9. Define the term capital -intensive.

May /June 2003

[3]
Ans: Using of very large quantity of capital goods like machinery, automation
instead of employing more labour is called capital-intensive.

A firm or industry which produces its output of goods or /and services using
proportionately large inputs of capital equipment and relatively small
amounts of labour is called capital –intensive firm or industry.
Most of the car manufacturing companies are capital –intensive. They
produce using robots with high capital cost and low labour cost. Capital-
intensive production is applicable where the size of market is very large.

10. Why are some organizations capitals - intensive and others labour
-intensive?
May /June 2003 [7]
Ans:Capital –intensive means using of large proportion of capital goods than
labour. Labour –intensive means, using of more proportion of labour than
capital goods. Some organizations are capital-intensive and others labour –
intensive because of the following reason.
i. There are certain lines of production where machinery cannot be used or
where it can be used only on a limited scale. Here most of the work needs
the attention of labour. For example in case of agriculture and gardening,
only a limited amount of capital goods can be used. In case of production of
artistic goods or works of arts. Jewellery making the human hands and mind
are necessary .The firms producing these items are generally labour –
intensive.

ii. Where the demand for the product is small, the use of machinery and large
–scale production will not be profitable .So the firms that concentrate on
local market uses labour-intensive methods of production .But the firms,
which have large market size and supply goods in international level use
Capital-intensive methods of production investing more money on capital
goods than labour.

iii. In countries where labour is very cheap like India, Bangladesh, Pakistan,
the labour-intensive methods may be cheaper than methods using elaborate
machinery. So firms in those developing countries use labour-intensive
methods, where as in developed countries like Japan, Britain, America, etc
the capital -intensive methods of production are used by the firms.
iv.Some firm produce large scale and some firms produce in small
scale.Large –scale production has become possible with the help of
machinery . So the firms producing inlarge scale use capital intensive
methods. Whereas the firms producing in small scale mostly use labour-
intensive method.

13. What is meant by ‘the economic problem’ Nov 2000

[4]
Ans:The economic problem arises because of scarcity. There is no limit to
peoples wants, they are infinite.Eg.People want more and better clothing and
health care and improved transport infrastructure. The number of workers,
Machines, offices, factories, raw materials and land used to produce these
products however is limited. Using these scarce resources we want satisfy
our unlimited wants. This result economic problem such as what,,how &for
whom to produce.

