: Cost and Revenue Curves [6 Hrs.]

– Concept of cost: actual cost and opportunity cost, implicit cost and explicit cost. accounting and economic cost.
– Derivation of short run and long run cost curves (total, average, marginal) and shape of short run and long run average cost curves.
– Relationship between short run and long run AC and MC curves
– Concept of revenue: total revenue, average revenue, and marginal revenue, revenue curves under perfect and imperfect competition, relation between average and marginal revenue
(Numerical exercise using excel)

Unit 5: Market Structure [9 Hrs.]

Perfect competition– meaning and characteristics of perfect competition, short run and long run equilibrium of the firm and industry(TR-TC approach and MC-MR approach), derivation of short run and long run supply curve of a firm and industry.
Monopoly: Meaning and characteristic of monopoly; pricing under monopoly: equilibrium of firm in short run and long run (TR-TC approach and MC-MR approach); Price discrimination and degree of price discrimination.
Monopolistic Competition: Meaning and characteristics of monopolistic competition; Pricing under monopolistic competition: equilibrium of firm in short run and long run; equilibrium of firm under product variation and selling expenses
Oligopoly: Meaning and characteristic of oligopoly; Pricing under cartel (aiming at joint profit maximization)
(Numerical exercise using excel)

Unit 6: National income Accounting [6 Hrs.]

– Circular flow of income and expenditure in two sector, three sector and four sector economy
– Meaning and different concept of national income: GDP, NDP, GNP, NNP, national income at factor cost (NI), personal income (PI), disposable personal income (DI), per capita income (PCI)
– Real and nominal GDP, GDP deflator
– Computation of National income: Product, Income and Expenditure method (Numerical exercise using excel)

Unit 7: Money, Banking and International Trade [6 Hrs.]

– Concept and functions of money- value of money-money supply —components of money supply (M1, M2, etc.)
– Inflation : Types, causes and effects of inflation
– Banking: role and functions of commercial banks , role and functions of central bank with reference to Nepal Rastra Bank
– International Trade: Distinction between internal and international trade, balance of trade and balance of payment.

Practical Works

Excel or other relevant statistical software should be used to compute numerical exercise.

Teaching Methods:

The general teaching pedagogy includes class lectures, presentations, group works, case studies, guest lectures, research works, project works, assignments ( Theoretical and practical). The teaching faculty will determine the choice of teaching pedagogy and statistical tools as per the requirements of topics.

Evaluation

Reference Books

– Ackley, Gardener. (1978). Macroeconomics: Theory and Policy. New York: Macmillan Publishing Co.
– Caves, Frankel, Jones, World Trades and Payments: (9th Ed.) Pearson Education
– Dominick Salvatore, International Economics: (8th Ed.) . Wiley India.
– Dwibedi, D.N. (2001). Macroeconomic Theory and Policy. Tata McGraw-Hill Publishing Company Limited, New Delhi
– G, Mankiw. (2007). Economics: Principles and Applications. South Western of Cengage Learning.
– Gupta, S.B. Monetary Economics, S.Chand & Co;New Delhi.
– Koutsoyiannis, A. (1991). Modern Microeconomics. Hongkong: ELBS
– Lipsey and Chrystal. Economics. Oxford University Press. (eleventh edition or latest one). Mankiw, N. Gregory. (2009). Principles of Microeconomics. Cengage Learning India Private Limited, New Delhi (4th edition)
– P. Samuelson and W. Nordhaus. Economics, Mcgraw Hill International Editions. (14th edition or latest one)
-Paul R. Krugman, Maurice Obstfeld, International Economics: (8th Ed.) Pearson Education
-Pindyck, Robort S. and Daniel, Rubinfeld. (2001). Microeconomics. New Delhi: Prentice Hall of India
– Salvatore, Dominic. (2009). Principles of Microeconomics. Publish in India Oxford University Press, New Delhi
– Shapiro, Edward. (2004). Macroeconomic Analysis. New Delhi: Galgotia Publication (P) Ltd.

 Unit 1: Introduction [6 Hrs.]

Unit 1: Introduction to Microeconomics and Macroeconomics

1. Concept and Types of Microeconomics and Macroeconomics

Microeconomics: Microeconomics is the branch of economics that focuses on the behavior and decision-making processes of individual economic units, such as households, firms, and industries. It examines how these entities allocate their resources, make decisions about production and consumption, and interact within markets. Microeconomics is concerned with the dynamics of supply and demand, pricing, and market equilibrium. The central idea is that the economy is made up of many individual decision-makers, each of whom plays a role in the overall functioning of the economy.

Key concepts in microeconomics include:

• Supply and Demand: The relationship between the quantity of a good or service that producers are willing to sell and the quantity that consumers are willing to buy at various prices.
• Consumer Behavior: How consumers make choices about the allocation of their limited resources (income) to maximize their utility.
• Firm Behavior: How firms make decisions about production and pricing to maximize profit.
• Market Structures: Different types of market environments, including perfect competition, monopoly, monopolistic competition, and oligopoly.

Macroeconomics: Macroeconomics, on the other hand, deals with the economy as a whole. It focuses on aggregate economic variables and how they interact on a national or global scale. Macroeconomics is concerned with broader economic trends and factors, such as GDP, inflation, unemployment, national income, and fiscal and monetary policies. It aims to understand how the overall economy functions and what policies can help improve its performance.

Key concepts in macroeconomics include:

• National Income: Measures the total income earned by the residents of a country, including wages, profits, rents, and other sources of income.
• Unemployment: The percentage of the labor force that is jobless but actively seeking work.
• Inflation: The rate at which the general level of prices for goods and services is rising, eroding purchasing power.
• Economic Growth: The increase in the production of goods and services in an economy over time.
• Fiscal and Monetary Policy: Tools used by governments and central banks to manage economic performance, such as government spending, taxation, and interest rates.

2. Distinction between Microeconomics and Macroeconomics

Microeconomics and macroeconomics are two distinct branches of economics, but they are deeply interconnected. The main distinctions between them can be summarized as follows:

Microeconomics	Macroeconomics
Focuses on individual economic units (households, firms, industries).	Focuses on the entire economy (national or global scale).
Analyzes specific markets, such as labor, goods, and services.	Analyzes aggregated economic variables like GDP, unemployment, and inflation.
Studies price mechanisms and market equilibrium in specific markets.	Studies national economic performance and policy impacts.
Deals with topics such as supply and demand, production costs, consumer behavior, and competition.	Deals with topics such as economic growth, fiscal policies, inflation, and unemployment.
Concerned with the decisions made by individual actors (e.g., firms and consumers).	Concerned with the broad actions taken by governments and central banks to regulate the economy.

Example:

• A microeconomic study might focus on how a firm decides the optimal price for its product in a competitive market.
• A macroeconomic study might focus on how government policies affect national unemployment rates or overall economic growth.

3. Goals and Instruments of Macroeconomics

The primary goals of macroeconomics are to ensure the economic stability, growth, and well-being of a country or economy. These goals are pursued through various instruments that are employed by governments and central banks. The main goals and instruments of macroeconomics are as follows:

Goals of Macroeconomics:

1. Economic Growth:

   • Economic growth refers to the increase in a country's output of goods and services over time, often measured as the growth of GDP (Gross Domestic Product). A growing economy usually leads to higher living standards, job creation, and improved quality of life.
   • The goal of economic growth is to increase the standard of living and reduce poverty.

2. Full Employment:

   • Full employment refers to a situation where all individuals who are able and willing to work can find employment at prevailing wage rates. In reality, there will always be some level of unemployment, known as frictional or structural unemployment.
   • The goal is to minimize cyclical unemployment, which occurs due to economic downturns.

3. Price Stability (Control of Inflation):

   • Inflation refers to the general rise in the price levels of goods and services over time, reducing purchasing power.
   • Price stability means keeping inflation under control, ideally at a low and stable rate. High inflation can erode savings, increase the cost of living, and destabilize the economy.

4. Balance of Payments Stability:

   • A nation should aim for a balanced balance of payments, meaning that the value of exports and imports should be in equilibrium.
   • Deficits or surpluses in trade balances can have significant economic implications.

5. Income Distribution and Equity:

   • One of the goals of macroeconomics is to reduce income inequality. Policies aim to redistribute wealth so that all individuals have access to basic necessities and opportunities.
   • Economic equity ensures that the benefits of growth and development are shared across society.

Instruments of Macroeconomics: To achieve these macroeconomic goals, various tools are used. The most common instruments of macroeconomic policy are:

1. Fiscal Policy:

   • Fiscal policy refers to government spending and taxation policies that influence the overall economy. The government can either increase or decrease spending and taxes to control economic activity.
   • Expansionary Fiscal Policy: In times of economic recession, the government may increase spending and reduce taxes to stimulate demand and encourage growth.
   • Contractionary Fiscal Policy: In times of inflation or an overheated economy, the government may reduce spending and increase taxes to control demand and prevent inflation.

2. Monetary Policy:

   • Monetary policy is controlled by a country's central bank and involves managing the money supply and interest rates to achieve macroeconomic objectives.
   • Expansionary Monetary Policy: When the economy is slow, the central bank may lower interest rates or increase the money supply to encourage investment and consumption.
   • Contractionary Monetary Policy: If inflation is rising, the central bank may increase interest rates or reduce the money supply to cool down the economy.
   • Tools of monetary policy include open market operations, reserve requirements, and the discount rate.

3. Exchange Rate Policy:

   • Exchange rate policies can be used to stabilize a country's currency value relative to others, which impacts international trade and capital flows.
   • Central banks may intervene in foreign exchange markets to adjust the value of their currency.

