K.Anandakumar/Lecturer/Doms/Engineering Economics & Financial Accounting

K.
ANANDAKUMAR/LECTURER/DOMS/ENGINEERING ECONOMICS & FINANCIAL

ACCOUNTING
A Ready Reckoner of Two Marks
1) What is economics?
• The word economics is derived from the ancient Greek word “Oiks” which means household
and “Nemein” which means management. Thus it refers to managing of a household using
the limited funds.
• Economics is a social science which deals with human wants and their satisfaction.
• It is mainly concerned with the way in which a society chooses to employ its scarce resources
which have alternative uses, for the production of goods for present and future consumption.
2) What is economic circle?
3) Give Adam Smith’s definition of Economics.(Wealth definition)
Adam Smith defined economics as “Economics is the sciences of wealth”
4) Give Alfred Marshall’s Definition of Economics ( Welfare definition)
According toAlfred Marshall Economics is defined as “a study of mankind in the ordinary

business of life”
5) Give Lionel Robbins’ definition of Economics (Scarcity definition).
Economics is the science which studies human behaviour as a relationship between ends and
scarce means which have alternative uses.
6) What are the main division of economics?
• Consumption
• Production
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K.ANANDAKUMAR/LECTURER/DOMS/ENGINEERING ECONOMICS & FINANCIAL
ACCOUNTING
• Exchange
• Distribution
• Public Finance
7) What is micro economics?
Micro means small. Micro economics deals with problems such as the output of a single firm,
price of a single commodity and spending on goods by a single household.
8) What is macroeconomics?
Macroeconomics studies the economic system as a whole. In it, we get the complete picture of
the working of the economy. It is a study of economic aggregate such as total employment,
savings, and investment.
9) What is wealth?
Wealth has been defined as “stock of goods existing at a given time that have money value”.
10) Give the classification of wealth.
• Personal wealth(individual wealth)
• Social wealth( collective wealth)
• National wealth (a+b)
• Cosmopolitan wealth (e.g. ocean)
11) What are goods? Classify.
• Anything that satisfies a human want can be considered as “good” in

economics.
• Goods can be classified into free goods and economic goods.
• Goods like air and sunlight which are the gifts of nature are the gifts of nature
are free goods. They are not scarce. So they do not command a price in the market.
• Economic goods command a price in the market. In other words, they have
value-in-exchange. For, they are scarce in relation to demand.
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12) What is income?
In economics, when we refer to income, generally we mean money income. According to

Seligman “income in the economic sense, is the flow of satisfactions from economic
goods”. The main source of income is wealth. There are two kinds of income-(1) money
income or nominal income and (2) real income.
13) What is real income?
Real income refers to the command of a person over actual commodities and services. Real
income is price adjusted money income.
14) What is National income?
National income refers to the value of commodities and services produced by a country during
a year.
15) What is Per capita income?
We get per capita income [income per person per year] by dividing national income by the
population of the country.
Per capita income= national income/population.
16) Value:
The term value refers to the exchange qualities of a good. According to Marshall, “the term
value is relative and expresses the relation between two things ata particular place and time”.
Value is of two kinds
• Value –in-use and
• Value-in-exchange.
Value is generally measured in money and it is a relative term. The value of a thing changes
according to time and situation. For example, ice has more value in summer than in winter.
17) What is an economic system?
An economic system refers to how the different economic elements will solve the central
problems of an economy: what, how and for whom to produce.
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18) Define managerial economics.
Managerial economics refers to the application of economic theory and methods of decision
sciences to arrive at the optimal solution to the various decision-making problems faced by
managers of business firms.
19) What is firm?
• A firm can be considered as a combination of people, physical and financial resources and a
variety of information.
• The firm is an agent in the economy that produces goods and services to satisfy wants of the
people.
• In its productive activity, it transforms inputs such as labour, raw materials, capital, and
natural resources into useful products which are demanded by consumers.
• Firms exist to use scarce resources of the society efficiently and thus help the economy to
cope with the basic problem of scarcity.
20) Why does firm exist?
Business firm exists for three main resources.
• They exploit the economies of mass production.
• They raise funds to finance its productive activities and
• They organise the production process
21) What is meant by boundaries of the firm?
By boundaries of firm we mean what parts of a product or what services a firm itself will
produce and what parts of a product or what services it will get from outside using the market
mechanism from other firms.
22) What is value of the firm?
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• Value of the firm is measured by calculating present value of cost flows of profits of the firm
over a number of years in the future.
• Value of the firm=present value of expected future profits
Demand means
23) What is • A desire to buy. demand?

