Assignment Set 1 (one)

What are the factors that determine the Demand curve?

Explain.

Answer: - A demand curve is a locus of points showing various

alternative prices – quantity combinations. The total quantity
demanded at different prices in a market by the whole body
consumers at a particular period of time is called market demand
schedule. The graphical presentation of the demand schedule is called
as a demand curve.

It represents the functional relationship between quantity demanded

and prices of a given commodity. The demand curve has a negative
slope or it slope downwards to the right. The negative slope of the
demand curve clearly indicates the quantity demanded goes on
increasing as price falls and vice versa.

Law of demand: “Other things being equal, a fall in price leads to

expansion in demand and a rise in price leads to contraction in
demand”.

The factors that determine the Demand curve are as follows:-

a) Price of the given commodity, prices of other substitutes and

complements,
future expected trends in price etc.
b) General Price level existing in the country -inflation or deflation.
c) Level of income and living standards of the people.
d) Size, rate of growth and composition of population.
e) Tastes, preferences, customs, habits, fashion and styles.
f) Publicity, propaganda and advertisements.
g) Quality of the product.
h) Profit margin kept by the sellers.
i) Weather and climatic conditions.
j) Conditions of trade-boom or prosperity in the economy.
k) Terms and conditions of trade.
l) Governments’ taxation policy, liberal or restrictive measures.
m) Level of savings and pattern of consumer expenditure.
n) Total supply of money circulation and liquidity preference of the
people.
o) Improvements in educational standards.
2. Briefly explain the profit-maximization model?

Answer: - Profit- making is one of the traditional, basic and major

objectives of a firm. Profit- motive is the driving force behind all
business activities of a company. It is the primary measure of success
or failure of a firm in the market.

Profit-maximization implies earning highest possible amount of profits

during the given time. A firm has to generate largest amount of profits
by building optimum productive capacity both in the short run and long
run depending upon various internal and external factors and forces.
There should be proper balance between short run and long run
objectives. In the short run a firm is able to make only slight or minor
adjustments in the production process as well as in business
conditions. The plant capacity in the short run is fixed and as such, it
can increase its production and sales by intensive utilization of existing
plants and machineries, having over time work for existing staff etc.
Thus, in the short run, a firm has its own technical and managerial
constraints. But in the long run, as there is plenty of time at the
disposal of a firm, it can expand and add to the existing capacities
build up new plants; employ additional workers etc to meet the rising
demand in the market. Thus, in the long run, a firm will have adequate
time and ample opportunity to make all kinds of adjustments and
readjustments in production process and in its marketing strategies.

There are various factors that contribute to the maximization

of profits of a firm. Some of them are listed below:-

Pricing and business strategies of rival firms and its impact on the
working of the given firm.
Aggressive sales promotion policies adopted by rival firms in the
market.
Without inducing the workers to demand higher wages and salaries
leading to rise in operation costs.
Without resorting to monopolistic and exploitative practices inviting
government controls and takeovers.
Maintaining the quality of the product and services to the customers.
Taking various kinds of risks and uncertainties in the changing
business environment.
Adopting a stable business policy.
Avoiding any sort of clash between short run and long run profits in the
business policy and maintaining proper balance between them.
Maintaining its reputation, name, fame and image in the market.
Profit maximization is necessary in both perfect and imperfect
markets. In a perfect market, a firm is a price-taker and under
imperfect market it becomes a price-searcher.

Assumptions of the model:-

The profit maximization model is based on three important

assumptions. They are as follows:-

Profit maximization is the main goal of the firm.

Rational behavior on the part of the firm to achieve its goal of profit
maximization.
The firm is managed by owner-entrepreneur.

3. What is Cyert and March’s behavior theory? What are the

demerits?

Answer: - Cyert and March’s behavior makes an attempt to explain

the behavior of inter group conflicts and their multiple objectives in an
organization. Basically, this theory explains the usual and normal
behavior of different groups of people who work in an organization
having mutually opposite goals.

Cyert and March explain how complicated decisions are taken in big
industrial houses under various kinds of risks and uncertainties in an
imperfect market in the background of limited data and information.
The organizational structure, goals of different departments,
behavioral pattern and internal working of a big and multi-product firm
differs from that of small organizations. The various kinds of internal
conflicts and problems faced by these organizations. They also explain
how there are certain common problems faced by similar organizations
in an industry and their effects on internal working of each individual
organization and their decision making process.

