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ICSE Class 10 Economic Applications Question Paper 2012 Solved

Section – A (40 Marks)
(Attempt All questions from this Section)

Question 1.
Explain in brief the following terms:
(a) Ceteris paribus assumption of the law of demand [2]
(b) Fiscal Policy [2]
(c) Sunk Capital [2]
(d) Product Differentiation [2]
(e) Statutory Liquidity Ratio [2]
Answers:
(a) Ceteris paribus assumption of Law of Demand: Law of demand depends on the basic assumption of other things being equal (ceteris paribus). By other things we mean factors other than price which affect the demand for a commodity. For example, prices of related goods, tastes and preferences of consumer, income of the consumer, population, etc. For the law to operate correctly, there should be no change in any of these determinants.

(b) Fiscal Policy: Fiscal policy is the policy of a government with regard to its revenue and expenditure. Fiscal policy means the use of taxation and public expenditure by the government for stabilisation or growth. Government uses various tools or investments such as taxation policy, public expenditure policy, public debt policy and deficit financing to achieve the objectives of fiscal policy. The objectives of fiscal policy for developed economies are different from its objectives for underdeveloped economies. The basic objectives of fiscal policy in developed countries are:

  1. Economic Stability
  2. Full employment

In case of underdeveloped or developing economies, its basic objectives are:

  1. Economic growth
  2. Price stability
  3. Reduction in inequalities
  4. Attainment of external equilibrium.

(c) Sunk Capital: Capital is said to be sunk when it is put to some special use and it cannot be shifted to any other use. It always remains at the place where it is fixed. Factory, machine or roads can be described as sunk capital.

(d) Product Differentiation: It is the most important feature of a monopolistically competitive market. In monopolistic competition, products sold by different firms are close substitutes but differentiated. Each producer tries to differentiate his product with a view to attracting the buyers. Product differentiation may be real or imaginary.

  1. Real or physical differentiation is based on difference in chemical components of the products, difference in quality, size, weight, design, colour, etc. For example, the calorie components of different cold drinks may differ or different brands of shirts may differ in terms of cotton and polyester mix.
  2. Sometimes, differentiation is only imaginary or artificial such as difference in packaging, brand name, trade mark, advertising, salesmanship, etc. Buyers develop some preference for the products of particular sellers depending on their taste, income, nature, etc.

(e) Statutory Liquidity Ratio (SLR) : Every bank is required maintain a fixed percentage of their total demand and time liabilities in the form of liquid assets which may be:

  1. Excess reserves
  2. Government and other approved securities
  3. Current account balances with other banks.

By changing SLR, the credit supply is affected. Increased SLR would reduce the credit supply and vice-versa.

ICSE 2012 Economic Applications Question Paper Solved for Class 10

Question 2.
(a) Distinguish between Fixed and Circulating Capital. [2]
(b) Explain one exception to the law of demand. [2]
(c) Mention the impact of advanced technology on the supply of a commodity. [2]
(d) What is meant by Running inflation? State its impact on fixed income groups. [2]
(e) Define a Degressive tax. [2]
Answers:
(a) Difference between Fixed and Circulating Capital: The fixed capital is used for the purchase of fixed assets, such as land, building, machinery, etc. On the other hand, the capital which can be used once or which becomes useless for the second time is called circulating capital such as materials, coal, kerosene oil, petrol, etc.

(b) Exceptions to the Law of Demand : According to the law, consumers purchase normally less of a commodity at a higher price and more of it at a lower price but there are situations when this may not hold good. Sometimes more of a commodity is purchased with rise in prices and less with fall in prices. Such a situation is called an exception. One of the exceptions to the Law of Demand is as follows:

  • Status symbol goods: This type of goods are purchased not because of their intrinsic value but because of status or prestige value. The same jewellery when sold at low price sells poorly but offered at five times the price, sells quite well. Similarly, demand for colour T.V. set, video tape recorders has been rising because of their status symbols in spite of the fact that their prices have also been rising continuously.

(c) Impact of Technology on Supply of a Commodity : A change in technique of production which lessens cost of production, increases supply of the commodity and shifts supply curve rightward. As against it, supply of those goods which are being produced with old and inferior technology causing increase in cost of production will fall and supply curve will shift leftward. That is why efforts are constantly made by the producing units to evolve an efficient technology which reduces marginal cost of production. Under such conditions of falling marginal cost, supply curve shifts rightwards (i.e., below the old supply curve). Hence it follows that a technological progress shifts the supply curve to the right.