• A decision to pay.
Demand for a commodity
refers to the
• The ability to pay or purchasing desire backed by
ability to power pay and
willingness to buy it. If a person below poverty line wants to buy a car, it is only a desire but
not a demand as he cannot pay for the car. If a rich man wants to buy a car, it is demand as he
will be able to pay for the car. Thus desire backed by purchasing power is demand.
24) What is demand function?
The demand function for a commodity describes the relationship between the quantity
demanded for it and the factors that influence it
Dx=F (Px, Ps, Y, T, W)
Dx represents demand for good X
Px represents price of good X.
Ps is price of related goods.
Y is income
T refers to tastes and preferences of the consumers
W refers to wealth of the consumer.
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25) State the Law of demand:
Law of demand states that there is a negative or inverse relationship between the price and
quantity demanded of a commodity over a period of time. Thus law of demand states that
people will buy more at lower prices and buy less at higher prices, other things remaining
the same.
26) State the assumptions of the law of demand.
• No change in the consumer’s income.
• No change in consumer’s tastes and preferences.
• No changes in the prices of other goods.
• No new substitutes for the goods have been discovered.
• People do not feel that the present fall in price is prelude to a further decline in price.
27) Why does demand curve slope downwards?
The demand curve slopes downwards to the right due to the following reasons:
• Operation of the law of diminishing marginal utility.
• Price effect
• Substitution effect
• Income effect
• Different uses and
• Entry of new consumers.
28) What are the factors determining demand?
• Tastes and preferences of the consumer
• Income of the consumer
• Price of substitutes
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• Number of consumers
• Expectations of future price changes
• Distribution of income
• Climate and weather conditions
• State of business
• Consumer innovativeness
29) What are the types of demand?
• Price demand
• Income demand
• Cross demand
• Direct and indirect demand
• Joint and composite demand
• Alternative demand
30) What is price demand?
Price demand refers to the various quantities of the commodity which the consumer will buy
per unit of time and at certain price (other things remaining the same). The quantity demanded
changes with the change in price. In other words, we can say that quantity demanded and
price has a negative correlation as
DA=F (PA)
DA = demand of commodity A.
PA = price of the commodity A.
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P↓ D↑
P↑ D↓
31) What is Income demand?
The income demand shows how much quantity a consumer will buy at different levels of his
income. Generally, there is positive relationship between income and demand of the
consumer.
DA=F (YA)
DA = demand of commodity A.
YA = income of the commodity A.
Y ↓ D↓
Y ↑ D↑
32) What is cross demand?
Cross demand refers to the relationship between quantity demanded of good A and price of
related good B, other things being equal. In simple words, from cross demand we mean the
change in the quantity demanded of a commodity without any change in its price but due to
change in the price of related goods.
33) What is direct and indirect demand?
The demand for consumer’s goods which satisfies human wants is called as direct demand.
For instance, let us take the case of food for which demand is direct. On the contrary when
same good satisfies human wants indirectly, is known as indirect demand. The demand for
factors of production is an indirect demand.
34) What is joint and composite demand?
The demand for one commodity leading to the demand for another commodity is known as
joint demand. For example, demand for ink and paper is joint demand. On the other hand,
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demand is said to be composite when a thing is demanded for two or many other purposes.
The demand of coal and rubber is composite as they are used for several purposes.
35) What is alternative demand?
Demand is known as alternative when it is satisfied by alternative ways. Let us consider the
demand for light. It has an alternative demand; one can get light either from electricity,
kerosene or gas etc.
36) What is utility?
• The utility means the amount of satisfaction which an individual derives from consuming
a commodity.
• It is also defined as want-satisfying power of a commodity.
37) What are the types of Elasticity of Demand?
There are three types of elasticity of demand
1. Price elasticity of demand;
2. Income elasticity of demand; and
3. Cross-elasticity of demand
38) What is price elasticity of demand?
‘’The degree of responsiveness of quantity demanded to a change in price is called price

elasticity of demand’’
Price elasticity of demand= Percentage change in quantity demanded
_________________________________________
Percentage change in price
39) What are the methods of measurement of price elasticity of demand?
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Important methods for calculating price elasticity of demand are
1) Percentage method
2) Point method or slope method
3) Total outlay method
4) Arc method
40) What is Income elasticity of demand?
Income elasticity of demand is the degree of responsiveness of demand to the change in

income.
41) What is Cross-elasticity of demand?
The responsiveness of demand to changes in prices of related goods is called cross-elasticity