Cyert and March consider that a modern firm is a multi-product, multi-

goal and multi-
decision making coalition business unit. Like a coalition government, it
is managed by a number of groups. The group consists of share
holders, managers, workers, customers, suppliers, distributors,
financiers, legal experts and so on. Each group is independent by itself
and has its own set of objectives and they try to maximize their
individual benefits.
Cyert and March points out the goals of a business organization would
depend upon the multiple objectives of each group and their collective
demands. Demands of each group would depend on their aspirations
levels, expectations, actual performance of the organization,
bargaining power of each group, past success in their demands, etc.

As all of them change over a period of time, the demands of each

group would all of them change over a period of time, the demands of
each group would also undergo changes. If actual performance and
achievements of the organization is much better than expected
aspirations and target level, in that case, there will upward revision in
their demands and vice-versa.

Thus, there is a strong linkage between the expected and actual

demand of each group in the organization, past success and future
environment. Each group makes an attempt to achieve its demand in
its own way.

Cyert and March are of the opinion that out of several

objectives a firm has five important goals. They are:-

Production goal: Production is to be organized on the basis of demand

in the market. Neither there should be over production nor under
production but just that much to meet the required demand in the
market, avoid excess capacity, over utilization of capital assets, lay-off
of workers etc.
Inventory goal: Inventory refers to stock of various inputs. In order to
ensure continuity in production and supply, certain minimum level of
inventory has to be maintained by a firm. Neither there should be
surplus stock or shortage of different inputs. Proper balance between
demand and supply should be maintained.
Sales goal: There should be adequate sales in any organization to earn
reasonable amounts of profits. In order to create demand, sales
promotion policies may be adopted from time to time.
Market-share goal: Each firm has to make consistent effort to increase
its market share to compete successfully with other firms and make
sufficient profits.
Profit goal: This is one of the basic objectives of any firm. The very
survival and success of the firm would depend upon the volume of
profits earned by it.

The above mentioned objectives also would undergo changes over a

period of time in the background of modern business environment.
Hence, decision making would become complex and complicated.

The demerits are as follows:-

The theory fails to analyze the behavior of the firm but it simply
predicts the future expected behavior of different groups.
It does not explain equilibrium of the industry as a whole.
It fails to analyze the impact of the potential entry of the new firms into
the industry and the behavior of the well established firms in the
market.
It highlights only on short run goals rather than long run objectives of
an organization. Thus, there are certain limitations to this theory.

4. What is Boumal’s Static and Dynamic?

Answer: - The model highlights that the primary objective of a firm is

to maximize its sales rather than profit maximization. It states that the
goal of the firm is maximization of sales revenue subject to a minimum
profit constraint. The minimum profit constraint is determined by the
expectations of the share holders. This is because no company can
displease the share holders. Maximization of sales does not mean
maximization of physical sales but maximization of total sales revenue.
Hence, the managers are more interested in increasing the sales
rather than profit. The basic philosophy is that when sales are
maximized automatically profits of the company would also go up.

Prof. Boumal has developed two models. The first is static model and
the second one is the dynamic model.

The Static model:-

The model is based on the following assumptions.

The model is applicable to a particular time period and the model does
not operate at different periods of time.
The firm aims at maximizing its sales revenue subject to a minimum
profit constraint.
The demand curve of the firm slope downwards from left to right.
The average cost curve of the firm is U-shaped one.

Sales Maximization (dynamic model):-

Many changes take place which affects business decisions of a firm. In
order to include such changes, Boumal developed dynamic model. This
model explains how changes in advertisement expenditure, a major
determinant of demand, would affect the sales revenue of a firm under
severe competitions.

This model is based on certain assumptions. They are as

follows:-

Higher advertisement expenditure would certainly increase sales

revenue of a firm.
Market price remains constant.
Demand and cost curves of the firm are conventional in nature.

Under competitive conditions, a firm in order to increase its volume of

sales and sales revenue would go for aggressive advertisements. This
leads to a shift in the demand curve to the right. Forward shift in
demand curve implies increased advertisement expenditure resulting
in higher sales and sales revenue. A price cut may increase sales in
general. But increase in sales mainly depends on whether the demand
for a product is elastic or inelastic. A price reduction policy may
increase its sales only when the demand is elastic and if the demand is
inelastic; such a policy would have adverse effects on sales.
Hence, to promote sales, advertisements become an effective
instrument today. It is the experience of most of the firms that with an
increase in advertisement expenditure, sales of the company would
also go up. A sales maximizer would generally incur higher amounts of
advertisement expenditure than a profit maximizer. However, it is to
be remembered that amount allotted for sales promotion should bring
more than proportionate increase in sales and total profits of a firm.
Otherwise, it will have a negative effect on business decisions.