(d) Running Inflation: When the price level rises at a faster rate and is generally around 10 per cent per annum, it is called running inflation. It normally shows two digit inflation. Running inflation is a warning signal indicating the need for controlling it.

Impact on Fixed Income Groups: Fixed income earners such as pensioners lose during running inflation. First, in many cases, pension is fixed so that the money income of the pensioners remains same during inflation. Even when pensions are revised periodically, increase in pension does not keep pace with the rising prices. Second, pensioners keep their savings in the form of bank and postal deposits which give them a fixed income in the form of interest.

ICSE 2012 Economic Applications Question Paper Solved for Class 10

(e) Degressive Tax: A tax is called degressive when the rate of progression in taxation does not increase in the same proportion as the increase in income. In this case, the rate of tax increases upto a certain limit, after that a uniform rate is charged. For instance, in the personal income tax structure in India, as amended in 2011, income upto ₹ 1.8 lakh a year is exempted from income tax. The rate of income tax is 10 per cent for the income between ₹ 1.8 lakh to ₹ 5 lakh a year, which increases to 20 per cent for the income between ₹ 5 lakh a year to ₹ 8 lakh a year and all income above ₹ 8 lakh a year is taxed at a flat rate of 30 per cent. Thus, degressive tax is a combination of progressive and proportional taxation. It is mildly progressive.

Question 3.
(a) Capital is the result of past labour. Briefly explain. [2]
(b) Define Monopsony. [2]
(c) Producers in a Monopoly market are price makers. Briefly explain. [2]
(d) What is bank rate? How is it altered to correct a depression in an economy? [2]
Answers:
(a) Capital is the Result of Past Labour : All man-made goods which are used for further production of wealth are included in capital. Thus it is man-made material source of production. Alternatively all man-made aids to production which are not consumed for then own sake are termed as capital. It is produced means of production. Examples are: machines, tools, buildings, roads, bridges, raw material, trucks, factories, etc. Logically and chronologically, capital is derived from land and labour and has, therefore, been named as stored-up labour or the result of past labour.

(b) Monopsony: It is a market structure in which there is a single buyer for a good or service. It may arise under the following situations:

  1. When consumers of a certain commodity are organised.
  2. When a single large firm is the sole buyer of some commodity.
  3. When a certain individual has liking or taste for some commodity which no one else requires.

Features:

  1. A single buyer of a good, service or factor input.
  2. Large number of sellers of a good, service or factor input.
  3. A monopsonist is a price maker.
    Monopsony is the counter-part of monopoly in the buyer’s market.

(c) Producers in a Monopoly are Price Makers: Under monopoly, the seller (or producer) is price maker and not ‘price taker because being the only seller of his product in the market, he fixes/ influences the price in two alternative ways:

  1. either he fixes the price himself and allows the output to be determined by the demand of the customers; or,
  2. he fixes the quantity to be sold and allows the price to be determined by the customers in the market. Either way a monopolist has substantial control over price directly or indirectly. It is in this sense that he is said to be a price maker.

(d) Bank Rate (or Discount Rate): Bank rate refers to that bank rate at which a central bank gives credit to commercial banks or to discount’ bills of specified types. In other words, rise in bank rate increases rate of interest and fall in bank rate lowers rate of interest. During the course of inflation, monetary authority raises the bank rate to curb inflation. Higher bank rate will check the expansion of credit of commercial banks. On the contrary, during depression, bank rate is lowered, business community will prefer to have more and more loans to pull the economy out of depression. Therefore, bank rate (or discount rate) can be used in both types of situation i.e. inflation and depression.

ICSE 2012 Economic Applications Question Paper Solved for Class 10

(e) According to given:
Original price (P) = ₹ 100
Change in price (ΔP) = ₹ (15 – 10) = ₹ 5
Original quantity supplied (Q) = 200 units
Change in quantity supplied (AQ) = 225 – 200
= 25 units
Elasticity of supply (es) = \(\frac{\Delta Q}{Q} \times \frac{P}{\Delta P}\)
= \(\frac{25}{200} \times \frac{10}{5}\) = 0.25

Question 4.
Citing reasons state the advantage of
(a) A progressive tax over proportional tax. [2]
(b) Monopolistic competition over monopoly. [2]
(c) Private sector over public sector. [2]
(d) A direct tax over an indirect tax. [2]
(e) A credit card over currency notes. [2]
Answers:
(a) Advantage of a Progressive Tax over Proportional Tax:
In case of a proportional tax, the rate of taxation remains constant as the income of the tax-payer increases. In this tax system, all incomes are taxed at a single uniform rate irrespective of whether tax-payer’s income is high or low. However, in case of a progressive tax, the rate of tax goes on increasing with every increase in income. In other words, lower income is taxed at a lower rate, whereas higher income is taxed at a higher rate. For example, income upto ₹ 1 lakh a year may be taxed at a rate of 10 per cent, and income between ₹ 1 lakh and ₹ 2 lakh a year may be taxed at a rate of 20 per cent and so on. It is for this reason that a progressive tax is considered to better than a proportional tax.

