Samacheer Kalvi Class 11 Economics Solutions Chapter 6 Distribution Analysis

Part - A

Multiple Choice Questions:

 

Question 1. In Economics, distribution of income is among the
(a) Factors of production
(b) Individual
(c) Firms
(d) Traders
Answer: (a) Factors of production
In simple words: In economics, the money earned from production is shared among the different elements that helped make it, such as land, labor, capital, and entrepreneurs. Each factor gets its share for its contribution.

🎯 Exam Tip: Remember that "factors of production" (land, labor, capital, entrepreneurship) are the fundamental components to which income is distributed in an economy.

 

Question 2. Theory of distribution is popularly known as
(a) Theory of product-pricing
(b) Theory of factor-pricing
(c) Theory of wages
(d) Theory of Interest
Answer: (b) Theory of factor-pricing
In simple words: The study of how income is shared among land, labor, capital, and entrepreneurship is also called the theory of factor-pricing because it explains how the price (reward) for each factor is set. It deals with how much rent, wage, interest, and profit each factor gets.

🎯 Exam Tip: Distinguish clearly between product-pricing (determining goods' prices) and factor-pricing (determining input rewards like wages, rent, interest, profit).

 

Question 3. Rent is the reward for the use of
(a) Capital
(b) Labour
(c) Land
(d) Organization
Answer: (c) Land
In simple words: Rent is the payment made to a landlord for using their land. It's the income generated specifically from the natural resource, land, that is used in production.

🎯 Exam Tip: Each factor of production (land, labor, capital, entrepreneurship) has a specific reward: rent for land, wages for labor, interest for capital, and profit for organization.

 

Question 4. The concept of 'Quasi-Rent' is associated with
(a) Ricardo
(b) Keynes
(c) Walker
(d) Marshall
Answer: (d) Marshall
In simple words: The idea of "quasi-rent" was introduced by Alfred Marshall. It refers to the temporary surplus earnings of a factor of production, similar to rent, but for a short period.

🎯 Exam Tip: Remember that 'Quasi-Rent' is a short-run concept, applying to man-made, fixed assets, unlike 'Rent' which is typically for land and is a long-run concept.

 

Question 5. The Classical Theory or Rent was propounded by
(a) Ricardo
(b) Keynes
(c) Marshall
(d) Walker
Answer: (a) Ricardo
In simple words: David Ricardo, a famous economist, was the one who developed the classical theory of rent. His theory explained how rent arises due to differences in land fertility.

🎯 Exam Tip: The Classical Theory of Rent, also known as Ricardian Rent, focuses on land's 'original and indestructible powers' as the source of rent.

 

Question 6. 'Original and indestructible powers of the soil' is the term used by
(a) J.S.Mill
(b) Walker
(c) Clark
(d) Ricardo
Answer: (d) Ricardo
In simple words: Ricardo used this phrase to describe why land earns rent. He believed that land has unique, lasting qualities that cannot be destroyed, and these qualities allow it to earn rent.

🎯 Exam Tip: This phrase is a key concept in Ricardian rent theory, emphasizing the natural and inherent advantages of land that contribute to its rental value.

 

Question 7. The reward for labour is
(a) Rent
(b) Wage
(c) Profit
(d) Interest
Answer: (b) Wage
In simple words: When people work, the money they get paid for their effort is called a wage. It's the price paid for using human labor in production.

🎯 Exam Tip: Always remember the basic economic rewards for each factor of production: land gets rent, labor gets wages, capital gets interest, and entrepreneurship gets profit.

 

Question 8. Money wages are also known as
(a) real wages
(b) nominal wages
(c) original wages
(d) transfer wages
Answer: (b) nominal wages
In simple words: Money wages refer to the actual amount of money a worker receives. This is different from real wages, which consider what those money wages can buy.

🎯 Exam Tip: Understand the difference: nominal wages are the cash amount, while real wages represent purchasing power, showing how much goods and services the money wages can buy.

 

Question 9. Residual Claimant Theory is propounded by
(a) Keynes
(b) Walker
(c) Hawley
(d) Knight
Answer: (b) Walker
In simple words: The Residual Claimant Theory, put forward by F.A. Walker, suggests that profit is what is left for the entrepreneur after all other costs, like rent, wages, and interest, have been paid. It's the 'leftover' income.

🎯 Exam Tip: In this theory, profit is seen as a residual payment, meaning it's not a predetermined cost but what remains after all other factors are compensated.

 

Question 10. The reward given for the use of capital is
(a) Rent
(b) Wage
(c) Interest
(d) Profit
Answer: (c) Interest
In simple words: When money or assets are lent for business or production, the payment received for using that capital is called interest. It is the cost of borrowing money.

🎯 Exam Tip: Capital, a factor of production, earns interest as its reward, just as land earns rent and labor earns wages.

 

Question 11. Keynesian Theory of interest is popularly known as
(a) Abstinence Theory
(b) Liquidity Preference Theory
(c) Loanable Funds Theory
(d) Agio Theory
Answer: (b) Liquidity Preference Theory
In simple words: Keynes's idea about interest is called the Liquidity Preference Theory. It says that people prefer to hold cash (be liquid) rather than invest it, and interest is the reward for giving up that cash preference.

🎯 Exam Tip: Keynes's theory emphasizes the role of liquidity (holding cash) and the motives behind it (transaction, precautionary, speculative) in determining the rate of interest.