By introducing, a non-price variable into this model, Boumal makes a

successful attempt to analyze the behavior of a competitive firm under
oligopoly market conditions. Under oligopoly conditions as there are
only a few big firms competing with each other either producing similar
or differentiated products, would resort to heavy advertisements as an
effective means to increase their sales and sales revenue.

5. The demand function of a good is as follows:

Q1=100-6P1-4P2+2P3+0.003Y
WHERE P1 and Q1 are the price and quantity values of good 1
P2 and P3 are the prices of good 2 and good 3 and Y is the
income of
the consumer. The initial values are given:
 P1 =7
P2 =15
P3 =4
Y=8000
Q1 =30

You are required to:

Using the concept of cross elasticity determine the

relationship between
good 1 and others
Determine the effect on Q1 due to a 10 % increase in the price
of good 2
and good

Answer:- Cross elasticity can be defined as the proportionate change

in the quantity demanded of a particular commodity in response to a
change in the price of another related commodity.

a) Cross elasticity between good 1 and product 2 = (dQ1/dP2)*(P2/Q1)

Cross elasticity between good 1 and product 3 = (dQ1/dP3)*(P3/Q1)

Taking the differentiation of the equation:

dQ1/dP2 = -4
dQ1/dP3 = 2

Putting the values in the elasticity equation:

Cross elasticity between good 1 and product 2 = (dQ1/dP2)*(P2/Q1)

= (-4) * (P2/Q1)
= (-4) * (15/30)
= -2

Cross elasticity between good 1 and product 3 = (dQ1/dP3)*(P3/Q)

= (2) * (P3/Q1)
= (2) * (4/30)
= 0.267

b) As per the cross elasticity equation:

E = % Change in demand of product A / % Change in price of product B

% Change in demand of product A = E * % Change in price of product
B

Putting the values from

% Change in demand of product A due to 10 % increase of good 2 = -2
* 10
= -20%
% Change in demand of product A due to 10 % increase of good 3 =
0.267 * 10 =
2.67%

6. A firm supplied 3000 pens at the rate of Rs 10. Next month,

due to a rise of
in the price to 22 rs per pen the supply of the firm increases
to 5000 pens.
Find the elasticity of supply of the pens?

Answer:- Price elasticity of demand is a ratio of two pure numbers,

the numerator is the percentage change in the quantity demanded and
the denominator is the percentage change in price of the commodity.
It is measured by the following formula:

Ep = Percentage change in quantity demanded/ Percentage changed

in price

Applying the provided data in the equation:

Percentage change in quantity demanded = (5000 – 3000)/3000

Percentage changed in price = (22 – 10) / 10

Ep = ((5000 – 3000)/3000) / ((22 – 10)/10) = 1.2

 Assignment Set 2 (Two)

What is pricing policy? What are the internal and external

factors of the policy?

Answer: - Pricing policy refers the policy of setting the price of the
product or products and services by the management after taking into
account of various internal and external factors, forces and its own
business objectives. Pricing policy basically depends on price theory
that is the corner stone of economic theory. Pricing is considered as
one of the basic and central problems of economic theory in modern
economy. Fixing prices are the most important aspect of managerial
decision making because market price charged by the company affects
the present and future production plans, pattern of distribution, nature
of marketing etc. Above all, the sales revenue and profit ratio of the
producer directly depend upon the prices.
Hence, a firm has to charge the most appropriate
price to the customers. Charging an ideal price, which is neither too
high nor too low, would depend on a number of factors and forces.
There are no standard formulas or equations in economics to fix the
best possible price for a product. The dynamic nature of the economy
forces to raise and reduce the prices continuously. Hence, price
fluctuates over a period of time.
In economic theory, generally, we take into account of
only two parties, i.e., buyers and sellers while fixing the prices.
However, in practice many parties are associated with pricing of a
product. They are rival competitors, potential rivals, middlemen,
wholesalers, retailers, commission agents and above all the
Government. Hence, we should give due consideration to the influence
exerted by these parties in the process of price determination.

