ECO 06 Solved Assignment 2021 – 22
IGNOU Free Solved Assignment 2021 – 22
TUTOR MARKED ASSIGNMENT
COURSE CODE: ECO-06
COURSE TITLE: ECONOMIC THEORY
ASSIGNMENT CODE: ECO-06/TMA/2021-22
COVERAGE: ALL BLOCKS
Maximum Marks: 100
Attempt all the questions:
1. What are the various forms of economic system? Describe the features of a mixed economy. (20)
Ans: Various forms of economic system
a) Capitalism: Capitalism is followed by a large number of countries these days. The countries like USA that are following the capitalist system are leading the world in terms of the level of economic development. Capitalism follows four basic principles:
(i) The doctrine of self interest
(ii) Laissez Faire policy
(iii) Theory of competitions (iv) Profit Motive. Free enterprise, competitions and private ownership of property are some of the features of capitalism. It is also known as the free enterprise economy. A policy of non-interference is adopted by the government in this system. Trade and industry are allowed to take their own course and the government is mainly concerned with the maintenance of law and order in the country.
b) Socialism: Socialism is a type of economic system in which the state totally owns or controls the resources and means of production. The basic stress is on the use of these resources for the overall welfare of all members of the society. The socialistic system followed in Communist countries is characterized by state capitalism but in the democratic socialistic nations a dominant private sector is also present. Under the socialistic system the workers in sectors like industry, agriculture and transport become the joint owners of the means and results of production. As the non-human resources of production are mainly owned by the state or the society it ensures better allocation and utilization of these resources, elimination of unemployment and class struggle. It also reduces the inequality in income. On the other hand, socialism can increase Red-tapism, corruption and Bureaucratization.
c) Mixed Economy: In a mixed economy we see the presence of the private economy freedom along with the centralized planning having a common goal of avoiding the problems that are linked with socialism as well as the capitalist system of economy. In the system of a mixed economy, freedom in economic activities is influenced by the licensing policies and regulations of the government. Mixed economy allows the participation of private entrepreneurs in the field of production and in a competitive environment with the objective of making profit. As against some of the features of socialism, mixed economy includes both public and private ownership in production with a view to maximize the welfare of the society.
Main Features of Mixed Economy
The following are the main characteristics of a mixed economy:
(i) Co-existence of the Public and Private Sectors. The chief characteristic of a mixed economy is that in this economy both public as well as the private sector work mutually. They co-exist. Generally, the basic industries, the industries concerned with the production of defense equipment, atomic energy, engineering industries, etc., are put in the public sector. On the other hand, the consumer goods industries, small and cottage industries, agriculture, etc., are generally given to the private sector. It may be borne in mind that the government does not work against the private sector. On the contrary, the government helps and encourages the private sector by providing them several incentives and facilities so that the industries in the private sector are able to develop properly and make the country’s economy efficient and strong.
(ii) Role of Price structure and Government Directives. Another characteristic of mixed economy is that it is operated both by the price system and government directives. So far as the public sector is apprehensive financial decisions linking to prices, manufacture and asset are made by the management or the system selected by the government. But the private sector in the mixed economy is operated by price-mechanism.
(iii) Government Regulation and Control of Private Sector. In a mixed economy, the administration implements required methods to control and control the private sector, so that it may work in the interest of the state rather than completely for profit making motives. For this purpose, it introduces the licensing system according “to which government approval or license is essential for setting up a factory. If the government considers that in a certain industry already there is excessive investment or excess capacity, no new licenses are issued for setting up factories in that industry. Licensing system is the instrument by which the government controls and regulates industrial investment and output. The government also controls and regulates the private sector through appropriate monetary and fiscal policies. For this purpose, the government gives rebates and tax concessions and credit facilities at low and reasonable rates so that the private entrepreneurs are induced to invest in those industrial lines.
(iv) Consumers Sovereignty Protected. In a mixed economy, the sovereignty of the consumers is protected. Like socialism, the mixed economy does not put an end to consumer’s sovereignty. It is clear that in spite of some restrictions imposed by the government, the consumers are free to purchase the goods they like. It is their demand or preferences which guide production in the private sector.
