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Aggregate supply indicates the total amount of goods and services produced within an economy at a given the general (or overall) price level during an accounting period.

\(AS=f(\bar{N},\bar{L},\bar{K},\bar{k},\bar{T})\)

where,

AS = Aggregate supply

N = Natural resources

L = Labour

K = Stock of capital

T = State of technology

Natural resources: Natural resources include the gifts of nature such as fertile land, weather conditions, adequate rainfall, flora and fauna, perennial rivers etc. The abundant availability of all these factors act in favour of production. The aggregate supply of a country bestowed with these natural resources will be higher and vice-versa.

Labour: Availability of skilled and motivated labour is another determinant of supply. The supply in an economy with abundance of skilled labour will be high and vice-versa.

Capital: Capital is essential in the production process. Capital helps in acquiring raw materials, equipments, plant and machinery, buildings etc. which are essential for increasing the production. Greater the stock of capital, greater would be the level of output and production.

State of technology: The state of technology in an economy decides the level of supply. Advanced technology helps in improving the production efficiency in a a country. With better and advanced technology production can be increased while reducing the cost of production. This in turn positively affects the supply. Thus, the availability of modern and advanced technology helps in increasing the supply.

Aggregate demand implies the total demand of final goods and services by all the people in an economy. Aggregate demand is the summation of consumption expenditure (C), investment expenditure (I), government expenditure (G), and net earnings from foreign transactions (X - M) (Where, X is exports and M is imports).

Algebraically,

AD = C + I + G + (X – M)

i. Consumption expenditure (C): Consumption expenditure refers to the total expenditure incurred by all the households in an economy on different types of final goods and services in order to satisfy their wants. Consumption expenditure can be further divided in two categories as - Autonomous consumption expenditure and Induced consumption expenditure. Autonomous consumption expenditure is independent of the levels of disposable income whereas, induced consumption expenditure varies directly with the level of disposable income.

ii. Investment expenditure (I): Private investment expenditure refers to the planned (ex-ante) total expenditure incurred by all the private investors on creation of capital goods such as expenditure incurred on new machinery, tools, buildings, raw materials etc. Broadly, investment can be categorised into two types- Autonomous investment expenditure and Induced investment expenditure. The autonomous investment expenditure is independent of the rates of interest and levels of income whereas, the induced investment expenditure varies inversely with the rate of interest and directly with the levels of income.

iii. Government expenditure (G): Government expenditure refers to the total planned expenditure incurred by the government on consumption and investment purposes to enhance the welfare of the society and to achieve higher economic growth rates. The government expenditure comprises of both investment expenditure as well as consumption expenditure.

iv. Net exports (X – M): Net exports of a country refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of that country.

Explanations:

1) Aggregate supply is defined as the minimum amount of sales receipts which an entrepreneur expects to receive from his sales proceedings to continue production at a given point of employment.

2) Autonomous investment is that investment which is independent of profit as a motive i.e. which is made without an aim of maximising the returns. Government investments on transportation, communication, defence which are aimed at public welfare are some examples of such an investment.

3) J.M.Keynes was the first economist who propounded the ‘Psychological Law of Consumption’, in which he explained the relationship between consumption and income.

4) Average propensity to consume is the consumption per unit income. It shows the ratio of consumption expenditure to the level of income. Algebraically, APC = C/Y

5) Investment is defined as the addition made to the physical stock of the capital of a country. The physical stock of the capital may include land, building, machinery, tools, inventories etc.

True. Net earnings from foreign transactions of a country refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of that country. In other words, it is the difference between the exports and imports. That is, Net earnings from foreign transactions = Total exports – Total imports

The above statement is incorrect. Besides, the state of technology, the aggregate supply is affected by various other factors as well, namely, natural resources, labour force and stock of capital. The aggregate supply function can be represented as follows.

\(AS=f(\bar{N},\bar{L},\bar{K},\bar{T})\)

Where,

AS = Aggregate supply

N = Natural resources

L = Labour

K = Stock of capital

T= State of technology

Aggregate demand is the summation of consumption expenditure (C), investment expenditure (I), government expenditure (G) and net earnings from foreign transactions (X – M). where, X is exports and M is imports AD = C + I + G + (X – M)

i. Consumption expenditure (C): Consumption expenditure refers to the total expenditure incurred by all the households in an economy on different types of final goods and services in order to satisfy their wants. There are two types of consumption expenditure - Autonomous consumption expenditure and Induced consumption expenditure. Autonomous consumption expenditure is independent of the levels of disposable income whereas, induced consumption expenditure depends on the levels of disposable income.