 

Question 12. According to the Loanable Funds Theory, supply of loanable funds is equal to
(a) S + BC + DH + DI
(b) I + DS + DH + BM
(c) S + DS + BM + DI
(d) S + BM + DH + DS
Answer: (a) S + BC + DH + DI
In simple words: The Loanable Funds Theory states that the total supply of money available for lending comes from personal savings (S), bank credit (BC), dishoarding (DH), and disinvestment (DI). All these sources combine to form the total funds ready to be borrowed.

🎯 Exam Tip: Remember the components of loanable funds supply: Savings (S), Bank Credit (BC), Dishoarding (DH), and Disinvestment (DI).

 

Question 13. The concept of meeting unexpected expenditure according to Keynes is
(a) Transaction motive
(b) Precautionary motive
(c) Speculative motive
(d) Personal motive
Answer: (b) Precautionary motive
In simple words: Keynes said that people hold cash not just for daily needs, but also to be ready for unforeseen events or emergencies. This desire to save for unexpected costs is called the precautionary motive.

🎯 Exam Tip: Keynes identified three motives for holding money: transaction (daily needs), precautionary (emergencies), and speculative (profit from market changes).

 

Question 14. The distribution of income or wealth of a country among the individuals are
(a) functional distribution
(b) personal distribution
(c) goods distribution
(d) services distribution
Answer: (b) personal distribution
In simple words: Personal distribution looks at how the total income or wealth of a nation is divided among its citizens. It shows the share of income each person or household receives.

🎯 Exam Tip: Personal distribution focuses on individuals' or households' shares of income, while functional distribution focuses on income shares for factors of production (rent, wages, interest, profit).

 

Question 15. Profit is the reward for
(a) Land
(b) Organization
(c) Capital
(d) Labour
Answer: (b) Organization
In simple words: Profit is the payment an entrepreneur receives for organizing all the factors of production, taking risks, and innovating in business. It's the reward for management and risk-taking.

🎯 Exam Tip: Profit is the unique reward for entrepreneurship, recognizing the risk and managerial effort involved in combining other factors of production.

 

Question 16. Innovation Theory of profit was given by
(a) Hawley
(b) Schumpeter
(c) Keynes
(d) Knight
Answer: (b) Schumpeter
In simple words: Joseph Schumpeter believed that profit comes from innovation. Entrepreneurs who introduce new products, methods, or markets gain temporary profits until others copy their ideas.

🎯 Exam Tip: Schumpeter's theory links profit directly to innovation and the dynamic changes it brings to the market, distinguishing it from profits earned in a static economy.

 

Question 17. Quasi – rent arises in
(a) Man-made appliances
(b) Homemade items
(c) Imported items
(d) None of these
Answer: (a) Man-made appliances
In simple words: Quasi-rent is a temporary payment received by man-made machines or equipment that are in fixed supply in the short run. It is like a temporary surplus over their running costs.

🎯 Exam Tip: Unlike pure economic rent (for land), quasi-rent applies to capital goods (like machinery) that are fixed in supply in the short run, but can be varied in the long run.

 

Question 18. "Wages as a sum of money are paid under contract by an employer to a worker for services rendered” -Who said this?
(a) Benham
(b) Marshall
(c) Walker
(d) J.S.Mill
Answer: (a) Benham
In simple words: Benham defined wages simply as the money an employer pays a worker based on an agreement for the work they do. This definition highlights the contractual nature of wage payments.

🎯 Exam Tip: When quoting definitions, ensure accuracy in both the content and the economist attributed to it. For wages, focus on the contractual payment for services.

 

Question 19. Abstinence Theory of Interest was propounded by
(a) Alfred Marshall
(b) N.W Senior
(c) Bohm - Bawerk
(d) J.M. Keynes
Answer: (b) N.W Senior
In simple words: N.W. Senior's Abstinence Theory states that interest is the reward for abstaining from using one's capital immediately. It's a payment for not spending now and instead saving or investing.

🎯 Exam Tip: The Abstinence Theory emphasizes that saving (abstaining from consumption) requires a sacrifice, for which interest serves as a compensation.

 

Question 20. Loanable Funds Theory of Interest is called as
(a) Classical Theory
(b) Modern Theory
(c) Traditional Theory
(d) Neo-Classical Theory
Answer: (d) Neo-Classical Theory
In simple words: The Loanable Funds Theory is also known as the Neo-Classical Theory because it combines classical ideas of savings and investment with monetary factors to explain interest rates.

🎯 Exam Tip: Understand that the Loanable Funds Theory is an extension of classical thought, integrating both real and monetary factors in determining interest rates, hence its 'Neo-Classical' designation.

 

Part - B

Answer the Following Questions in One or Two Sentences.

 

Question 21. What is meant by distribution?
Answer: Distribution in economics refers to how the total income or wealth generated from production is divided among the four main factors: land, labor, capital, and entrepreneurship. Each factor receives a specific reward: rent for land, wages for labor, interest for capital, and profit for the entrepreneur. This process explains how the national income is shared among everyone involved.
In simple words: Distribution means sharing the total money earned in an economy among land owners (rent), workers (wages), money lenders (interest), and business owners (profit). It's about how the pie is divided.

🎯 Exam Tip: Clearly state that distribution is about allocating income to the factors of production and list the four factors along with their respective rewards for a complete answer.

 

Question 22. Mention the types of distribution.
Answer: There are two main types of distribution studied in economics:
1. Functional Distribution: This type examines how income is distributed among the different factors of production, such as land, labor, capital, and entrepreneurship. It looks at the share each factor receives (rent, wages, interest, profit).
2. Personal Distribution: This type looks at how the total income or wealth of a country is shared among individual people or households. It studies the inequality in income or wealth across different groups in society. The distribution process shows how economic resources reach different parts of the population.
In simple words: There are two types: functional distribution (how money is shared among land, labor, capital, and entrepreneurs) and personal distribution (how money is shared among all people).