(v) Government Protection of Labor. In a mixed economy, government protects the weaker sections of society especially labor. That is, it saves labor from abuse by the capitalists. In the developed countries, in the beginning of Industrial Revolution, the greed and selfishness of the factory owners inflicted untold hardships on male labor, women and children. Social conscience was roused on seeing the pitiful and miserable working and living conditions of such labor. The government realized its responsibility for protecting labor from exploitation by industrialists and factory owners.
(vi) Reduction of Economic Inequalities. Extreme inequalities of income reduce social welfare. Income inequality creates inequalities of opportunities for education and training in favor of high-income groups. The extreme inequalities of income create class distinctions and generate class-conflict which splits the whole society into two-warring camps—the rich and the poor or the ‘haves’ and the ‘have-nots’. The rich exploit the poor. For this purpose, government levies progressive taxation, wealth tax, death duties, gift tax, etc. On the other hand, free education, free medical aid and old-age pensions, for the poor, stipends for poor students are some of the remedies adopted for distributing the extra income of the rich among the poor.
(vii) Control of Monopoly. In a mixed economy, the government tries to control and regulate monopolies. The monopolist uses his monopoly power to exploit the consumers. He fixes a price which is above the marginal cost of production and in this way reduces consumers’ welfare. Such a price-output policy results in misallocation of productive sources of the society. Besides, the excessive profits made by monopolists result in accentuating economic inequalities in the country. Moreover, monopoly creates unemployment by reducing output and thus hampers-industrial growth.
2. Describe the law of equi-marginal utility. Explain it with the help of a diagram. How does a consumer attain equilibrium? (20)
3. Explain the marginal and average revenues of a firm in both, perfect and imperfect competition. (20)
4. Discuss the concepts of money wage and real wage. How are competitive wages determined? (20)
Concept of Money and Real Wages
Money wages or nominal wages are wages that are paid to a person regardless of the inflation rate in the market. Many companies use this method to pay their employers. Money wages include the whole salary package of the employee such as basic salary plus any additional benefits that are provided by the company or institution. Money wages do not take into consideration the purchasing power and the employee receives the amount that is promised to him when he/she is hired. Raise in money wages are also solely dependent on the employee rather than economic conditions of the country or the purchasing power of a basic employee.
Real wages are wages that provided taken into consideration the inflation amount. Real wages are wages that determine the purchasing power of the individual or how much goods the salary can buy. Real wages can also be defined as the amount of goods and services that can be bought from the individual’s wages after taking inflation into account. Some dictionaries also define it as providing goods and service to the individual in form of remuneration. However, only select places follow this definition.
According to author J.L. Hanson, “Real wages is the wages in terms of the goods and services that can be bought with them.” This shows that real wages show the purchasing power of the person. Real wages indirectly affect the money wages, since as real wages rise, they may force employee to demand a higher money wage. Money wages may or may not affect real wage, but higher money wages can increase the cost of living which could indirectly affect the real wage. This depends on the situation of the country.
Determination of Competitive wages:
Prices of labour in a competitive labour market are determined by the equilibrium of demand and supply of labour, The supply of labour which refers to number of workers or labour hours available to an economy, is determined by factors like total population and prevalent culture and practice in terms of people capable of willing to take up employment. Demand for the labour is determined indirectly by the demand for goods and services that the manufactures wish to produce and sell. Both these demand and supply of labour is affected by the price of labour that is the wages for which people are willing to work as employees. When manufacturers offer higher wages the supply of labour increases. On the other hand, manufactures are willing to produce more and, in turn, employ more labour when the wages fall.
The wage rate at which the demand and supply of labour is equal is the market equilibrium wage. This is the ruling wage rate in a competitive labour market.
5. Write short notes on the following: (4 x 5) = 20
(a) Lorenz Curve
Ans: In economics, the Lorenz curve is a graphical representation of the distribution of income or of wealth. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution.
The curve is a graph showing the proportion of overall income or wealth assumed by the bottom x% of the people, although this is not rigorously true for a finite population. It is often used to represent income distribution, where it shows for the bottom x% of households, what percentage (%) of the total income they have. The percentage of households is plotted on the x-axis, the percentage of income on the y-axis. It can also be used to show distribution of assets. In such use, many economists consider it to be a measure of social inequality.