of demand (related goods may be substitutes or complementary goods). In other words, it is
the responsiveness of demand for commodity X to the change in the price of commodity Y.
42) Factors determining elasticity of demand
The elasticity of demand depends on
1. Nature of the commodity
2. Uses of commodity
3. Existence of substitutes
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4. Postponement of demand
5. Amount of money spent
6. Habits and
7. Range of prices of commodity
43) State Law of supply
The law of supply establishes a direct relationship between price and supply. Firms will
supply less at lower prices and more at higher prices. ‘’ Other things remaining the same, as
the price of commodity rises, its supply expands and as the price falls, its supply contracts’’.
44) What are the Factors determining supply?
1. Production technology
2. Prices of factors
3. Prices of other products
4. Number of producers or firms
5. Future price expectations
6. Taxes and subsidies
7. Non- economic factors
45) What is meant by Elasticity of Supply?
The law of supply tells us that quantity supplied will respond to a change in price. The
concept of elasticity of supply explains the rate of change in supply as a result of change in
price. It is measured by the formula mentioned below
Elasticity of supply = proportionate change in quantity supplied
________________________________________
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Proportionate change in price
46) What are the types of elasticity of supply?
There are five types of elasticity of supply.
1. Perfectly elastic supply
2. Relatively elastic supply
3. Unitary elastic supply
4. Relatively inelastic supply
5. Perfectly inelastic supply
47) What are the factors determining elasticity of supply?
The following factors will influence the elasticity of supply
1. Changes in cost of production
2. Behaviour pattern of producers
3. Availability of facilities for expanding output.
4. Supply in the short and long period.
48) What is Veblen effect?
Thorstein Veblen explained that rich people buy certain luxurious goods (i.e. ornaments made
of gold or diamond or platinum) because they give them more psychic satisfaction or psychic
income. They buy these goods not for their use value but for their prestige value. Normally, if
price of such goods increases, rich people have a tendency to buy more of them. This is called
Veblen effect. The demand curve moves upwards to the right due to this effect.
49) What is Giffon Paradox?
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• Giffengoods can be classified into two categories-(a) superior goods and (b) inferior
goods.
• Superior goods are those goods where, when their prices increase, their demand also
increases. For example, when the French Intimate Scent Company advertised ‘intimate
Scent is the costliest in the world’, its sales shot up.
• Inferior goods are those goods where their demand falls with a fall in price. For example,
when the price of ragi falls, traditional consumers of ragi, give up ragi consumption and
start buying rice because, ragi has now become an inferior good.
50) What is supply?
Supply means the goods offered for sale at aprice during a specific period of time. It is the
capacity and intention of the producers to produce goods and services for sale at a specific
price.
51) Draw the graph of demand curve, supply curve and equilibrium price curve.
52) What is demand forecasting?
It refers to the prediction or estimation of future demand at a given point

of time under given constraints.
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53) What is the need and importance of demand forecasting?
To reduce the uncertainty in planning for future production levels, for

launching a new product, for expanding production capacity and for
entering an industry, demand forecasting is essential.
54) What are the types of demand forecasts?
There are two types of demand forecast:
i. Short term forecasts are usually made for a period up to one year
such as for a month, a quarter or a whole year.
ii. Long term forecasts which relates to the production for a year or
more.
55) What are the methods used to estimate demand?
i. Consumer surveys
ii. Consumer clinics
iii. Market experiments
iv. Statistical technique or regression analysis.
56) What are the methods of demand forecasting?
i. Consumer survey method
ii. Expert opinion method
iii. Market experiments
iv. Time series analysis
v. Econometric method
vi. Statistical methods- correlation and regression analysis and

trend projection
57) What are the components of time series?
i. Trends
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ii. Seasonal variation
iii. Cyclical variation
iv. Erratic trend
58) What is meant correlational and regression analysis?
Correlation analysis: It refers to degree of association between two

variables such as sales and advertisement expenditure.
Regression analysis: it refers to predicting the value of unknown

variable by using the value of known variable.
59) What is Delphi technique?
• In this method, opinion of a number of experts about future demand

is first obtained.
• Then, each expert is told about the prediction of other experts and
asked in the light of other’s views whether he would revise his
prediction about future demand.
• The experts are again shown each other’s’ revised forecasts and
asked to reconsider their forecasts till a consensus is reached.
60) What is Test marketing?
• Test marketing is a method of introducing a new product in a particular area (may

consists of several cities and towns) which represents the whole market and the
responses of consumers will be judged.
• For example, price, advertising, packaging, product model can be different in various
market areas. Sales (demand for the product) can be compared at different levels of
price, advertising and different models of the product.
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61) What is production function?
• The production function shows how a certain amount of inputs will result in
the production of a certain amount of output of a commodity.
• It explains how the output can be maximized with the help of given inputs.
• The production function is given as
Q= f (X1, X2, X3,…………,Xn)
Q →Quantity produced during a given period of time
Xn→quantities of different factors used in production.
62) Classify production function.
• Short run production function which is studied through law of variable

proportions.
• Long run production function which is explained by returns to scale.
63) State the law of variable proportion.
As the proportion of one factor in a combination of factors s is increased, after a point,

first the marginal and then the average product of that factor will diminish.
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64) What is return to scale? What are the three phases of returns to scale?
Returns to Scale refers to the magnitude of the change in the rate of output relative to
the changes in scale.
Returns to scale studies the changes in output when all factors or inputs are changed.
The changes in output as a result of changes in the scale can be studied in 3 phases.
• Increasing returns to scale.
• Constant returns to scale.
• Decreasing returns to scale.
65) Differentiate short run (laws of returns) and long run (returns to scale) production
function.
S.No Laws of returns Returns to scale

