NEB Class 12 Management Economics Question Paper 2077 Nepal

Price elasticity of demand ($E_d$) measures the responsiveness of quantity demanded to a change in price: $E_d=\dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}$.

Types: (1) Perfectly elastic ($E_d=\infty$); (2) Perfectly inelastic ($E_d=0$); (3) Unitary elastic ($E_d=1$); (4) Relatively elastic ($E_d>1$); (5) Relatively inelastic ($E_d<1$).

Monopoly is a market structure with a single seller of a product having no close substitutes, with strong barriers to entry; the firm is a price-maker.

Price/output determination: A monopolist maximises profit where Marginal Revenue equals Marginal Cost ($MR=MC$), provided MC cuts MR from below. The profit-maximising output is read where $MR=MC$, and the price is set from the demand (AR) curve at that output. Since AR > MR for a monopolist, price exceeds marginal cost. Supernormal profit exists if AR > AC at that output.

The law of diminishing marginal utility states that as a consumer consumes more and more units of a commodity, the additional (marginal) utility derived from each successive unit goes on decreasing, other things remaining constant. Beyond a point marginal utility may become zero (point of satiety) and then negative. It explains the downward-sloping demand curve.

In the short run, $TC = TFC + TVC$. TFC is constant at all output levels (a horizontal line); TVC rises with output, starting from zero; TC starts at the level of TFC (when output = 0) and rises parallel to TVC. The vertical distance between the TC and TVC curves at every output equals TFC.

The wages fund theory (J.S. Mill) holds that wages are paid out of a predetermined fund of circulating capital set aside by employers. The wage rate equals the wages fund divided by the number of workers: $\text{Wage}=\dfrac{\text{Wages fund}}{\text{Number of workers}}$. Thus wages can rise only if the fund increases or the number of workers falls. (Criticisms: the fund is not really fixed; it ignores productivity and bargaining.)

Variable cost is the cost that changes (increases or decreases) directly with the level of output — it is zero when output is zero and rises as production increases. Examples: cost of raw materials, wages of casual labour, power/fuel used in production.

Economic rent is the payment made for the use of land or any factor of production that is in fixed/perfectly inelastic supply — the surplus earned over and above its transfer earnings (the minimum payment needed to keep the factor in its present use).

National income is the total money value of all final goods and services produced by the normal residents of a country during a given year (one accounting period).

Difficulties in measurement: (1) double counting; (2) treatment of non-monetised/subsistence output; (3) transfer payments; (4) lack of reliable data and illiteracy; (5) services valued at cost; (6) underground/black economy; (7) depreciation estimation; (8) goods kept for self-consumption.

Direct tax: a tax whose burden (impact and incidence) falls on the same person on whom it is levied and cannot be shifted (e.g. income tax, property tax).

Indirect tax: a tax whose burden can be shifted to another person; levied on goods/services (e.g. VAT, customs, excise).

Features of a good tax system (canons of taxation): equity (ability to pay), certainty, convenience, economy, productivity, elasticity, simplicity, diversity, and flexibility.

Importance of money: it serves as a medium of exchange (removes the difficulties of barter), a measure/unit of value, a store of value, a standard of deferred payments, and a basis of credit. It facilitates trade, specialisation, capital formation, and the functioning of modern economies (consumption, production, distribution, public finance).

Government budget formulation process (Nepal): (1) issuing of budget guidelines/ceilings by the Ministry of Finance; (2) preparation of estimates of revenue and expenditure by line ministries; (3) discussion and review by the National Planning Commission and Ministry of Finance; (4) preparation of the budget by the Ministry of Finance; (5) approval by the Council of Ministers; (6) presentation of the budget in the Federal Parliament by the Finance Minister; (7) parliamentary discussion and passage (Appropriation Act); (8) implementation and audit.

Importance of the banking system: it mobilises savings and channels them into investment; provides credit for trade, industry and agriculture; creates credit/money; facilitates payments and the transfer of funds; promotes capital formation and economic development; implements monetary policy (through the central bank); and supports financial inclusion and safe custody of deposits.