The various factors and forces that affect the price are divided into two
categories.

They are as follows:-

External Factors (Outside factors):-

Demand, supply and their determinants.

Elasticity of demand and supply.
Degree of competition in the market.
Size of the market.
Goodwill, name, fame and reputation of a firm in the market.
Trends in the market.
Purchasing power of the buyers.
Bargaining power of customers.
Buyer’s behavior in respect of particular product.
Availability of substitutes and complements.
Government’s policy relating to various kinds of incentives,
disincentives, controls, restrictions and regulations, licensing, taxation,
export & import, foreign capital, foreign technology, MNC’s etc.
Competitors pricing policy.
Social consideration.
Bargaining power of customers.

Internal Factors (Inside factors):-

Objectives of the firm.

Production costs.
Quality of the product and its characteristics.
Scale of production.
Efficient management of the resources.
Policy towards percentage of profits and dividend distribution.
Advertising and sales promotion policies.
Wage policy and sales turn over policy etc.
The stages of the product on the product life cycle.
Use pattern of the product.
Extent of the distinctiveness of the product and extent of product
differentiation practiced by the firm.
Composition of the product and life of the firm.

Thus, multiple factors and forces affect the pricing policy of a firm.

8. Mention three crucial objectives of price policies?

Answer: - The ultimate objective of every firm is to maximize profits.

This is possible when the returns exceed costs. Setting an ideal price
for a product assumes greater importance.

The following objectives are considered while fixing the prices

of the product.

Profit Maximization in the short term:-

The primary objective of the firm is to maximize its profits. Pricing

policy as an instrument to achieve this objective should be formulated
in such a way as to maximize the sales revenue and profit. Maximum
profit refers to the highest possible profit. In short run, a firm not only
should be able to recover its total costs, but also should get excess
revenue over costs. This will build the morale of the firm and instill the
spirit of confidence in its operations. It may follow skimming price
policy, i.e., charging a very high price when the product is launched to
cater to the needs of only a few sections of people. It may exploit wide
opportunities in the beginning. But it may prove fatal in the long run. It
may lose its customers and business in the market. Alternatively, it
may adopt penetration pricing policy i.e., charging a relatively lower
price in the latter stages in the long run so as to attract more
customers and capture the market.

Profit optimization in the long run:-

The traditional profit maximization hypothesis may not prove beneficial

in the long run. With the sole motive of profit making a firm may resort
to several kinds of unethical practices like charging exorbitant prices,
follow Monopoly Trade Practices (MTP), Restrictive Trade Practices
(RTP) and Unfair Trade Practices (UTP) etc. This may lead to opposition
from the people. In order to over come these evils, a firm instead of
profit maximization, aims at profit optimization. Optimum profit refers
to the most ideal or desirable level of profit. Hence, earning the most
reasonable or optimum profit has become a part and parcel of a sound
pricing policy of a firm in recent years.

Price Stabilization:-

Price stabilization over a period of time is another objective. The prices

as far as possible should not fluctuate too often. Price instability
creates uncertain atmosphere in business circles. Sales plan becomes
difficult under such circumstances. Hence, price stability is one of the
pre requisite conditions for steady and persistent growth of a firm. A
stable price policy only can win the confidence of customers and may
add to the goodwill of the concern. It builds up the reputation and
image of the firm.

9. Mention the bases of price discrimination?

Answer: - The policy of price discrimination refers to the practice of a

seller to charge different prices for different customers for the same
commodity, produced under a single control without corresponding
differences in cost.

The basis for Price discrimination is as follows:-

Personal Differences: - This is nothing but charging different prices

for the same commodity because of personal differences arising out of
ignorance and irrationality of consumers, preferences, prejudices and
needs.
Place:-Markets may be divided on the basis of entry barriers, for e.g.
price of goods will be high in the place where taxes are imposed. Price
will be low in the place where there are no taxes or low taxes.

Different uses of the same commodity:- When a particular

commodity or service is meant for different rates may be charged
depending upon the nature of consumption. For e.g. different rates
may be charged for the consumption of electricity for lighting, heating
and productive purposes in industry and agriculture.

Time:- Special concessions or rebates may be given during festival

seasons or on important occasions.

Distance:- Railway companies and other transporters, for e.g., charge

lower rates per km if the distance is long and higher rates if the
distance is short.

Special orders:- When the goods are made to order it is easy to

charge different prices to different customers. In this case, particular
consumer will not know the price charged by the firm for other
consumers.