🎯 Exam Tip: Differentiate clearly between functional distribution (to factors of production) and personal distribution (to individuals/households) to show a full understanding of income distribution.

 

Question 23. Define 'Rent'?
Answer: Rent is a specific payment made by a tenant to a landlord. This payment is for using the land and its unique natural qualities. It is given solely for the use of the natural resource, land, that is involved in production.
In simple words: Rent is the money a person pays to a landlord just for using their land.

🎯 Exam Tip: When defining rent, emphasize its connection to land and its 'original and indestructible powers', distinguishing it from payments for buildings or other assets.

 

Question 24. Distinguish between real and money wages?
Answer:

The difference highlights that simply getting more money does not always mean a person can buy more things.
In simple words: Money wages are the cash you get. Real wages are what you can actually buy with that cash.

🎯 Exam Tip: When distinguishing, always compare and contrast corresponding points for clarity. Focus on the core difference: nominal value (money wages) versus purchasing power (real wages).

 

Question 25. What do you mean by interest?
Answer: Interest is the reward or payment given by a borrower to a lender for using their capital. It is essentially the cost of borrowing money over a period. Generally, interest is the payment that a borrower makes to the lender for the money that has been borrowed for productive use in any market.
In simple words: Interest is the extra money you pay back when you borrow money, or the extra money you get when you lend money.

🎯 Exam Tip: Define interest as the reward for capital and the cost of borrowing, ensuring to mention both the borrower and lender in your explanation.

 

Question 26. What is profit?
Answer:
1. Profit is the reward for the entrepreneur who organizes and coordinates all other factors of production, such as land, labor, and capital.
2. It is the payment received by an entrepreneur for their services in production.
3. Profit also represents the return to the entrepreneur for using their unique business skills and ability.
4. It is considered the net income of the organizer after all other costs are covered.
5. Profit is the amount that remains with the entrepreneur after making all payments for other factors like land, labor, and capital used in the production process. An entrepreneur's ability to innovate and take risks contributes significantly to profit.
In simple words: Profit is the money left over for the business owner after paying for everything else (like rent, wages, and materials). It's their reward for running the business and taking risks.

🎯 Exam Tip: When defining profit, highlight its role as the reward for entrepreneurship, emphasizing coordination, risk-taking, and innovation.

 

Question 27. State the meaning of liquidity preference.
Answer: Liquidity preference refers to the desire of individuals to hold their wealth in the form of liquid cash rather than in other less liquid assets like bonds, stocks, or property. This preference is driven by various motives, such as needing money for daily transactions or for unexpected expenses.
In simple words: Liquidity preference means people like to keep their money as cash, rather than investing it or putting it in a bank, because cash is easy to use right away.

🎯 Exam Tip: Connect liquidity preference directly to the desire to hold cash and mention that this desire influences interest rates in Keynesian economics.

 

Part - C

Answer the Following Questions in a Paragraph.

 

Question 28. Explain the Motives of Demand for Money?
Answer: According to John Maynard Keynes, people demand money for three main reasons, or "motives for liquidity preference":
1. The Transaction Motive: This motive relates to the desire of people to hold cash for their everyday transactions and routine expenses. The amount of money needed for this motive depends on a person's income level.
\( M_t = f(y) \)
2. The Precautionary Motive: This motive arises from the desire to hold cash to cover unexpected or unforeseen expenses, such as medical emergencies, accidents, or theft. The amount of money held for precautionary reasons also depends on the level of income.
\( M_p = f(y) \)
3. The Speculative Motive: This motive is about holding cash to take advantage of future market movements, particularly changes in the prices of bonds and securities in the capital market. The amount of money held for this motive depends on the rate of interest, with an inverse relationship: if interest rates are high, people hold less cash for speculation.
\( M_s = f(i) \)
These three motives together explain why individuals and businesses choose to hold a certain amount of their wealth in liquid form.
In simple words: People want to keep cash for three reasons: for daily shopping (transaction motive), for emergencies (precautionary motive), and to make money from market changes (speculative motive).

🎯 Exam Tip: When explaining Keynes's motives for demanding money, clearly define each motive and state its primary determinant (income for transaction/precautionary, interest rate for speculative).

 

Question 29. Distinguish between different types of wages.
Answer: Wages, the reward for labor, can be categorized into different types:
1. Nominal Wages or Money Wages: These refer to the actual amount of money a worker receives for their labor. It is the wage expressed in monetary terms, without considering its purchasing power.
2. Real Wages: Real wages represent the purchasing power of nominal wages. They show the amount of goods and services that can be bought with the money wages. Factors like price levels, working conditions, and job security affect real wages.
3. Piece Wages: These are wages paid based on the amount or "quantum" of work done or the number of units produced. For example, a worker might be paid per item assembled.
4. Time Wages: These wages are paid based on the amount of time spent working, such as an hourly, daily, or monthly rate, regardless of the output produced during that time.
Understanding these different types helps to fully grasp the concept of labor compensation in economics.
In simple words: Wages can be money wages (the cash amount), real wages (what you can buy with that cash), piece wages (paid per item made), or time wages (paid per hour or day worked).

🎯 Exam Tip: Clearly define each type of wage and emphasize the key distinguishing factor for each (e.g., money for nominal, purchasing power for real, output for piece, time for time wages).

 

Question 30. Distinguish between rent and quasi – rent?
Answer:

The key distinction lies in the nature of the asset and the time period considered for its supply.
In simple words: Rent is for using land forever, and it's a fixed cost. Quasi-rent is for using machines for a short time, and it's a temporary extra earning.

