RBSE Solutions Class 12 Economics Chapter 7 Concept of Production

RBSE Class 12 Economics Chapter 7 Multiple Choice Questions

 

Question 1. A rational producer chooses which stage for his production?
(a) First
(b) Second
(c) Third
(d) Fourth
Answer: (b) Second
In simple words: A smart producer wants to make the most profit. The second stage of production is where they get the best results from their efforts. It's the most efficient point where total product is maximized and average product is still positive.

🎯 Exam Tip: Focus on how efficiency and profit maximization guide producer decisions in economics, especially in the context of the Law of Variable Proportions.

 

Question 3. Factors of production are :
(a) land and labour
(b) capital and technology
(c) enterprise
(d) All of the options
Answer: (d) All of the options
In simple words: The main things needed to make goods and services are land, labor, capital, and a person to bring them all together (enterprise or entrepreneurship). Together, these make up all the resources a business uses.

🎯 Exam Tip: Remember the four core factors of production: Land, Labour, Capital, and Entrepreneurship/Organization. Sometimes technology is grouped with capital or entrepreneurship.

 

Question 4. In short-term, variable factor of production is :
(a) labour
(b) entreprise
(c) capital and technology
(d) land
Answer: (a) labour
In simple words: In the short run, a business can easily change things like the number of workers (labour) to make more or less product. Other things like factories (capital) or land are fixed for a while.

🎯 Exam Tip: Distinguish between fixed factors (hard to change quickly, like buildings) and variable factors (easy to change quickly, like daily workers) in the short run.

 

Question 5. The point where total production is maximum, the marginal production will be :
(a) zero
(b) one
(c) infinite
(d) two
Answer: (a) zero
In simple words: When adding one more unit of input (like a worker) does not increase the total output at all, then the marginal production is zero. This is the peak point of total output before it starts to fall.

🎯 Exam Tip: Understand the relationship between total production (TP) and marginal production (MP) curves; MP is zero when TP is at its peak.

RBSE Class 12 Economics Chapter 7 Very Short Answer Type Questions

 

Question 1. What is production?
Answer: Production is the process of making goods and services. It involves using various inputs like raw materials, labor, and machinery to create something that has value and can satisfy needs. This process adds utility to a product, meaning it makes it more useful or desirable. Economic production is central to how societies meet their needs and wants.
In simple words: Production is simply making things, or giving things more use. We use different resources to turn them into new goods or services that people want.

🎯 Exam Tip: Define production clearly as the "creation of utility" or the "transformation of inputs into outputs with value."

 

Question 3. What is total production?
Answer: Total production refers to the entire amount of output generated by using all available resources (factors of production) within a specific time period. It measures the total quantity of goods and services produced by a firm or an economy. This concept provides a comprehensive overview of the overall output.
In simple words: Total production is just the total amount of everything a business makes during a certain time, using all its resources.

🎯 Exam Tip: Emphasize "total output" and "all factors of production" within a "given period" when defining total production.

 

Question 4. What is average production ?
Answer: Average production (AP) is the output produced per unit of a variable factor used in production. We calculate it by dividing the total production by the number of units of the variable factor employed. This helps us understand the efficiency of each unit of input. The formula is:
\[ \text{Average Production} = \frac{\text{Total Production}}{\text{Number of Units of a Factor Employed}} \]
In simple words: Average production tells us how much product is made by each unit of a changeable resource, like each worker. We find it by dividing the total output by the number of workers.

🎯 Exam Tip: Remember the formula for average product (\( \text{AP} = \text{TP}/\text{L} \) or \( \text{AP} = \text{TP}/\text{variable factor} \)) and explain that it measures per-unit efficiency.

 

Question 5. What is marginal production?
Answer: Marginal production (MP) is the extra output gained when one additional unit of a variable factor is used, while all other factors of production remain unchanged. It shows how much total output increases with just one more unit of input. This concept is crucial for making decisions about increasing or decreasing input usage in the short term.
In simple words: Marginal production is the extra bit of product we get when we add just one more worker or one more unit of any changeable resource.

🎯 Exam Tip: Key phrase for marginal production is "additional output from an additional unit of variable factor, keeping others constant."

RBSE Class 12 Economics Chapter 7 Short Answer Type Questions

 

Question 1. Write the importance of organisation among various factors of production.
Answer: Organization is a critical factor of production, often referred to as management. It involves arranging and coordinating other factors like land, labor, and capital to achieve production goals. Through effective management, technology, and specialists, production activities are planned and executed efficiently. Organization is truly the "heart" of production because it ensures all resources work together smoothly to create goods and services. Modern production on a large scale has greatly increased the importance of this factor.
In simple words: Organization, or good management, is super important in making things. It's like the brain that puts all the other parts (land, workers, money) together so they work well and make products efficiently.

🎯 Exam Tip: Highlight organization's role in coordinating factors and ensuring efficient production, often equating it with management or entrepreneurship.

 

Question 2. Write a short note on factors of production-land and labour.
Answer:
(i) Land: In economics, 'land' means more than just soil; it includes all natural resources provided freely by nature. This covers actual land, water, air, light, heat, minerals, and soil richness. Land is fixed in location and cannot be moved, unlike labor or capital, and its productivity varies from place to place. It is a fundamental, essential, and limited resource.
(ii) Labour: Labour is any physical or mental effort by humans directed towards producing goods or services for economic gain. Work done purely for enjoyment or love, without economic intention, is not considered labor in economics. It is directly linked to human effort, and the efficiency of individual workers can differ significantly.
In simple words: (i) Land means all free natural gifts, like soil, water, and minerals. It cannot be moved and its quality changes from place to place. (ii) Labour is any human effort, mental or physical, to make things for money. It's about working for pay, not for fun, and people work at different speeds.

🎯 Exam Tip: For land, focus on "free gifts of nature" and "immobile." For labor, highlight "physical or mental effort for economic purpose" and "human effort."