(b) Advantage of Monopolistic Competition over Monopoly: Monopolistic competition is a market structure in which there are a large number of sellers selling closely related but differentiated products.
Products produced by such firms are close substitutes to each other. For example, toothpaste industry in which various firms like Colgate, Close-up, Pepsodent, etc. sell closely related products but differentiated on account of colour, size, taste, etc. Monopolistic competition has blending elements of monopoly as well as competition. This is because each producer has a monopoly control over his own product but at the same time has to face Competition from rival firms producing different varieties of the same product. It is for this reason that monopolistic competition is considered to be better as compared to monopoly.

(c) Advantage of Private Sector over Public Sector: Private sector is considered to be better than public sector because it leads to improvement in managerial efficiency, improvement in production, and greater investment & employment opportunities. Also it does not suffer from some of the serious drawbacks of public sector, such as:

  1. low efficiency
  2. low profitability
  3. underutilisation of installed capacity
  4. lack of functional autonomy
  5. lack of incentive and dynamism.

(d) Advantage of a Direct Tax over an Indirect Tax : A direct tax is better than an indirect tax because of various reasons such as:

  1. it is economical in the sense that the cost of collection is low as compared to an indirect tax.
  2. its burden can be put more on the rich than on the poor by making its rate-structure progressive. This is not applicable in case of an indirect tax.

(e) Advantage of a Credit Card over Currency Notes: In modem times, credit cards are called as money. Credit cards are a form of identification which allows the individual to purchase commodities on credit. Thus, with a credit card, one can purchase goods without cash or cheques. This means credit cards allow one to purchase goods without using money but ultimately, all transactions are settled with the use of money. Its advantage over liquid money (currency notes) is that it is safer to cany from one place to another.

Section – B (60 Marks)
(Attempt any FOUR questions from this Section)

Question 5.
(a) Explain with the help of an example the Horizontal and the Vertical division of labour. Mention any three merits of division of labour. [7]
(b) Define Composite demand. Clearly explain any three determinants of demand in a market. [8]
Answers:
(a) Horizontal and Vertical division of labour : They are forms of process-based division of labour. In Horizontal division of labour, the production process is organised that the different parts of the process can run simultaneously. For example, in case of automobiles, different parts are manufactured simultaneously and then assembled together at the end.

In Vertical division of labour, the production process is organised in such a way that there are successive stages in the production of a commodity. For example, in cotton textile industries, raw cotton is first transformed into yam by spinning. Only then can the yam be woven into cloth. Thus, weaving depends upon spinning and dying depends upon weaving.

Merits of Division of Labour:

  1. Right man at the right job: Every worker is assigned a job for which he is best suited. When the job matches worker’s capability, aptitude and taste, he gets job satisfaction and a motivation to give his best.
  2. Increase in labour efficiency: Division of labour permits a worker to repeat the same task again and again. This gives him specialisation, proficiency and perfection in that task. This makes him expert in the job and improves his efficiency in terms of quantity and quality.
  3. Saving of time: As the worker is required to carry out only one type of job, he is not required to move frequently from one job to another. Also he need not change the tool or machine now and then. This saves time and increases output.
  4. Economics of large scale production: Division of labour facilitates economics of large scale production, both internal and external. This results in higher profits for the producers as well as reasonable prices for the consumers.
  5. Facilitates occupational mobility: The worker becomes professional and specialized in a particular job process by performing it again and again. This facilitates his occupational mobility, both horizontal and vertical.
  6. Increased employment opportunities: Due to the division of labour, the number and variety of jobs have increased. Complex process is simplified into several small steps so that even semi-skilled and unskilled workers get a chance for some kind of job.

ICSE 2012 Economic Applications Question Paper Solved for Class 10

(b) Composite Demand: Demand for a commodity which can be put to several uses is called composite demand, for example, demand for coal, steal, electricity, demand for milk that can be used for cheese, butter, tea, sweets, etc.