1 Short run production function Long run production function
2 Only one factor is varied and all All the factors are varied.
other factors are kept constant.
3 Law does not apply when the factors Law does not apply when the factors
must be used in fixed proportions to must be used in fixed proportions to
produce a product. produce a product.
4 Increasing returns are due to the Increasing returns to scale are due to
indivisibility of factors and economies of scale while diminishing
specialization of labour. returns to scale are due to
Diminishing returns are due to non- diseconomies of scale.
optimal factor proportion and
imperfect elasticity of substitution of
factors.
5 Factors proportions are changed Factors proportions are not changed.
The scale changes.
66) What is meant by economies of scale?
• Economies mean advantage. Scale refers to the size of unit. Economies of scale
refer to the cost advantages due to the larger size of production.
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• As the volume of production increases, the overhead cost will come down. The
bulk purchase of inputs will give a better bargaining power to the producer which
will reduce the average variable cost too. All these advantages are due to the larger
scale production and these advantages are called economies of scale.
67) What are the two types of economies?
• Internal economies of scale.
• External economies of scale.
68) What are internal economies of scale? Mention its types.
Internal economies of scale are the advantages enjoyed within the production unit.
These economies are enjoyed by a single firm independently of the action of the other
firms. For instance, one firm may enjoy the advantage of good management; another
may have the advantage of more up-to-date machinery.
There are five kinds of internal economies
• Technical economies
• Financial
• Managerial
• Labour
• Marketing
• Economies of survival
69) What are external economies of scale?
When many firms expand in a particular area- i.e. when the industry grows-they enjoy
a number of advantages which are known as external economies of scale. This is not
the advantage enjoyed by a single firm but by all the firms in the industry due to the
structural growth.
They are
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• Increased transport facilities
• Banking facilities
• Development of townships
• Information and communication development.
All these facilities are available to all firms in an industrial region.
70) What is meant by diseconomies of scale?
The diseconomies are the disadvantages arising to a firm or a group of firms due to
larger scale production. There are two types of diseconomies. They are
• Internal diseconomies of scale
• External diseconomies of scale.
71) What is isoquant?
In economics, an isoquant (derived from quantity and the Greek word iso [meaning
equal]) is a contour line drawn through the set of points at which the same quantity of
output is produced while changing the quantities of two or more inputs. The isoquant
deals with the cost-minimization problem of producers.
72) What is isoquant curve? Draw it.
• In Latin, "iso" means equal and "quant" refers to quantity. This translates to
"equal quantity".
• The “isoquant curve” is, therefore, also known as “Equal product curve” or
“Production Intelligence Curve”.
• An isoquant curve is locus of point representing various combinations of two
inputs – capital and labour – yielding the same output.
• The isoquant curve helps firms to adjust their inputs to maximize output and
profits. At some point, the returns of adding another worker or piece of
equipment will start to hurt output.
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73) What is isocost line? Draw it.
• An isocost line is defined as locus of points representing various combinations

of two factors, which the firm can buy with a given outlay.
• Higher isocost lines represent higher outlays (total cost) and lower isocost
lines represent lower outlays.
o For the two production inputs labour and capital, with fixed unit costs of the
inputs, the equation of the isocost line is
Where w represents the wage rate of labour, r represents the rental rate of capital, K is
the amount of capital used, L is the amount of labour used, and C is the total cost of
acquiring those quantities of the two inputs.
74) What is isoquant map?
A set of isoquants which represents different levels of output is called “isoquant map”.
In the isoquant map, the isoquants on the right sides represent higher levels of output
and vice versa.
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75) State Cobb-Douglas production function.
The Cobb-Douglas production function can be stated as follows:
Q=ALaKb
Q= output
L=labour
K=capital
A=state of technology
a=exponent of labour
b=exponent of capital.
76. What is meant by production?
Production in Economic refers to the creation of those goods and services

which have exchange value. It means the creation of utilities.
77. What is meant by Form Utility?
If the physical form of a commodity is changed, its utility may increase.

For instance, the utility of cotton increases, if it is converted into clothes.
The other examples are processing of paddy into rice, wheat into flour and
butter into ghee.
78. What is meant by Place Utility?
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If the commodity is transported from one place to another, its utility may
increase. For instance, of rice is transported from Tamil Nadu to Kerala, its
utility will be more.
79. What is meant by Time utility?
If the commodity is stored for future usage, its utility may increase. During
rainy season, water is stored in reservoirs and it is used at a later time.
This increases the utility of that stored water. Agricultural commodities like
paddy, wheat, oilseeds, and pulses are stored for the regular uses of
consumers throughout the year.
80. What is meant by Possession Utility?
Commodities in the transaction process, change from one person to

another person. Commodities in the hands of producers have some utility
and by the time they reach consumers through the traders their utility is
increased. Such utility due to possession or transfer of ownership of the
commodity is called, possession utility. For example, paddy in the hands of
producers, i.e. farmers has less utility compared to that of the rice in the
hands of consumers.
81. What is meant by Factors of production?
Factors of production refer to those goods and services which help in the
productive process. They are Land, Labour, Capital and Organisation
(entrepreneurship).
82. What is meant by Division of Labour?
Division of Labour means dividing the process of production into distinct

and several component processes and assigning each component in the
hands of a labour or a set of labourers, who are specialists in that
particular process.
For example, a tailor stitches a shirt in full. In the case of garment