4. Government Regulations and Controls:

   • Governments may also employ regulations such as price controls, wage controls, and trade restrictions to influence economic activity, protect domestic industries, and maintain economic stability.

 Unit 2: Elasticity of Demand and Supply [6 Hrs.]

Unit 2: Elasticity of Demand and Supply

1. Concept and Types of Elasticity

Elasticity refers to the responsiveness of one variable to changes in another variable. In economics, the concept of elasticity helps measure how changes in prices, income, or other factors affect the demand or supply of goods and services. There are different types of elasticity, including price elasticity of demand, income elasticity of demand, and cross elasticity of demand.

1.1. Price Elasticity of Demand (PED)

• Definition: Price elasticity of demand measures the responsiveness of quantity demanded to a change in the price of a good or service.

• Formula:

  $$E_d = \frac{\% \, \text{Change in Quantity Demanded}}{\% \, \text{Change in Price}}$$ $$E_d = \frac{(Q_2 - Q_1)}{(Q_1)} \div \frac{(P_2 - P_1)}{(P_1)}$$

  Where:

  • $Q_1$ and $P_1$ are the initial quantity and price
  • $Q_2$ and $P_2$ are the new quantity and price

• Interpretation of PED:

  • If $E_d > 1$: Demand is elastic (consumers are highly responsive to price changes).
  • If $E_d = 1$: Demand is unitary elastic (percentage change in quantity demanded equals the percentage change in price).
  • If $E_d < 1$: Demand is inelastic (consumers are less responsive to price changes).
  • If $E_d = 0$: Demand is perfectly inelastic (no change in quantity demanded despite any price change).
  • If $E_d = \infty$: Demand is perfectly elastic (consumers will only buy at one price, and any increase in price causes the quantity demanded to fall to zero).

1.2. Income Elasticity of Demand (YED)

• Definition: Income elasticity of demand measures the responsiveness of the quantity demanded of a good to changes in consumer income.

• Formula:

  $$E_y = \frac{\% \, \text{Change in Quantity Demanded}}{\% \, \text{Change in Income}}$$

• Interpretation of YED:

  • If $E_y > 1$: The good is a luxury good (demand increases more than proportionally as income increases).
  • If $0 < E_y < 1$: The good is a normal good (demand increases with income but less than proportionally).
  • If $E_y < 0$: The good is an inferior good (demand decreases as income increases).

1.3. Cross Elasticity of Demand (XED)

• Definition: Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good.

• Formula:

  $$E_{xy} = \frac{\% \, \text{Change in Quantity Demanded of Good X}}{\% \, \text{Change in Price of Good Y}}$$

• Interpretation of XED:

  • If $E_{xy} > 0$: The goods are substitutes (e.g., butter and margarine).
  • If $E_{xy} < 0$: The goods are complements (e.g., printers and ink cartridges).
  • If $E_{xy} = 0$: The goods are unrelated (no relationship between the goods).

---

2. Measurement of Price, Income, and Cross Elasticity of Demand

2.1. Total Outlay Method (for Price Elasticity of Demand)

The Total Outlay Method is a way to measure price elasticity of demand by looking at the effect of a price change on total revenue (or expenditure). Total revenue is the price of the good multiplied by the quantity sold.

• Total Outlay (Revenue): $TR = P \times Q$ Where:
  • $P$ = Price of the good
  • $Q$ = Quantity of the good sold

Using the Total Outlay Method:

• If Total Revenue increases when price falls, demand is elastic.
• If Total Revenue remains unchanged, demand is unitary elastic.
• If Total Revenue decreases when price falls, demand is inelastic.

Example:

• Suppose the price of a product decreases from $10 to $8, and quantity demanded increases from 100 to 150 units.
  • Initial total revenue: $TR = 10 \times 100 = 1000$
  • New total revenue: $TR = 8 \times 150 = 1200$
  • Since total revenue increased with a price decrease, the demand is elastic.

2.2. Point Method (for Price Elasticity of Demand)

The point method calculates elasticity at a particular point on the demand curve, using the following formula:

$$E_d = \frac{P}{Q} \times \frac{1}{\text{Slope of the Demand Curve}}$$

This method requires knowledge of the slope of the demand curve, which reflects how quantity demanded changes as price changes.

• This method provides more accurate and precise elasticity calculations when a price change occurs at a specific point on the demand curve.

---

3. Uses of Price, Income, and Cross Elasticity

Understanding and calculating the various types of elasticity has several practical uses for both businesses and policymakers:

3.1. Price Elasticity of Demand (PED)

• Pricing Strategy: Businesses use price elasticity to set prices. If demand is elastic, lowering the price may increase total revenue. If demand is inelastic, raising prices may increase total revenue.
• Taxation: Governments may use PED to assess the impact of taxes on goods. For instance, taxing inelastic goods (like tobacco) might not significantly decrease demand.
• Substitution Effects: Understanding elasticity helps in determining the potential for consumers to switch to substitute products when the price of a good changes.

3.2. Income Elasticity of Demand (YED)

• Market Segmentation: Businesses can classify products as inferior, normal, or luxury goods based on income elasticity. This allows firms to target the right income groups.
• Economic Forecasting: Economists use YED to predict changes in demand based on expected changes in income levels, helping to forecast economic trends.

3.3. Cross Elasticity of Demand (XED)

• Product Substitution: Firms can use cross elasticity to understand how price changes in related products (substitutes or complements) might affect demand for their own product.
• Pricing of Related Goods: A firm can adjust prices of related goods, such as complementary goods, to increase the overall sales of both products.

---

4. Concept of Elasticity of Supply and Its Measurement

4.1. Elasticity of Supply (Es)

Elasticity of supply measures the responsiveness of quantity supplied to a change in price. It is similar to price elasticity of demand but focuses on how producers react to price changes.

• Formula:

  $$E_s = \frac{\% \, \text{Change in Quantity Supplied}}{\% \, \text{Change in Price}}$$ $$E_s = \frac{(Q_2 - Q_1)}{(Q_1)} \div \frac{(P_2 - P_1)}{(P_1)}$$

  Where:

  • $P_1$ and $P_2$ are the initial and new prices
  • $Q_1$ and $Q_2$ are the initial and new quantities supplied

• Interpretation of Elasticity of Supply:

  • If $E_s > 1$: Supply is elastic (producers are highly responsive to price changes).
  • If $E_s = 1$: Supply is unitary elastic.
  • If $E_s < 1$: Supply is inelastic (producers are less responsive to price changes).
  • If $E_s = 0$: Supply is perfectly inelastic (quantity supplied does not change with price).
  • If $E_s = \infty$: Supply is perfectly elastic (suppliers will only supply at one price).

4.2. Factors Affecting Elasticity of Supply:

• Time Period: The longer the time period, the more elastic the supply is. In the short run, firms may not be able to adjust their production quickly, making supply inelastic.
• Availability of Resources: If resources are abundant, producers can easily increase production, making supply more elastic.
• Production Capacity: If a firm is operating below its full capacity, it can increase production quickly in response to price changes, making supply elastic.

---

5. Numerical Exercises Using Excel

To calculate elasticity using numerical data, Excel can be an effective tool. Here's a simple example:

Example:

1. Price Elasticity of Demand Calculation:

   • Suppose the price of a good changes from $10 to $8, and the quantity demanded changes from 100 units to 120 units.

   • The formula for PED is:Ed​=108−10​100120−100​​=−0.20.2​=−1

In Excel, you can input the data into cells and use basic formulae to calculate the percentage change and the elasticity.

2. Elasticity of Supply Calculation:

   • Suppose the price of a good changes from $5 to $6, and the quantity supplied changes from 200 units to 240 units.
   • Use the same method as for PED but focusing on quantity supplied.

   Example Excel formula:
   = (New Quantity - Old Quantity) / Old Quantity
   / (New Price - Old Price) / Old Price

Using Excel allows for quick recalculations and provides a clear, organized method for handling large datasets.

---

 Unit 3: Theory of Consumer Behavior 6 Hrs.

Unit 3: Theory of Consumer Behavior

1. Concept of Utility

Utility refers to the satisfaction or pleasure derived by consumers from consuming goods and services. It is an essential concept in understanding consumer behavior in economics.

There are two types of utility:

1. Cardinal Utility: This is a quantitative approach where utility can be measured numerically (i.e., in units such as "utils"). Cardinal utility analysis assumes that a consumer can express preferences for different goods in measurable quantities.
2. Ordinal Utility: This approach assumes that utility cannot be measured in absolute terms, but preferences can be ranked or ordered. The consumer can rank different combinations of goods according to their preferences, but cannot measure the satisfaction numerically.

2. Cardinal Utility Analysis

Cardinal utility analysis is based on the following assumptions:

• Quantifiable Utility: Consumers can measure utility in exact numerical terms.
• Diminishing Marginal Utility: As the consumption of a good increases, the additional satisfaction (marginal utility) derived from each additional unit decreases.
• Rational Behavior: Consumers aim to maximize their total utility, given their income and the prices of goods.
• Constant Preferences: The consumer's preferences are consistent over time.

Consumer’s Equilibrium (Cardinal Utility Approach)

Consumer equilibrium occurs when a consumer allocates their income in such a way that the marginal utility per unit of currency spent on each good is equal across all goods.

The equilibrium condition is given by:

$$\frac{MU_x}{P_x} = \frac{MU_y}{P_y}$$

Where:

• $MU_x$ and $MU_y$ are the marginal utilities of goods $x$ and $y$.
• $P_x$ and $P_y$ are the prices of goods $x$ and $y$.

This implies that the consumer achieves maximum satisfaction when the ratio of marginal utility to price is equal for all goods consumed.