 

Question 3. Explain the relationship between average product and marginal product.
Answer: The relationship between Average Product (AP) and Marginal Product (MP) is important:
1. Both AP and MP are derived from total production.
2. When AP increases, MP also increases, but MP rises faster than AP (\( \text{MP} > \text{AP} \)).
3. When AP reaches its highest point, MP is equal to AP.
\( \implies \) The MP curve cuts the AP curve at its maximum point.
4. When AP begins to fall, MP also falls, and MP falls faster than AP (\( \text{MP} < \text{AP} \)).
5. It is possible for MP to decrease while AP is still increasing, but AP will never decrease while MP is increasing. This is a key dynamic.
6. MP can become zero or even negative, but AP will always remain positive because total production cannot be negative.
In simple words: AP and MP are related. When AP goes up, MP also goes up and is higher than AP. When AP is at its highest, MP is equal to AP. When AP starts falling, MP also falls and is lower than AP. MP can even be zero or negative, but AP is always positive.

🎯 Exam Tip: Clearly state the three key points of intersection/relationship: when AP is rising, at its maximum, and falling, always comparing it to MP.

 

Question 4. Define law of variable proportions.
Answer: The Law of Variable Proportions states that if we keep some factors of production fixed (like land) and continuously increase a variable factor (like labor), total production will first increase at an increasing rate, then at a slower rate, and eventually start to decrease. This means the additional output from each extra unit of the variable factor (marginal product) first rises and then falls. This law helps explain how output changes in the short run. It is also known as the Law of Returns to a Factor, and applies to the short term.
In simple words: This law says that if you use more and more of one changing resource (like workers) with a fixed resource (like a factory), your total output will first grow fast, then slow down, and then might even shrink. The extra output from each new worker will go up and then come down.

🎯 Exam Tip: Define the law by mentioning fixed and variable factors, and how total production changes through increasing, diminishing, and negative returns.

 

Question 5. Explain in brief the rational stage of production.
Answer: The rational stage of production for a producer is typically the second stage. In this stage, the total production is increasing, but at a diminishing rate, and the marginal product is positive but decreasing. A rational producer chooses this stage because it allows them to maximize their output or minimize their cost for a given output level. This stage represents the most efficient use of resources and is often called Producer's Equilibrium. Operating in the first stage would mean not fully utilizing fixed factors, while operating in the third stage would mean incurring negative marginal returns.
In simple words: The best stage for a producer to work in is usually the second stage. Here, total output is still growing, but more slowly, and each new worker adds less than the previous one, but still adds something useful. This is where they make the most sense for profit and efficiency.

🎯 Exam Tip: Link the rational stage to maximizing output or minimizing costs, usually identified as Stage II where MP is positive but decreasing and AP is either rising or falling, but still positive.

 

Question 1. Explain in detail the factors of production.
Answer: Production of goods and services relies on several key factors. The total amount produced and a nation's economic growth depend on how well these factors are supplied and used efficiently. These are the main factors:
(i) Land: In economics, 'land' encompasses all natural resources given freely by nature, not just soil. This includes water, air, light, heat, minerals, and the land itself. Land is fixed in location, cannot be moved, and its natural fertility can vary. It is a fundamental, essential, and limited resource that forms the base of all production.
(ii) Labour: Labour refers to any human effort, physical or mental, performed for economic reward. This includes work by professionals like doctors and teachers, as well as manual laborers. Work done purely for enjoyment or love, without economic intention, is not considered labor. Labour is perishable; if a worker is unemployed for a day, that labor cannot be recovered later. Worker efficiency also varies from person to person.
(iii) Capital: Capital represents assets used to generate income, such as raw materials, buildings, machinery, and equipment. It is essentially produced means of production, vital for large-scale operations.
(iv) Management and Technology: This factor, also known as organization, is crucial for arranging and coordinating other factors of production in the right amounts. With its help, resources are combined, and coordination is established. Modern large-scale production makes the role of efficient management and technology even more vital, as it boosts overall efficiency and productivity.
(v) Entrepreneurship: The entrepreneur is the individual who organizes production, takes key decisions, and bears the risks associated with starting and running a business. They bring together land, labor, and capital to create an enterprise, acting as the manager, organizer, and risk-taker to begin the business.
In simple words: To make anything, we need several factors: (i) Land is all free natural resources. (ii) Labour is human effort for pay. (iii) Capital is tools, machines, and buildings used for making things. (iv) Management and Technology is how we organize and use smart methods to produce. (v) Entrepreneurship is the person who starts the business and takes the risks. These five things are like the ingredients for making goods and services.

🎯 Exam Tip: List and define each factor of production (Land, Labor, Capital, Organization/Management, Entrepreneurship) clearly with their key characteristics and roles in the production process.

 

Question. Explain the three stages of production with the help of a diagram.
Answer: Production can be divided into three stages based on how output changes as more variable input (like labor) is added to fixed inputs. The diagram typically shows the Total Product (TP), Average Product (AP), and Marginal Product (MP) curves.
**First Stage (Stage of Increasing Returns):**
(i) In this initial stage, as more units of the variable factor are added, the total production increases at an increasing rate.
(ii) This stage usually begins from the origin and continues up to the point where the marginal product is at its maximum.
(iii) During this stage, Total Product (TP) increases initially at an increasing rate. After a point, it might increase at a diminishing rate within this stage itself. Both Marginal Product (MP) and Average Product (AP) are increasing, with MP generally higher than AP.
(iv) The first stage ends when MP equals AP, and AP is at its maximum point. A producer usually pushes beyond this stage as there's still room for efficiency gains.
**Third Stage (Stage of Negative Returns):**
(i) This stage is characterized by diminishing total output.
(ii) It begins after total production has reached its maximum, and marginal product has become zero.
(iii) During this stage, Total Production (TP) starts to decrease, Average Product (AP) continues to fall, and Marginal Product (MP) becomes negative. This means adding more variable input actually reduces total output.
(iv) A producer would never operate in this stage as it is highly inefficient and results in lower total output.
In simple words: Production happens in stages as we add more workers. In the first stage, output grows faster and faster. In the third stage, adding more workers actually makes total output go down because there are too many workers for the fixed resources. The second stage, between these two, is where a smart producer usually works, but the source text did not detail it separately.

🎯 Exam Tip: When explaining the stages, define how total, average, and marginal products behave in each stage. Remember that a rational producer typically operates beyond Stage I and avoids Stage III.