exporters, cutting of cloth, stitching of hands, body, collars, holes for
buttons, stitching of buttons, etc., are done independently by different
workers. Therefore, they are combining the parts into a whole shirt.
83. What is meant by Capital?
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Capital is the man made physical goods used to produce other goods and
services. In the ordinary language, capital means money. In Economics,
capital refers to that part of man-made wealth which is used for the further
production of wealth. According to Marshall, ‘’Capital consists of those
kinds of wealth other than free gifts of nature, which yield income’’.
84. What are the Forms of Capital?
1. Physical Capital or Material Resources
2. Money Capital or Monetary Resources, and
3. Human Capital or Human Resources
85. What is meant by Organisation or Entrepreneurship?
An entrepreneur is a person who combines the different factors of

production (land, labour and capital), in the right proportion and initiates
the process of production and also bears the risk involved in it. The
entrepreneur is also called ‘organiser’. Entrepreneurship is risk taking,
managerial, and organizational skills needs to produce goods and services
in order to gain a profit. In modern times, an entrepreneur is called ‘the
changing agent of the society’. He is not only responsible for producing
the socially desirable output but also to increase the social welfare.
86. What is meant by Cost?
The term ‘cost of production’ means expenses incurred in the production

of a commodity. This refers to the total amount of money spent on the
production of a commodity. The determinants of cost of production
are: the size of plant, the level of production, the nature of technology
used, the quantity of inputs used, managerial and labour efficiency. Thus
the cost of production of a commodity is the aggregate of prices paid for
the factors of production used in producing a commodity.
87. What is the cost of function?
The cost function expresses a functional relationship between costs and

input that determine it. Symbolically, the cost function is
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C = f (Q)
Where
C = Cost
Q = Output
88. What is meant by Money Cost and Real Cost?
Money cost or nominal cost is the total money expenses incurred by a firm
in producing a commodity.
It includes
(i) Cost of raw materials
(ii) Wages and salaries of labour
(iii) Expenditure on machinery and equipment
(iv) Depreciation on machines, buildings and such other capital goods
(v) Interest on capital
(vi) Other expenses like advertisement, insurance premium and taxes
(vii) Normal profit of the entrepreneur.
89. What is meant by Opportunity Cost?
The opportunity cost of any goods is the next best alternative good that is
sacrificed. For example a farmer who is producing wheat can produce
potatoes with the same factors. Therefore the opportunity cost of a quintal
of wheat is the amount of output of potatoes given up.
90. What is meant by Accounting cost or explicit cost?
• Accounting costs or explicit costs are the payments made by the

entrepreneur to the suppliers of various productive factors.
• The accounting costs are only those costs, which are directly paid
out or accounted for by the producer i.e. wages to the labourers
employed, prices for the raw materials purchased, fuel and power
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used, rent for the building hired for the production work, the rate of
interest on the borrowed capital and the taxes paid.
91. What is meant by Economic cost?
The economic cost includes not only the explicit cost but also the implicit
cost. The money rewards for the own services of the entrepreneur and the
factors owned by himself and employed in production are known as
implicit costs or imputed costs. The normal on money capital invested by
the entrepreneur, the wages or salary for his own services and rent of the
land and buildings belonging to him and used in production constitute
implicit cost. Thus Economic cost = Explicit cost + Implicit cost.
92. What is meant by private cost and social cost?
• Private cost is the cost incurred by a firm for production. It includes

both implicit costs and explicit costs.
• Social costs are those costs, which are not borne by the producing
firm but are incurred by others in society. For example, when an oil
refinery discharges its waste in the river causing water pollution,
such a pollution results in tremendous health hazards which involve
costs to the society as a whole
93. What is meant by fixed cost and Variable cost?
• Fixed costs are those which are independent of output, that is, they
do not change with changes in output. These costs are a ‘fixed’
amount, which must be incurred by a firm in the short run whether
the output is small or large. E.g. contractual rent, interest on capital
invested, salaries to the permanent staff, insurance premium and
certain taxes.
• Variable costs are those costs, which are incurred on the

employment of variable factors of production whose amount can be
altered in the short run. Thus the total variable costs change with
the level of output.
94. What is meant by Total cost?
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Total cost is the sum of total fixed cost and total variable cost.
TC = TFC =TVC where
TC = Total cost
TFC = Total Fixed cost
TVC = Total Variable cost
It should be noted that total fixed cost is the same irrespective of the level
of output. Therefore a change in total cost is influenced by the change in
variable cost only.
95. What is meant by Average Fixed Cost (AFC)?
The average fixed cost is the fixed cost is the fixed cost per unit of output.
It is obtained by dividing the total fixed cost by the number of units of the
commodity produced.
Symbolically AFC = TFC / Q
Where AFC =Average fixed Cost
TFC = Total Fixed cost
Q = Number of units of output produced
96. What is meant by Average Variable Cost (AVC)?
Average variable cost is the variable cost per unit of output. It is the total
variable cost divided by the number of units of output produced.
AVC = TVC /Q
Where AVC = Average Variable Cost
TVC = Total Variable Cost
Q = Number of units of output produced
97. What is meant by Average Total Cost or Average Cost?
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Average total cost is simply called average cost which is the total cost
dividend by the number of units of output produced.
AC = TC /Q where
AC = Average Cost
TC = Total cost
Q = number of units of output produced
Average cost is the sum of average fixed cost and average variable
cost. I.e. AC =AFC + AVC
98. What is meant by Marginal Cost?
Marginal cost is defined as the addition made to the total cost by the
production of one additional unit of output.
99. What is revenue?
The amount of money, which the firm receives by the sale of its output in
the market, is known as its revenue.
100. What is meant by Total Revenue?
Total Revenue refers to the total amount of money that a form receives
from the sale of its products.
Mathematically TR =PQ where TR = Total Revenue; P = Price; Q =Quantity