Criticisms of Cardinal Utility Analysis

• Measurement Issue: It is difficult to assign a precise numerical value to the satisfaction derived from consuming goods.
• Subjectivity: The idea that utility can be measured in "utils" is often considered unrealistic.
• Unrealistic Assumptions: The assumption of constant preferences and rationality in all situations may not hold true in the real world.

Derivation of Demand Curve (Cardinal Utility Approach)

To derive the demand curve, we assume that as the price of a good falls, the consumer will buy more of the good, as the marginal utility per unit of money spent on the good increases. This relationship results in a downward-sloping demand curve.

3. Ordinal Utility Analysis

Ordinal utility analysis focuses on the ranking of preferences without assigning exact numerical values to the level of satisfaction. According to this theory, a consumer does not measure utility, but rather ranks different combinations of goods in terms of preference.

Indifference Curves

An indifference curve represents all combinations of two goods that give the consumer the same level of satisfaction or utility. The key properties of indifference curves are:

1. Downward Sloping: Indifference curves slope downward to reflect the trade-off between two goods.
2. Convex to the Origin: Indifference curves are convex due to the principle of diminishing marginal rate of substitution.
3. Higher Curves Represent Higher Utility: Indifference curves farther from the origin represent higher levels of utility.
4. Indifference Curves Do Not Intersect: If two indifference curves were to intersect, it would imply contradictory preferences.

Marginal Rate of Substitution (MRS)

The marginal rate of substitution (MRS) is the rate at which a consumer is willing to exchange one good for another while maintaining the same level of utility. It is the slope of the indifference curve at any point. As the consumer consumes more of one good, the MRS decreases, reflecting diminishing marginal utility.

$$MRS = \frac{MU_x}{MU_y}$$

Where:

• $MU_x$ and $MU_y$ are the marginal utilities of goods $x$ and $y$.

Price Line and Consumer’s Equilibrium (Ordinal Utility Approach)

The price line, or budget line, represents all combinations of two goods that a consumer can afford, given their income and the prices of the goods. It is a straight line with a slope equal to the negative of the price ratio of the two goods.

Consumer equilibrium occurs where the budget line is tangent to an indifference curve. This is the point where the consumer maximizes their utility given their income and the prices of goods. At equilibrium, the marginal rate of substitution (MRS) is equal to the ratio of prices:

$$\frac{MU_x}{MU_y} = \frac{P_x}{P_y}$$

4. Price Effect, Income Effect, and Substitution Effect

When the price of a good changes, the consumer's optimal choice will also change. This can be decomposed into:

• Price Effect: The total effect on the quantity demanded due to a change in the price of a good. The price effect is made up of the income effect and the substitution effect.
• Income Effect: The change in the consumer's real income or purchasing power when the price of a good changes.
• Substitution Effect: The change in the quantity demanded due to a change in the relative prices of goods, leading consumers to substitute cheaper goods for more expensive ones.

Derivation of Price Consumption Curve (PCC)

The price consumption curve (PCC) traces the consumer's equilibrium points as the price of one good changes, holding income constant. The PCC shows how the consumption of two goods changes when the price of one good changes, with the consumer adjusting their consumption to maximize utility.

Derivation of Income Consumption Curve (ICC)

The income consumption curve (ICC) shows how the optimal consumption of goods changes as the consumer’s income changes, with prices held constant.

Decomposition of Price Effect into Income and Substitution Effects

The price effect can be divided into two parts:

1. Substitution Effect: When the price of a good changes, the consumer substitutes away from the good that has become more expensive and towards the good that has become relatively cheaper.
2. Income Effect: When the price of a good falls, the consumer effectively becomes wealthier, allowing them to buy more of both goods.

This decomposition helps understand the underlying reasons for changes in demand due to price changes.

Derivation of Demand Curve (Hicksian Approach)

The Hicksian approach to the demand curve is based on the concept of compensating variation, which adjusts income to hold utility constant when prices change. The demand curve derived using the Hicksian approach reflects the substitution effect, as it isolates the change in quantity demanded due to price changes while keeping utility constant.

5. Numerical Exercises (Using Excel)

Numerical exercises can be used to illustrate the concepts of consumer behavior in practice. Using Excel or similar tools, students can calculate the marginal utility, price elasticity of demand, and derive demand curves for various price changes. These exercises can also demonstrate the effects of income and price changes on consumption choices.

Summary

In Unit 3, we learned about consumer behavior and how individuals make consumption choices based on their preferences and income. The two main approaches to understanding utility are cardinal and ordinal utility analysis. Cardinal utility focuses on measurable utility, while ordinal utility focuses on ranked preferences. Consumer equilibrium is achieved when the marginal utility per unit of currency is equal across all goods. The price effect, income effect, and substitution effect help explain how consumers adjust their demand when prices change. The Hicksian approach provides a method for deriving the demand curve that isolates the substitution effect.

 Unit 4: Cost and Revenue Curves [6 Hrs.]

Unit 4: Cost and Revenue Curves

1. Concept of Cost

In economics, cost refers to the expenditure incurred by a firm in producing goods or services. Cost is an essential concept in determining how much a firm can produce profitably and in understanding the firm's behavior in various market conditions.

Types of Cost

• Actual Cost: The actual or explicit cost involves all monetary payments made by the firm for factors of production, such as wages, rent, interest, and raw materials. It includes both fixed and variable costs.

• Opportunity Cost: This is the cost of the next best alternative that is foregone when a particular decision is made. Opportunity cost represents the value of the best alternative use of resources. For instance, if a firm uses its resources to produce good A instead of good B, the opportunity cost is the value of the production of good B that the firm could have produced with the same resources.

• Explicit Cost: These are costs that involve direct payments of money, such as wages, rent, and material costs. Explicit costs are easily identifiable and measurable in monetary terms.

• Implicit Cost: These are costs that do not involve a direct monetary payment but represent the opportunity cost of using the firm’s resources in a particular way. For example, the owner's time or the capital invested in the business that could have been used elsewhere generates implicit costs.

• Accounting Cost: Accounting costs include only the explicit costs involved in production, excluding opportunity costs. These costs are used for the firm's financial reporting and tax calculations.

• Economic Cost: Economic cost includes both explicit costs and implicit costs. It considers not just the actual expenditures but also the opportunity costs of using the firm's resources in the current activity.

2. Derivation of Short Run and Long Run Cost Curves

In economics, cost curves represent the costs incurred by a firm for producing a given level of output. These curves are essential in determining pricing strategies and profitability.

Short Run Cost Curves

In the short run, at least one factor of production is fixed, and firms cannot adjust all inputs to production. The short-run cost curves are derived based on the combination of fixed and variable factors of production.

• Total Cost (TC): Total cost is the sum of fixed and variable costs.

  $$TC = TFC + TVC$$

  Where:

  • TFC is Total Fixed Cost (costs that do not change with output).
  • TVC is Total Variable Cost (costs that change with the level of output).

• Average Cost (AC): Average cost is the total cost per unit of output.

  $$AC = \frac{TC}{Q}$$

  Where $Q$ is the quantity of output.

• Marginal Cost (MC): Marginal cost is the additional cost incurred by producing one more unit of output. It is derived as the change in total cost divided by the change in output.

  $$MC = \frac{\Delta TC}{\Delta Q}$$

The short-run average cost curve (SAC) is typically U-shaped, reflecting economies and diseconomies of scale. Initially, the firm experiences decreasing average costs as output increases, but after a certain level of production, average costs begin to rise due to diminishing returns to the variable factor of production.

Long Run Cost Curves

In the long run, all factors of production are variable. Firms can adjust all inputs to achieve the most efficient production. The long-run cost curves are derived from the relationship between input prices, technology, and the scale of production.

• Long Run Total Cost (LRTC): In the long run, firms can change both fixed and variable inputs. The LRTC curve represents the total cost of producing any given level of output when the firm can adjust all inputs.

• Long Run Average Cost (LRAC): This curve represents the per-unit cost when all inputs are variable and can be adjusted. The LRAC curve is typically U-shaped and reflects the firm's ability to adjust its scale of production and optimize costs.

• Long Run Marginal Cost (LRMC): The LRMC curve reflects the additional cost of producing one more unit of output in the long run. It is the change in long-run total cost divided by the change in output.

3. Relationship Between Short Run and Long Run AC and MC Curves

• Short-Run Average Cost (SAC) and Long-Run Average Cost (LRAC): The long-run average cost curve is generally considered to be the envelope curve of the short-run average cost curves. The LRAC curve is tangent to each of the SAC curves at different output levels. The firm will choose the short-run cost curve that best matches its current production capacity.

• Short-Run Marginal Cost (SMC) and Long-Run Marginal Cost (LRMC): The LRMC curve is derived by considering the marginal cost of the most efficient combination of inputs. It intersects the LRAC curve at its minimum point. The short-run marginal cost curve (SMC) intersects the short-run average cost curve (SAC) at its minimum point, and it is generally steeper than the LRMC curve.

In the long run, a firm can adjust all its inputs, and it will choose the level of production that minimizes its costs. The short-run cost curves are applicable when some factors are fixed, while the long-run cost curves apply when all factors of production are variable.

4. Concept of Revenue

Revenue refers to the income that a firm earns from the sale of goods or services. It is a crucial concept in determining a firm’s profitability and pricing strategies. There are different types of revenue measures:

• Total Revenue (TR): Total revenue is the total income received from selling a given quantity of output. It is calculated as the price per unit multiplied by the quantity of goods sold.

  $$TR = P \times Q$$

  Where:

  • $P$ is the price of the good.
  • $Q$ is the quantity sold.