 

Question 3. Explain in detail the law of variable proportions.
Answer: The Law of Variable Proportions explains how total production changes in the short run when one factor of production (the variable factor) is increased while others remain fixed. It states that as more units of a variable factor are continuously added to a constant amount of fixed factors, total production will first increase at an increasing rate, then at a diminishing rate, and eventually decline. This means the additional output from each extra unit of the variable factor (marginal product) first rises and then falls. This economic principle is also called the Law of Returns to a Factor, and it applies to the short-run where some factors are fixed. The law shows that the proportion between fixed and variable factors changes as production increases.
**Definitions:**
(i) P.A. Samuelson defined it by stating that an increase in certain inputs relative to other fixed inputs, given technology, will increase output. However, after a certain point, the extra output from adding more of those inputs will continuously decrease. This highlights the concept of diminishing returns.
(iv) Mrs. Joan Robinson's definition states that with a fixed amount of one production factor, increasing other factors will eventually lead to a decreasing rate of additional output.
In summary, the Law of Variable Proportions (or diminishing returns) describes how output behaves when one factor is increased while others remain fixed. It shows that total output might initially grow at an increasing rate, but beyond a certain point, the rate of increase slows down. Ultimately, the marginal increase in total output decreases as more variable factors are applied to fixed ones. This law exists because production factors are not perfectly interchangeable, and the elasticity of substitution among them is not infinite. This means that you cannot indefinitely substitute one input for another and get the same proportional output.
In simple words: The Law of Variable Proportions describes what happens to total output when you keep some things the same (like a factory size) but keep adding more of one thing (like workers). At first, output grows faster, then slower, and might even go down. This means each new worker helps less and less. Famous economists like Samuelson and Robinson explained how adding more of one input eventually gives you smaller and smaller gains in output.

🎯 Exam Tip: When explaining this law, ensure you clearly state the assumptions (short-run, one variable factor, others fixed) and describe the three phases of increasing, diminishing, and negative returns to the variable factor.

 

Question 4. Why does a rational producer select the second stage of production? Explain.
Answer: A rational producer chooses to operate in the second stage of production because this is where production is most efficient, allowing them to maximize output or minimize costs for a given output level. This optimal point is known as Producer's Equilibrium.
In the first stage, total, marginal, and average products are all increasing. While it seems good, it indicates under-utilization of fixed factors. A rational producer would want to expand beyond this to make better use of their fixed resources. The third stage, however, is characterized by declining total product and negative marginal product, meaning additional input actually reduces total output. This is highly inefficient and results in losses.
Therefore, the rational stage of productivity is the second stage. Here, total output is still increasing (though at a diminishing rate), and the factors of production are used most effectively. For example, if adding more than a certain amount of labor leads to negative marginal productivity and less total product, a rational producer will employ labor up to the point of maximum total output. Manufacturers aim to increase output while keeping costs low and quality high, which is best achieved in the second stage of production.
In simple words: A smart business person chooses the second stage of production because that's where they can make the most goods or make their goods at the lowest cost. It's the sweet spot between adding too few workers and adding too many workers that just get in each other's way. This stage helps them get the best results from their resources.

🎯 Exam Tip: Emphasize that the second stage is rational because it balances increasing returns from the first stage with avoiding the negative returns of the third, leading to efficiency and profit maximization (Producer's Equilibrium).

RBSE Class 12 Economics Chapter 7 Multiple-Choice Questions

 

Question 1. Identify the correct statement:
(a) The average product is at its maximum when marginal product is equal to average product.
(b) The law of increasing returns to scale relates to the effect of changes in factor proportions.
(c) Economies of scale arise only because of invisibilities of factor proportions.
(d) Internal economies of scale can accrue only to the exporting sector.
Answer: (a) The average product is at its maximum when marginal product is equal to average product.
In simple words: The average output per worker is highest exactly when the additional output from the last worker is equal to the average. This is a key relationship in production theory.

🎯 Exam Tip: Remember the important relationship that AP is maximized when MP = AP. This is a fundamental concept in economics, similar to how your average grade works with your next test score.

 

Question 3. Diminishing marginal returns implies :
(a) decreasing average variable costs
(b) decreasing marginal costs
(c) increasing marginal costs
(d) decreasing average fixed costs
Answer: (c) increasing marginal costs
In simple words: When each extra unit of input (like a worker) adds less to total output (diminishing marginal returns), it means the cost to produce each extra unit of output (marginal cost) is going up. This happens because less productive inputs are being used.

🎯 Exam Tip: Remember the inverse relationship between diminishing marginal returns (falling MP) and increasing marginal costs (rising MC). They are two sides of the same coin.

 

Question 4. The short-run, as economists use the phrase, is characterized by :
(a) at least one fixed factor of production and firms neither leaving nor entering the industry
(b) a period where the law of diminishing returns does not hold
(c) no variables inputs that are all of the factors of production are fixed
(d) all inputs being variable
Answer: (a) at least one fixed factor of production and firms neither leaving nor entering the industry
In simple words: In economics, the "short-run" is a time frame where a business cannot change all its resources. At least one resource, like a building, stays fixed, while others like labor can be changed. This is a conceptual distinction, not a calendar period.

🎯 Exam Tip: The defining characteristic of the short-run is the presence of at least one fixed factor of production. All other options describe different economic scenarios.

 

Question 5. The marginal, average and total product curves encountered by the firm producing in the short-run exhibit all of the following relationships except:
(a) when total product is rising, average and marginal product may be either rising or falling
(b) when marginal product is negative, total product and average product are falling
(c) when average product is at a maximum, marginal product equals average product, and total product is rising
(d) when marginal product is at a maximum, average product equals marginal product, and total product is rising
Answer: (d) when marginal product is at a maximum, average product equals marginal product, and total product is rising
In simple words: This question is about the relationships between Marginal Product (MP), Average Product (AP), and Total Product (TP). The only statement that is false is (d), because when marginal product is at its maximum, average product is still rising, not equal to marginal product. AP equals MP when AP is at its maximum.

🎯 Exam Tip: Study the typical shapes and intersection points of the TP, AP, and MP curves. A common misconception is confusing when MP is maximum versus when AP is maximum.

 

Question 7. Diminishing return occurs :
(a) when units of a variable input are added to a fixed input and total product falls
(b) when units of a variable input are added to a fixed input and marginal product falls
(c) when the size of the plant is increased in the end
(d) when the quantity of the fixed input is increased and returns to the variable input falls
Answer: (b) when units of a variable input are added to a fixed input and marginal product falls
In simple words: Diminishing returns begin when adding more of a changeable resource to a fixed resource causes the extra output from each new unit to go down. The total output is still increasing, but at a slower pace.

🎯 Exam Tip: Distinguish between diminishing *marginal* returns (MP falls) and negative *total* returns (TP falls). Diminishing returns starts earlier, when MP begins to decline.