sold. Suppose a firm sells 1000 units of a product at the price of Rs 10
each, the total revenue will be 1000 X Rs 10 =Rs 10,000/-
101. What is meant by Average Revenue?
Average revenue is the revenue per unit of the commodity sold. It is

calculated by dividing the total revenue by the number of units sold.
AR =TR /Q where
AR =Average Revenue
TR = Total Revenue
Q = Quantity sold
27
ACCOUNTING
Thus average revenue means price of the product.
102. What is meant by Marginal Revenue?
Marginal Revenue is the addition made to the revenue by selling one more
unit of a commodity.
For example, if 10 units of a product are sold at the price of Rs 15 and all
units are sold at Rs 14 /-, the marginal revenue will be:
MRn =TRn– TRn -1
= Rs (11 x 14) – Rs (10 x 15)
= Rs 154 -150
= Rs 4 /-
103) what do you mean by perfect competition?
• If a market satisfies the following conditions, it is a perfect competition.
• Large number of buyers and sellers.
• Homogeneous product
• Absence of artificial restrictions.
• Free entry and free exist of firms.
• Perfect knowledge on the part of buyers and sellers.
• Perfect mobility of FOP.
• Perfect knowledge about the market condition.
• Absence of transport costs.
• No government interference.
• Absence of collision.
104) Distinguish between a firm and industry.
28
ACCOUNTING
A firm is a production unit producing for sale; selling at a profit; with the
objective of maximising the profit. It is a single unit of production and is a
legal person. A group of firms producing similar or identical goods are
known as industry.
105) The demand curve of a firm under perfect competition is a

horizontal line. Why?
Under the perfect competition the firm can sell any amount of product at
the prevailing price only. A single firm cannot influence the prize; a firm is
a price taker. Therefore the demand curve of the firm will be a horizontal
straight line parallel to X-axis.
106) what does monopoly refer to?
Monopoly is a market structure in which there is a single seller only. There

are no close substitutes for the commodity it produces and there are
barriers to entry. Monopoly exists where there is a single producer and
seller of a product. The single producer seller may be an individual or a
partnership company or a joint stock company or state.
107) Why does the demand curve slope downwards under monopoly?
29
ACCOUNTING
The average revenue curve of a monopoly firm is also the demand curve. The demand
curve is sloping downwards because larger quantities can be sold by reducing the
price.
108) Define the term market.
In economics, market is a concept referring to a grouping of buyers and sellers, who

involve in the transaction of commodities and services.
109) Classify market according to competition.
110) what do you mean by pure competition?
When the following four conditions are satisfied, it is called pure competition.
• Large number of buyers and sellers.
• Homogeneous product.
• Absence of artificial restrictions
• Free entry and exist of firms.
111) what is price discrimination?
30
ACCOUNTING
It is also known as discriminating monopoly. A monopolist sells the same commodity at

different prices to different buyers and this act is known as price discrimination. Price
discrimination may be defined as “the sale of technically similar products at prices which are
not proportional to marginal cost”.
112) what is monopolistic competition?
It refers to a market situation in which many producers produce goods that are those close
substitutes for one another. Their products are similar but not identical. They are competing
with each other. For example, in India, there are various manufacturers of bathing soap. They
produce different brands such as “Lifebuoy, Hamam, Lux and so on. But the buyers are
attached to their favourite brand.
113) write a short note on Oligopoly.
Oligopoly is an important form of imperfect competition. Oligopoly is said to prevail when

there are a few firms producing a product. The number of firms may be more than two. It
means competition among a few.
114) write a short note on duopoly.
Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both
the sellers are completely independent and no agreement exists between them. A seller may
assume that his rival is unaffected by what he does. In that case he takes only his own direct
influence on the price.
115) What is meant by Ratio Analysis?
Ans: - Ratio is an expression of one number in relation to another. Ratio

analysis is the process of determining and interpreting the numerical
relationship between figures of financial statements. A ratio is a mathematical
relationship between two items expressed in a quantitative form.
116) What are all the objectives of ratio analysis?
Ans: - The objectives of using ratios are to test the profitability, financial
position (liquidity and solvency) and the operating efficiency of a concern.
117) What are all the Advantages of Ratio Analysis?
31
ACCOUNTING
Ans:-
• It is an useful device for analysis the financial statements.
• It simplifies, summarizes the accounting figures to make it