Determinants of Demand in a Market: All the factors that influence the individual demand are equally relevant in determining the market demand. Some of them are summarised below:

  1. Price of the commodity.
  2. Price of related commodities (substitutes and complimentary goods).
  3. Consumer’s income.
  4. Consumer credit facility.
  5. Consumer’s tastes and preferences.
  6. Consumer’s expectations.

Some other determinants of market demand are as follows:

  1. Size and composition of population: An increase in the population size increases the demand for a commodity and vice versa. Population composition in terms of age, sex etc. also affects, the nature of demand for different commodities. For example, with an increase in the population of children, demand for toys, toffees, etc. will increase. Similarly with an increase in female population demand for goods meant for female will go up.
  2. Income Distribution: Market Demand is also influenced by change in the distribution of income in the society. If income is equally distributed, there will be more demand. If income is not equally distributed, there will be less demand.
  3. Government Policy : Due to tax on commodities such as sales tax, excise duty, etc. their prices rise and there is fall in demand. Due to subsidies the prices of commodities fall and their demand increases. Also if government incurs more expenditure on construction of roads, bridges, setting up of industries etc. then demand for cement, iron and other goods used for these purposes will increase.
  4. Prevailing business conditions : During boom periods market demand increases, while the level of demand goes down during the period of depression.
  5. Climatic factors : For example during summers demand for ice, air conditioner etc. increases. During rainy season rain coats, umbrellas, etc. are more in demand.

Question 6.
(a) What is meant by privatisation ? Explain in brief three arguments against privatisation of public sector units in India. [7]
(b) Explain four characteristics of a perfectly competitive market. [8]
Answers:
(a) Privatisation: Privatisation is the process which leads to transfer of ownership of public sector enterprises from the government to the private sector and the policy of granting autonomy to the public sector enterprises. Thus any process that reduces the participation of the state or public sector and greater role for private sector in economic activities of a country is called privatisation. Arguments against Privatisation of Public Sector in India : A number of arguments have been advanced against the policy of privatisation of public sector units in India. Some of them are as follows :

(i) Social welfare neglected: Public sector enterprises are set up to achieve social welfare, while private sector enterprises operate mainly with the aim of profit- maximisation. Private operaters would not like to provide goods at the subsidised prices to the poor consumers to promote social welfare.

(ii) Growth of Private, monopoly : Another genuine apprehension is that the sale of a public sector undertaking to a private company can only result in the substitution of a public monopoly by a private monopoly. This may lead to monopolistic exploitation by efficient private owners replacing the inefficient public ownership.

(iii) Possibility of corrupt practices: Implementation of the privatisation policy may open the door to corruption. There is the possibility of under-valuation of assets of public sector units to favour the private sector. There may be complicity between politicians, bureaucrats and particular business groups. In India, the sale of BALCO, a cash-rich public sector company, to Sterlite group in 2001, was in news for being heavily under valued.

(iv) Possibility of unemployment: One of the fears of labour is that privatisation leads to unemployment. The experience of privatisation in many countries is testimony to this fact.

(v) Cumbersome process: Privatisation needs strategic planning efforts as well as appropriate administrative apparatus to carry it out. However, in developing economy like India, this is not feasible due to cumbersome bureaucratic system.

(b) Characteristics of a Perfectly Competitive Market: Perfect competition is a market structure where there are a large number of firms producing a homogeneous product, so that no individual firm can influence the price of the commodity. Characteristics of a perfectly competitive market are as follows:

(i) Large number of buyers and sellers: Under perfect competition, number of buyers is very large and thus no single buyer can influence the market price of the good. Similarly, there are large number of sellers so that no single seller or firm can influence the market price. Therefore, the price is determined by the total supply of the industry and the total demand in the market. All buyers and sellers are ‘price-takers’.

(ii) Homogeneous products: All the firms sell goods which are completely identical with regard’ to quality, shape, colour, size, design, packing, servicing and all other attributes associated with the product. Thus buyers do not have preference for a particular seller. Thus, no firm has any basis for charging higher price for its product. This ensures a uniform price throughout the market.

(iii) Free entry and exit of firms: New firms can enter the industry without any time and cost barriers. Similarly, quitting the industry is also easy and quick. Thus, if existing firms in the industry make super normal profits, new firms can enter the industry so that extra profits are removed. If existing industries make losses they can move out of the industry so that losses are removed. Thus, all firms in perfect competition will make only normal profits in the long run.