ii. Investment expenditure (I): Private investment expenditure refers to the planned (ex-ante) total expenditure incurred by all the private investors on creation of capital goods such as expenditure incurred on new machinery, tools, buildings, raw materials etc. Broadly, investment can be categorised into two types- Autonomous investment expenditure and Induced investment expenditure. The autonomous investment expenditure is independent of the rates of interest and levels of income whereas, the induced investment expenditure depends varies inversely with the rates of interest and directly with the levels of income.

iii. Government expenditure (G): Government expenditure refers to the total planned expenditure incurred by the government on consumption and investment purposes to enhance the welfare of the society and to achieve higher economic growth rates. The government expenditure comprises of both investment expenditure as well as consumption expenditure.

iv. Net exports (X – M): Net exports of a country refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of that country.

False. Autonomous consumption is that consumption which is independent of income. This is the minimum level of consumption irrespective of whether a person earns or not. Hence, it is correct to say that the autonomous consumption is income inelastic.

Positive income from foreign transactions implies that the income of the people increases. Aggregate demand is a direct function of the net positive income earnings from foreign transactions. As such income increases the aggregate demand also increases.

False. The components of aggregate demand include consumption, investment, government expenditure and net earnings from foreign transactions. So, as per the definition, aggregate demand consists of the following components.

Demand by households - Private consumption expenditure (C)

Demand by firms - Private investment expenditure (I)

Demand by government - Government expenditure (G)

Demand by foreign sector- Net exports (X – M)

Where, X is exports and M is imports.

Thus, AD = C + I + G + (X – M)

Breakeven point is a point where consumption exactly equals income and correspondingly, savings are zero. Graphically, it is determined at the intersection of the income line or the 45 degrees line and the curve. Algebraically, breakeven is achieved when Y = C

The above statement is incorrect. Apart from consumption expenditure, the aggregate demand also depends on the investment, government expenditure and net exports. It consists of the following components.

Demand by households - Private consumption expenditure (C)

Demand by firms - Private investment expenditure (I)

Demand by government - Government expenditure (G)

Demand by foreign sector- Net exports (X – M)

Where, X is exports and M is imports

Thus,

AD = C + I + G + (X – M)

Organisation: The work of bringing together land, labour and capital at one place, combining them in proper proportion and making them work together for the purpose of production is called the organisation. The man who does this work is called the organiser. The larger the scale of production, the greater is the need for organisation.

Subjective or Psychological Factors: These are internal factors and depend on personal decision. According to Keynes, there are eight subjective motives which prevent an individual from current consumption.

i. Motive of precaution: People save money for the future in order to meet unexpected expenditure.

ii. Motive of foresightedness: People cut down their spending in order to meet future requirements for money. For examples, requirements for higher education, marriage, buying a house etc.

iii. Motive of improvement: Individuals cut down their expenditure to improve their standard of living.

iv. Motive of independence: As per this motive, man saves more in order to depict more power and independence.

v. Motive of pride: Another motive that prevents people from spending is wanting to maintain the same economic stability in the future. Providing some wealth to their future generations or making donations gives them a feeling of pride.

vi. Motive of enterprise: People prevent current consumption and save for the purpose of investing. Under this motive, people save to invest in a profitable enterprise.

vii. Motive of calculation: Under this motive, people save to invest in shares and debentures in order to increase their income.

viii. Motive of avarice: Some people have a habit unnecessarily abstaining from consumption.

Land, Labour, capital, organization and enterprise.

Form utilities, Time utilities and Place utilities.

Land is regarded as primary factor of production.

Explanation:

Land is regarded as a primary factor of production as it is used in every kind of production. It facilitates production and does not change itself in the process. Thus, it acts as a base in the production process.

The above columns can be correctly matched as:

Explanations:

1. Production is the process of converting inputs (raw materials) into outputs. Since in the production process, goods and services are created to satisfy human wants, it can be regarded as the process of creating utilities.

2. Land is a primary factor of production and rent is the factor payment. That is, rent is the income received by the land owner in return for the services provided by him/her in the production process.

3. Wages are the income received by the labour (factor of production) in return for the services provided by them in the production process. Thus, wages are the returns to the labourer.

4. Interest is the reward of capital. A moneylender or a capital owner receives interest on the amount of capital contributed by him in the production.

5. An entrepreneur organises the production process by hiring all the services of all the factors to produce the output. He sells this in the market and remunerates the factor. For his dare in undertaking the risk of production, he receives profits in return.

Land is subject to diminishing returns.

Explanation:

Land is a fixed factor of production. When more and more units of labour and capital are applied to land, the total output increase but only at a decreasing rate. Thus, we can say that land is subject to diminishing returns.

