INTRODUCTION TO ECONOMICS AND FINANCE

General:

Overall paper was straight forward and based on essentials of economics and finance. As in previous attempts the examinees were seen writing more than the justified length. It was one of the main reason for failure of apparently good students, as they were unable to attempt the paper completely. Another advice to students is that they should try to avoid ambiguous answers. Answers which do not give a clear idea as to what the student is trying to say, can not be expected to secure marks.

Question-wise comments are as under:

Q.1

(a)

This question was misunderstood by some students as they wrote about the diminishing marginal utility. Some stated the concept correctly but made the table showing marginal rate of substitution (MRS) column with increasing trend (taking change in quantity of item being substituted as denominator).

(b)

A number of students repeated the concept of diminishing MRS already discussed in part (a) without giving the reasons for its diminishing behaviour, which was the requirement of the question.

Q.2

(a)

This part proved to be a high scoring question for most of the candidates and they correctly identified almost all the major causes of inflation in an economy that is an increase in the demand, an increase in the money supply, a decline in the supply of a product, an increase in the cost of production, imported inflation and inflation due to inflationary expectations. Weak replies incorporated only the social and political factors that were responsible for inflation. Some examinees concentrated on kinds of inflation, like cost push, demand pull etc. whereas others commented on pros and cons of inflation and wrote different definitions which were irrelevant and of no gain.

(b)

Better replies incorporated all the measures taken by the authorities to check the rate of inflation for example pursuing tight monetary and fiscal policies, encouraging supply side of the economy, income and price control policies etc. Some examinees had misconception and suggested measures like restriction on imports, increase in indirect taxes and government spending etc.

Q.3

Quite a good number of students were of the opinion that shut down point is where the firm’s Average Cost (AC) exceed its AR rather than the point where Average Variable Cost (AVC) =Price=AR. Some of the candidates unnecessarily elaborated all the possibilities faced by a perfectly competitive firm under short run.

Q.4

This was an easy question and many students got full marks. Some replies incorporated types of the trade restrictions such as quota, tariff, embargoes and exchange controls which were not required at all. A sizeable number of examinees kept on repeating the same point i.e. supporting local industry.

Q.5

Factors of production is another essential topic of economics. Students showed good performance and explained almost all major characteristics of land. However, economic meaning of land was confused with the literal meaning by a number of students. Some examinees tried to explain the determination of rent which was not required.

Q.6

Approximately 50% of the candidates correctly identify the factors that determine the size of the market for example type of commodity, nature of demand, transport and communication, security and peace, government policies etc. Quite a good number of students were of the opinion that market size is determined by factors such as space, time, type of competition etc. which was not correct.

Q.7

This question on cannons of taxation was probably the easiest of the paper. Most of the candidate attempted the question well and gained full marks.

Q.8

Most of the candidates correctly described the main purpose of raising public debts for example financing economic development, creating employment, curbing inflation, financing the public sector and war financing etc. However,  some examinees described public debt as the borrowing by general public from financial institutions. Some repeated only one purpose again and again in different ways and gained no additional marks.

Q.9

Most of the candidates outlined almost all the essential functions performed by the commercial banks these days apart from accepting deposits and advancing loans for example payment of utility bills, buying and selling of securities, disbursing dividends and non-fund based facilities etc. However, some students did not read the question carefully and started describing the functions of deposit taking and advancing loans.

Q.10

Many students secured full marks in this question. However some candidates got confused and quoted the determinants of demand instead of assumptions of law of demand.

Q.11

Students faced no difficulty in describing oligopoly but lost the track while describing its economic effects. Instead of explaining the effects of oligopoly on an economy, most of them wrote characteristics of oligopolistic market.

Q.12

The basic economic problems are what, how and for whom to produce. Many of the students got confused and identified problems like inflation, poverty, inefficiency as the basic problems. Those who did manage to identify the basic problems correctly did score well. However, some of them limited their answer towards defining market mechanism and explaining how it worked and did not explain as to how the basic problems are solved by market mechanism.

Q.13

(a)

Students had a general idea of nature of mutual funds but lacked lucidity. Extremely few could differentiate between a closed and open end mutual fund.

(b)

The quality of response about advantages of mutual funds was far better. The students were generally aware of the concept of diversification of market risk by way of pooling of funds.

(c)

With the expansion of capital market in the country we see a large number of mutual funds in the market with varying investment approaches. Students are supposed to be reasonably aware of the developments in the real world around them. Knowledge about mutual funds was broadly lacking and perfunctory.

Q.14

Candidates had good knowledge of determination of equilibrium of national income by the interaction of aggregate demand and aggregate supply. However, there were many who misunderstood the requirement and wrote about circular flow of national income.