Nature of the product:- Prices charged also depends on nature of

products e.g., railway department charge higher prices for carrying
coal and luxuries and less prices for cotton, necessaries of life etc.

Quantity of purchase:- When customers buy large quantities,

discount will be allowed by the sellers. When small quantities are
purchased, discount may not be offered.

Geographical area:- Business enterprises may charge different

prices at the national and international markets. For example, dumping
– charging lower price in the competitive foreign market and higher
price in protected home market.

Discrimination on the basis of income and wealth:- For e.g., a

doctor may charge higher fees for rich patients and lower fees for poor
patients.

Special classification of consumers:- For e.g., Transport

authorities such as Railway and Roadways show concessions to
students and daily travelers. Different charges for I class and II class
traveling, ordinary coach and air conditioned coaches, special rooms
and ordinary rooms in hotels, etc.
Age:- Cinema houses in rural areas and transport authorities charge
different rates for adults and children.

Preference or brands:- Certain goods will be sold under different

brand names or trade marks in order to attract customers. Different
brands will be sold at different prices even though there is not much
difference in terms of costs.

Social or Professional status of the buyer:-A seller may charge a

higher price for those customers who occupy higher positions and have
higher social status and fewer prices to common man on the street.

Convenience of the buyer:- If a customer is in hurry, higher price

would be charged. Otherwise normal price would be charged.

Discrimination on the basis of sex:- In selling certain goods,

producers may discriminate between male and female buyers by
charging low prices to females.

If price differences are minor, customers do not bother about

such discrimination.

Peak season and off peak season services:- Hotel and transport
authorities charge different rates during peak season and off peak
seasons.

10. What do you mean by the fiscal policy? What are the
instruments of
fiscal policy? Briefly comment on India’s fiscal policy?

Answer: - Fiscal policy is an important part of the over all economic

policy of a nation. The term “fisc” in English language means
“treasury”, and as such, policy related to treasury or government
exchequer is known as fiscal policy. Fiscal policy is a package of
economic measures of the government regarding its public
expenditure, public revenue, public debt or public borrowings.

In the words of Ursula Hicks, “Fiscal policy is concerned with the

manner in which all the different elements of public finance, while still
primarily concerned with carrying out their own duties (as the first duty
of a tax is to raise revenue) may collectively be geared to forward the
aims of economic policy”.

The instruments of fiscal policy are as follows:-

Public Revenue:- It refers to the income or receipts of public
authorities. It is classified into two parts – Tax-revenue and non-tax
revenue. Taxes are the main source of revenue to a government.
There are two types of taxes. They are direct taxes like personal and
corporate income tax, property tax and expenditure tax etc and
indirect taxes like customs duties, excise duties, sales tax now called
as VAT etc. Administrative revenues are the bi-products of
administrate functions of the government. They include fees, license
fees, price of public goods and services, fines, escheats, special
assessment etc.

Public expenditure policy:- It refers to the expenditure incurred by

the public authorities like central, state and local governments. It is of
two kinds, developments or plan expenditure and non-developments or
non-plan expenditure. Plan expenditure include income – generating
projects like development of basic industries, generation of electricity,
developments of transport and communications, construction of dams
etc. Non-plan expenditure includes defense expenditure, subsidies,
interest payments and debt-servicing changes etc.

Public debt or public borrowing policy:- All loans taken by the

government constitutes public debt. It refers to the borrowings made
by the government to meet the ever-rising expenditure. It is of two
types, internal borrowings and external borrowings.

Deficit financing:- It is an extraordinary technique of financing the

deficits in the budgets. It implies printing of fresh and new currency
notes by the government by running down the cash balances with the
central bank. The amount of new money printed by the government
depends on the absorption capacity of the economy.

Built in stabilizers or automatic stabilizers (BIS):- The automatic

or built in stabilizers imply, automatic changes in tax collections and
transfer payments or public expenditure programmes so that it may
reduce destabilizing effect on aggregate effective demand. When
income expands, automatic increase in taxes or reduction in transfer
payments or government expenditures will tend to moderate the rise
in income. On the contrary, when the income declines, tax falls
automatically and transfers and government expenditure will rise and
thus built in stabilizers cushions the fall in income.

