Commerce Question Bank – 28 Short Questions With Answers on “Business Economics”

1. Who is a sole trader?

A sole trader is a person who sets up the business with his own resources, manages the business himself by employing persons for his help and alone bears all the gains and risks of the business.

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2. Describe the legal position of a sole-trade business.

Following points will explain the legal position of a sole-trade business:

1. There is no specific law under which this business requires registration etc. So this business can be started and dissolved at the discretion of the owner without reference to any statutory provisions.

2. The sole-trade business will be subject to the general laws of the land

3. The sole-trader and his business are one and the same thing. The business exists only with the sole-trader. If he disappears from the scene due to death or some other reason then the business will also be dissolved.

4. The liability of the sole-trader is unlimited. If a business is dissolved then no distinctions are made between business and private assets and business and private loans of the sole trader.

3. What do you mean by production?

By production, we mean the creation of utility. Any activity which makes matter or any other useful object is called production. Production can be either of goods or services or both. The necessary condition is that such an activity, in order to be called production, should create utility. If a service that has been rendered does not command any reward in return, it cannot be considered production.

4. Which types of activities are excluded from production?

The following two types of activities are excluded from production:

(a) Domestic work, for example, the cooking of food by a housewife for the family, or any other work done due to family affection, but not done with the object of earning a reward, is not included in production.

(b) Voluntary service performed out of a sense of patriotism, or owing to a sense of duty born out of t respect and love for the community, is also not considered a part of production.

5. What are consumer goods?

Consumer goods are those goods which are available for consumption, and satisfy human want for these goods. For instance, a loaf of bread produced in a bakery is a consumer good, since it can be directly used to satisfy our want. Similarly a pen, pencil, or book, etc. is a consumer good as it also satisfies our wants.

6. What are capital goods?

Capital goods by themselves do not satisfy human wants. They help in further production of those commodities which may directly satisfy human wants. Brick cannot be used by the consumers, but it is the basic input required in the construction industry.

Cement, iron, or steel in itself is not a useful commodity for the consumers: but it forms base of practically, all other industries. These commodities can be classified as capital goods.

7. What are single use goods and durable goods?

Single use goods are those goods which are destroyed during their use, e.g. coal, iron-ore, raw materials, etc. used by the manufacturers. Durable goods, on the other hand, can be used a number of times. A machine installed in a factory can be used a number of times. However the longevity of a durable good goes on diminishing at every subsequent stage of production because of the wear and tear involved.

8. Distinguish between consumer goods and capital goods.

The use to which a commodity is put is the basis of distinction between consumer goods and capital I goods If a commodity helps in further production, i.e., generating some income, it is classified as a’ capital good. If a commodity does not help in further production, but in itself is a means to the satisfaction of some human wants, it is classified as a consumer good

9. What is meant by investment?

‘Investment’ means ‘adding to wealth’ or ‘capital formation.’ It arises to the extent that commodities produced in a specific period are not consumed in that period. These remain available for future consumption, or for use in the production of other goods and services for future consumption.

The accumulation of stock through an excess of production of goods over consumption of them is a part of, the process described as ‘investment1. Investment raises a country’s capacity to produce goods in the future.

10. Briefly describe inventory investment.

Inventory investment is described as that part of output that is absorbed by business firms in an economy as an increase in their stocks of finished goods, goods in process, and raw materials. The essence of inventory investment in an economy is the excess of production over consumption.

11. What is fixed investment?

Fixed investment consists of business purchase of durable capital assets, like machinery, factory, buildings, stores, etc. Those capital goods are not ‘consumed’ immediately, rather they are means production for the future, since their utility stretches over a number of years. Any increase in the fix capital stock of an economy adds to its productive capacity.

12. What is net investment?

Since an economy adds to fixed capital stock, it has to understand that capital goods, though not consumed soon, are consumed eventually. If nothing is done to keep them in repair, they wear out; even if they are properly maintained, there comes a time when it is better to replace them with new item than to repair them any more. The economy, thus has to make a provision for the depreciation and replacement of the capital stock, so that the level of net investment that adds to productive potential of the economy would be considerably less than the gross investment of the economy. In brief net investment can be defined as follows:

Net Investment = Gross Investment – Depreciation Cost (Consumption of fixed capital)

13. What is the essential condition for the growth of an economy?

The essential condition for the growth of an economy is that the level of net investment should increase so that the economy is in a position to produce at a higher production possibility frontier.

14. What are the reasons for gathering cost information?

Some of the reasons for gathering cost information are as follows:

1. Decide the number, units, which should be produced at a given market price of output.

2. Decide the employment of different factors of production.

3. Check the inefficiency in production by comparing the cost data of the firm with other competitors.

4. Forecasting future cost level which will help in corporate planning.

15. What is meant by supply?

Supply is that part of stock which the producer is willing to sell at a given price at a particular time period. A supply function is the relationship between different quantities sold due to change in any of its determinants.

16. On what factors does the supply of commodity depend?

Some of the important factors which affect the quantity supplied of a commodity are as follows:

1. Price:

The higher the price of the commodity more of the commodity will be offered for sale on account of rise in its profitability and vice-versa.