• Average Revenue (AR): Average revenue is the revenue per unit of output, which is simply the price of the good in perfect competition.

  $$AR = \frac{TR}{Q} = P$$

  In perfect competition, average revenue is equal to the price of the product.

• Marginal Revenue (MR): Marginal revenue is the additional revenue generated by selling one more unit of output. It is calculated as the change in total revenue divided by the change in quantity of output.

  $$MR = \frac{\Delta TR}{\Delta Q}$$

5. Revenue Curves Under Perfect and Imperfect Competition

• Perfect Competition: In a perfectly competitive market, the firm is a price taker, meaning it cannot influence the price of the product. The demand curve faced by the firm is perfectly elastic, and the total revenue curve is a straight line. In this case, $AR = MR = P$, and the firm's marginal revenue curve coincides with the price line.

• Imperfect Competition: In markets characterized by monopoly, monopolistic competition, or oligopoly, the firm has some degree of market power and can influence the price of the good. The marginal revenue curve in imperfect competition is downward sloping because the firm must lower the price to sell additional units, which reduces total revenue for previous units. In such markets, $MR < AR$.

6. Relationship Between Average and Marginal Revenue

The relationship between average and marginal revenue is crucial in understanding a firm’s pricing and output decisions.

• In Perfect Competition: In a perfectly competitive market, the average revenue is equal to the marginal revenue because the price remains constant. $AR = MR = P$.

• In Imperfect Competition: In imperfect competition, marginal revenue is less than average revenue because to sell an additional unit, the firm must lower the price for all units sold, which causes marginal revenue to decline faster than average revenue.

7. Numerical Exercises Using Excel

To understand cost and revenue curves, it is helpful to solve numerical exercises using Excel. Excel can be used to plot cost curves (total cost, average cost, marginal cost) and revenue curves (total revenue, average revenue, marginal revenue) based on data inputs for output, prices, and costs. By inputting data such as fixed costs, variable costs, price per unit, and output levels, students can visualize how costs and revenues change with production and analyze profit-maximizing output levels.

Summary

In Unit 4, we learned about cost and revenue concepts crucial to understanding firm behavior in economics. The distinction between explicit and implicit costs, as well as accounting and economic costs, provides insight into the true costs of production. Short-run and long-run cost curves illustrate the effects of fixed and variable factors on a firm’s cost structure. Revenue concepts—total revenue, average revenue, and marginal revenue—help determine pricing strategies in different market structures, such as perfect and imperfect competition. Numerical exercises using Excel can aid in visualizing cost and revenue data, enhancing understanding of these key economic concepts.

 Unit 5: Market Structure [9 Hrs.]

Unit 5: Market Structure

Market structure refers to the characteristics and features that define the competitive environment of a particular industry. Understanding the various market structures is crucial for analyzing how firms set prices, how they produce goods and services, and how they interact with each other in the market. This unit will cover the four primary types of market structures: Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly.

---

1. Perfect Competition

Meaning:
Perfect competition is a market structure characterized by a large number of buyers and sellers, where no individual seller or buyer can influence the price of the product. It is often considered the most competitive and efficient market type, serving as a benchmark for comparing other market structures.

Characteristics of Perfect Competition:

• Large Number of Buyers and Sellers: The market has so many buyers and sellers that no single entity has market power.
• Homogeneous Products: All firms sell identical or perfectly substitutable products.
• Free Entry and Exit: There are no barriers to entering or exiting the market. New firms can enter freely, and existing firms can leave if they are unprofitable.
• Perfect Knowledge: All buyers and sellers have perfect knowledge about the product and prices.
• Price Takers: Individual firms are price takers, meaning they cannot influence the market price. They accept the price determined by supply and demand.

Short-Run and Long-Run Equilibrium of the Firm and Industry

Short-Run Equilibrium:

• In the short run, firms in perfect competition will maximize profit by producing the quantity of output where Marginal Cost (MC) equals Marginal Revenue (MR), which is also equal to the price in perfect competition.

  $$MC = MR = P$$

• Profit Maximization Condition: Firms will produce at the level of output where the difference between Total Revenue (TR) and Total Cost (TC) is maximized.

Long-Run Equilibrium:

• In the long run, if firms in perfect competition are making profits, new firms will enter the industry, causing the supply to increase and driving the price down. Conversely, if firms are making losses, some firms will exit, reducing supply and driving the price up.

• In the long run, firms will earn normal profit (zero economic profit) because the entry and exit of firms will continue until Price (P) = Average Total Cost (ATC).

TR-TC Approach:
Profit or loss is the difference between Total Revenue (TR) and Total Cost (TC).

• Profit: $TR - TC$
• Loss: $TC - TR$

MC-MR Approach:
Firms will adjust output to the point where MC = MR to maximize profits.

Derivation of Short-Run and Long-Run Supply Curve of a Firm and Industry

• Short-Run Supply Curve of a Firm:
  The firm’s supply curve in the short run is the portion of its Marginal Cost (MC) curve that lies above the Average Variable Cost (AVC) curve. This is because, in the short run, a firm will continue to produce as long as its revenue covers its variable costs.

• Long-Run Supply Curve of a Firm:
  The long-run supply curve is the portion of the MC curve that lies above the Average Total Cost (ATC) curve. In the long run, the firm must cover both its variable and fixed costs.

• Industry Supply Curve:
  The industry supply curve in the short run is the horizontal sum of the individual firms’ supply curves. In the long run, the supply curve is perfectly elastic under perfect competition because firms can freely enter or exit the industry.

---

2. Monopoly

Meaning:
Monopoly is a market structure where a single firm is the sole producer of a product or service with no close substitutes. The monopolist has significant market power and can influence the price.

Characteristics of Monopoly:

• Single Seller: The industry is dominated by a single firm.
• Unique Product: The monopolist sells a product with no close substitutes.
• Barriers to Entry: There are significant barriers to entry that prevent other firms from entering the market (e.g., high startup costs, patents, control over resources).
• Price Maker: The monopolist can set the price because it is the only firm in the market.

Pricing under Monopoly: Short-Run and Long-Run Equilibrium

• Short-Run:
  In the short run, a monopolist maximizes profit by producing the output where MC = MR and charging the price corresponding to that quantity on the demand curve.

  Profit Maximization Condition:

  $$MC = MR$$

  The monopolist will produce at the point where marginal cost equals marginal revenue and will charge a price higher than the marginal cost, resulting in economic profit.

• Long-Run:
  In the long run, the monopolist may continue to earn economic profits due to barriers to entry. The monopolist’s equilibrium condition remains the same (MC = MR), but there are no competitive pressures to drive the price down to the level of average cost.

Price Discrimination and Degrees of Price Discrimination

• Price Discrimination: The practice of charging different prices to different consumers for the same good or service.

  Types of Price Discrimination:

  1. First-Degree Price Discrimination (Personalized Pricing): Charging each consumer the maximum price they are willing to pay.
  2. Second-Degree Price Discrimination: Charging different prices based on the quantity consumed or product version.
  3. Third-Degree Price Discrimination: Charging different prices to different groups of consumers based on their elasticity of demand (e.g., discounts for students, seniors, etc.).

---

3. Monopolistic Competition

Meaning:
Monopolistic competition is a market structure where many firms sell similar but differentiated products. While firms have some control over the price due to product differentiation, there is still competition.

Characteristics of Monopolistic Competition:

• Many Sellers: There are many firms, each offering a slightly different product.
• Product Differentiation: Firms differentiate their products based on quality, features, branding, etc.
• Free Entry and Exit: There are low barriers to entry and exit in the market.
• Non-Price Competition: Firms use advertising, branding, and product differentiation to compete.

Pricing under Monopolistic Competition: Short-Run and Long-Run Equilibrium

• Short-Run Equilibrium:
  In the short run, firms can make profits or incur losses. The firm’s equilibrium is determined by the condition MC = MR.

• Long-Run Equilibrium:
  In the long run, if firms are making profits, new firms will enter the market, leading to a decrease in demand for the individual firms. Conversely, if firms incur losses, some will exit, causing demand for the remaining firms to increase. In the long run, firms will make zero economic profit, where Price = Average Total Cost (ATC).

Product Variation and Selling Expenses:

• Firms under monopolistic competition often engage in product variation, where they modify their products to attract different consumer preferences.
• Selling Expenses: These are costs incurred by firms in the form of advertising, sales promotions, and other strategies aimed at increasing market share.

---

4. Oligopoly

Meaning:
Oligopoly is a market structure characterized by a small number of firms that dominate the market. These firms have significant market power and their actions are interdependent, meaning the actions of one firm can significantly affect the others.

Characteristics of Oligopoly:

• Few Firms: The market is dominated by a small number of firms.
• Interdependence: Firms in an oligopoly are interdependent. The actions of one firm (e.g., price changes) can affect the others.
• Barriers to Entry: High barriers to entry prevent new firms from entering the market easily.
• Product Differentiation or Homogeneity: Products may either be differentiated or homogeneous, depending on the industry.

Pricing Under Cartel (Joint Profit Maximization):

• Cartel: A cartel is a group of firms that collude to set prices and output levels in order to maximize joint profits. In this situation, firms act like a monopoly by agreeing on prices, quantities, or market shares.
• The goal of a cartel is to maximize the collective profits of the firms involved, which typically involves reducing competition, controlling prices, and limiting supply.

---

5. Numerical Exercise Using Excel

To analyze market structures and pricing under different conditions, numerical exercises using Excel can be conducted to plot and calculate:

• TR, TC, and profit under various pricing strategies.
• Cost curves and revenue curves for firms in different market structures.
• Profit maximization and equilibrium conditions for firms under perfect competition, monopoly, monopolistic competition, and oligopoly.

