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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2003 ICFAI University M.B.A Suggested Answers Economics (MB141) : October 2003 Question paper
Suggested Answers Economics (MB141) : October 2003
Part A : Basic Concepts
1. Answer : (d) <
TOP >
Reason : (a) True. Under first-degree price discrimination, the monopolist charges the
maximum possible price for each unit of output. That is, the consumer actually pays the price what he
is willing to pay. Hence, the monopolist would extract the entire consumer’s surplus.
(b) True. Since each unit is charged the maximum possible price, price for each unit will be different.
(c) True. As the monopolist is extracting the entire consumer surplus, profit of the discriminating
monopolist would be more than the monopolist charging a single price.
(d) False. Since each unit is charged the maximum possible price, price for each unit will be different
and subsequent units are charged less and less price.
(e) True. Under first-degree price discrimination, the monopolist charges the maximum possible
price for each unit of output. Hence it is also called perfect price discrimination.
2. Answer : (d) <
TOP >
Reason : Intermediate goods are those goods that are meant for resale, further processing, or
manufacturing. The value of the intermediate good is included in the value of final good.
a. The tyres sold to Hero Cycles Ltd. are used as components of Hero cycles and
hence are intermediate goods.
b. Fertilizers bought by a vegetable cultivator are used for production and hence
constitute intermediate goods.
c. Art paper purchased by a painter is for the purpose of painting. The value of the
art paper will be included in the price of painter’s masterpiece. Hence, an art paper purchased by the
painter is an intermediate good.
d. A pack of sweets bought by Mr. Rajesh to celebrate his success with friends is
for his final consumption and hence is a final good.
e. Aviation fuel sold to Air India is an intermediate good since it is an input in
providing air service.
3. Answer : (a) <
TOP >
Reason : When the CRR is reduced to 4.5% from 4.75%, the money supply in the economy
increases with the increase in the value of money multiplier. Higher money supply lowers the interest
rates in the economy. Lower interest rate in turn encourages investment and consumption in the
economy. As consumption and investment are part of aggregate demand, aggregate demand increases
with the reduction of CRR. When aggregate demand increases, the real GDP and price levels increase in
the economy.
Therefore, change in the CRR ??change in money supply ??change in nominal
interest rate ??change in consumption and investment ??change in aggregate demand ??change in
real GDP and price level.
4. Answer : (c) <
TOP >
Reason : A production possibility curve indicates the various combinations of two classes of
goods that an economy can produce when its resources are fully employed. An upward shift in the PPF
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takes place when the ability of the countries to produce the goods increases. Country A has only made a
gross investment equal to its depreciation. That means, there is no net investment in the country. Hence,
the productive capacity of country A remains same even after 10 years. Country B has spent most of its
income for consumption. As there is no investment its capital stock erodes and PPF shifts towards left
as time progresses. And hence, countries that invest heavily will have higher investment and
consumption in the future. Thus, country C would have a higher PPF.
5. Answer : (d) <
TOP >
Reason : A depression is immediate followed by recovery.
a. During recovery unemployment rate decreases because of picking up of economy activity.
b. Depression is immediately followed by recovery and not recession.
c. Only during boom there will be rapid increase in wages because of high business activity.
d. It is true that during recovery the cost of production will gradually increase because of gradual
increase in wages.
e. Production will increase moderately during recovery.
6. Answer : (b) <
TOP >
Reason : The value of price index in base year is 100. A country is said to be facing inflation
when the price index increases from the base year. Thus, a country having a price index of more than
100 is said to be facing inflation.
7. Answer : (c) <
TOP >
Reason : Loans are a form of credit, and as they can be used to purchase goods and services they
are the equivalent of money. Banks through the ‘process of credit creation’ creates the money. The
process of credit creation is done by accepting deposits and lending loans.
8. Answer : (c) <
TOP >
Reason : a. Price elasticity of demand is infinitely elastic in perfect competition because of
presence of homogenous goods.
b. Because of presence of closely substitutable goods in the monopolistic market, the price
elasticity of demand for a good would be higher when compared to that of monopoly.
c. In monopoly market, there is only one single seller and one good. Hence, the price elasticity of
demand would be least.
d. & e. In oligopoly market, there will be homogenous goods or closely substitutable goods. Hence the
price elasticity of demand would be higher than in monopoly.