Economic system

9. Discuss why a mixed economy might be preferred to a market or a command economy.

NOV 2000 [8]
Write the meaning of, market economy and command economy .Mixed economy
is an economic system which combines both the features of market and command
economy. At present this system is being adopted by many nations in the world.
i) Economic stability: A market economy suffers from economic instability. But in a
mixed economy because of state regulation and planning of the economy, there is no
economic instability.
ii) Rapid economic growth: In a mixed economy the rate of economic growth will be
more as compared to market or command economy. In mixed economy the growth
rate is more as both private and public sectors produce more goods with competitive
spirit.
iii) Preservation of freedom: A mixed economy is based on democratic principles. It
promotes economic, political, civil and cultural freedom of the people. There is also
freedom of occupation, press and speech which are not found in a completely
command economy or completely market economy.
iv) Consumers sovereignty: Consumers’ sovereignty is not found in command
economy, but in mixed economy the commodities will be produced according to the
tastes of the consumers .Consumers will feel happier as they purchase goods which
they like.
v) Private sector is guided by the profit motive whereas public sector is guided by
service motive] [welfare motive]. Some industries will be under the joint ownership of
private individual and government. Government will control and supervise the private
sector by the way of price policy, tax policy etc.In mixed economy everything will be
directed by the planning commission.
vi) In command economy there is little incentive[motivation ]to innovate, and there is
no reward for hard work. Due to lack of competition economic growth is very low. But
in market economy the economic growth is very high but there is social costs such
as pollution, damage to environment, crime etc. But in mixed economy social costs
are controlled by the government and there will be steady economic growth.
Government may use laws or high taxes to control social cost made by private firms.
vii) In mixed economy a Government helps vulnerable (weak) group, ensuring that
they have access to basic necessities. They can charge more taxes from the rich
people, hence result even distribution of income.
vii) In mixed economy, Government may be able to stop people consuming harmful
goods imposing taxes and providing information or passing legislation.
viii) In mixed economy, Government can finance the production of products that
cannot be charged for directly, for Eg. defence.
ix) In mixed economy, Government can prevent private sector firms from exploiting
consumers by charging high prices.
From this discussion it is concluded that mixed economy might be preferred
to a market or a command economy.
4. Discuss the advantages and disadvantages of placing a greater emphasis [relaying more] on the
market system. Nov.2007 ,2001 [8]
. Many countries, including old planned economies like china and Russia are
relying more on the market system to allocate scarce resources in their
economies because of its advantages. For example, a market economy will
tend to produce a wider variety of goods and services for consumers to
choose from if it profitable to do so.This of course depends on consumers
being willing and able to buy them. As consumer’s buying habits change then
firms will quickly allocate resources to the production of those goods and
services they want. In this way, consumers can quickly get want they want
and can pay for in a market economy.
Private sectors firms will compete for the custom of
consumers to make profits. It is therefore in the interest of each firm to try to
produce better –quality products at lower prices than their competitors in
order to attract more consumer demand .new technology and methods of
production can lower the cost of producing goods and services so that fewer
resources can be used to make them. In this way more goods and services in
total can be made, and more wants satisfied, from the scarce resources
available in the economy.
Because a market system relies on the decisions of
consumer and producers to determine the allocation of resources, there is
little or no need for government intervention. As a result, government
spending and levels of taxation can be much lower in economies that rely
more on the market system.
However, there are some clear disadvantages with a market
economic system.clearly,those consumers with the most money will be able
to buy the goods and services they want and need .private firms may also
produce goods and services these consumers want even if they are harmful
to them ,to other people ,or the environment. For example, some consumers
may want to buy dangerous drugs or guns .Firms may do little to reduce or
clean up pollution from their productive activities because it may be
expensive to do so and this would reduce their profit.
In contrast, consumers with little or no money ,for example ,
because they are too old or disabled to work to earn money ,may be unable
afford many basic goods and services .Firms will also fail to produce some of
the goods and services they may need ,such as health care or products that
aid mobility, simply because it is not profitable to do so .similarly, other
goods or services like street lighting ,a legal system and defence may not be
provided in pure market economies because it will be difficult for private
firms to identify and collect money from individual consumers who will
benefit from them. This is because once provided it is difficult to exclude
consumers from the benefit of, say, street lighting, whether they have paid for
it or not.
High levels of unemployment among workers can also be a
big problem in many market economies. Resources may become unemployed
if the products they produce are no longer profitable.

10. Contrast the operation of a market economy with a command economy. NOV 2000 [8]

i) The means of production [factors of production] are owned by private individuals in market economy
whereas the means of production are owned by the state in the command economy.
ii) Producers are guided by profit motives in the market economy but Public welfare is the motto of a
command economy.
iii) Competition is the important pillar of market economy but Command economy aims at elimination of
competition.
iv) Price mechanism is the main organizing force. In a market economy, a shortage of a commodity will
cause its price to rise. But in a command economy Central planning authority regulates everything.
Prices are not free to change in responds to changes in supply and demand here.
v) In market economy producers, consumers and workers have remarkable freedom in whatever they do.
But in a command economy, everything is decided by the government.
vi) Concentration of economic power [wealth] in a few hands [inequality] is seen in market economy
whereas equal distribution of income and wealth among people is there in a command economy.
vii) Very limited role [very few economic functions] for government in the market economy but
Government has major role in a command economy.Evey thing is run by the government.
viii) Public goods are not provided and merit goods are underprovided in the market economy. But for
the welfare of the people a government provides these goods.