understandable.
• It helps in financial forecasting.
• It facilitates interfirm and intrafirm comparisons.
118) What is mean by Liquidity Ratios?
Ans: - Liquidity Ratios measure the firm’ ability to pay off current dues i.e.,
repayable within a year. Liquidity ratios are otherwise called as Short Term
Solvency Ratios. The important ratios are
1. Current Ratio
2. Liquid Ratio
3. Absolute Liquid Ratio
119) What is mean by Current Ratio?
Ans: - This ratio is used to assess the firm’s ability ti meet its current
liabilities. The relationship of current liabilities is known as current ratio. The
ratio is calculated as:
Current Assets
Current ratio = _____________________
Current Liabilities
120) What is meant by Current Assets?
Ans: - Current Assets are those assets, which are easily convertible into
cash within one year. This includes cash in hand, cash at bank, sundry
debtors, bills receivable, short term investment or marketable securities,
stock and prepaid expenses.
121) What is meant by Current Liabilities?
32
ACCOUNTING
Current Liabilities are those liabilities which are payable within one year. This
includes bank overdraft, sundry creditors, and bills payable and outstanding
expenses.
122) What is meant by Liquid Ratio?
Ans: - This ratio is used to assess the firm’s short term liquidity. The
relationship of liquid assets to current liabilities is known as liquid ratio. It is
otherwise called as Quick ratio or Acid Test ratio. The ratio is calculated as:
Liquid Assets
Liquid Ratio = ______________________
Current Liabilities
Liquid assets mean current assets less stock and prepaid expenses.
123) What is Absolute Liquid Ratio?
Ans: - It is a modified form of liquid ratio. The relationship of absolute liquid

assets to liquid liabilities is known as absolute liquid ratio. This ratio is called
as ‘Super Quick Ratio’. The ratio is calculated as:
Absolute Liquid Assets
Liquid ratio = _________________________
Liquid Liabilities
124) What is meant by Solvency Ratio?
Ans: - Solvency refers to the firms ability to meet its long term
indebtedness. Solvency ratio studies the firms ability to meet its long term
obligations. The following are the important solvency ratios:
1. Debt – Equity Ratio
2. Proprietory Ratio
125) What is meant by Debt Equity Ratio?
33
ACCOUNTING
Ans: - This ratio helps to ascertain the soundness of the long term financial
position of the concern. It indicates the proportion between total long term
debt and shareholders funds. This also indicates the extent to which the firm
depends upon outsiders for its existence. The ratio is calculated as:
Total long term Debt
Debt-Equity Ratio = ________________________
Shareholders funds
126) What is meant by Proprietory Ratio?
Ans: - This ratio shows the relationship between proprietors or

shareholders funds and total tangible assets. The ratio is calculated as:
Shareholders funds (Proprietors funds)
Proprietory Ratio = _____________________________________
Total tangible assets
Tangible assets will include all assets except goodwill, preliminary expenses
etc.
127) What is meant by Profitability Ratios?
Ans: - Efficiency of a business is measured by profitability. Profitability

ratio measures the profit earning capacity of the business concern. The
important profitability ratios are discussed below:
1. Gross Profit Ratio
2. Net Profit Ratio
3. Operating Profit Ratio
4. Operating Ratio
128) What is meant by Gross Profit Ratio?
Ans: - This ratio indicates the efficiency of trading activities. The

relationship of Gross Profit to Sales is known as gross profit ratio. The ratio is
calculated as:
34
ACCOUNTING
Gross Profit
Gross Profit Ratio = _______________ X 100
Sales
Gross profit is taken from the Trading Account of a business concern.

Otherwise Gross profit can be calculated by deducting cost of goods sold from
sales. Sales mean Net sales.
Gross profit = sales - cost of goods sold
Cost of goods sold = opening stock + purchases – closing stock
(Or)
Sales – Gross Profit
129) What is meant by Net Profit Ratio?
Ans: - This ratio determines the overall efficiency of the business. The
relationship of Net profit to Sales is known as net profit ratio. The ratio is
calculated as:
Net Profit
Net Profit Ratio = __________________ X 100
Sales
Net profit is taken from the Profit and Loss Account of the business concern or
the gross profit of the concern less administration expenses, selling and
distribution expenses and financial expenses.
130) What is meant by Operating Profit Ratio?
Ans: - This ratio is an indicator of the operational efficiency of the

management. It establishes the relationship between Operating Profit and
Sales. The ratio is calculated as:
Operating Profit
Operating Profit Ratio = ___________________ X 100
Sales
35
ACCOUNTING
Where operating profit is Net profit + Non- operating expenses – Non-

operating income.
Where, Non-operating expenses are interest on loan and loss on sale of

assets.
Non-operating incomes are dividend, interest received and profit on sale of

asset. (Or) Operating profit = Gross profit – Operating expenses.
Operating expenses include administration, selling and distribution expenses.