🎯 Exam Tip: Clearly contrast the factors earning rent (land, fixed in long run) versus quasi-rent (man-made capital, fixed only in short run) and their impact on pricing.

 

Question 31. Briefly explain the Subsistence Theory of Wages.
Answer: The Subsistence Theory of Wages, often called the Iron Law of Wages, was initially explained by the Physiocrats and later re-stated by David Ricardo. This theory suggests that wages naturally tend towards a level just enough for workers to survive and reproduce, maintaining a constant population.

• According to this theory, the wage received by a laborer and their family must be equal to their subsistence level (basic living needs).
• If workers are paid higher wages, their living conditions improve, which could lead to larger families and an increase in population. This increased population would then boost the supply of labor, causing wages to fall back to the subsistence level.
• Conversely, if wages fall below the subsistence level, the population would decrease due to poverty, disease, or starvation. This reduction in labor supply would then cause wages to rise again to the subsistence level.
• Therefore, this theory asserts that the wages of workers cannot permanently rise above or fall below the basic subsistence level required for the laborer and their family to survive. This theory highlights the harsh realities of early industrial economies.

In simple words: The Subsistence Theory says that workers will always get paid just enough to live and have families, but no more. If they get more, more babies are born, leading to more workers, and then wages drop again. If they get less, people die, so fewer workers mean wages go up to just enough to live.

🎯 Exam Tip: When explaining the Subsistence Theory, clearly state its main premise (wages at subsistence level) and briefly explain the population mechanism that drives wages back to that level.

 

Question 32. State the Dynamic Theory of Profit?
Answer: The Dynamic Theory of Profit was proposed by J.B. Clark in 1900. According to Clark, profit is the difference between the selling price and the cost of production of a commodity. He argued that profit can only arise in a dynamic society, meaning a society that is constantly changing. In a static society, where everything remains the same, there would be no profit.
Clark identified several key dynamic changes that lead to profit:

• The population is increasing, which changes the demand for goods and services.
• The volume of capital is increasing, leading to new investment opportunities.
• Methods of production are improving, making manufacturing more efficient and reducing costs.
• Forms of industrial organization are changing, introducing new business structures and management techniques.
• The wants of consumers are multiplying and changing, creating new demands and market opportunities.

Profit is therefore seen as a reward for entrepreneurs who successfully adapt to and navigate these continuous changes.
In simple words: J.B. Clark's theory says that profit only happens when society is changing. Things like population growth, new machines, better ways to make things, or new customer wants create opportunities for business owners to earn profit. If nothing changed, there would be no profit.

🎯 Exam Tip: Clearly link J.B. Clark's Dynamic Theory of Profit to societal changes; emphasize that profit is a reward for managing and adapting to these dynamic factors, not something found in a static economy.

 

Question 33. Describe briefly the Innovation Theory of Profit.
Answer: The Innovation Theory of Profit was put forward by Joseph A. Schumpeter. He argued that profit is fundamentally a reward for "innovation." Innovation, in this context, means bringing new ideas or inventions into practical commercial use, not just inventing something new.
An innovation can involve several aspects:
1. Introduction of a new product or service to the market.
2. Introduction of a new method of production, making existing processes more efficient.
3. Opening up a new market or finding new customers for existing products.
4. Discovery of new raw materials or sources of supply.
5. Reorganization of an industry or a firm, leading to new ways of doing business.
Schumpeter believed that these innovations lead to temporary cost reductions or increased revenues, generating profits for the innovating entrepreneur. However, these profits are temporary because competitors will eventually imitate the innovation, making the profits disappear over time. Innovation is a key driver of economic progress and change.
In simple words: Schumpeter's theory says that business owners make profit when they invent something new or find a new way to do things (innovate). These new ideas help them earn extra money for a while, until other businesses copy them.

🎯 Exam Tip: For Schumpeter's theory, emphasize that profit comes from innovation (applying new ideas commercially) and that these profits are temporary as competitors eventually catch up.

 

Question 34. Write a note on the Risk-bearing Theory of Profit?
Answer: The Risk-bearing Theory of Profit was proposed by F.B. Hawley in 1907. This theory views profit primarily as the reward that an entrepreneur receives for bearing risks in a business. Every business activity involves uncertainties and potential losses, and the entrepreneur is the one who takes on these risks.

• Every business naturally involves some risks. So, taking risks is a very important job for the entrepreneur and forms the basic reason for earning profit.
• The theory suggests that higher the risks an entrepreneur undertakes, the greater the potential profit they can earn as a reward.
• Profit acts as an incentive, encouraging entrepreneurs to take on these risks and venture into new business opportunities, which can lead to economic growth.

This theory highlights the entrepreneur's role not just as an organizer but also as a primary risk-taker, with profit serving as compensation for that crucial function.
In simple words: Hawley's theory says that business owners get profit because they take risks. If a business takes bigger risks, it can earn bigger profits. Profit is like a payment for daring to face uncertainties.

🎯 Exam Tip: Focus on the entrepreneur's role as a risk-bearer when explaining Hawley's theory, stating that profit is the compensation for undertaking business risks and uncertainties.

Part - D

Answer the following questions on one page.

 

Question 35. Explain the Marginal Productivity Theory of Distribution?
Answer:

Introduction:
1. This theory explains how the prices for different factors of production are decided. It was developed by economists Clark, Wicksteed, and Walras.
2. It clarifies how payments like rent, wages, interest, and profit are set.
3. This theory is also known as the "General Theory of Distribution" or the "National Dividend Theory of Distribution".