 

Question 8. Total cost in the short-run is classified into fixed costs and variable costs. Which one of the following is a variable cost?
(a) Cost of raw material
(b) Cost of equipment
(c) Interest payment on past borrowings
(d) Payment of rent on building
Answer: (a) Cost of raw material
In simple words: In the short run, variable costs are those that change with the amount of production. Raw materials are a good example because you use more materials to make more products.

🎯 Exam Tip: Remember that variable costs change with output (like raw materials, labor wages), while fixed costs do not (like rent, interest payments, equipment cost).

 

Question 9. Diminishing marginal returns begin to occur between units :
(a) 2 and 3
(b) 3 and 4
(c) 4 and 5
(d) 5 and 6
Answer: (c) 4 and 5
In simple words: Diminishing marginal returns happen when the extra output from each new unit of input starts to get smaller. Based on typical production curves, this often begins after a certain number of inputs have already been used.

🎯 Exam Tip: This type of question often requires analyzing a production schedule or graph to identify the point where Marginal Product starts to decrease. Remember that diminishing returns do not imply negative returns; MP is still positive but decreasing.

 

Question 11. Which of the following is true of the relationship between the marginal cost function and the average cost functions?
(a) If MC is greater than ATC, then ATC is falling
(b) The ATC curve intersects the MC curve at minimum MC
(c) The MC curve intersects the ATC curve at minimum ATC
(d) If MG is less than ATC, then ATC is increasing
Answer: (c) The MC curve intersects the ATC curve at minimum ATC
In simple words: The marginal cost (MC) curve always cuts the average total cost (ATC) curve at its very lowest point. This is a fundamental rule for how these cost curves behave.

🎯 Exam Tip: Always remember that the marginal curve intersects the average curve at the average curve's minimum point, whether for costs or products. This applies to both average variable cost and average total cost.

 

Question 12. Which of the following statements is true of the relationship among the average cost functions?
(a) ATC = AFC – AVC
(b) AVC = AFC + ATC
(c) AFC = ATC + AVC
(d) AFC = ATC - AVC
Answer: (d) AFC = ATC - AVC
In simple words: Average total cost (ATC) is made up of average fixed cost (AFC) and average variable cost (AVC). So, if you know ATC and AVC, you can find AFC by subtracting AVC from ATC.

🎯 Exam Tip: Know the fundamental cost relationships: \( \text{ATC} = \text{AFC} + \text{AVC} \). From this, you can easily derive other formulas like \( \text{AFC} = \text{ATC} - \text{AVC} \) or \( \text{AVC} = \text{ATC} - \text{AFC} \).

 

Question 13. Which of the following is not a determinant of the firm's cost function?
(a) The production function
(b) The price of labour
(c) Taxes
(d) The price of the firm's output
Answer: (d) The price of the firm's output
In simple words: A firm's costs depend on how it makes things (production function), how much its resources cost (like labor prices), and taxes. But the price at which the firm sells its final products does not directly determine its production costs; it affects revenue.

🎯 Exam Tip: Differentiate between factors that influence production costs (inputs, technology, taxes) and market factors that influence revenue (output price and demand).

 

Question 15. In describing a given production technology, the short-run is best described as lasting :
(a) upto six months from now
(b) upto five years from now
(c) as long as all inputs are fixed
(d) as long as at least one input is fixed
Answer: (d) as long as at least one input is fixed
In simple words: The short-run is an economic term, not a fixed time period. It means a period where a business cannot change all of its resources; at least one factor of production is stuck in place, like a factory building.

🎯 Exam Tip: Define short-run as a period with at least one fixed factor, distinguishing it from the long-run where all factors are variable.

 

Question 16. If decreasing returns to scale are present then if all inputs are increased by 10% then :
(a) output will also decrease by 10%
(b) output will increase by 10%
(c) output will increase by less than 10%
(d) output will increase by more than 10%
Answer: (c) output will increase by less than 10%
In simple words: Decreasing returns to scale means that if you increase all your resources by a certain percentage, your total output will increase by a smaller percentage. So, if inputs go up by 10%, output goes up by less than 10%.

🎯 Exam Tip: Understand the concept of returns to scale: increasing (output > input %), constant (output = input %), and decreasing (output < input %).

 

Question 17. If the marginal product of labour is below the average product of labour, it must be true that :
(a) the marginal product of labour is negative
(b) the marginal product of labour is zero
(c) the average product of labour is falling
(d) the average product of labour is negative
Answer: (c) the average product of labour is falling
In simple words: Think of grades: if your next test score (marginal product) is lower than your average score (average product) so far, then your average score has to go down. The same rule applies to production, where the average product will fall if the marginal product is lower than it.

🎯 Exam Tip: The relationship between marginal and average quantities is crucial: if marginal is below average, average is falling; if marginal is above average, average is rising; if marginal equals average, average is at its peak.

 

Question 18. What is a production process?
(a) Technical relationship between physical inputs and physical output
(b) Relationship between fixed factors of production and variable factors of production
(c) Relationship between fixed factors of production and the utility created by it
(d) Relationship between a quantity of output produced and time taken to produce the output
Answer: (a) Technical relationship between physical inputs and physical output
In simple words: A production process is basically how a business turns raw materials and other resources (inputs) into finished goods or services (outputs). It's the technical way things are made using a specific method.

🎯 Exam Tip: A production process fundamentally describes the engineering or technical method of converting inputs into outputs. It's about 'how' things are made, not just the factors involved.

 

Question 1. What is scale of production?
Answer: The scale of production refers to the overall size or capacity of a production unit, often measured by the quantity of inputs used or the level of output produced. It can be expressed in terms of physical units like meters, liters, kilograms, or by the area of land, such as bigha, acre, or hectare. It essentially indicates the size of the operation and the amount of resources deployed.
In simple words: Scale of production just means how big a business's production is. We measure it using units like how many items they make, or how much land they use.

🎯 Exam Tip: Define "scale" as the overall size or capacity of production, and give examples of measurement units to illustrate its meaning.

 

Question 2. What is meant by TP?
Answer: TP stands for Total Product. It represents the entire quantity of output produced by combining all units of variable factors with the fixed factors during the production process. In essence, it is the sum of all goods or services created within a given time period. This gives the full picture of a firm's overall output.
In simple words: TP means Total Product. It's simply the whole amount of stuff a company makes using all its resources, both the fixed and the changeable ones.