(b) Collective Bargaining
Ans: It was Adam Smith in the 18th Century who made the first reference to collective bargaining in the labour market. The Bargaining Theory Proponents have argued that short-run wages have always been determined by the process of bargaining. Collective bargaining is possible because there exist today the bilateral monopoly situation in the labour market. That is to say that labour market is neither perfectly competitive nor is it marked by monopoly conditions only. Both the employers and employees have now equal strength to negotiate on problems of wage settlement. This situation is called bilateral monopoly situation. Collective bargaining is conducted under bilateral monopoly.
Under bilateral monopoly conditions wages rate and volume of employment will depend on the relative bargaining strength of the Employer’s associations and Worker’s unions. If the Employer’s Association is stronger than Trade Union, it will push the wage below the competitive equilibrium level or very near to the subsistence level. On the contrary if the Trade Union is stronger than the Employers Association the wage rate will be pushed up above competitive equilibrium rate or to marginal productivity or at least to the level of the capacity to pay of the employers. Thus, there is no definiteness about the levels of wage under collective bargaining. In other words wages under bilateral monopoly situation are indeterminate. We can only indicate the broad limits within which the wages rate and the volume of employment would come to be settled according to relative bargaining power of the parties.
Many mathematical models have been built by economists to determine the bargaining power of the parties. Of these Chamberlain’s explanation is more acceptable. He has tried to determine the bargaining power of the two parties of the two parties in terms of cost of agreement relative to the cost of disagreement to each party in collective bargaining process. Greater the cost for the employers of disagreeing (facing a strike) as opposed to the cost of agreeing (granting unions demand) greater will be bargaining power of union and vice versa.
Ans: An isoquant is a firm’s counterpart of the consumer’s indifference curve. An isoquant is a curve that shows all the combinations of inputs that yield the same level of output. ‘Iso’ means equal and ‘quant’ means quantity. Therefore, an isoquant represents a constant quantity of output. The isoquant curve is also known as an ‘’Equal Product Curve” or “Production Indifference Curve” or Iso-Product Curve.”
The concept of isoquants can be easily explained with the help of the table given below:
Combinations of Labor and Capital
Units of Labor (L)
Units of Capital (K)
Output of cloth (meters)
The above table is based on the assumption that only two factors of production, namely, Labor and Capital are used for producing 100 meters of cloth.
Combination A = 5L +9K = 100 meters of cloth
Combination B = 10L + 6K 100 meters of cloth
Combination C = 15L +4K = 100 meters of cloth
Combination D = 20L +3K = 100 meters of cloth
The combinations A, B, C and D show the possibility of producing 100 meters of cloth by applying various combinations of labor and capital. Thus, an isoquant schedule is a schedule of different combinations of factors of production yielding the same quantity of output.
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(d) Indifference Curve
Ans: An indifference curve is a curve which shows the various combinations of two goods, which give the same total satisfaction to the consumer. The indifference curve analysis is built upon the following assumptions:
1) Two Goods: It is assumed that consumer buys only two goods. This assumption is made because a graph has only two axes. Therefore, only two goods can be represented one on each axis.
2) Rationality: Like Marshall’s utility analysis, indifference curve analysis also assumes consumer’s rationality. According to Hicks, consumer acts rationally and aims at the maximization of utility, given his income and market prices of the commodities.
3) Utility is Ordinal: Indifference curve analysis has abandoned the concept of cardinal utility and instead has adopted the concept of ordinal utility. According to this analysis, utility is a psychic entity and therefore cannot be measured in cardinal terms.
4) More is better: A consumer always prefers more of any good to less of it. Such preferences are called monotonic preferences. It is assumed that consumer had not reached the satiety point.
Some of the features of indifference curve are as follows:
a) Indifference curve slopes downward from left to right.
b) Higher indifference curve represents higher level of satisfaction.
c) No two indifference curve cut each other.
d) Indifference curve are convex to the origin due to diminishing marginal rate of substitution.