class 12 commerce economics notes

class 12 commerce economics notes:- Economics is one of the social sciences, which has great influence on every human being. As economic life and the economy go through changes, the need to ground education becomes essential. While doing so, it is imperative to provide them opportunities to acquire analytical skills to observe and understand the economic realities. It is at this stage, the learners are exposed to the rigour of the discipline of economics in a systematic way.

class 12 commerce economics notes

class 12 commerce economics notes

Economics : Introductory Macroeconomics

class 12 commerce economics notes:-Introduction

What is the difference between microeconomics and macroeconomics?

What are the important features of a capitalist economy?

Capitalist economy is an economic system where the means of production are privately owned. These means of production are driven by the motive of profit making. This economic structure is also known as free market economy or laissez faire.

Following are the features of a capitalist economy:

1. Role of the government

The government provides the basic framework for the smooth functioning of an economy. It provides the basic framework and is responsible for maintenance of law and order, justice, growth and stability, defence, etc.

2. Profit motive

The economic agents are driven by the prime motive of profit maximization.

3. Central problems

The central problems of an economy are solved by the market forces of demand and supply, i.e., the law of demand and supply operates here. The producers will supply only those goods and services that are demanded by the economy.

4. Role of private sector

The role of private individuals is more dominant. The main role of undertaking production and organising factors of production are played by the private individuals and capitalists.

5.Laissez-faire

This economy is also called `laissez faire‘. It has minimum interference or restriction from the government.

class 12 commerce economics notes:-National Income Accounting

What are the four factors of production and what are the remunerations to each of these called?

The four factors of production are:

1. Land – It denotes the natural resources like air, water, soil, etc. The payment that is paid by the firms to acquire these services is called rent.

2.Labour – It refers to the physical and mental effort required to do a work. For example, engineer, manager, worker, etc. The payment made to the labour in exchange of his/her services is called as wage.

3. Capital – It refers to the monetary investments and physical and tangible investments like machinery, buildings, technology, tools, etc, which assists in production process. The payment received in exchange of these services is called interest.

4. Entrepreneur – It refers to the individual who undertakes the risk to organise the production process. Entrepreneurs are the risk takers and often are the innovators of new techniques. They receive profit in exchange of their entrepreneurship.

The remunerations paid to the factors of productions are called factor payments or factor incomes. These are the aggregation of rent, wage, interest and profit.

Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.

In a two sector economy, consisting of households and firms, the only way in which the households can dispose their income is on the goods and services produced by the firms. The factors of production use their remuneration to purchase goods and services. Thus, the income will come back to the producers in the form of sales’ revenue. So, there is no difference between the amount that firms distribute in the form of factor payments and consumption expenditure incurred by the households. The same process continues year after year. However, if there has been any leakage in the form of savings, imports or taxes, then there arises a difference between the aggregate consumption expenditure and aggregate factor payments. In the case of some leakage, the households will spend less than their factor incomes. Consequently, the firms will receive lesser amount in the form of revenue, which will reduce the production level and employment level. This process will continue in every successive round and production and employment levels will continue to drop. Thus, the equality between the aggregate consumption expenditure and the aggregate factor payments is very necessary for the smooth functioning of the economy.

class 12 commerce economics notes:-Money and Banking

What is a barter system? What are its drawbacks?

Barter system is a system that was used in ancient times to exchange goods. In other words, this system was used to exchange one commodity for another before the monetary system came into existence. For example, if a person having rice wants tea, then he can exchange rice with a person who has tea and needs rice. The economy having the barter system was called ‘C-C economy’, i.e. commodity is exchanged for commodity.

The various drawbacks of the barter system are as follows:

1. Problem of double coincidence of wants

Double coincidence of wants implies that needs of two individuals should complement each other for the exchange to take place. For example, in the above case, the second person must need rice in exchange of tea.

2. Lack of common unit of value

Under barter system there was no common unit for measuring the value of one good in terms of the other good for the purpose of exchange. For example, a horse cannot be measured in terms of rice in the case of exchange between rice and horse.

3. Difficulty in wealth storage

It was very difficult to store commodities for future exchange purposes. The perishable goods like grains, milk and meat could not be stored to exchange goods in future. Therefore, wealth storage was a major difficulty of batter system.

4. Lack of standard of deferred payments

The future payments could not be met in a C-C economy (barter system) as wealth could not be stored. It was very difficult to pay back loans.

What are the main functions of money? How does money overcome the shortcomings of a barter system?