🎯 Exam Tip: Clearly state that TP is the "sum total of output" from "all factors" (fixed and variable) during a specific period.

 

Question 3. What is AP?
Answer: AP stands for Average Product. It measures the output produced per unit of the variable factor employed in the production process. To calculate it, you divide the total product by the number of units of the variable factor. This tells you the average efficiency of each unit of a changeable input, showing how much each unit contributes on average.
In simple words: AP means Average Product. It tells you how much product each unit of a changeable resource (like each worker) makes on average. You get it by dividing total output by the number of workers.

🎯 Exam Tip: Define AP as "output per unit of variable factor" and give its formula (\( \text{AP} = \text{TP}/\text{Variable Factor} \)) to ensure a complete answer.

 

Question 4. What do you understand by MP?
Answer: MP stands for Marginal Product. It refers to the additional output that results from adding one more unit of a variable factor to the production process, while all other factors are kept constant. It shows the impact of the last unit of input on total output. This is a crucial concept for short-term decision-making about adding or reducing inputs.
In simple words: MP means Marginal Product. It's the extra amount of product you get when you add just one more worker, assuming everything else stays the same.

🎯 Exam Tip: Stress "additional output" from "one additional unit of variable factor" for MP. This highlights its incremental nature.

 

Question 5. When is TP maximum in relation to MP?
Answer: Total Product (TP) is at its maximum point when Marginal Product (MP) becomes zero. At this stage, adding another unit of the variable factor does not contribute any additional output, so the total production stops increasing. This indicates the peak of the production curve before it starts to decline. This point is critical for a producer to understand before over-employing variable factors.
In simple words: Total production is highest when the extra output from the very last worker (MP) is zero. If you add more workers after this point, total production will actually start to go down.

🎯 Exam Tip: Remember the critical point: TP is maximized when MP equals zero. This is a key relationship in the Law of Variable Proportions.

 

Question 6. What does increasing returns to a factor means?
Answer: Increasing returns to a factor, also known as the Stage of Increasing Returns (the first stage of production), means that as you add more units of a variable factor to a fixed factor, the total output increases at an accelerating rate. This happens because the fixed factors are not fully utilized at the start and can be used more efficiently with more variable input. For example, if you have a big machine, adding more workers helps utilize it better, leading to more than proportional increases in output due to better division of labor and specialization.
In simple words: Increasing returns to a factor means that when you add more workers, the total amount of goods made increases faster and faster. Each new worker helps a lot more than the last one, making the factory run much better.

🎯 Exam Tip: Explain increasing returns by linking them to the better utilization of indivisible fixed factors, leading to a rising marginal product and greater efficiency in the initial stages of production.

 

Question 8. What is returns to factor?
Answer: This concept describes how the output changes when you increase only one factor of production for a short time, while keeping other factors the same. It helps us understand how a single input affects overall production. For instance, adding more workers to a fixed number of machines will change the total output in the short run.
In simple words: It shows how production changes if you add more of one resource but keep others constant.

🎯 Exam Tip: Remember that 'returns to factor' focuses on short-run production changes with one variable input, distinguishing it from 'returns to scale' which applies to long-run changes with all inputs varying proportionally.

 

Question 9. What is the definition of the law of variable proportions or diminishing returns as given by Samuelson?
Answer: According to P.A. Samuelson, the law states that if you increase some inputs while keeping others fixed, the total output will grow. However, after a certain point, the extra output you get from each additional unit of input will become less and less. This means that adding too much of one resource, like labor, without increasing others, like land, eventually makes each new unit less productive. This is why it's also called the law of diminishing returns.
In simple words: Samuelson said that if you add more of one resource but keep other resources the same, the total amount produced will go up, but each new bit you add will make less and less extra product.

🎯 Exam Tip: When quoting definitions, always attribute them correctly and try to explain the core idea in your own simple words afterwards to show understanding.

 

Question 10. What is the meaning of input?
Answer: An input is any good or service that is used in the process of making something else. For example, raw materials, labor, and machinery are all inputs. Economist Baumol explained it as "anything which the firm buys for use in its production or other processes." This helps clarify that inputs are the building blocks of any production activity.
In simple words: An input is anything used to make a product or provide a service.

🎯 Exam Tip: Differentiate between factors of production (land, labor, capital, entrepreneurship) and inputs, which are the specific resources within those categories.

 

Question 11. What is the meaning of output?
Answer: Output refers to any good or service that comes out of a production process. It can be something you can touch, like a finished product, or something intangible, like a service. The goal of any production process is to create a desired output. For example, a car factory's output is cars, while a doctor's output is healthcare services.
In simple words: Output is the final product or service made after using inputs in production.

🎯 Exam Tip: Connect inputs and outputs: inputs are what you use, and outputs are what you get, showing the transformation process in economics.

 

Question 12. What do you understand by fixed input?
Answer: A fixed input is a resource whose supply cannot be easily changed in the short run, meaning it's used in a constant amount. For example, a factory building or heavy machinery are fixed inputs because you can't quickly add more or less of them. These inputs define the scale of operations in the short term.
In simple words: A fixed input is a resource that stays the same, or cannot be changed easily, in a short period of time.

🎯 Exam Tip: Remember that fixed inputs are characteristic of the short run, as in the long run, all inputs are considered variable.

 

Question 13. What do you understand by variable input?
Answer: A variable input is a resource whose quantity can be easily changed in the short run to adjust production levels. For example, raw materials or hourly labor are variable inputs because you can buy more or less of them as needed. These inputs are crucial for adjusting output to demand. The opposite of a fixed input, variable inputs allow flexibility in production.
In simple words: A variable input is a resource that can be changed quickly to make more or less product.

🎯 Exam Tip: Contrast fixed and variable inputs by remembering that variable inputs allow quick changes in production volume, while fixed inputs do not.

 

RBSE Class 12 Economics Chapter 7 Short Answer Type Questions

 

Question 1. Describe the relationship between the marginal production and total production of an input.
Answer: The relationship between marginal production (MP) and total production (TP) is as follows:
1. When MP increases, TP also increases, but at a faster rate.
2. When MP is zero, TP reaches its maximum point. This means no more extra output is gained.
3. When MP becomes negative, TP starts to decrease. This happens because adding more input actually harms overall production. Understanding this helps businesses decide the best level of input to use.
In simple words: As you add more of a resource, total production goes up. But if the extra bit produced (marginal production) starts to fall, total production will eventually stop increasing and might even go down.