A). India’s Fiscal Policy Overview:-

1. The Union Budget 2008-09 was presented in the backdrop of
impressive growth in the Indian economy which clocked about 9 per
cent of average growth in the last four years.
 This striking performance coupled with significant improvement
in fiscal indicators, during the Fiscal Responsibility and Budget
Management (FRBM) Act, 2003 regime definitely put the country on a
higher growth trajectory inspiring confidence in the medium to long
term prospects of the economy. The process of fiscal consolidation
during these years has resulted in improvement in fiscal deficit from
5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP in 2007-08.
During the same period, revenue deficit has declined from 4.4 per cent
to 1.1 per cent of GDP.
In tune with the
philosophy of equitable growth, the process of fiscal consolidation was
taken forward without constricting the much-required social sector and
infrastructure related expenditure.
This improvement in the state of public
finances was achieved through higher revenue buoyancy, driven by
efficient tax administration and improved compliance which is evident
from increase in the tax to GDP ratio from 8.8 per cent in 2002-03 to
12.5 per cent in 2007-08.
2. Riding on the path of fiscal
consolidation, the Union Budget 2008-09 was presented with fiscal
deficit estimated at 2.5 per cent of GDP and revenue deficit at 1 per
cent of GDP.
However after the presentation of the
Union Budget in February 2008, the world economy was hit by three
unprecedented crises -- first, the petroleum price rise; second, rise in
prices of other commodities; and third, the breakdown of the financial
system.
The combined effects of these crises of
these orders are bound to affect emerging market economies and India
was no exception. The first two crises resulted in serious inflationary
pressure in the first half of 2008-09. The focus of the monetary as well
as fiscal policy shifted from fuelling growth to containing inflation,
which had reached 12.9 per cent in August, 2008.
Series of fiscal measures both on
tax revenue and expenditure side were undertaken with the objective
of easing supply side constraints. These measures were supplemented
by monetary initiatives through policy rate changes by the Reserve
Bank of India, and contributed to the softening of domestic prices.
Headline inflation fell to 4.39 per cent in January, 2009. However, the
fiscal measures undertaken through tax concessions and increased
expenditure on food, fertilizer and petroleum subsidies along with
increased wage bill for implementing the Sixth Central Pay Commission
recommendations significantly altered the deficit position of the
Government.
3. The global financial crisis in the second half of the financial year
which heralded recessionary trends the world over also impacted the
Indian economy causing the focus of fiscal policy to be shifted to
providing growth stimulus.
The moderation in growth of
the economy and the impact of the fiscal measures taken to stimulate
growth can be seen reflected in the estimates for gross tax revenue
which stand reduced from Rs 6,87,715 crore in B.E.2008-09 to Rs
6,27,949 crore in R.E.2008-09.
Additional budgetary resources of
Rs.1, 50,320 crore provided as part of stimulus package and various
committed liabilities of Government including rising subsidy
requirement, provision under NREGS, implementation of Central Sixth
Pay Commission recommendations and Agriculture Debt Waiver and
Debt Relief Scheme for Farmers contributed to the higher fiscal deficit
of 6 per cent of GDP in RE 2008-09 as compared to 2.5 per cent of GDP
in B.E.2008-09.

4. The Country is facing difficult economic situation, the cause of which

is not emanating from within its boundaries. However, left unattended,
the impact of this crisis is going to affect us in medium to long term.
The Government had two policy
options before it. In view of falling buoyancy in tax receipts, the
Government could have taken a decision to cut expenditure and
thereby live within the estimated deficit for the year.
The second option was to increase public expenditure,
even with reduced receipts, to stimulate economy by creating demand
and maintain the growth trajectory which the country was witnessing
in the recent past.
The Government
took the second option of adopting fiscal measures to increase public
expenditure to boost demand and increase investment in
infrastructure sector.
Ensuring revival of the higher
growth of the economy will restore revenue buoyancy in medium term
and afford the required fiscal space to revert to the path of fiscal
consolidation.