2. Cost of Production:

If the prices of a factor of production rise, the total cost of production goes up. Each unit will be supplied at higher price.

3. State of Technology:

Improvements in the methods of production reduce the cost of production. As a result, firms supply more than before at the given price.

4. Length of Time:

In the short period, it is not possible for the producer to increase the supply. In long period, the supply of a commodity can be increased by utilizing the capacity fully.

17. State the law of supply. What is supply curve?

The law of supply states that as the price of commodity increases, the quantity of the commodity supplied per unit of time increases and vice-versa, assuming all other factors influencing supply remains unchanged. The relationship between price and supply is known by supply curve.

18. Describe the relation between cost and supply curve.

Relation between cost and supply curve can be described as follows:

1 In case average cost increases as output increases, supply curve will be upward sloped.

2. In case average cost decreases as output increases, supply curve will be downward sloped.

3 In case average cost remains constant as output increases, supply curve will be a horizontal line

19. What is increase and decrease in supply?

When the quantity of a commodity rises due to factors other than price of the commodity in question, it is termed as increase in supply. Increase in supply implies a rightward shift of the supply curve showing that producers are willing to supply more at each price. On the other hand, when the quantity of commodity supplied falls at the same price, it is referred to as a decrease in supply. This leads to leftward shift of the supply curve indicating that producers are willing to supply less at each price.

20. What is meant by extension and contraction of supply? Define elasticity of supply

When the quantity supplied falls due to the fall in the price of a commodity it is termed as contraction of supply. Similarly, when the quantity supplied rises due to rise in the price of the commodity, it called extension of supply.

Elasticity of supply is defined as the ratio of percentage change in quantity supplied and the percentage change in the price of the commodity. It measures the degree to which the quantity supplied responds to price changes.

21. What are iso-quants?

Iso-quant is the locus of all the technically efficient methods by using various combinations of factors of production for producing a given level of output

The production iso-quant may assume various shapes depending on the degree of substitutability of factors.

1. Linear iso-quant assumes perfect substitutability of factors of production.

2. Input-output iso-quant assumes zero substitutability of the factors of production

3. Kinked iso-quant assumes limited substitutability of K and L.

4. Convex iso-quant assumes continuous substitutability of K and L only over a certain range, beyond which factors cannot substitute each other

22. What are the laws of production?

The laws of production describe the technically possible ways of increasing the level of production. In the short run, output may be increased by using more of the variable factors while capital is kept constant.

23. What is determined by laws of returns of scale in long run analysis of production?

Laws of returns of scale in long run analysis of production determine the percentage increase in output when all the inputs are increased at the same rate by a certain percentage.

1. Constant Returns to Scale:

Percentage increase in output is equal to percentage increase in all the inputs.

2. Increasing Returns to Scale:

Percentage increase in output is more than the percentage increase in all the inputs.

3. Decreasing Returns to Scale:

Percentage increase in output is less than the percentage increase in all the inputs.

24. What is production function?

Production function describes the whole arrangement of iso-quants, each showing a different level of output. It describes how output varies as the factor inputs change. Mathematically, it can be shown as:

Q = f (K, L, S, R, a, ?)

where,

Q = level of output

L = Labour input

R = Raw materials

S = Land input

K = Capital input

? = Returns to scale

? = Efficiency parameter

Efficiency Parameter (?) refers to the organizational efficiency with which a firm operates. Two firms may have the same factor inputs but different levels of output only because they have their efficiency parameters differing.

Returns to Scale (?) are the long-run analysis of the laws of production where all the factors of production are assumed to be variable. Graphically, the returns to scale are shown by the distance between successive iso-quants.

25. (a) Give two assumptions of utility analysis

(b) What do you mean by indifference curve analysis?

(a) (i) The utility analysis is based on the cardinal concept which assumes that utility is measur­able and additive like weights and lengths of goods, (ii) Utility is measurable in terms of money.

(b) The indifference curve analysis measures utility. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say X and Y.

26. Explain the terms: (a) Cross elasticity of demand, (b) Secular period.

(a) The cross elasticity of demand is the relation between percentage change in the quantity de manded of a good to a percentage change in the price of a related good.

(b) The secular period is a period of more than ten years in which changes in demand fully adjust themselves to supply. Pricing is not analysed in this period.

27. Explain the terms: (a) Money costs, (b) Revenue.

(a) Money costs are the total money expenses incurred by a firm in producing a commodity. They include wages and salaries of labour, costs of raw materials; expenditures on machines an equipments.

(b) ‘Revenue’ refers to the receipts obtained by a firm from the sale of certain quantities of a commodity at various prices. The revenue concept relates to total revenue, average revenue and marginal revenue.

28. (a) What do you mean by price discrimination?

(b) What are the assumptions of monopoly price determination?

(a) Price discrimination means charging different prices from different customers or for different limits of the same product. It is based on income of the customer, nature of the product, age status, time of service, etc.

(b) Assumptions of monopoly price determination are:

(i) There is one seller or producer of a homogeneous product.

(ii) There are no close substitutes for the product.

(iii) There is pure competition in the factor market so that the price of each input he buy is given to him.

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