🎯 Exam Tip: Visualize this relationship with a graph: TP is an inverted U-shape, while MP initially rises, then falls through zero, and becomes negative, crossing the X-axis when TP is at its peak.

 

Question 2. What is the law of increasing production?
Answer: The law of increasing production (or increasing returns to a factor) happens when you keep some factors of production constant, but increase others, and the total output grows at a faster rate than the increase in the variable inputs. This means that each additional unit of variable input adds more to the total production than the previous unit. This is often seen in the early stages of production due to better use of fixed resources. For example, adding a second worker to a machine might make both workers more efficient than the first worker alone.
In simple words: This law says that if you add more of one resource, production will grow faster and faster for a while.

🎯 Exam Tip: Increasing returns often occur due to better specialization, division of labor, or more efficient utilization of fixed assets as variable inputs are initially added.

 

Question 3. What do you understand by law of diminishing production?
Answer: The law of diminishing production (or diminishing returns) occurs when you keep some resources fixed (like land in agriculture) and increase other variable inputs. After a certain point, the increase in total production becomes less than the increase in the quantity of variable inputs. This means each additional unit of variable input adds less and less to the total output. For instance, in farming, adding too many workers to a fixed plot of land might lead to less additional yield per worker. This is a common economic observation.
In simple words: This law explains that if you keep adding more of one resource to a fixed amount of others, eventually the extra production you get will get smaller and smaller.

🎯 Exam Tip: This law is critical for understanding short-run production decisions and highlights the point where adding more variable inputs becomes less efficient.

 

Question 4. What is the importance of land in production function?
Answer: Land is an essential factor of production because it provides the physical space and natural resources needed for any economic activity. It includes not just soil, but also water, air, light, heat, minerals, and soil fertility-all free gifts of nature. Without land, production cannot happen, making it a fundamental input. Its varying fertility and limited supply also play a critical role in determining production costs and output.
In simple words: Land is very important because it gives us space and natural things like water and minerals that we need to make anything.

🎯 Exam Tip: Emphasize that 'land' in economics is broader than just soil, encompassing all natural resources provided by nature that are used in production.

 

Question 5. What do you mean by labour? Explain.
Answer: Labour means any physical or mental effort done by people to produce goods or services in exchange for money. Work done out of love or for pleasure, without payment, is not considered labor in economics. Labour is an active factor of production and a key source used in creating things. For example, a teacher teaching in exchange for salary is labor, but a parent teaching their child is not, in economic terms.
In simple words: Labour is any work a person does for money, using their body or mind, to help make something.

🎯 Exam Tip: Distinguish economic 'labour' (work for remuneration) from general 'work' (can be for pleasure or love), as this is a common point of confusion.

 

Question 6. What do you mean by capital? State the importance of capital in production function.
Answer: Capital refers to the part of a society's wealth (like land and other property) that is used for creating more wealth or for fundraising. It is seen as a very important tool for production in the modern world. Capital comes in many forms, such as raw materials, machinery, buildings, and equipment. For instance, a factory building itself is capital, as are the machines inside it, all contributing to the production process. Access to capital allows businesses to grow and produce on a larger scale.
In simple words: Capital is money, machines, and buildings used to make goods and services. It helps production happen and grow.

🎯 Exam Tip: Explain that capital isn't just money; it's also the physical assets (tools, buildings) that help produce other goods and services.

 

Question 7. Why does the third stage of negative return come?
Answer: The third stage of negative returns happens when you add too many variable inputs (like workers) to a fixed factor (like one machine), making production less efficient and actually causing total output to fall. At this point, the variable factors get in each other's way, leading to negative marginal product. The saying "too many cooks spoil the broth" perfectly describes this stage. In this situation, reducing the variable inputs would actually increase the total output. This emphasizes that there's an optimal point for input combination.
In simple words: The third stage comes when you use too much of one resource, and it starts to make less product or even reduce the total product because things get messy.

🎯 Exam Tip: The key characteristic of the third stage is negative marginal product, where additional variable input actively reduces total output.

 

Question 8. Write down the characteristics of land.
Answer: Here are the main characteristics of land in economics:
1. Land is a Free Gift of Nature: Humans did not create land; it is naturally available. This includes things like soil, water, and minerals.
2. Land is Immovable: You cannot move land from one place to another, unlike labor or capital. Its location is fixed.
3. Land is an Inactive Factor of Production: Land itself doesn't produce anything unless human effort is applied to it. It needs active factors like labor and capital to yield results.
4. Land Differs in Fertility: Not all pieces of land are equally productive. Some land is more fertile or has richer mineral resources than others. This natural variation affects agricultural output.
These characteristics highlight why land is a unique and fundamental factor in production.
In simple words: Land is a free gift from nature, it cannot be moved, it needs human effort to produce things, and its quality can be different in different places.

🎯 Exam Tip: When discussing land, remember to define it broadly as all natural resources, not just the soil, and highlight its fixed nature and varying quality.

 

Question 9. Write down the characteristics of labour.
Answer: Here are the main characteristics of labor as a factor of production:
1. Labour is directly connected with human efforts: It is the human being who provides the labor.
2. Labour is inseparable from the laborer: You cannot separate the worker from the work they do. The person themselves is the source of their labor power.
3. Labour is perishable: You cannot store labor. If a worker doesn't work for a day, that day's labor is lost forever and cannot be recovered. This means workers often have to accept the wages offered.
4. The efficiency of labor differs: Not all workers are equally productive. Some are skilled, others semi-skilled or unskilled, affecting their output.
5. Labour has weak bargaining power: Historically, workers have often been economically weaker than employers, leading to less power in wage negotiations, though this has changed over time with labor unions.
6. All labor is not productive: Not every effort leads to valuable resources or production.
7. Labour is a movable factor: Workers can move from one job to another or from one place to another in search of better opportunities. These points help explain the unique economic aspects of human effort in production.
In simple words: Labour is human effort, it cannot be separated from the person, it cannot be saved (perishable), different people work differently, workers often have less power to set wages, and it can move to different jobs.

🎯 Exam Tip: Focus on the human element of labor-its inseparability, perishability, and varying efficiency-as these are key economic distinctions.