The main functions of money are as follows:

1. Medium of exchange

Money acts as a medium of exchange as it facilitates exchange through a common medium, i.e. currency. In other words, money helps in the buying and selling of goods. For example, a person can sell his goods to another for money and that person can use money to purchase goods of his choice. Money solves the problem of double coincidence of wants.

2. Unit of value

The values of goods can be measured in terms of money. It is a common medium through which we can calculate the value of each and every good. The value of a good in terms of money is called the price. In barter system the lack of a common denominator for measuring values of goods was a major drawback.

3. Store of value

This function explains the importance of money as value storage. This implies that wealth in the form of money can be stored easily as a medium of exchange for future use. For example, money can be stored in banks for meeting emergency and future needs.

4. Standard of deferred payments

Payments can easily be made through the medium of money. In other words, it is very difficult to pay back a loan in terms of goods and services. However, with the advent of money the payments of loans or interests can easily be made.

Money overcomes the shortcomings of barter system in the following manner:

1. Money solves the problem of double coincidence of wants. For example, if a person needs wheat in exchange of tea, then he/she must search for a person who is ready to trade wheat for tea. Money made the need for such searches redundant.

2. In barter system, it was very difficult to measure the value of one good in terms of another. For example, it is difficult to calculate the value of a cow in terms of wheat.

3. It was very difficult to store goods, especially perishable goods (fruits, meat, etc.) for the purpose of value storage. Money serves this purpose.

4. The contractual or future payments are much difficult to be made in barter system. For example, a worker working on contract basis could not be paid in terms of rice or chairs.

class 12 commerce economics notes:-Income Determination

What is marginal propensity to consume? How is it related to marginal propensity to save?

Marginal propensity to consume refers to the ratio of change in the consumer’s expenditure due to the change in disposable income (income after deducting taxes). In other words, MPC measures how consumption will vary with the change in income.

So,

MPC

Where,

ΔC = Change in consumption

ΔY = Change in income

For example, if income increases from Rs 200 crores to Rs 250 crores and consumption increases from Rs 20 crores to Rs 40 crores, it implies that 0.4 is the MPC or 40% increase in the income is being consumed.

This can further be explained with the help of a table and a diagram.

If income and consumption are:

Then MPC

class 12 commerce economics notes

Also, MPC can be explained with the given diagram.

In the diagram, x-axis represents national income and y-axis represents consumption level.

So, MPC

The relationship between MPC and MPS can be explained as –

Y = C + S (Assuming that the income earned is either consumed or saved)

Or, ΔY = ΔC + ΔS

Dividing both sides by ΔY

class 12 commerce economics notes

Or, 1 = MPC + MPS

Or, MPC = 1 – MPS

Or, MPS = 1 – MPC

So, the sum of MPC and MPS is always equal to unity.

What is the difference between ex ante investment and ex post investment?

class 12 commerce economics notes:-The Government: Budget and The Economy

Explain why public goods must be provided by the government.

A good that is non-rival and non-excludable is referred to as public good. Non-rival means that consumption by one individual does not affect the consumption of another individual. Whereas, non-excludable implies that no individual can be excluded from using the good. For example, parks, roads, national defence, etc.

These goods must be provided by the government because of the following reasons:

1. The benefits of public goods can be easily enjoyed by anyone without affecting the consumption of other individuals. There arises market failure.

2. No individual can be excluded from using public goods as it is available to all. The link between the producer and the consumer becomes non-functional, necessitating government interference through public provisions.

Distinguish between revenue expenditure and capital expenditure.

class 12 commerce economics notes:-Open Economy Macroeconomics

Differentiate between balance of trade and current account balance.

What are official reserve transactions? Explain their importance in the balance of payments.

The transactions carried by monetary authority of a country, which cause changes in official reserves, are termed as official reserve transactions (ORT). These transactions are carried through purchase or sale of currency in the exchange market for foreign currencies or other assets. The reserves are drawn by selling foreign currencies in exchange market during deficits and foreign currencies are purchased during surplus. When the official reserves increases or decreases, it is called overall balance of payments surplus or deficit respectively.

Importance of ORT in balance of payments:

1. Purchase of a country’s own currency is a credit item in the balance of payments; whereas, sale of the currency is a debit item.

2. It helps to adjust the deficit and surplus in balance of payments.

class 12 commerce economics notes

Recommended Read:-class 12 commerce economics notes

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class 12 commerce economics notes