B. Fiscal Policy for the ensuing financial year:-

5. The Interim Budget 2009-2010 is being presented in the backdrop of
uncertainties prevailing in the world economy. The impact of this is
seen in the moderation of the recent trend in growth of the Indian
economy in 2008-09 which at 7.1 per cent still however makes India
the second fastest growing economy in the World.
The measures taken by Government to
counter the effects of the global meltdown on the Indian economy,
have resulted in a short fall in revenues and substantial increases in
government expenditures, leading to a temporary deviation from the
fiscal consolidation path mandated under the FRBM Act during 2008-09
and 2009-2010.
The revenue deficit and fiscal deficit for R.E.2008-09 and B.E.2009-
2010 are, as a result, higher than the targets set under the FRBM Act
and Rules.
The grounds, due to which this temporary deviation has taken place,
are detailed in the Fiscal Policy Overview above and also in the Macro-
economic Framework Statement being presented in the Parliament.
The fiscal policy for the year 2009-2010 will continue to be guided by
the objectives of keeping the economy on the higher growth trajectory
amidst global slowdown by creating demand through increased public
expenditure in identified sectors.
However, the medium term objective will be to revert to the
path of fiscal consolidation at the earliest, with improvement in the
economic situation.

11. Comment on the consequences of environmental

degradation on the
economy of a community?

Answer: - There has been very fast and quick economic growth in
many countries of the world. There is a visible change in the pattern of
economic growth. In the name of quick economic development in a
very short period of time, there is fast depletion of all kinds of
resources and many types of resources may be exhausted in the near
future. There has been excessive and over-utilization of many
resources. Degradation and destruction of resource-base is
unpardonable. They have adverse effects on health, efficiency and
quality of life of the people. Hence, there is cry for environmental
protection in recent years. Unless concrete measures are taken in right
time, the man kind may have to pay a heavy price in the near future.
In this background, today economists are talking about the concept of
sustainable economic development.
Sustainable economic development seeks to meet the needs
and aspirations of the present without compromising the
ability of future generations to meet their own needs. It is felt
that sustainable development can be achieved only when the
environment is protected, conserved, saved and improved consciously
by the people in a country. The process of development will become
sustainable only when the stocks of various sources of resources, their
quantities represent a common heritage for all generations. Hence, all
out efforts are to be made to augment these resources in several ways
and means.
While estimating the national income of a country, under the new
system of accounting, one has to take into account of the total physical
volume of resources and their monetary value. The total depreciation
charges include the wear and tear of capital assets, depletion of
natural resources, various kinds of losses arising out of capital assets,
depletion of natural resources, various kinds of losses arising out of
environmental decay and degradation etc.

Environmental damages may be in the following categories

they are as follows:-

1. Water Pollution
2. Air Pollution
3. Soil Pollution
4. Deforestation
5. Loss of Biodiversity
6. Solid and Hazardous wastes
Thus, several factors have contributed for environmental degradation.

12. Write short notes on the following:-

Answer: - Philips Curve:- A. W. Philips the British economist was the
first to identify the inverse relationship between the rate of
unemployment and the rate of increase in money wages. Philips in his
empirical study found that when unemployment was high, the rate of
increase in money wage rates was high. Philips calls it as the trade off
between unemployment and money wages.

In the figure the horizontal axis represents the rate of unemployment

and the vertical axis represents the rate of money wages. In the figure,
the diagonal represents the Philips curve; diagonal is sloping
downwards and is convex to the origin of the two axes and cuts the
horizontal axis. The convexity of diagonal shows that money wages fall
with increase in the rate of unemployment or conversely money wages
rise with decrease in the rate of unemployment.
This inverse relationship between money wage rates
and unemployment is based on the nature of business activity. During
the period of rising business activity wage rate is high and the rate of
unemployment is low and during periods of declining business activity
wage rate is low and the rate of unemployment is high.

Stagflation:- The present day inflation is the best explanation for

stagflation in the whole world. It is inflation accompanied by stagnation
on the development front in an economy.

Stagflation is a portmanteau term in macro economics used to

describe a period with a high rate of inflation combined with
unemployment and economic recession. Inflationary gap occurs when
aggregate demand exceeds the available supply and deflationary gap
occurs when aggregate demand is less than the aggregate supply.
These are two opposite situations. For instance, when inflation goes
unchecked for some time, and prices reach very high level, aggregate
demand contracts and a slump follows. Private investment is
discouraged. Inflationary and deflationary pressures exist
simultaneously. The existence of an economic recession at the height
of inflation is called “stagflation”.
The effects of rising inflation and unemployment are especially
hard to counteract for the government and the Central Bank. If
monetary and fiscal measures are adopted to redress one problem, the
other gets aggravated. Say, if a cheap money policy and public works
programme are adopted to remedy unemployment inflation gets
aggravated. On the other hand, if a dear money policy and stringent
fiscal measures are followed unemployment will get aggravated. It is
the most difficult type of inflation that the world is facing today.