 

Question 10. How many types of capital are there?
Answer: There are several types of capital, each playing a different role in production:
1. Fixed Capital: This type of capital exists in a durable form, like machines and factory buildings, used over a long period.
2. Circulating Capital: This is capital used up in a single production cycle, such as raw materials.
3. Real Capital: This refers to investment in physical goods, like plant, machinery, and buildings.
4. Human Capital: This represents the skills, abilities, and knowledge of people, which increase their productivity.
5. Tangible Capital: This is capital that can be touched or seen, such as plant and machinery.
6. Intangible Capital: This includes non-physical assets like rights, benefits, goodwill, or patents.
7. Individual Capital: This is the personal property owned by an individual or a group. These different forms highlight the diverse ways capital contributes to economic activity.
In simple words: Capital can be fixed (like machines), used up quickly (like raw materials), real (physical things), human (skills), tangible (can be seen), intangible (like rights), or individual (personal property).

🎯 Exam Tip: Be able to give examples for each type of capital to demonstrate a clear understanding of their differences and applications in production.

 

Question 12. What are the functions of an entrepreneur?
Answer: Entrepreneurs perform several key functions in an economy:
(i) To Initiate a Business Venture and Coordination: The most important task is to start a business by gathering all the necessary factors of production (land, labor, capital). They pay for these factors and receive any surplus as profit. This foundational step brings resources together to create value.
(ii) Risk Bearing and Uncertainty: Entrepreneurs take on risks, both insurable (like fire) and non-insurable (like price changes or demand shifts). F.H. Knight emphasized that non-insurable risks are the primary source of profit. This willingness to face unknowns is crucial for economic growth.
(iii) Innovation: Entrepreneurs introduce new production methods, discover new raw materials, adopt new organizational forms, or create new products and markets. This function drives progress and keeps the economy dynamic. These roles are vital for creating jobs, fostering innovation, and driving economic development.
In simple words: Entrepreneurs start businesses by bringing resources together, take on the risks of the business, and come up with new ideas and ways of doing things.

🎯 Exam Tip: When describing entrepreneurship, focus on the three core functions: innovation, risk-bearing, and coordination, as these are universally recognized roles.

 

Question 14. What do you understand by the third stage of negative returns?
Answer: The third stage of negative returns occurs when, as you keep adding more of a variable factor to a fixed amount of other factors, the total production starts to decrease, and the marginal product becomes negative. This happens because the variable factors become so numerous that they actually hinder each other, reducing overall efficiency. In this stage, taking away some of the variable inputs would actually increase the total output. This shows that beyond a certain point, adding more resources can be counterproductive.
In simple words: This is when adding more of one resource actually makes the total production go down, because there are too many resources getting in each other's way.

🎯 Exam Tip: The defining characteristic of the third stage is that marginal product is negative, meaning each additional unit of variable input reduces total output.

 

RBSE Class 12 Economics Chapter 7 Essay Type Questions

 

Question 1. What is division of labour? What are the advantages of division of labour?
Answer: Division of labor means breaking down the production of a good or service into smaller, specialized tasks, with different workers performing different tasks. This is a very important part of modern industry and greatly increases a country's total output and wealth. Adam Smith, an important economist, highlighted its significance. For example, instead of one person making an entire shoe, one person cuts the leather, another sews, and another attaches the sole.
Advantages of Division of Labour:
(i) Increase in Productivity: Workers become much more efficient at their specific tasks through repetition, leading to a significant increase in overall production.
(ii) The Right Man in the Right Place: Work can be assigned based on each worker's skills and abilities, ensuring that the most suitable person does each task. This avoids mismatching skills and tasks.
(iii) Dexterity and Skill: Workers repeatedly performing the same task become very skilled and precise, improving the quality and speed of their work. Practice truly makes perfect in this scenario.
(iv) Inventions are Facilitated: Focusing on a single task often leads workers to think of better ways to do it, encouraging new ideas, improvements, and even the invention of new tools and machinery.
(v) Saving in Time: Workers don't waste time switching between different tasks or tools. Also, training time is reduced as they only need to learn one specific part of the process.
(vi) Economy in the Use of Tools: Instead of each worker needing a full set of tools, only the specific tools for each task are required, which can be shared among many workers, saving costs.
(vii) Use of Machinery Encouraged: Breaking down production into simple, repeatable steps makes it easier to design and use specialized machines for each task, further boosting efficiency. These advantages show how specialization makes production faster, cheaper, and more efficient.
In simple words: Division of labor is when different people do different small tasks to make one big product. It helps us make more things, lets people do what they are best at, makes workers more skilled, helps invent new tools, saves time, uses tools wisely, and encourages using machines.

🎯 Exam Tip: When explaining division of labor, always define it first and then clearly list and explain each advantage, perhaps with a simple example like a car assembly line.

 

Question 2. Write your comments on:
(i) Capital formation and technological progress
(ii) Capital formation and employment generation.
Answer:
(i) Capital Formation and Technological Progress: Creating more capital (like machines and factories) helps an economy advance technologically. Different types of capital goods are needed for different technologies. When new, better technologies are invented, they can only be used if suitable capital goods are available. This means that without new capital, new inventions might remain unused. Therefore, capital formation is essential for technological progress and speeds up a country's economic development.
(ii) Capital Formation and Employment Generation: Building capital also creates jobs in two main ways. First, when capital goods (like machinery, factories, and dams) are being produced, many workers are hired for their construction. Second, once this new capital is ready, it is used to produce other goods, which means even more workers are employed to operate the machines and factories. So, more capital leads to more jobs. However, if the population grows much faster than capital, there might not be enough equipment for everyone to be employed. This shows a balance is needed.
In simple words: Building more capital (like machines) helps technology improve and creates more jobs. But if too many people need jobs and there isn't enough capital, it can be a problem.

🎯 Exam Tip: When discussing capital formation, remember to link it to both technological advancement (by enabling new methods) and employment (by direct creation and facilitating further production).