Assumptions:
1. All factors of production, like labor or capital, are assumed to be identical.
2. One factor of production can be easily swapped for another.
3. There is perfect competition in both the market for goods and the market for factors of production.
4. Factors of production can move freely from one place or job to another.
5. All available factors of production are fully used.
6. This theory only applies over a long period.
7. Businesses always aim to make the most profit.
8. There is no government involvement in setting the price of any factor.
9. There are no changes in technology.

Explanation of the Theory:
According to the Marginal Productivity Theory of Distribution, the payment or reward for any factor of production is equal to its marginal productivity. This means each factor gets paid based on how much extra it adds to the total output.

Marginal Product:
The Marginal Product is also known as the "Marginal Physical Product" (MPP). It represents the extra output gained when one more unit of a factor is used. The Marginal Product can be shown as MPP, VMP, and MRP.

1. Marginal Physical Product [MPP]: This is the increase in total product when one more unit of a factor is employed.
2. Value of a Marginal Product [VMP]: This is found by multiplying the marginal physical product of a factor by the product's price. Symbolically: \( VMP = MPP \times Price \)
3. Marginal Revenue Product [MRP]: This is the increase in total revenue when one more unit of a factor is employed. Symbolically: \( MRP = MPP \times MR \)

The Marginal Productivity Theory of Distribution states that:
1. The price of a factor of production depends on how productive it is.
2. The price of a factor is decided by and will be equal to its marginal productivity.
3. Under certain situations, the price of a factor will match both its average and marginal productivity.

In simple words: This theory explains how wages, rent, and profits are determined. It says that each input in production is paid based on how much extra it adds to the final product or income. The idea is that everyone gets paid fairly for their contribution.

🎯 Exam Tip: When explaining theories, always start with a clear definition, list the main assumptions, and then detail the key concepts and their implications. Using bullet points helps organize complex information.

 

Question 36. Illustrate the Ricardian Theory of Rent?
Answer:

1. The traditional view of rent is called the "Ricardian Theory of Rent".
2. David Ricardo defined rent as the payment made to a landlord for using the original and never-ending productive qualities of land.

Assumptions:
1. Not all land is equally fertile.
2. The law of diminishing returns applies to farming.
3. Rent depends on how fertile the land is and where it is located.
4. The theory assumes perfect competition in the market.
5. It is based on a long-term view.
6. There is such a thing as "marginal land" or "no-rent land" (land that earns no rent).
7. Land has certain "original and indestructible powers" that last forever.
8. Land is used only for growing crops.
9. The most fertile lands are always farmed first.

Statement of the Theory with Illustration:
Imagine an island with three types of land: A, B, and C. Land A is the most fertile, B is less fertile, and C is the least fertile. Farmers will first cultivate all of the most fertile A-grade land. This land yields 40 bags of paddy per acre with a certain amount of labor and capital.

Next, farmers move to B-grade land, which yields 30 bags of paddy per acre with the same effort. The surplus yield on A-grade land compared to B-grade land (40 - 30 = 10 bags) is considered "Economic Rent" for A-grade land.

Finally, farmers cultivate C-grade land, which yields 20 bags of paddy per acre. This is the least productive land, and its cost of production equals the price of its products, meaning it yields no rent (20 - 20 = 0). This C-grade land is called "no-rent land" or "marginal land". Land that yields rent (like A and B) is called "intra-marginal land".

Diagrammatic Explanation:
1. In the diagram, the X-axis shows different grades of land, and the Y-axis shows the yield (in bags) per acre.
2. OA, AB, and BC represent 'A', 'B', and 'C' grade lands, respectively.
3. The 'C' grade land is the land that earns no rent.
4. 'A' and 'B' grade lands are considered "intra-marginal lands" because they earn rent.
5. The economic rent earned from 'A' and 'B' grade lands is shown by the shaded area of their respective rectangles in the graph.

In simple words: Ricardo's theory says that rent comes from the natural differences in land quality. Better land produces more, so farmers pay rent for it. Land that barely covers its costs (marginal land) pays no rent.

🎯 Exam Tip: When asked to illustrate a theory, a clear diagram with labels is essential. Always explain the components of your diagram and how it demonstrates the theory's principles.

 

Question 37. Elucidate the Loanable Funds Theory of Interest?
Answer:

1. The Loanable Funds Theory, also called the "Neoclassical theory", explains how interest rates are set. It was developed by economists from Sweden, including Wicksell, Bertil Ohlin, Viner, and Gunnar Myrdal.
2. Interest is simply the cost paid for borrowing funds.
3. The rate of interest is determined by where the demand for loanable funds meets the supply of loanable funds in the credit market.

Demand for Loanable Funds:
1. **Demand for Investment (I):** Businesses borrow to invest in new projects.
2. **Demand for Consumption (C):** People borrow money to buy goods and services.
3. **Demand for Hoarding (H):** People might want to hold onto cash instead of spending or investing it.

Supply of Loanable Funds:
1. **Savings (S):** Savings include:
a. **Planned Savings ("ex-ante savings"):** Money individuals plan to save, like paying an LIC premium.
b. **Unplanned Savings ("ex-post savings"):** Savings that happen unexpectedly.
2. **Bank Credit:** Commercial banks create new credit and make it available as loanable funds to investors.
3. **Dishoarding (DH):** This is when people release hoarded money back into use, increasing the supply of loanable funds.
4. **Disinvestment (DI):** This is the opposite of investment. It means not having enough funds to cover the wear and tear (depreciation) of equipment.