Financial expenses like interest on loan are excluded for this purpose.
131) What is meant by operating ratio?
Ans: - This ratio determines the operating efficiency of the business

concern. Operating ratio measures the amount of expenditure inurred in
production, sales and distribution of output. The relationship between
Operating costs to Sales is known as Operating Ratio. The ratio calculated as:
Cost of goods sold + operating

expenses
Operating Ratio = ________________________________________ X

100
Sales
132) What is meant by Activity Ratios?
Ans: - activity ratios indicate the performance of the business. The

performance of a business is judged with its sales (turnover) or cost of goods
sold. These ratios are thus referred to as turnover ratios. A few important
activity ratios are discussed below:
1. Capital turnover ratio
2. Fixed assets turnover ratio
3. Stock turnover ratio
4. Debtors turnover ratio
5. Creditors turnover ratio
36
ACCOUNTING
133) What is meant by Capital Turnover Ratio?
Ans:- This shows the number of times the capital has been rotated in the
process of carrying on business. Efficient utilisation of capital would lead to
higher profitability. The relationship between sales and capital employed is
known as capital turnover ratio. The is calculated as:
Sales
Capital turnover ratio = ____________________
Capital employed
Where sales means sales less sales returns and capital employed refers to
total long term funds of the business concern i.e., Equity share capital,
preference share capital, reserves and surplus and long term borrowed funds.
134) What is meant by Fixed Assets Turnover Ratio?
Ans:- this shows how best the fixed assets are being utilised in the
business concern. The relationship between sales and fixed assets is known
as Fixed Assets Turnover Ratio. The ratio is calculated as:
Sales
Fixed Assets Turnover Ratio= __________________
Fixed assets
Fixed assets mean Fixed Assets less depreciation.
135) What is meant by Stock Turnover Ratio?
Ans: - This ratio is otherwise called as inventory turnover ratio. It indicates

whether stock has been efficiency used or not. It establishes a relationship
between the cost of goods sold during a particular period and the average
amount of stock in the concern. The ratio calculated as:
Cost of goods sold
Stock Turnover Ratio = ____________________
Average stock
37
ACCOUNTING
136) What is meant by Debtors Turnover Ratio?
Ans: - this establishes the relationship between credit sales and average
accounts receivable. Debtors’ turnover ratio indicates the efficiency of the
business concern towards the collection of amount due from debtors. The
ratio is calculated as:
Credit Sales
Debtors turnover Ratio = ___________________________
Average Accounts Receivable
Accounts receivable includes sundry debtors and bills receivable.
Opening (debtors + bills receivable) +
Closing (debtors + bills receivable)
Average accounts receivable = _______________________________
In case credit sales are not given, total sales can be taken as credit sales.
137) What is meant by Creditors Turnover Ratio?
Ans: - this establishes the relationship between credit purchases and

average accounts payable. Creditor’s turnover ratio indicates the period in
which the payments are made to creditors. The ratio is calculated as:
Credit Purchases
Creditors turnover ratio = _____________________
Average Accounts Payable
Accounts payable include sundry creditors and bills payable.
Opening (creditors + bills payable) +
Closing (creditors + bills payable)
Creditors turnover ratio = ________________________________
38
ACCOUNTING
In case a credit purchase is not given total purchases can be taken as credit
purchases.
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A Ready Reckoner of Two Marks

2) What is economic circle?

3) Give Adam Smith’s definition of Economics.(Wealth definition)

Adam Smith defined economics as “Economics is the sciences of wealth”

4) Give Alfred Marshall’s Definition of Economics ( Welfare definition)

According toAlfred Marshall Economics is defined as “a study of mankind in the ordinary

5) Give Lionel Robbins’ definition of Economics (Scarcity definition).

6) What are the main division of economics?

7) What is micro economics?

10) Give the classification of wealth.

• Personal wealth(individual wealth)

• Social wealth( collective wealth)

• National wealth (a+b)

• Cosmopolitan wealth (e.g. ocean)

11) What are goods? Classify.

• Anything that satisfies a human want can be considered as “good” in

• Goods can be classified into free goods and economic goods.

12) What is income?

In economics, when we refer to income, generally we mean money income. According to

13) What is real income?

14) What is National income?

15) What is Per capita income?

Per capita income= national income/population.

Value is of two kinds

• Value –in-use and

17) What is an economic system?

18) Define managerial economics.

19) What is firm?

20) Why does firm exist?

Business firm exists for three main resources.

• They exploit the economies of mass production.

• They raise funds to finance its productive activities and

• They organise the production process

21) What is meant by boundaries of the firm?

22) What is value of the firm?

• Value of the firm=present value of expected future profits

23) What is • A desire to buy. demand?

24) What is demand function?

Dx=F (Px, Ps, Y, T, W)

Dx represents demand for good X

Px represents price of good X.

Ps is price of related goods.

T refers to tastes and preferences of the consumers

W refers to wealth of the consumer.

25) State the Law of demand:

26) State the assumptions of the law of demand.

• No change in the consumer’s income.

• No change in consumer’s tastes and preferences.

• No changes in the prices of other goods.

• No new substitutes for the goods have been discovered.

27) Why does demand curve slope downwards?

• Operation of the law of diminishing marginal utility.

• Different uses and

• Entry of new consumers.

28) What are the factors determining demand?

• Tastes and preferences of the consumer

• Income of the consumer

• Expectations of future price changes

• Climate and weather conditions

29) What are the types of demand?