(iv) Perfect knowledge: All the buyers, sellers and owners of factor services have perfect knowledge about the market conditions and changes in market conditions. Thus, no buyer or seller can take advantage of any exclusive knowledge that only he possesses and can make a profit. Each seller knows the prevailing market price and will not sell below it. Each buyer – also knows the prevailing price and quantity of the product. This ensures a single uniform price in the market.

(v) Perfect, mobility: There is no restriction on the movement of both-goods and factors of production. All factors of production can move from one firm or industry to another without any time lag or extra cost. Similarly, there is perfect mobility of goods from areas of surplus to areas of deficit. This condition ensures free entry and exit of firms, production of homogenous goods and a single uniform price in the market.

(vi) Absence of transportation cost: No buyer or seller incurs any transportation cost for buying or selling the product. This ensures a uniform price throughout the market. The location of different sellers in the market does not affect the price. No seller is close or far off from group of buyers.

(vii) Absence of selling cost: Selling costs are incurred by the firms to increase their sales such as expenditure on advertisement, publicity, etc. Under perfect competition, goods are completely identical and sold at uniform price. Hence, firms need not incur any selling cost.

(viii) Independent Decision : There is no agreement between the sellers regarding production, quantity and price. All firms are free to take their own decision.

ICSE 2012 Economic Applications Question Paper Solved for Class 10

Question 7.
(a) Explain the terms Impact, Shifting and Incidence of a tax. Explain in brief two merits of direct tax. [7]
(b) Define price elasticity of supply. With the help of suitable diagrams explain the following degrees a of elasticity.
(i) Perfectly elastic supply
(ii) Perfectly inelastic supply [8]
Answers:
(a) Impact, Shifting and Incidence of a tax : Direct taxes can be distinguished from indirect taxes on the basis of shifting of the ultimate burden (called incidence) of taxation. In this context, it is important to differentiate between impact of a tax and incidence of a tax. The impact of a tax refers to the person who pays it to the government in the first instance. The incidence of a tax refers to the money burden of a tax on the person who ultimately pays it. The impact and the incidence of tax is on the same person. He cannot shift or transfer the burden of tax on some other person; he has to pay it himself.

For example, income tax is a direct tax as it has to be paid by the person on whom it is levied. On the other hand, an indirect tax is that tax which is initially imposed on and paid by one individual, but the burden of which is passed over to some other individual who ultimately bears it. Indirect taxes are imposed upon and collected from producers and sellers but producers and sellers can shift the burden of these taxes on to the consumers. For example, excise duty on motor cars is paid in the first instance by the manufacturer of the cars, but ultimately he transfers the burden of this duty to the buyer of the car in the form of higher price.

Merits of Direct Taxes: The following are the merits of direct taxes:

  1. Economical: Direct taxes are economical in the sense that cost of collecting these taxes is relatively low as they are usually collected at source and they are paid to the government directly by the tax-payers.
  2. Certainty: Direct taxes satisfy the cannon of certainty. The tax-payers know how much they have to pay and on what basis they have to pay. The government also knows fairly definitely the amount of tax revenue it will receive. Thus, the direct taxes satisfy the cannon of certainty.
  3. Equity: Direct taxes can be made to conform to the principle of ability to pay by choosing the appropriate rate-schedules. By making the rate-structure progressive, their burden can be put more on the rich than on the poor persons.
  4. Reducing Inequalities: Direct taxes are progressive in nature. Rich people are subjected to higher rate of taxation as compared to poor people. Hence, these taxes can be used for reducing inequalities of income and wealth in the economy.
  5. Elasticity: Another advantage of direct taxes is that these taxes are elastic as the government revenue can be increased by raising the tax rates in time of crisis. Moreover, the yield from direct taxes goes up with increase in income of the people.

(b) Price Elasticity of Supply : Price elasticity of supply indicates how sellers react to change in price. The greater the reaction, the greater will be the elasticity, lesser the reaction, the smaller will be the elasticity.
For example, if the price of wheat roes, the farmers may be tempted to sell more in the market, and keep less for themselves. On the other hand, if the price of cars falls, the car manufacturers may not probably be in a position to offer more cars for sale, because they may not be keeping stock of cars.
Price Elasticity of Supply
ICSE 2012 Economic Applications Question Paper Solved for Class 10 4

Diagrammatic Representation of Price Elasticity of Supply:

(i) Perfectly elastic supply (Es = ∞) : When supply of a commodity rises or falls to any extent without or with very little change in price, the supply of the commodity is said to be perfectly elastic or infinitely elastic supply. Here elasticity of supply = ∞
ICSE 2012 Economic Applications Question Paper Solved for Class 10 5