Explanation:
Imagine a graph where the X-axis shows the amount of loanable funds demanded and supplied, and the Y-axis shows the rate of interest. The "LS curve" shows the total supply of loanable funds, while the "LD curve" shows the total demand for loanable funds. The point where the LD and LS curves cross is labeled "E", which is the equilibrium point. At this point, the interest rate (OR) and the quantity of loanable funds (OM) are determined. This balance ensures that exactly the right amount of money is available for lending and borrowing at a stable interest rate.

Criticisms:
1. This theory includes many factors, but critics argue it still misses others, such as:
a. Asymmetric information (where one party has more or better information than the other).
b. Moral Hazard (when one party takes more risks because another party bears the cost).
2. It is difficult to accurately combine real economic factors with monetary factors within this theory.

In simple words: This theory says the interest rate is decided by how much money people want to borrow (demand) and how much money is available to lend (supply). When more money is available, interest rates might fall, and when many people want to borrow, rates might go up.

🎯 Exam Tip: Remember the components of both demand and supply sides for loanable funds. An enriching detail is to mention that the market for loanable funds acts like any other market where price (interest) is determined by supply and demand.

 

Question 38. Explain the Keynesian Theory of Interest?
Answer:

Keynes' Liquidity Preference Theory of Interest or The Monetary Theory of Interest:
1. John Maynard Keynes introduced the Liquidity Preference Theory of Interest in his famous book, "The General Theory of Employment, Interest, and Money", published in 1936.
2. According to Keynes, interest is purely a money-related concept because its rate is always calculated in terms of money.
3. Keynes stated, "Interest is the reward for giving up the opportunity to hold liquid cash for a specific period of time."

Meaning of Liquidity Preference:
1. Liquidity preference means that people prefer to hold their wealth in the form of easily accessible cash instead of other assets that are harder to convert to cash, such as bonds, securities, bills of exchange, land, buildings, or gold. The preference for cash means they want money readily available for various needs.
2. As Meyer explained, "Liquidity Preference is the preference to have an amount of cash rather than of claims against others."

Motives of Demand for Money:
Keynes identified three main reasons (motives) why people prefer to hold liquid cash:

1. **The Transaction Motive:**
• This motive comes from people's desire to hold cash for their daily expenses and regular transactions.
• The amount of money held for this motive depends on a person's income. \( M_t = f(y) \)

2. **The Precautionary Motive:**
• This relates to people wanting to keep cash for unexpected events or emergencies, like sickness, accidents, fire, or theft.
• The amount saved for this reason also depends on income. \( M_p = f(y) \)

3. **The Speculative Motive:**
• This motive involves holding cash to take advantage of future changes in market prices, especially for bonds and other securities. People might hold cash if they expect bond prices to fall (and interest rates to rise), so they can buy bonds later at a lower price.
• The amount saved for this motive depends on the interest rate. \( M_s = f(i) \)
• There is an inverse relationship: when liquidity preference is high, interest rates tend to be low, and vice versa.

In simple words: Keynes believed that interest is the payment you get for not holding cash. People want to hold cash for three main reasons: to buy things, for emergencies, and to make money from changing prices later. The interest rate balances this desire for cash against the supply of money available.

🎯 Exam Tip: Clearly differentiate between the three motives for holding money, as this is central to Keynes's theory. Remember the inverse relationship between liquidity preference and the rate of interest for the speculative motive.

Samacheer Kalvi 11th Economics Distribution Analysis Additional Important Questions and Answers

Part - A

Multiple Choice Questions:

 

Question 1. The theory of factor prices is popularly known as the theory of
(a) Distribution
(b) Exchange
(d) Profit
Answer: (a) Distribution
In simple words: The theory of factor prices looks at how the cost for each input in production, like labor or land, is determined. This is known as the theory of distribution.

🎯 Exam Tip: Understand that "factor prices" directly relates to how income (like wages, rent, interest, profit) is distributed among the factors of production.

 

Question 2. Net profit is otherwise called
(a) Profit
(b) Risk profit
(c) Dynamic profit
(d) Pure profit
Answer: (d) Pure profit
In simple words: Net profit, also known as pure profit, is the real profit left after all costs and payments for self-owned resources have been covered. It's the entrepreneur's true reward.

🎯 Exam Tip: Distinguish between different types of profit (gross, net, normal, supernormal) as they represent different stages of calculation and economic meaning.

 

Question 3. F.A. Walker wrote a book
(a) Political economy
(b) Social economy
(c) Principles of economics
(d) Wealth of nations
Answer: (a) Political economy
In simple words: F.A. Walker, a notable economist, wrote a book titled 'Political Economy'. His work contributed significantly to economic theories, especially regarding profit.

🎯 Exam Tip: Knowing key economists and their works helps in understanding the historical development of economic thought.

 

Question 4. Which is the gift of nature?
(a) Land
(b) Interest
(c) Profit
(d) Capital
Answer: (a) Land
In simple words: In economics, land is considered a primary factor of production and is often referred to as a "gift of nature" because it is not created by human effort.

🎯 Exam Tip: Remember the classical factors of production: land, labor, capital, and entrepreneurship. Land is unique as it's not man-made.

 

Question 5. Keynes liquidity preference theory is also called as
(a) Classical theory of interest
(b) Psychological theory of interest
(c) The monetary theory of interest
(d) Abstinence theory of interest
Answer: (c) The monetary theory of interest
In simple words: Keynes's liquidity preference theory focuses on how people prefer to hold money, making it a "monetary theory" of interest, different from classical theories.