Macroeconomics is the branch of economics that studies the economy as a whole — aggregate variables such as national income, total output, employment, the general price level, inflation, aggregate demand and supply, money, and economic growth.

The capital market is the market for medium- and long-term funds (securities such as shares, debentures and bonds) where savings are channelled into long-term investment. It includes the primary market (new issues) and the secondary market (stock exchange) and institutions like banks, finance companies, and the securities board.

Malthus held that population grows in a geometric ratio (1,2,4,8,...) while the means of subsistence (food) grow only in an arithmetic ratio (1,2,3,4,...); hence population tends to outrun food supply, kept in check by 'positive checks' (war, famine, disease) and 'preventive checks' (moral restraint).

Weaknesses: it underestimated technological progress and rising agricultural productivity; ignored the role of birth control and changing social attitudes; the ratios were arbitrary; food supply has grown faster than predicted in many countries; ignored international trade and migration.

AR, MR, TR under perfect competition: Under perfect competition price is constant (firm is price-taker), so $AR=MR=\text{price}$, both being a horizontal straight line. $TR=\text{price}\times Q$ rises as a straight line through the origin (constant slope = price). Since each extra unit adds the same revenue (= price), MR = AR.

Or — Classical theory of interest: Interest is the reward for saving; the rate of interest is determined by the demand for capital (investment, which falls as interest rises) and the supply of capital (saving, which rises with interest). Equilibrium interest rate is where saving = investment. Weaknesses: it ignores the influence of money/liquidity preference (Keynes' critique), assumes full employment, and treats saving and investment as functions of interest alone.

(क) Shift in supply curve: A shift occurs when, at a given price, the quantity supplied changes due to non-price factors (input prices, technology, taxes/subsidies, number of sellers, expectations). A rightward shift = increase in supply; leftward = decrease. (Distinct from movement along the curve caused by price change.)

(ख) Consumer's surplus: The difference between the maximum price a consumer is willing to pay and the price actually paid; measured by the area under the demand curve above the market price.

(ग) Subsistence theory of wages: Wages tend in the long run towards the subsistence level (the minimum needed for a worker to live and reproduce). If wages rise above subsistence, population grows and labour supply increases, pushing wages back down; if below, population falls, raising wages. Hence the 'iron law of wages'.

(क) Four features of market economy: (1) private ownership of property/means of production; (2) freedom of enterprise and choice; (3) price mechanism / forces of demand and supply allocate resources; (4) profit motive; (5) competition; (6) minimal government intervention. (Any four.)

(ख) Four assumptions of the law of diminishing marginal utility: (1) utility is cardinally measurable; (2) consumption is continuous (no time gap); (3) units of the commodity are homogeneous/identical and of suitable size; (4) tastes, income and prices remain constant; (5) consumer is rational; (6) marginal utility of money is constant. (Any four.)

(क) Functions of money: Primary — medium of exchange and measure/unit of value. Secondary — store of value, standard of deferred payments, transfer of value. (Contingent — basis of credit, distribution of national income, etc.)

(ख) Functions of commercial banks (Nepal): accepting deposits (current, saving, fixed); advancing loans/credit; credit creation; agency functions (collection/payment, remittance); general utility services (lockers, foreign exchange, guarantees); supporting trade and development.

(ग) Features of a good tax system: equity, certainty, convenience, economy, productivity, elasticity, simplicity, diversity.

Or — Ricardian comparative cost theory: A country should specialise in and export goods in which it has a comparative (relative) cost advantage and import those in which its comparative disadvantage is least, even if one country is absolutely more efficient in both goods. Mutual gains from trade arise from differences in opportunity (comparative) costs.

(क) Inflation: A sustained, continuous rise in the general price level of goods and services in an economy over time, which reduces the purchasing power of money.

(ख) Budget: An annual financial statement of the estimated receipts (revenue) and expenditure of the government for a coming fiscal year, presented and approved by the legislature.