Price (₹ per kg)

Supply (kg)

20

 100
20

300

(ii) Perfectly inelastic supply (Es = 0) : When quantity supplied does not change at all irrespective of any change in price of the commodity, it is said to be perfectly inelastic supply. Here elasticity of supply = 0
ICSE 2012 Economic Applications Question Paper Solved for Class 10 6

Price (₹ per kg)

Supply (kg)

10

 50
20

50

Question 8.
(a) Define production. Explain threefactors which determine land productivity. [7]
(b) Explain an important characteristic of each of the following factors ofproduction:
(i) Land
(ii) Labour
(iii) Capital
(iv) Entrepreneur [8]
Answers:
(a) Production: Production is a process of creating various goods and services. It is a process of value adding.
Thus, ‘Production’ covers the whole field of creating the goods and the services in agriculture, industry, trade and many other sectors of the economy. The activities of men for increasing the supply of goods may also be included in ‘Production’.

Factors which Determine Land Productivity :
Productivity of land is defined as average output per unit of land i.e., output per acre, per hectare etc. It is calculated using following formula :
Productivity of land =
ICSE 2012 Economic Applications Question Paper Solved for Class 10 7

Productivity of land depends upon a large number of factors which are as follows:

  1. Natural Factors: Land productivity is largely determined by its natural qualities such as fertility, climate, chemical and biological properties of the soil, slope of land etc.
  2. Human Factors: Land is a passive factor of production. It cannot produce anything by itself, efforts of labour generate yield from land. Thus productivity of land also depends upon the knowledge and training of labour. A wise farmer can grow more produce on the same land than an untrained farmer.
  3. Availability of Capital: Land productivity can be increased with the help of machines, chemical manures, improved seeds, implements and scientific methods. Intensive cultivation gives a higher productivity on a small piece of land.
  4. Improvements on Land: Land development measures like provisions of well or tubewell for proper irrigation, hedging and fencing of fields, proper drainage, etc. have positive effects on the land productivity. In states like Punjab and Haryana, productivity is high mainly at because of adequate irrigation facilities which lack in case of states like Bihar and Orissa.
  5. Population Pressure on Land: It adversely affects the average availability of land. The law of inheritance of equal land among children leads to subdivision and fragmentation of land holdings. These small pieces of land are uneconomic holdings where productivity of land tends to be low. These small holdings cannot take advantage of the large scale production and modem techniques of production.
  6. Location of Land : For example, land located near water resources is more desirable and productive. Similarly, land located near the market is supposed to be more productive as money is saved in bringing the produce to the market.

(b) Characteristics of Factors of Production :

(i) Land

  • Free Gift of Nature : Land is a gift of nature given to man free of cost. Rather, it existed long before the evolution of man. However, to improve the usefulness or fertility of land or extraction of minerals involves cost. Moreover, from the view point of entire economy, land may have a zero cost of production. But from the view point of any particular user, land too has at cost or a price. For example, if a farmer needs a piece of land for agricultural purposes, he has to purchase or hire it on rent.
  • Fixed Supply: The supply of land available to the economy is relatively fixed, whereas supply of other factors of production can be increased.

(ii) Labour.

  • Labour is inseparable from the Labourer: Land and capital can be separated from their owners but labour cannot be separated from a labourer. Labour and labourer are inseparable from each other. Labourer always carries his labour power with him. Thus, the labourer will have to present himself at a place where work is going on. For example, it is not possible for a teacher to teach in the school, while staying away at home.

(iii) Capital

  • Mobility: It has the highest mobility amongst all the factors of production. It has both-place as well as occupational mobility, i.e., it is easily transferable from one place to another and also from one occupation to another. On the other hand, land is immobile, while labour has low mobility.
  • Elastic Supply : The supply of capital is elastic and can be adjusted easily and quickly according to demand. On the other hand, the supply of land is fixed and supply of labour cannot be increased or decreased easily and quickly.

(iv) Entrepreneur

  • Not a hired factor: One fundamental feature which distinguishes the entrepreneur from other factors of production is that while land, labour and capital are all hired factors, entrepreneur is not a hired factor. In fact, an entrepreneur hires other factors.
  • Residual income : An important difference between an entrepreneur and other factors of production is that unlike the ‘rewards of the other factors, the reward of an entrepreneur is in the nature of residual. Labour gets wages, land gets rent and capital gets interest but an entrepreneur gets profit, which is the residue left after paying to other factors. Moreover, while the rewards of the other factors of production are always positive, the reward of an entrepreneur can be negative, i.e., may suffer losses.