 

Question 3. Explain the chief factors which determine the efficiency of labour.
Answer: The efficiency of labor, or how productive workers are, depends on several key factors:
(i) Physical Fitness: Workers who are healthy and strong are more efficient. Unhealthy or tired workers are less productive, have low morale, and might be absent often. Good physical health depends on diet, climate, and racial factors.
(ii) Level of Education and Skill: Educated and skilled workers can handle complex machines and tasks better than uneducated ones. Education also helps develop responsibility and a better attitude towards work and equipment.
(iii) Natural Resources: The availability of good quality natural resources, like water, electricity, and favorable climates, can boost labor efficiency. For example, a cool climate helps people work harder.
(iv) Division of Labour: When workers specialize in specific tasks, they become experts, which improves their speed, quality, and overall productivity. Practice leads to perfection.
(v) Amount of Capital per Worker: The more tools, machines, and equipment a worker has access to, the more productive they can be. Countries with less capital per worker often have lower labor productivity.
(vi) Quality of Capital and Technological Progress: Not just the amount, but also the quality of tools and technology available impacts labor efficiency. Better tools and advanced technology allow workers to produce more and better outputs. Clean factory environments and good working conditions also significantly improve worker efficiency.
(vii) Hours of Work: The number of hours a worker works affects their efficiency. After a certain point, working too long leads to stress and fatigue, reducing productivity. Proper breaks and reasonable working hours increase efficiency.
(viii) Fair Wages: Good health and efficiency are linked. Workers who are paid fairly can afford nutritious food, stay healthy, and are more motivated. Prompt payment also encourages better productivity. All these elements combined contribute to how well labor performs.
In simple words: How well people work depends on their health, education, the natural resources around them, how tasks are divided, how many tools they have, and how good those tools are. Plus, fair pay and reasonable work hours also make a big difference.

🎯 Exam Tip: For each factor affecting labor efficiency, think of a real-world example to strengthen your explanation and show practical understanding.

 

Question 4. Show the different aspects of returns to scale with diagrams.
Answer: Returns to scale describe how output changes when all inputs are increased proportionally in the long run. There are three main aspects, usually shown with production function diagrams (isoquants):
(i) Increasing Returns to Scale: This occurs when output increases at a faster rate than the increase in all inputs. For example, if you double all inputs, output more than doubles. This is often due to economies of scale, like better specialization or more efficient use of machinery at larger scales. The accompanying diagram typically shows isoquants (curves representing equal output) getting closer together as output increases along a scale line, illustrating that less additional input is needed for each subsequent unit of output.
(ii) Decreasing Returns to Scale: This happens when output increases at a slower rate than the increase in all inputs. If you double all inputs, output less than doubles. This can be due to diseconomies of scale, such as management difficulties or communication problems in very large organizations. The diagram for this shows isoquants getting further apart as output increases along a scale line, indicating that more additional input is needed for each subsequent unit of output.
(iii) Constant Returns to Scale: This is when output increases in exact proportion to the increase in all inputs. If you double all inputs, output exactly doubles. This implies that the production process can be perfectly replicated at a larger scale without gaining or losing efficiency. In its diagram, isoquants remain equally spaced along a scale line, showing a consistent input-output ratio. These visual representations help in understanding the implications of scaling up production.
In simple words: Returns to scale show how much more you produce if you increase all your resources together. It can be 'increasing' (output grows faster), 'decreasing' (output grows slower), or 'constant' (output grows at the same rate). Diagrams help us see these changes in production.

🎯 Exam Tip: While drawing complex graphs in an exam might be challenging, understand the *implications* of each return to scale (e.g., isoquants getting closer for increasing returns) and describe them clearly. Always remember that returns to scale apply in the long run where all inputs are variable. Refer to diagrams in your textbook for visual clarity.

 

RBSE Class 12 Economics Chapter 7 Numerical Questions

 

Question 1. Find out AP and MP with the help of given TP and labour per units.
Answer: To find Average Product (AP) and Marginal Product (MP) from Total Product (TP), we use the formulas: \( AP = \frac{TP}{L} \) and \( MP = TP_n - TP_{n-1} \). Where \( L \) is units of labour. This helps analyze how productivity changes with each additional unit of labor. The calculation is shown in the table below.

When 6 units of labor (or variable factor) are employed, \( TP = AP \times L = 25 \times 6 = 150 \). The marginal product for the 7th unit is \( 147 - 150 = -3 \). This calculation highlights the stages of production where marginal product can be positive, zero, and negative.
In simple words: We find Average Product by dividing Total Product by the number of workers. We find Marginal Product by subtracting the Total Product of the previous worker from the current one. This helps us see how much each extra worker adds to the total.

🎯 Exam Tip: Always show your calculations clearly for each step in numerical questions, and remember to include the units. Pay close attention to the point where MP becomes zero, as that is where TP is maximum.

 

Question 2. Find out the average production and marginal production with the help of total production and units of variable labour factor in the following table:
Answer: We can calculate Average Product (AP) and Marginal Product (MP) from the given Total Product (TP) and units of labor. AP is found by dividing TP by labor units, and MP is found by noting the change in TP for each additional unit of labor. These calculations help understand the productivity patterns as more labor is added. The complete calculation is shown in the table below.

In simple words: We calculate the average amount produced per worker and the extra amount produced by each new worker using the total production numbers.

🎯 Exam Tip: Ensure your MP calculation correctly uses the difference from the *previous* total product, not an average, to avoid common errors.

 

Question 3. Find out the total production (TP) and marginal production (MP), if average production (AP) is given in the following table:
Answer: We can find Total Production (TP) and Marginal Production (MP) when Average Production (AP) is given. We use the formula \( TP = AP \times L \). Once TP is known, MP can be calculated as \( MP = TP_n - TP_{n-1} \). This calculation helps reverse-engineer the productivity figures when only average data is provided, which is useful for business analysis. The detailed calculations are presented in the table below.

In simple words: When we know the average product per worker, we can find the total product by multiplying it by the number of workers. Then, we can find the marginal product (the extra bit each new worker adds) from the total product.

🎯 Exam Tip: When working backward from AP to TP and then to MP, always start by calculating TP accurately for each level of labor, as subsequent MP calculations depend on it.

 

Question 4. Calculate average production and total production from the given below information:
Answer: To calculate Average Production (AP) and Total Production (TP) from Marginal Production (MP), we first sum up MP values to get TP for each unit of labor. Then, AP is found by dividing TP by the respective units of labor. This process is crucial for understanding how individual worker contributions build up total output and average efficiency. The detailed calculations are shown in the table.

In simple words: To find the total amount produced, we add up the extra amount each worker adds. Then, to find the average, we divide the total amount by the number of workers.

🎯 Exam Tip: Always calculate Total Production cumulatively from Marginal Production before calculating Average Production, as a mistake in TP will lead to incorrect AP values.