🎯 Exam Tip: Recognize that Keynes's theory emphasizes the role of money (a monetary factor) in determining the interest rate, a departure from earlier theories that focused on real factors like savings and investment.

 

Question 6. Which one is considered a homogeneous factor?
(a) Labour
(b) Land
(c) Capital
(d) All of the options
Answer: (d) All of the options
In simple words: A homogeneous factor means all units of that factor are exactly alike and interchangeable. In some economic models, all factors of production are assumed to be homogeneous for simplicity.

🎯 Exam Tip: The assumption of "homogeneous factors" simplifies economic models by treating all units of a factor (e.g., all workers or all machines) as identical in quality and productivity.

 

Question 7. Risk bearing theory of profit was propounded by
(a) J.B. Clark
(b) J.M. Keynes
(c) F.B. Hawley
(d) H.Knight
Answer: (c) F.B. Hawley
In simple words: F.B. Hawley proposed that profit is a reward for the risks that business owners take. The bigger the risk, the higher the potential profit.

🎯 Exam Tip: Link specific theories of profit (e.g., Risk Bearing, Innovation) to their respective economists to show a deeper understanding of economic thought.

 

Question 8. What is the payment for the service of labour?
(a) Wages
(b) Income
(c) Salary
(d) Profit
Answer: (a) Wages
In simple words: Wages are the specific payment given to workers for their labor or services. It is one of the main forms of income for individuals.

🎯 Exam Tip: Clearly define the payments for each factor of production: rent for land, wages for labor, interest for capital, and profit for entrepreneurship.

 

Question 9. _____ is the produced means of production.
(a) Land
(b) Labour
(c) Capital
(d) Organisation
Answer: (c) Capital
In simple words: Capital refers to man-made goods used to produce other goods and services, such as machines, tools, and factories. It is a "produced" means of production because it is created by humans.

🎯 Exam Tip: Capital is distinct from land (natural) and labor (human effort). It's a resource that itself had to be produced.

 

Question 10. Organization is done by the
(a) Private sector
(b) Public sector
(c) Service sector
(d) Entrepreneur
Answer: (d) Entrepreneur
In simple words: The entrepreneur is the person who brings together all the other factors of production (land, labor, and capital) and organizes them to create a business and produce goods or services.

🎯 Exam Tip: Understand the role of the entrepreneur as the organizer and risk-taker among the factors of production.

Part - B

Answer the following questions in one or two sentences.

 

Question 1. Define Marginal product?
Answer:
1. The marginal product of a factor of production is the extra output that is added to the total product when one more unit of that factor is used.
2. The Marginal Product can be represented as MPP (Marginal Physical Product), VMP (Value of Marginal Product), and MRP (Marginal Revenue Product).
In simple words: Marginal product is simply the additional amount of goods made when you add one more unit of an input, like one more worker or one more machine. It measures the extra value that unit brings.

🎯 Exam Tip: Define marginal product precisely, focusing on the "additional" output from "one more unit" of input.

 

Question 2. What are the other names of the marginal productivity theory of distribution?
Answer:
1. One other name for this theory is the general theory of distribution.
2. It is also known as the national dividend theory of distribution.
In simple words: This theory has other names: the "general theory of distribution" and the "national dividend theory of distribution". These names show its broad application in economics.

🎯 Exam Tip: Knowing alternative names for theories helps in recognizing them in different contexts or questions.

 

Question 3. What do you mean by the Marginal Productivity theory of distribution?
Answer:
1. The Marginal Productivity Theory of Distribution was developed by economists Clark, Wicksteed, and Walras.
2. This theory explains how the prices of various factors of production are determined.
3. It also explains how the rewards for factors like rent, wages, interest, and profit are set.
4. This theory is also known by other names, such as the "General Theory of Distribution" or "National Dividend Theory of Distribution".
In simple words: This theory explains how the price (or pay) for things like land, labor, and capital is decided. It says each factor gets paid based on how much extra it helps produce.

🎯 Exam Tip: When defining the theory, clearly state its main purpose: explaining factor pricing based on productivity. Mentioning its originators adds value.

Part - C

Answer the following questions in a paragraph.

 

Question 1. List out the Concepts of Profit?
Answer:

Concepts of Profit:
1. **Gross Profit:** This is the money a company has left over after subtracting its total spending from its total earnings. It is a first look at how profitable a business is.
\( Gross Profit = Total Revenue - Total cost \)
2. **Net Profit or Pure Profit or Economic Profit or True Profit:** This is the actual profit an entrepreneur keeps after taking out all costs, including the hidden costs (implicit costs) for their own resources used in the business. It shows the real financial gain.
\( Net Profit = Gross Profit - implicit costs \)
3. **Normal Profit:** This is the smallest amount of profit a business needs to make to stay operating in the market. It covers the entrepreneur's effort and the use of their own capital.
4. **Supernormal Profit:** This is any profit earned that is more than the normal profit. It shows that the business is doing exceptionally well.
\( SuperNormal Profit = Actual profit - Normal profit \)
In simple words: Profit can be looked at in different ways. Gross profit is simply sales minus costs. Net profit is the actual profit an owner keeps. Normal profit is the minimum needed to stay in business. Supernormal profit is extra profit made above the normal amount.

🎯 Exam Tip: Clearly define each type of profit and know the simple formulas. Understanding the distinctions (especially between gross, net, and normal profit) is crucial for economic analysis.

 

Question 2. Distinguish between Demand and Supply of Money?
Answer:
1. The interest rate is decided by the balance between how much money people want (liquidity preference) and how much money is available (supply of money).
2. In the short term, the total amount of money available in the economy is usually considered fixed.