Excel can be used to perform numerical exercises to analyze the short-run and long-run equilibrium, and graphically represent cost, revenue, and profit curves.

---

Summary

In Unit 5, we explored the various market structures, each with distinct characteristics that influence firm behavior and pricing. Perfect competition features many firms selling homogeneous products and results in firms earning normal profit in the long run. Monopoly involves a single firm with significant market power, allowing it to charge

higher prices. Monopolistic competition features many firms with differentiated products and a degree of pricing power. Oligopoly consists of a few firms that are interdependent, with barriers to entry and potential cartel formation. By understanding these structures, we can analyze how firms in each structure determine prices and output, as well as the economic efficiency of each market type.

 Unit 6: National income Accounting [6 Hrs.]

Unit 6: National Income Accounting

National income accounting refers to the system used to measure the total economic activity within a country, including the income generated by individuals, firms, and the government. This unit introduces the fundamental concepts, methods, and tools used in national income accounting to understand how economic activity is measured and analyzed.

---

1. Circular Flow of Income and Expenditure

The circular flow of income model represents the movement of money between different sectors of the economy. It shows how income is distributed and spent within the economy, and how goods and services circulate.

Two-Sector Economy

• In a two-sector economy, there are only households and firms.

• Households provide factors of production (labor, land, capital, and entrepreneurship) to firms and, in return, receive income (wages, rent, interest, and profit).

• Firms produce goods and services, which are sold to households, generating revenue.

• The circular flow between these two sectors represents the simplest economic model. The income generated from production flows back into households as payments for factors of production.

  Flow of Income:

  • Households provide factors of production to firms.
  • Firms pay income to households in the form of wages, rent, interest, and profits.
  • Households spend their income on goods and services produced by firms.

Three-Sector Economy

• In a three-sector economy, the government is added to the model.

• Government collects taxes from households and firms and spends on goods and services, providing subsidies, wages, and transfers. The government also participates in production and consumption.

  Flow of Income:

  • Households and firms pay taxes to the government.
  • The government makes transfer payments, purchases goods and services, and engages in public spending (e.g., infrastructure, education, healthcare).
  • The government influences overall economic activity through fiscal policy, which impacts aggregate demand.

Four-Sector Economy

• In a four-sector economy, the foreign sector is introduced.

• The foreign sector represents exports and imports. Households and firms buy goods and services from foreign countries (imports) and sell domestic goods and services abroad (exports).

  Flow of Income:

  • Firms export goods and services, earning revenue.
  • Households and firms import goods and services, which result in spending on foreign products.
  • The foreign sector influences the economy by affecting domestic supply and demand through trade balances.

In all these models, income flows in a circular manner, with continuous interactions between households, firms, the government, and the foreign sector.

---

2. Meaning and Different Concepts of National Income

National income is the total monetary value of all the goods and services produced within a country in a given time period. Various concepts of national income help measure different aspects of economic activity:

Gross Domestic Product (GDP):

• GDP is the total market value of all goods and services produced within the boundaries of a country in a specific period, usually a year or quarter.

• GDP at Market Price includes all private and public sector output but also includes indirect taxes like sales tax and excludes subsidies.

  $$GDP = C + I + G + (X - M)$$

  Where:

  • C = Consumption
  • I = Investment
  • G = Government Spending
  • X = Exports
  • M = Imports

Net Domestic Product (NDP):

• NDP is the GDP adjusted for depreciation (i.e., the loss in value of capital goods over time).

  $$NDP = GDP - Depreciation$$

Gross National Product (GNP):

• GNP is the total value of goods and services produced by the residents of a country, including income from abroad (net income from abroad).

  $$GNP = GDP + Net Factor Income from Abroad$$

Net National Product (NNP):

• NNP is the GNP adjusted for depreciation.

  $$NNP = GNP - Depreciation$$

National Income at Factor Cost (NI):

• National Income at Factor Cost represents the total income earned by factors of production (land, labor, capital, and entrepreneurship) in the production of goods and services.

  $$NI = NNP at Market Price - Indirect Taxes + Subsidies$$

Personal Income (PI):

• Personal Income is the total income received by individuals or households before taxes. It includes income from wages, investments, and transfers from the government (e.g., social security).

  $$PI = NI - Retained Earnings + Transfer Payments$$

Disposable Personal Income (DI):

• Disposable Personal Income is the income remaining after taxes are deducted from personal income. This is the amount available for consumption or saving.

  $$DI = PI - Taxes$$

Per Capita Income (PCI):

• Per Capita Income is the average income earned per person in a given country. It is calculated by dividing the national income by the population.

  $$PCI = \frac{NI}{Population}$$

---

3. Real and Nominal GDP

• Nominal GDP refers to the total value of all goods and services produced within a country in a given period, measured using current prices (i.e., without adjusting for inflation).

• Real GDP adjusts nominal GDP for changes in price levels over time, using a base year to eliminate the effect of inflation, thus reflecting the true value of production.

  $$Real \, GDP = \frac{Nominal \, GDP}{GDP \, Deflator} \times 100$$

GDP Deflator:

The GDP deflator is a measure of the level of prices of all final goods and services in an economy. It is used to convert nominal GDP into real GDP.

$$GDP \, Deflator = \frac{Nominal \, GDP}{Real \, GDP} \times 100$$

---

4. Computation of National Income

National income can be calculated using three different approaches: the Product Method, the Income Method, and the Expenditure Method.

Product Method (Output Method):

• In this method, national income is calculated by summing the value of all goods and services produced in an economy. It involves measuring the value added by each producer during the production process.

  $$GDP = \sum \text{Value Added at Each Stage of Production}$$

Income Method:

• The Income Method calculates national income by summing the income earned by all factors of production (wages, rent, interest, and profit). It focuses on the income generated from the production of goods and services.

  $$NI = Wages + Rent + Interest + Profits$$

Expenditure Method:

• The Expenditure Method calculates national income by adding up all expenditures made on goods and services within the economy.

  $$GDP = C + I + G + (X - M)$$

  Where:

  • C = Consumption expenditure
  • I = Investment expenditure
  • G = Government expenditure
  • X = Exports
  • M = Imports

---

5. Numerical Exercise Using Excel

To compute national income using the three methods (Product, Income, and Expenditure), you can use Excel for practical exercises. For example:

• Product Method: Input the value-added at each stage of production for different sectors and sum them up to compute GDP.
• Income Method: Sum the wages, rent, interest, and profit earned in the economy from various sectors.
• Expenditure Method: Input values for consumption, investment, government spending, exports, and imports to calculate GDP.

By setting up these calculations in Excel, you can easily calculate national income and perform analysis on real vs. nominal GDP, and measure economic growth over time.

---

Summary

Unit 6 focused on the fundamental concepts and methods used in National Income Accounting, a critical tool for measuring and analyzing the total economic activity of a country. Key concepts include GDP, NDP, GNP, NNP, National Income at Factor Cost, Personal Income, Disposable Income, and Per Capita Income. We also discussed the differences between Nominal and Real GDP and introduced the GDP Deflator. Finally, the unit covered the three primary methods of computing national income: the Product Method, Income Method, and Expenditure Method, with practical exercises in Excel for hands-on learning. Understanding these concepts is essential for analyzing the economic health and growth of a nation.

 Unit 7: Money, Banking and International Trade [6 Hrs.]

Unit 7: Money, Banking, and International Trade

This unit delves into the fundamental concepts related to money, banking, and international trade. It covers how money functions in the economy, the role of banks, and the dynamics of international trade, focusing on key terms like inflation, money supply, and balance of payments. The unit also emphasizes the specific roles of commercial and central banks, with a particular focus on Nepal Rastra Bank.

---

1. Concept and Functions of Money

Money is any asset or item that is widely accepted as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment. It eliminates the need for barter (direct exchange of goods and services) and facilitates trade in modern economies.

Functions of Money:

1. Medium of Exchange: Money is used to buy goods and services, facilitating transactions. It eliminates the inefficiencies of barter, where a double coincidence of wants is needed.

2. Store of Value: Money can store purchasing power for the future. People can save money to use it at a later time.

3. Unit of Account: Money provides a standard measure of value, allowing people to compare the worth of goods and services easily.

4. Standard of Deferred Payment: Money is used to settle debts. Loans and payments are agreed upon in monetary terms, which can be paid later.

---

2. Value of Money and Money Supply

The value of money refers to its purchasing power, which changes due to inflation or deflation. The value of money is influenced by various factors, including demand for goods, inflation rates, and the overall economic environment.

Money Supply:

The money supply refers to the total amount of money available in an economy. Central banks control the money supply, and it plays a crucial role in influencing inflation, interest rates, and economic growth.

Components of Money Supply:

1. M1: This is the narrowest definition of money supply, including:

   • Currency in circulation (coins and banknotes).
   • Demand deposits (balances in checking accounts).
   • Other checkable deposits (such as NOW accounts).

2. M2: This is a broader measure of money supply, including:

   • M1 components.
   • Savings deposits.
   • Time deposits (like fixed deposits).
   • Money market mutual funds.

3. M3: Includes M2 plus larger time deposits, institutional money market funds, and other larger liquid assets.

---

3. Inflation: Types, Causes, and Effects

Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. It erodes purchasing power and can impact economic stability.

Types of Inflation:

1. Demand-Pull Inflation: Occurs when aggregate demand in an economy exceeds aggregate supply. This could happen due to increased consumer spending, government expenditure, or investment by firms.

2. Cost-Push Inflation: Occurs when the costs of production (such as wages or raw materials) increase, leading to higher prices of goods and services.