ICSE 2012 Economic Applications Question Paper Solved for Class 10

Question 9.
(a) Name the bank which has sole authority to issue currency in India. Mention three ways by which it differs from a commercial bank. [7]
(b) Define money. Explain how money performs thefollowing functions:
(i) As a measure of value.
(ii) As a standard of deferred payment.
(iii) As a store of value. [8]
Answers:
(a) The Reserve Bank of India (RBI) has the sole monopoly to issue currency notes in India from ₹ 2 and above. The central government (Ministry of Finance) issues the one-rupee note and all coins but the responsibility for putting them into circulation rests with the RBI.

Difference between RBI and a Commercial Bank

RBI (Central Bank) Commercial Bank
1. It is the apex bank in the money market of a country. 1. It is merely a unit in the banking structure of the country.
2. Its primary aim is general public welfare. 2. Its primary aim is to make profit.
3. It has the sole monopoly right to issue currency notes. 3. A commercial bank is statutorily denied function of issuing notes.
4. It cannot deal with the public. 4. It directly deals with the public and business firms.
5. It acts as a banker to the government. 5. It has no such responsibility towards the state.
6. It decides its monetary policy to realise economic stability and full employment in the country. 6. It plays a supplementary role and is quite often regulated by the Central Bank
7. It is custodian of Nation’s Gold and Foreign Exchange Reserve. 7. It does not perform such function.
8. The central bank does not accept any deposits or advance loans. 8. Commercial banks accept deposits and advance loans.

(b) Meaning of Money : Money is a concept which we all understand but which is difficult to define in exact terms. Most definitions of money take ‘functions of money as their starting point. ‘Money is that which money does. According to Prof. Walker, ‘Money is as money does.’ This means that the term money should be used to include anything which performs the functions of money, viz., medium of exchange, measure of value, unit of account etc. Since general acceptability is the fundamental characteristic of money, therefore, money may be defined as ‘anything which is generally accepted by the people in exchange of goods and services or in repayment of debts’.

Functions of Money:

(i) As Measure of Value : Money serves as unit of account or a measure of value. Money is the measuring rod, i.e., it is the unit in terms of which the values of other commodities and services are measured and expressed different goods produced in the country are measured in different units, e.g., cloth in metres, milk in litres, sugar in kilograms. Without a common unit of measure, exchange of goods and services becomes very difficult. Values of all goods and services can be expressed in a single common unit called money. Again without a measure of value, there can be no pricing process.

The measuring rod of money is also indispensable to all forms of economic planning. Consumers compare the values of alternative purchases in terms of money. Producers compare the relative costliness of the factors of production in terms of money and also plan their output on the basis of the money yield. For example: Value of sugar can be expressed in monetary unit by saying that price of sugar is ₹ 25 per kg.

(ii) As a Standard of Deferred Payments: It refers to those payments which are made in future. Debts are usually expressed in terms of the money account. Loans are taken and repaid in terms of money. The use of money as the standard of deferred or delayed payments immensely simplifies borrowing and lending operations and thereby facilitates the formation of capital markets and the work of financial intermediaries like Stock Exchange, Investment Trust and Banks. Money is the link which connects the values of today with those of the future.

(iii) As a Store of Value: Money can store value of goods in liquid form. By spending it we can get any commodity in future. Holding money is equivalent to keeping a reserve of liquid assets because it can be easily converted into other things. People, therefore, normally wish to keep a part of their wealth in the form of money. This desire is known as liquidity preference. Thus it would seem that value can be stored by hoarding money. Wheat or any other product which will command a value cannot be stored, for a long period.

Question 10.
(a) What is a public sector undertaking? Explain three problems faced by public sector undertakings in India. [7]
(b) Read the excerpt given below and answer the questions that follow:
The Hindu, 11th July 2011.
“We need to remember that we should work towards bringing nearly 400 million citizens to the formal fold of the banking sector,” said RBI Deputy Governor, K.C. Chakraborty.
In rural areas, where accessibility is a problem, banks are using the Micro finance network business correspondents and facilitators to bring more people under the ambit of banking services.
(i) Why is it necessary to bring more people under the formal fold of the banking sector ? Give one reason. [1]
(ii) Mention one way by which people would benefit from banking services. [1]
(iii) Which stage of capital formation is the above extract referring to? Explain the stage in brief. [2]
(iv) Explain two ways in which banks accept deposits. [2]
(v) What is meant by cash credit ? [2]
Answers:
(a) (i) Public Sector Undertaking (PSU): The term ‘Public Sector’ covers all undertakings which are owned and managed by the government or by an agency or body set up by the government. The purpose is to promote public interest. Public sector undertaking are the industrial and commercial enterprises which are owned, managed and operated by the government. According to one of the many ways of defining a PSU: “By public enterprises is meant the industrial, commercial and economic activities carried out by the Central Government or by a State Government or jointly by the Central Government and a State Government.”