3. The "LP" (Liquidity Preference) curve represents the demand curve for money.
4. The line labeled M2M2 shows the fixed supply curve of money for speculative reasons. The intersection of this supply curve and the demand curve (LP) determines the equilibrium point (E), and thus the interest rate. If people's desire to hold cash (liquidity preference) increases, causing the demand curve to shift from LP to L₁P₁, while the money supply stays the same, the interest rate will rise from Ol to Ol1. This means more demand for a fixed supply of money pushes up the price of money (interest rate).
5. If the demand curve (LP) remains unchanged, but the supply of money changes, the interest rate will also change. For example, if the supply of money is OM2, the interest rate is Ol2. If the supply of money is reduced to OM3 (less than OM2), the interest rate would increase to Ol3. Conversely, if the supply of money is increased to OM4 (more than OM2), the interest rate would decrease to Ol4. This shows how changes in money supply affect interest rates when demand for money is stable.

In simple words: The interest rate is found where the desire for money meets the available supply. If people suddenly want more money (demand goes up) but the supply stays the same, interest rates go up. If there's more money available (supply goes up) but people's desire to hold it stays the same, interest rates go down.

🎯 Exam Tip: Clearly label axes and curves in your diagrams. Remember to explain how shifts in demand for money (liquidity preference) or changes in the money supply affect the equilibrium interest rate.

 

Question 3. Define the kinds of interest.
Answer:
Gross Interest: This is the total money a creditor receives from a debtor. It includes the actual net interest, an additional amount for any inconvenience caused, insurance against the risk that the loan might not be repaid, and a payment for managing the debt. Essentially, it covers all the costs and risks involved for the lender.
Net Interest: This is the pure payment received for simply using capital. It represents the actual cost of borrowing money, without any extra charges for risk, inconvenience, or management fees. An example of net interest is the interest paid for government securities.
In simple words: Gross interest is the total payment a lender gets, covering the basic interest plus extra charges for risk and effort. Net interest is just the basic payment for using the money itself.

🎯 Exam Tip: Clearly distinguish between gross and net interest by explaining what each term includes, highlighting that gross interest covers more than just the pure cost of capital.

Part - D

 

Question 1. Explain the classical theory of Interest?
Answer:
Introduction:
1. The Classical Theory of Interest was developed by economists like Clark, Wicksteed, and Walras.
2. This theory helps explain how the prices of various production factors are determined.
3. It clarifies how rent, wages, interest, and profit are all set in the economy. This theory is also known as the "General Theory of Distribution" or the "National Dividend Theory of Distribution."

Equilibrium:
1. The interest rate is decided where the total demand for loanable funds meets the total supply of loanable funds. This balance point is called equilibrium.
2. The supply of loanable funds is the sum of savings, bank credit, money that was previously hoarded but is now being used (dishoarding), and disinvestment.
\( \implies \) Supply of loanable funds \( = \) Savings \( + \) Bank Credit \( + \) Dishoarding \( + \) Disinvestment \( = S + BC + DH + DI \)
3. The demand for loanable funds comes from investment needs, consumption, and the desire to hoard money.
\( \implies \) Demand for loanable funds \( = \) Investment \( + \) Consumption \( + \) Hoarding \( = I + C + H \)

In the diagram, the X-axis shows the demand and supply of money for lending, and the Y-axis shows the rate of interest. The 'LS' curve represents the total supply of loanable funds. The 'LD' curve shows the total demand for loanable funds. These two curves cross each other at point 'E', which is the equilibrium point. At this point, 'OR' is the stable rate of interest, and 'OM' is the amount of loanable funds exchanged.
In simple words: The classical theory says the interest rate is set by how much money people want to borrow versus how much is available to lend. The diagram shows where these two meet, setting the price of borrowing money.

🎯 Exam Tip: When explaining economic theories, always start with who developed it, define the core concepts, and illustrate with a simple diagram if applicable to show the relationship between variables.

 

Question 2. Illustrate the uncertainty Bearing Theory of profit?
Answer:
The Uncertainty Bearing Theory of profit was introduced by the American economist Frank H. Knight. This theory states that profit is earned as a reward for dealing with uncertainty in business. Knight explained that there are two main kinds of risks:

Insurable Risks:
1. Some risks can be measured or calculated. These are predictable.
2. Examples include the risk of fire, theft, or damage from natural disasters.
3. Insurance companies cover these types of risks, meaning businesses can get money back if these events happen. Businesses can transfer these risks to an insurer.

Non-Insurable Risks (Uncertainty):
1. Other risks cannot be measured or predicted. These are unpredictable and unique to each situation.
2. These include things like strong competition, changes in market conditions, new technology, or government policies.
3. No insurance company can cover these types of risks because their likelihood cannot be calculated.
4. Knight believed that "risks" refer to the measurable events that can be insured. However, "uncertainty" refers to events that are unexpected, cannot be calculated, or are impossible to measure and insure. These are the true challenges for entrepreneurs.
5. According to Knight, profit does not come from taking *insurable* risks because a business person can get insurance for them. But uncertain events cannot be protected against in the same way. When an entrepreneur takes on the burden of facing these uncertain events, they get a special reward. This reward for facing genuine uncertainty is what Knight called "profit."
In simple words: Profit, in this theory, is the reward for dealing with things you cannot predict or insure, like new competitors or sudden market changes. It is not just for taking normal risks that you can insure.

🎯 Exam Tip: Clearly distinguish between "risk" (insurable, measurable) and "uncertainty" (non-insurable, immeasurable) when discussing Knight's theory, as this distinction is the core of his argument for the source of profit.