(b) Infinite Wants

Correct option is No.

A capitalist is a leader of organisation.

Explanation:

A capitalist is a person who invests his money in an organisation with the sole objective of making profits. He/she is a firm believer of capitalism. Also, he organises the production process, by hiring services of various factors of production to produce output, and sells the output in the market. In this way, we can say that a capitalist is the leader of an organisation.

(a) Limited Nature

Demand for labour is direct demand. False

Explanation:

No, it is not correct. Demand for labour is not direct demand, rather, it is a derived demand. This is because,labour is demanded in the production process to produce goods and services which are further sold in the market. In this way demand for labour is dependent on the demand for the goods and services in the production of which it will be used.

Land is a free gift of nature.

Explanation:

Land is not created by Man. It is available to human beings without any effort. That is, all natural resources, flora and fauna, earth, buildings, avenues, air, water, minerals etc. are available to human beings as free gifts of nature.

Labour cannot be stored. - True

Explanation:

Labour includes all the physical and mental efforts of workers. In other words, it is the exertion by the human body and mind with the objective of earning a living. Since we cannot store the mental and physical efforts of workers, we can conclude that labour cannot be stored and used in the future.

Labour refers to the people who actually use the land and capital to produce goods. In other words, it is the exertion by the human body and mind, with the objective of earning a living. The following are some of the features of labour:

i. Inseparable from the labourer - Labour cannot be separated from the labourer. For labour to occur, a labourer is required. This labourer is the individual who will do the work and get remunerated in return. 

ii. Perishable in nature - Labour is considered perishable in nature because, if the labourer (worker) is absent for a day, that day’s labour (exertion) is gone forever and cannot be brought back. 

iii. Inelastic supply - The working population of a country consists of individuals between the age group of 15-59. Therefore, at least in the short run, this pool of working people cannot be increased. As a result, supply of labour becomes inelastic.

 iv. Restricted mobility - Certain factors like family problems, the geographical location, climatic conditions etc. often restrict the free flow of labour from one place to another.

 v. Active factor of production- Unlike other factors, labour has feelings. It is the labour that makes the other factors productive. In this regard labour is said to be the active factor of production.

Labour refers to the people who actually use the land and capital to produce goods. It includes all physical and mental efforts of workers, employees, managers etc. In other words, the exertion by the human body and mind, with the objective of earning a living, is known as labour.

The supply of land is inelastic which means that it is less responsive to the changes in its price. This is because of its limited availability. Thus, even when the price of the land increases, its supply cannot be increased.

Capital includes all the capital goods or assets used in production. These assets are used by the labour to produce goods.

The following are some of the features of capital:

i. Artificial factor - Capital cannot produce goods on its own and therefore, is regarded as an artificial factor of production.

 ii. Derived demand - Capital is used in the production of goods meant for final consumption. It cannot be consumed directly. Therefore, it is said to have a derived demand. 

iii. Highly mobile - Capital includes machinery, raw materials etc. which can be easily transferred from one place to the other and from one occupation to the other.

iv. Elastic supply - The amount of capital can be increased at any time as per the requirement and availability of funds. 

v. Durable- Capital is durable in nature in the sense that it can be used again and again in the production process.

1. To determine whether the material is magnetic or non-magnetic, a magnet is moved over it.

2. If the material sticks to the magnet, it is called magnetic material.

3. If the material does not stick to the magnet, it is non-magnetic.

Capital includes money invested in the business, machinery and tools. A moneylender or a capital owner receives interest on the amount of capital contributed by him in the production. It is regarded as an artificial factor of production. This is because it cannot produce goods on its own.

Yes, the statement given above is correct. This is because labour refers to the people who actually use the land and capital to produce goods. It refers to the exertion by the human body and mind with the objective of earning a living. It is considered to be perishable in nature because, if the labourer (worker) is absent for a day, that day’s labour (exertion) is gone forever and cannot be brought back.

Land is a free gift of nature. – True

Explanation:​

​​​​​​The above statement is true. Land is a free gift of nature as it is not created by mankind. All the natural resources, flora and fauna, earth, buildings, avenues, air, water, minerals etc. are available to human beings as free gifts of nature.

Labour refers to the people who actually use the land and capital to produce goods. It is the exertion by the human body and mind, with the objective of earning a living. Since we cannot store the mental and physical efforts, we can conclude that labour cannot be stored and used in the future.

Variable capital refers to the capital whose demand changes over time. In other words, it refers to the capital that is used in the process of production only once. For instance, raw material, fuel, power, wages etc.