3. Built-In Inflation (Wage-Price Spiral): This type of inflation occurs when workers demand higher wages due to the rising cost of living, which in turn increases the cost of production for firms, leading them to raise prices.

Causes of Inflation:

1. Demand-Side Factors: Increased demand for goods and services due to higher consumption or government spending.

2. Supply-Side Factors: An increase in the cost of production due to higher wages or raw material costs.

3. Monetary Expansion: An increase in the money supply by central banks can lead to inflation, especially when the growth of money outpaces the growth of goods and services.

Effects of Inflation:

1. Erosion of Purchasing Power: Inflation reduces the value of money, meaning people can buy fewer goods and services with the same amount of money.

2. Redistribution of Wealth: Inflation can affect income distribution, hurting fixed-income earners (e.g., retirees) and benefiting borrowers who repay loans in less valuable money.

3. Uncertainty in Business: High inflation can create uncertainty for businesses, making it difficult to plan for the future and causing volatility in investment.

4. Interest Rates: Central banks often raise interest rates to combat inflation, which can affect borrowing and investment.

---

4. Banking: Role and Functions of Commercial and Central Banks

Commercial Banks:

Commercial banks are financial institutions that offer a wide range of services, including accepting deposits, providing loans, and facilitating payment systems.

Functions of Commercial Banks:

1. Accepting Deposits: Commercial banks accept deposits from individuals and businesses, offering various types of accounts such as savings, checking, and fixed deposits.

2. Providing Loans and Credit: They lend money to individuals, businesses, and governments for consumption, investment, and business expansion.

3. Payment and Settlement: Commercial banks facilitate payment services, such as wire transfers, checks, and electronic payments.

4. Wealth Management: Banks offer services such as investment advisory, asset management, and insurance products.

5. Foreign Exchange: Commercial banks play a role in the exchange of currencies for international trade and investment.

Central Banks:

The Central Bank of a country (e.g., Nepal Rastra Bank) is the primary institution responsible for regulating and managing the country's money supply, interest rates, and overall economic stability.

Functions of Central Banks:

1. Monetary Policy Implementation: Central banks control inflation, stabilize the currency, and manage interest rates through monetary policies like open market operations, reserve requirements, and discount rates.

2. Lender of Last Resort: In times of financial crisis, the central bank provides emergency loans to commercial banks to maintain liquidity.

3. Regulation of Commercial Banks: The central bank sets reserve requirements and supervises the activities of commercial banks to ensure the stability of the banking system.

4. Issuance of Currency: The central bank has the sole authority to issue national currency, ensuring that the money supply is sufficient for economic needs.

5. Government's Bank: The central bank acts as the government's banker, managing the country’s foreign reserves, public debt, and government transactions.

6. Maintaining Exchange Rate Stability: The central bank manages the exchange rate by intervening in the foreign exchange market when necessary.

In Nepal, the Nepal Rastra Bank (NRB) serves as the central bank and plays a key role in the country's economic management, including monetary policy, financial stability, and managing foreign reserves.

---

5. International Trade

Internal vs. International Trade:

• Internal Trade refers to the trade of goods and services within the boundaries of a country. It involves exchanges between businesses, consumers, and the government.
• International Trade refers to the exchange of goods and services between countries. It involves exports (goods and services sold to foreign countries) and imports (goods and services purchased from foreign countries).

Balance of Trade:

• The Balance of Trade refers to the difference between a country’s exports and imports of goods. It is a key indicator of the trade position of an economy.
  • Trade Surplus: When exports exceed imports.
  • Trade Deficit: When imports exceed exports.

Balance of Payments (BOP):

• The Balance of Payments is a broader concept that includes not just the balance of trade (goods), but also services, income, and current transfers. It is divided into the current account, the capital account, and the financial account.
  • Current Account: Includes trade in goods and services, income from abroad, and current transfers (e.g., remittances).
  • Capital Account: Includes capital transfers, such as foreign investment.
  • Financial Account: Covers transactions involving foreign ownership of financial assets, such as stocks, bonds, and direct investment.

A positive BOP indicates a surplus, while a negative BOP indicates a deficit, which could signal potential problems in the economy.

---

6. Summary

Unit 7 provides a comprehensive understanding of the key concepts related to money, banking, and international trade. It covers the functions of money, the role of commercial and central banks, and the complexities of inflation and its effects on the economy. Additionally, the unit explores the dynamics of international trade, distinguishing between internal and international trade, and elaborating on key concepts like balance of trade and balance of payments. Understanding these concepts is vital for analyzing the economy and the global trade environment.

 Practice Long 10 Marks Questions

---

Unit 1: Introduction to Microeconomics and Macroeconomics

1. Explain the concept of microeconomics and macroeconomics. Discuss the different types of economic analysis under both branches. How do they complement each other?

2. Distinguish between microeconomics and macroeconomics. Discuss their scope and significance in understanding economic activities. How do they differ in their approach to the study of markets and economies?

3. What are the primary goals and instruments of macroeconomics? Analyze how fiscal and monetary policies serve as important tools in achieving macroeconomic objectives like full employment, price stability, and economic growth.

---

Unit 2: Elasticity of Demand and Supply

1. Explain the concept of elasticity of demand. Differentiate between price elasticity, income elasticity, and cross elasticity of demand with relevant examples.

2. How do we measure price, income, and cross elasticity of demand? Explain the Total Outlay Method and Point Method with appropriate illustrations.

3. Discuss the uses of price, income, and cross elasticity of demand in formulating business strategies. How does elasticity affect pricing decisions, and how can it influence total revenue?

4. What is the concept of elasticity of supply? Explain its measurement with suitable examples. Discuss the factors that affect the elasticity of supply.

---

Unit 3: Theory of Consumer Behavior

1. Explain the difference between cardinal and ordinal utility analysis. Discuss the assumptions, criticisms, and the derivation of the demand curve under cardinal utility theory.

2. Discuss the properties of indifference curves in ordinal utility analysis. How is the concept of marginal rate of substitution used to derive the consumer’s equilibrium?

3. Explain the Price Effect with reference to the derivation of the Price Consumption Curve (PCC). Analyze the Income and Substitution Effects and derive the Income Consumption Curve (ICC).

4. What is the Hicksian approach to deriving the demand curve? Explain how the decomposition of the price effect into income and substitution effects helps in understanding consumer behavior.

---

Unit 4: Cost and Revenue Curves

1. Discuss the concept of cost in economics, explaining the difference between actual cost and opportunity cost, as well as implicit and explicit costs. How are accounting cost and economic cost different?

2. Explain the derivation of short-run and long-run cost curves. Discuss the total, average, and marginal cost curves and their respective shapes in the short-run and long-run.

3. What is the relationship between short-run and long-run average cost and marginal cost curves? How does the long-run cost curve differ from the short-run cost curve? Illustrate your answer with appropriate diagrams.

4. Explain the concepts of total revenue, average revenue, and marginal revenue. How do revenue curves behave under perfect and imperfect competition? Discuss the relationship between average and marginal revenue with relevant examples.

---

Unit 5: Market Structure

1. What are the characteristics of perfect competition? Discuss the short-run and long-run equilibrium of a firm and the industry under perfect competition using both the TR-TC approach and the MC-MR approach. Derive the supply curve in both the short-run and long-run.

2. Explain the concept of monopoly and its characteristics. How does pricing under monopoly differ from that under perfect competition? Discuss the equilibrium of a monopoly firm in both the short run and long run using the TR-TC and MC-MR approaches.

3. What is price discrimination in a monopoly? Discuss the different degrees of price discrimination with suitable examples. How does a monopolist maximize profits through price discrimination?

4. Discuss the characteristics of monopolistic competition. How does pricing occur under monopolistic competition, and what is the equilibrium of a firm in both the short run and long run? Explain the equilibrium under product variation and selling expenses.

5. Explain the concept of oligopoly. What are the key characteristics of oligopoly? How does pricing work in a cartel aiming at joint profit maximization? Discuss the factors that influence pricing behavior in an oligopolistic market.

---

Unit 6: National Income Accounting

1. Explain the circular flow of income and expenditure in a two-sector, three-sector, and four-sector economy. Discuss the role of each sector in the circular flow and how income is generated and redistributed in the economy.

2. Discuss the various concepts of national income, such as GDP, NDP, GNP, NNP, National Income at factor cost, Personal Income, Disposable Personal Income, and Per Capita Income. Provide formulas for each concept and explain their significance in measuring economic performance.

3. What is the difference between real and nominal GDP? Explain the concept of GDP deflator and its use in measuring inflation. How do real and nominal GDP help in comparing the economic performance of different periods?

4. Explain the three methods of computing national income: the Product Method, the Income Method, and the Expenditure Method. How are these methods applied, and what are the challenges faced in the calculation of national income? Illustrate your answer with examples.

---

Unit 7: Money, Banking, and International Trade

1. Explain the concept and functions of money. Discuss the different types of money and their roles in facilitating economic transactions. How does the value of money affect the economy?

2. Discuss the components of the money supply (M1, M2, etc.). How do these components affect the overall money supply and economic activity? Explain the role of central banks in controlling money supply and managing inflation.

3. What are the causes and effects of inflation? Discuss the different types of inflation, including demand-pull, cost-push, and built-in inflation. How do inflationary pressures affect the purchasing power of money and economic stability?

4. Discuss the role and functions of commercial banks and the central bank (with reference to Nepal Rastra Bank). How do these institutions contribute to the economy in terms of monetary policy, financial intermediation, and ensuring economic stability?

5. What is the difference between internal and international trade? Discuss the concept of balance of trade and balance of payments. How do these concepts help in understanding a country’s economic standing in the global market?