Public Sector can be classified into three broad categories:

  1. Departmental undertakings
  2. Statutory Corporations
  3. Government companies.

Problems Faced by PSUs in India: Public sector undertakings are facing a number of problems due to which their performance has been much below expectations. Some of these problems are as follows:

(i) Low Efficiency : Public sector enterprises are characterised as inefficient. Main reasons for their inefficiency are their monopoly power and lack of competition, non-technical and bureaucratic regulations, political interference and absence of clear cut goals and objectives.

(ii) Low Profitability : Poor performance of the public sector enterprises is reflected in their low profits. Low profitability is partly due to the deliberate policy of keeping the prices of their products low for welfare and economic development considerations, particularly in case of public utilities like railways, electricity, telecommunication etc.

(iii) Sick Units: Public sector enterprises are also facing the problem of a large number of sick units. Sick units are those enterprises which have been showing continuous losses for several years. Continuation of sick enterprises involves a very high cost in terms of financial losses as well as locking up of resources in these enterprises.

(iv) Underutilisation of Installed Capacity: The output produced by the public sector enterprises is much below what they are capable of producing. Underutilisation of installed plant capacity is due to inefficient operation, poor management, labour disputes, etc. This underutilised capacity leads to an increase in average cost of production.

(v) Lack of Incentive: The government servants do not have the same incentive to do their best, as a man in private enterprise. In the government service, promotion is awarded by seniority instead of merit. Employees enjoy job security and are least concerned with the profitability of the enterprises. Indiscipline and lack of responsibility among the workers, frequent labour unrest, poor labour management relations also paralyse public sector enterprises.

ICSE 2012 Economic Applications Question Paper Solved for Class 10

(b) (i) More and more of people should be brought under the formal fold of the banking sector because banks provide the households the most important and reliable agency where they may deposit their surplus funds to earn interest income with high degree of security. Banks promote thrift and habit of saving among people by providing various attractive saving schemes. Banks make available these savings for productive investment and thereby promote capital formation, which is very vital for economic development of the country.

(ii) People will benefit from banking services in the following ways:

  • Transfer of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts, mail transfers, tele transfers, etc.
  • Collection and Making of Payments: Commercial banks collect and make various types of payments on behalf of their customers such as insurance premium, pension, dividends, interests, etc.

(iii) The given extract refers to the second stage of capital formation (Mobilisation of Savings).

  • Mobilisation of Savings: Savings by itself does not ensure capital formation. Capital formation cannot take place, unless the savings of people are actually invested in the production of capital goods. Thus, the savings of various households and individuals need to be effectively mobilized and made available to businessmen and entrepreneurs for investment. Financial intermediaries such as banks, mutual funds, insurance companies, finance corporations, etc., play a significant role in bringing together the savers and investors.

(iv) Methods of Accepting Deposits by Commercial Banks: The primary function of a commercial bank is to accept deposits from people who have surplus funds with them. People deposit money with banks for safekeeping, convenience or to earn interest income. Commercial banks accept deposits in many ways. We discuss below two of them:

  • Demand Deposits: Deposits in these accounts are payable to demand. These deposits can be withdrawn by the depositor any number of times he likes and can also withdraw the same any number of times he likes. These accounts are mostly held by traders, businessmen and industrialists who use these accounts for making business payments. Banks do not pay any interest on these deposits. Rather, the depositors have to pay something to the bank for the services rendered by it.

Savings Deposits : These deposits are also payable on demand and money can be withdrawn by cheques. However, the bank imposes a limit on the amount and number of withdrawals during a particular period. For example, a bank may allow its saving depositors only five cheques a month. These accounts are normally held by households who have idle cash for a short period. Saving accounts earn interest at nominal rates.

(v) Cash Credit : Cash credit is one of the several accounts commercial banks extend loans and advances to their customers. In case of cash credit, the entire sanctioned amount of loan but the bank is not given to the borrower at a particular time. The borrower is allowed to withdraw the sanctioned amount as and when he require money. Interest is charged only on the actual amount withdrawn from the bank.