Capital can be classified into the following categories:

i. On the basis of ownership:

a. Private capital - It is owned by private individuals or institutes.

b. Public capital - It is owned by the government or a society.

ii. On the basis of mobility:

a. Sunk capital - It is the capital which is used only for a specific purpose. For instance, washing machines, which are used only for the specific purpose of washing clothes.

b. Floating capital - It is the capital which is used for a variety of purposes. For example - electricity.

iii. On the basis of nature:

a. Real capital - It is the capital which is used in the production of other goods. For example, capital assets like buildings, machinery, raw materials etc.

b. Money capital - It is the capital which is in the form of money. This capital is used to purchase real capital.

iv. On the basis of durability:

a. Fixed capital - It refers to the capital which is used in the process of production repeatedly.

b. Working capital - It refers to the capital which is used in the process of production only once.

Entrepreneur is the person who undertakes the task of production. He organises the various activities, controls the activities related to production and distribution, and also bears the risk of failure of the business. He sells the output in the market and remunerates the factors. For his dare in undertaking the risk of production, he receives profits in return.

The following are some of the qualities of an entrepreneur:

i. An entrepreneur should be efficient.

ii. He/she should be organised.

iii. He/she should have good leadership qualities.

iv. An entrepreneur should be bold and courageous.

v. He/she should have vision and foresight.

An entrepreneur is a person who undertakes the task of production. He organises tasks, controls the activities related to production and distribution, and also bears the risk of failure of the business. Thus, an entrepreneur is regarded as a leader of the organisation

An entrepreneur is a person who undertakes the task of production, organises tasks, controls the activities related to production, undertakes the distribution activities as well and also bears the risk of failure of the business. He is often regarded as the captain of an industry as, like a captain, the entrepreneur coordinates all the tasks related to production and distribution. Moreover, like a captain, an entrepreneur possesses the following characteristics.

i. Efficient - An entrepreneur is an intelligent individual. He is efficient in handling the day to day problems arising in business. An entrepreneur is a problem solver. He has the most efficient solution to any problem and does not let the problem come in the way of achieving a goal. 

ii. Organiser - An entrepreneur has the ability to combine all the factors of production in an organised manner. Also, he is good in co-ordinating activities. 

iii. Leadership - He can be regarded as a good leader as he has the skills to give directions to different factors of production. He also aims at finding the right people for the right job.

 iv. Bold and courageous - An entrepreneur is bold and courageous as he faces difficulties with courage. He works with full confidence. He is aware of his strengths and weaknesses. 

v. Vision and foresight - He has the vision and foresight and knows how to lead a team. With his vision, he can foresee the future and accordingly take the action required. 

vi. Innovator - An entrepreneur is an innovator in the sense that he introduces a new combination of the means of production. This combination of the means of production can be done by introducing new products, new techniques, a new market, new sources of raw materials etc.

An entrepreneur basically performs three important functions. These functions are: 

i. Organising Function 

ii. Bearing risks and uncertainty

 iii. Innovative function

i. Organising - An entrepreneur aligns the activities in a certain order. That is, he designs the roles and directs the people towards accomplishment of organisational goals. Also, under this function, human efforts (labour), along with the resources (land and capital), are brought together and co-ordinated. Besides this, it also includes making payment to the factors of production, supervising the activities of the factors of production; and making decisions about what to produce, how to produce etc. 

ii. Bearing risks and uncertainty - An entrepreneur performs the function of bearing the risks in the business. Every business is subject to variety of risks, such as the risk of failure of the business, risk of loss due to uncertain events etc. Some of these risks are insurable, while some are non-insurable. The insurable risks include the risk of death, risk of burglary, risk of fire etc. On the other hand, risks arising out of a change in government policies, changes in the demand for a product etc. are a part of the non-insurable risks. 

iii. Innovative functions - An entrepreneur, in addition to performing the organising and risk bearing functions, also undertakes activities related to innovation. He is an innovator in the sense that he introduces a new combination of the means of production. This combination of the means of production can be done by introducing new products, new techniques, a new market, new sources of raw materials etc.

1. If we are lost in a forest, we should take help of a mariner’s compass which will help us to find the directions while travelling through unknown regions. 

2. If mariner’s compass is not available, a bar magnet when suspended in the centre will rest in north-south direction.

1. Sharp and heavy iron scrap material is attached to a big disc. 

2. The disc is a magnet and all scrap is attracted to it. 

3. It is not possible to create, store such a big size magnet. Therefore magnetism is induced in the disc with the help of electricity.

An electromagnet is used which is attached to a crane for loading and unloading, transporting scrap and loose iron material from a trash.

A bar magnet can be attached to the window pane so that the window will be closed tight during strong winds also.

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