---

These practice questions are designed to cover a wide range of topics under each unit, encouraging in-depth analysis and application of economic concepts. Students should practice these questions in preparation for exams, focusing on explaining concepts, deriving relevant diagrams, and providing real-world examples wherever possible.

 2021 Applied Economics TU Old Question BCA

Group B

2. Explain the Macro Economics with its subject matters. [6x5=30]

3. Explain the price elasticity of demand with point method of elasticity measurement.

4. How is income effect can be explained on the basis of indifference curve approach?

5. Define cost and its various types.

6. Profit can be maximized in a Monopoly Market. Explain.

7. Is the study of Economics useful to BCA students? How? Explain.

8. Write short notes on (Any Two):

   a) Relation between AC & MC of a firm.

   b) Law of Diminishing Marginal Utility.

   c) Functions of Central Bank.

Attempt any TWO questions.

Group C

9. Briefly explain about Short run equilibrium of a firm in monopolistic competition.

10. Explain circular flow of Income and expenditure in three sector economy.

11. How is National Income calculated with Final Production Method? [2×10=20]

 2021 Applied Economics TU Old Question Solutions BCA

Group B Solutions:

---

1. Explain Macro Economics with its Subject Matters.

Macroeconomics is the branch of economics that studies the behavior and performance of the entire economy as a whole. It focuses on aggregate indicators and the economy-wide phenomena, rather than individual markets. Macroeconomics looks at issues like national income, inflation, unemployment, fiscal policies, and international trade.

Subject Matters of Macroeconomics:

• National Income (Income and Output): Measures the total economic output of a country, including Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP), and Net National Product (NNP).
• Inflation and Deflation: The study of general price levels in an economy, with inflation indicating rising prices and deflation indicating falling prices.
• Unemployment: The study of unemployment levels and types, including frictional, structural, and cyclical unemployment.
• Monetary Policy: The control of money supply by the central bank to manage inflation and stabilize the economy.
• Fiscal Policy: Government policies regarding taxation and spending to influence national economic performance.
• International Trade and Finance: Examines how countries engage in trade and finance, including the balance of payments, exchange rates, and trade policies.
• Economic Growth: Focus on the long-term expansion of the economy, which involves the increase in the productive capacity of the country.

Macroeconomics aims to understand the broad aggregates and averages within an economy, offering insights into policies and actions that can influence the overall economic environment.

---

2. Explain the Price Elasticity of Demand with Point Method of Elasticity Measurement.

Price Elasticity of Demand (PED) is a measure of how much the quantity demanded of a good responds to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Mathematically, it is represented as:

$$PED = \frac{\% \text{Change in Quantity Demanded}}{\% \text{Change in Price}}$$

Point Method of Elasticity Measurement: The point method of measuring elasticity involves calculating elasticity at a particular point on the demand curve using the following formula:

$$PED = \frac{P}{Q} \times \frac{dQ}{dP}$$

Where:

• $P$ = Price of the good
• $Q$ = Quantity demanded
• $\frac{dQ}{dP}$ = The slope of the demand curve (rate of change in quantity demanded with respect to price)

This method provides elasticity at a specific point, rather than over a range of prices, and helps to determine the exact responsiveness of demand at that point.

For example, if a firm wants to know how demand changes when the price changes from $P_1$ to $P_2$, the point elasticity can provide insights into how sensitive demand is at that exact price level.

---

3. How Is Income Effect Explained on the Basis of Indifference Curve Approach?

In the Indifference Curve Approach, the income effect refers to the change in the quantity demanded of goods when a consumer's real income changes as a result of a price change, while the consumer's preferences remain the same.

Income Effect Explanation:

• When the price of a good decreases, the consumer’s purchasing power effectively increases, which allows them to buy more of the good or other goods. This is because they now have more real income to spend.
• The income effect is represented by a shift from one indifference curve to another. If the price of a good decreases, the consumer can reach a higher indifference curve, implying an increase in satisfaction.
• Conversely, if the price of a good increases, the consumer’s real income decreases, and they move to a lower indifference curve, resulting in reduced satisfaction.

The income effect, when combined with the substitution effect, helps explain the overall price effect, which is the total change in the quantity demanded resulting from a price change.

---

4. Define Cost and Its Various Types.

Cost in economics refers to the expenditure incurred by firms in the production of goods and services. Costs play a crucial role in decision-making for firms, especially when determining output levels and pricing.

Types of Costs:

1. Fixed Costs (FC): Costs that do not change with the level of output. These include rent, salaries of permanent staff, and depreciation of equipment.
2. Variable Costs (VC): Costs that vary with the level of output. For example, raw materials, wages of temporary workers, and utilities used in production.
3. Total Cost (TC): The sum of fixed and variable costs. $TC = FC + VC$.
4. Average Cost (AC): The total cost per unit of output. It is calculated by dividing total cost by the quantity of output: $AC = \frac{TC}{Q}$.
5. Marginal Cost (MC): The additional cost incurred when producing one more unit of output. It is the change in total cost resulting from a one-unit change in output: $MC = \frac{\Delta TC}{\Delta Q}$.
6. Opportunity Cost: The cost of forgoing the next best alternative when making a decision.
7. Explicit Costs: Actual monetary payments made by a firm to purchase resources.
8. Implicit Costs: The opportunity costs of using resources already owned by the firm, such as the owner's time and capital.

---

5. Profit Can Be Maximized in a Monopoly Market. Explain.

In a Monopoly, the firm is the sole producer of a good or service and therefore has control over the market price. The monopolist maximizes profit by choosing the level of output where marginal cost (MC) equals marginal revenue (MR).

Profit Maximization in Monopoly:

1. Output Level: A monopolist will produce at the point where $MC = MR$ to maximize profit. This is because, at this point, the cost of producing an additional unit is exactly equal to the revenue it generates.
2. Pricing: After determining the profit-maximizing quantity, the monopolist will charge a price based on the demand curve. Since the monopolist faces a downward-sloping demand curve, the price is higher than in a perfectly competitive market.
3. Profit Calculation: The monopolist’s profit is the difference between total revenue (TR) and total cost (TC). TR is determined by multiplying the price at the profit-maximizing output level by the quantity produced.

Since the monopolist controls the price and output, they can achieve higher profits than in competitive markets, where firms are price takers and cannot influence market prices.

---

6. Is the Study of Economics Useful to BCA Students? How? Explain.

Yes, the study of Economics is very useful for BCA (Bachelor in Computer Applications) students. Here's how:

1. Understanding Market Behavior: Economics helps BCA students understand the market and economic forces. It is essential for those involved in tech entrepreneurship, product pricing, and business strategy.

2. Decision Making: Economics provides insights into optimal decision-making, resource allocation, and cost-benefit analysis, which is crucial for software development, project management, and budgeting.

3. Business Acumen: Economics teaches students about business cycles, market structures, and fiscal policies, which are vital in understanding the tech industry, its demand patterns, and its global market.

4. Technological Impact on Economy: BCA students can understand how technology impacts various sectors of the economy, from finance to trade, and how businesses adapt to changing economic conditions.

5. Quantitative Analysis: Economics also involves data analysis and statistical methods, which are important for BCA students as they often work with data and analytics in their careers.

---

Short Notes:

a) Relation between AC & MC of a Firm:

• The Marginal Cost (MC) curve intersects the Average Cost (AC) curve at the minimum point of the AC curve. When MC is less than AC, AC is falling; when MC is greater than AC, AC is rising. Therefore, the MC curve plays a crucial role in determining the behavior of the AC curve.

b) Law of Diminishing Marginal Utility:

• The Law of Diminishing Marginal Utility states that as a person consumes more units of a good or service, the additional satisfaction (marginal utility) derived from each additional unit decreases. This law helps explain consumer behavior and the demand curve.

c) Functions of Central Bank:

• The Central Bank (e.g., Nepal Rastra Bank) regulates the money supply, manages inflation, sets interest rates, and ensures the stability of the financial system. It also serves as the banker to the government and the lender of last resort to commercial banks.

---

Group C: Long Answers

---

1. Briefly Explain about Short Run Equilibrium of a Firm in Monopolistic Competition.

Monopolistic Competition is a market structure that combines elements of both perfect competition and monopoly. In this market, there are many firms, each producing a differentiated product, meaning that consumers perceive each firm's product as slightly different from others. Because of this differentiation, firms in monopolistic competition have some degree of market power (the ability to influence the price of their product).

In the short run, a firm in monopolistic competition can either make abnormal profits, break even, or incur losses, depending on the situation in the market. The key to understanding the short-run equilibrium of a firm in monopolistic competition lies in understanding how firms respond to changes in demand and cost, as well as the relationship between average cost (AC), marginal cost (MC), marginal revenue (MR), and price.

Key Characteristics of Short-Run Equilibrium in Monopolistic Competition:

1. Profit Maximization:

   • Like all firms, a firm in monopolistic competition maximizes its profit by producing at the level of output where its marginal cost (MC) equals marginal revenue (MR).
   • The profit-maximizing output occurs where the firm’s MC = MR. This is the point where the cost of producing an additional unit is equal to the additional revenue generated from selling that unit.

2. Price Determination:

   • Once the firm decides on the optimal output level where MC = MR, it sets the price by referring to the demand curve. Since the firm in monopolistic competition faces a downward-sloping demand curve, the price will be determined from the demand curve at the output level produced by the firm.
   • In contrast to a perfectly competitive market, where firms are price takers, firms in monopolistic competition are price makers due to product differentiation. Therefore, they can charge a price higher than marginal cost, leading to a price above the firm’s average cost if it is making profits.

3. Short-Run Profits or Losses:

   • Abnormal Profits: If the firm’s price (determined from the demand curve) is greater than the average cost at the equilibrium output, the firm will make abnormal (supernormal) profits. The area between the price and the average cost curve, multiplied by the quantity of output, represents the abnormal profit.
   • Losses: Conversely, if the firm’s price is less than its average cost at the equilibrium output, the firm will incur losses. The firm will still produce where MC = MR, but the price will not cover the average cost, resulting in a loss. In the short run, firms may continue to produce even when they incur losses, as long as they can cover their variable costs.

4. Short-Run Equilibrium Diagram:

   • In the short-run equilibrium diagram of monopolistic competition, the firm’s demand curve (D) is downward sloping, while its marginal revenue curve (MR) is also downward sloping but lies below the demand curve because the firm must lower the price to sell more units.
   • The marginal cost curve (MC) intersects the marginal revenue curve (MR) at the equilibrium output. The price is determined by the demand curve at the equilibrium output.
   • If the firm makes profits, the price (P) is greater than average cost (AC). If the firm incurs losses, the price (P) is less than AC.

5. Adjustment of Firms in the Short Run:

   • In monopolistic competition, firms enter or exit the market freely in the long run, but in the short run, firms cannot immediately adjust to changes in market conditions. If a firm is making abnormal profits, it attracts new entrants to the market, which will eventually shift the demand curve for the existing firms, reducing their profits. If a firm is making losses, some firms may exit the market, and the demand curve for the remaining firms will shift outward, potentially leading to profits.

6. Conclusion on Short-Run Equilibrium:

   • In the short run, a firm in monopolistic competition can make abnormal profits or losses. The firm will produce at the point where MC = MR, and the price is determined by the demand curve. The equilibrium in the short run depends on the relationship between price, average cost, and marginal cost. However, this equilibrium will not be stable in the long run due to free entry and exit in the market.

Short-Run Equilibrium Summary:

• Profit Maximization occurs at MC = MR.
• Price is determined by the demand curve.
• Firms can make abnormal profits or losses in the short run.
• The firm has some market power due to product differentiation but faces competition from other firms.

---

2. Explain Circular Flow of Income and Expenditure in Three-Sector Economy.

The Circular Flow of Income and Expenditure describes the movement of money, goods, and services within an economy. In a three-sector economy, which includes households, businesses, and the government, the circular flow shows how income and expenditure circulate between these sectors. The economy is a continuous loop of income generation and expenditure that supports the production and consumption of goods and services.

Three-Sector Economy:

In a three-sector economy, the primary sectors involved are:

1. Households: Consumers who own the factors of production (labor, land, capital, and entrepreneurship).
2. Businesses (Firms): Producers of goods and services that hire factors of production from households.
3. Government: Collects taxes from households and businesses and spends money on public goods and services.

Key Components of the Circular Flow:

1. Households to Firms (Factor Payments):

   • Households supply the factors of production (land, labor, capital, and entrepreneurship) to firms in exchange for income.
   • For example, individuals work in firms, providing labor in exchange for wages, which represents an income flow from businesses to households.

2. Firms to Households (Goods and Services):

   • Firms produce goods and services using the factors of production provided by households. These goods and services are then sold to households for consumption.
   • The expenditure by households on goods and services represents an income flow to firms.

3. Government to Households and Firms (Expenditure and Transfers):

   • The government collects taxes from both households and businesses. This is a leakage from the circular flow.
   • The government then spends this money on public services, welfare programs, infrastructure, and other governmental functions. This expenditure is an injection into the economy.
   • Government transfers (like subsidies, unemployment benefits, or pensions) represent another way that the government injects income into households, increasing their spending capacity.

4. Government to Firms (Expenditure on Goods and Services):

   • The government purchases goods and services from firms for public sector operations, infrastructure projects, and other services. This is another form of injection into the economy.

Flow of Money in the Economy:

The circular flow shows that income earned by households from supplying factors of production to businesses is used to buy goods and services from firms. This expenditure by households becomes income for firms, which, in turn, pays for the factors of production, continuing the cycle. The government injects money through expenditure and transfers, and also removes money through taxes, creating a balance of inflows and outflows.

Leakages and Injections:

• Leakages: These are withdrawals from the flow of income, such as savings (money saved by households), taxes (paid to the government), and imports (money spent on foreign goods and services).
• Injections: These are additions to the flow of income, such as investment (spending by businesses on capital goods), government spending (public sector expenditure), and exports (sales of goods and services to foreign countries).

In a balanced economy, the total injections equal the total leakages. However, if there is more leakage than injection, the economy will contract, leading to a reduction in national income. Conversely, if injections exceed leakages, the economy will expand, increasing national income.

Graphical Representation of Circular Flow:

• Households: Receive income (wages, rents, etc.) from businesses and government, and spend it on goods and services produced by businesses.
• Businesses: Pay for factors of production (labor, capital, etc.) to households and produce goods and services for sale to households and the government.
• Government: Collects taxes from both households and businesses and spends on public goods and services, which circulate back into the economy.

Conclusion on Circular Flow of Income and Expenditure in Three-Sector Economy:

The circular flow in a three-sector economy shows the continuous movement of income and expenditure between households, businesses, and the government. This system is essential for understanding how economic activity is sustained through interactions and how government policies can influence economic outcomes.

---

3. How Is National Income Calculated with Final Production Method?

The Final Production Method (also known as the Value Added Method) is one of the most widely used methods for calculating National Income. This method calculates national income by summing up the value added at each stage of production in the economy. The basic principle is that only the value added at each stage of production is counted, avoiding double-counting of intermediate goods.

Steps in the Final Production Method:

1. Identify Final Goods and Services:
   • The first step is to identify final goods and services produced in the economy during a

specific period. Final goods are those that are not used as intermediate goods in the production of other goods.

• For example, a car purchased by a consumer is a final good, while the steel used in making the car is an intermediate good.

2. Calculate the Value Added at Each Stage of Production:

   • The next step is to calculate the value added at each stage of production. Value added is the difference between the value of output and the cost of intermediate goods used in production.
   • For example, if a firm sells a product for Rs. 200, but it purchased Rs. 100 worth of raw materials, the value added is Rs. 100 (Rs. 200 - Rs. 100).

3. Sum the Value Added Across All Sectors:

   • The final national income is the sum of the value added by all firms in different sectors of the economy (agriculture, manufacturing, services, etc.).
   • This can be done for individual industries and sectors. The value added by all sectors gives the total Gross Domestic Product (GDP) of the country.

4. Adjustments for Indirect Taxes and Subsidies:

   • To compute Net National Income (NNI), we adjust for indirect taxes (such as sales tax) and subsidies (if any) paid by firms to the government.
   • Indirect taxes increase the value of goods and services in the economy, while subsidies decrease it.

5. Net National Income (NNI):

   • Finally, if we subtract depreciation (or capital consumption allowance) from the gross value of the national income, we get the Net National Income (NNI).

Formula for National Income Using Final Production Method:

$$\text{National Income (GDP)} = \sum (\text{Value Added at Each Stage of Production})$$

Where:

• Value added = Value of output - Value of intermediate goods.

Advantages of Final Production Method:

• This method avoids the double-counting problem as only the value added at each stage is considered.
• It provides a clear measure of the total production in the economy.
• It can be used to compare the contribution of different sectors to national income.

Conclusion:

The Final Production Method is an effective way to measure national income by summing the value added at each stage of production. It helps to avoid the problem of double-counting and provides a clear picture of economic output in a given period.

---

 Applied Economics Mcq 6th SEM BCA

Questions and Answers

---

1. One of the goals of the macroeconomic policy is related to:

• a) Controlling inflation ✅
• b) Analyzing a consumer's behavior
• c) Determining a firm's profits
• d) Determining the price of a commodity

---

2. If the income elasticity of demand for a commodity (EM) is negative, then the commodity is called:

• a) Inferior ✅
• b) Normal
• c) Neutral
• d) None of all

---

3. When the total utility received by an individual from consuming a commodity (TUx) reaches a maximum, the marginal utility (MUx) becomes:

• a) Negative
• b) Zero ✅
• c) Positive
• d) None of the above

---

4. Average fixed cost (AFC) is equal to the vertical distance between the:

• a) AC curve and the AVC curve ✅
• b) AC curve and the MC curve
• c) AVC and the MC curve
• d) All of the above

---

5. A firm in a market of perfect competition maximizes its profits when:

• a) TR = TC
• b) TC > TR by the greatest amount
• c) It is at the break-even point
• d) TR > TC by the greatest amount ✅

---

6. The demand curve facing the monopolistic competitor is:

• a) Negatively sloped and highly elastic ✅
• b) Negatively sloped and highly inelastic
• c) Horizontal
• d) Infinitely elastic

---

7. A Latin phrase ceteris paribus, frequently used in economics, means that:

• a) The model is logical
• b) Other factors are held constant ✅
• c) No other variable affects the dependent variable
• d) No other model can explain the dependent variable

---

8. In an open economy model, the gross domestic product at market price (GDPmp) is equal to:

• a) C + Ig + G + X
• b) C + In + G + Xn ✅
• c) C + Ig + G + X
• d) W + R + i + π + D

---

9. Inflation is a situation having:

• a) A fall in the purchasing power of the monetary unit ✅
• b) A fall in the general price level
• c) A rise in the purchasing power of the monetary unit
• d) Any of the above

---

10. An open economy refers to an economy that has:

• a) An economic relationship with the outside world ✅
• b) No government sector
• c) No economic relationship with the outside world
• d) No foreign sector

---

---