9. Answer : (b) <
TOP >
Reason : a. GNPMP is the total market value of the final goods and services produced in a
given period by factors of production owned by the citizens of a country.
b. GDPMP is defined as the total market value of all the final goods and services produced in a
given period by factors of production located within a country
c. NNPMP is GNPMP – depreciation
d. GNPFC is the total value of the final goods and services produced in a given period by factors of
production owned by the citizens of a country and valued at factor cost.
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e. GDPFC is the total market value of the final goods and services produced in a given period by
factors of production located within a country and valued at factor cost.
10. Answer : (b) <
TOP >
Reason : Transfer payments are money payments which are not associated with any current
production activity on the part of income receives.
11. Answer : (d) <
TOP >
Reason : M1 (narrow money) = Currency with public + Demand deposits with banks + Demand
portion of savings deposits with banks + other deposits with RBI
M2 = M1 + Post Office Savings Deposits
M3 (broad money) = M1 + Time deposits with banks
Thus, the difference between broad money (M3) and narrow money (M1) is the time
deposits with banks.
12. Answer : (a) <
TOP >
Reason : The economic process in an economy can be expressed in the form of a circular flow of
incomes and spending between the households and firms. In a two-sector economy, i.e. where there is
no government role, households provide firms with factors of production and receive factor prices from
firms. That means, households are the suppliers of factors of production and recipients of income.
13. Answer : (d) <
TOP >
Reason : Personal income is the income that is received by the individuals before paying
personal taxes. Personal income comprises of three components - personal saving, personal
consumption and personal income taxes. Corporate profits consist of dividends, undistributed profits
and corporate taxes. Personal income only includes dividends they are distributed to individuals, while
undistributed profits and corporate taxes are not given to individuals. Retained earnings are nothing but
the undistributed profits of businesses and hence are not included in the personal income.
14. Answer : (c) <
TOP >
Reason : If any firm earns more than normal profits, new firms will enter the industry in the long
run, leading to fall in good prices. This decline in the price reduces the volume of profits of the existing
firms. This process continues till all existing firms earn only normal profits. On the contrary, when
existing firms get losses, some of the firms leave the industry. This increases the price of good. This
process continues till the existing firms get normal profits.
(a) Product homogeneity in the industry ensures equal price for the good in the industry, but it does
not result in normal profits.
(b) Presence of large number of sellers and buyers in the industry does not allow individual buyer or
seller, however large, to influence the price by changing the purchase or output.
(c) Free entry and exit of firms in an industry ensures normal profits in the long run as higher profits
increases the entry of new firms, while losses make existing firms to move out of the industry.
(d) As (a) and (b) are not the answers, (d) cannot be the answer.
(e) As (b) is not the answer, (e) cannot be the answer.
15. Answer : (a) <
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TOP >
Reason : When the government levies a specific tax, buyers and sellers share the burden
depending on the price elasticities of demand and supply. The tax burden will be more on those who are
lesser sensitive to price changes. If cigarette companies pass much of the new tax on the consumers in
the form of higher prices, it implies that the demand for cigarettes is comparatively lesser elastic than
supply. The demand for cigarettes cannot be perfectly inelastic as part of the tax (although less) is borne
by the sellers.
16. Answer : (d) <
TOP >
Reason : Explicit costs refer to those costs that are made out-of-pocket and are recorded in
accounting books. Salaries paid to workers, medical expenses of an employee, advertisement expenses
and telephone bills are all out-of-pocket costs and are entered in the books of accounts. The amount
forgone by the firm’s owner by not working at another job represents the opportunity cost (implicit
cost) and hence is the answer. Note that the opportunity cost is the highest valued benefit that must be
sacrificed as a result of choosing an alternative.
17. Answer : (b) <
TOP >
Reason : When a rice miller can sell as much rice as he wants in the market at the current price;
which indicates that the market is a perfectly competitive market. The demand curve of any firm
operating in a perfectly competitive market is horizontal at the market price because of perfectly elastic
price demand. For a horizontal straight line, the slope would be zero. Hence (b) is correct.
18. Answer : (c) <
TOP >
Reason : In economics, cost includes opportunity costs. A normal return to management or
capital is the minimum payment necessary to keep those resources from moving to some other firm or
industry. Thus, economic cost includes a normal rate of profit. The term economic profit refers to profit
in excess of these normal returns. Thus, a firm earning normal profits represents that the firm is getting
zero economic profits but not zero accounting profits.
(a) A firm earning zero economic profit (= normal profits) generally would show a positive profit on
the income statement prepared by its accountants. This is because the normal returns to entrepreneurial
skill and capital supplied by the owners are not considered while computing accounting costs.
(b) MR = MC represents only profit maximizing condition of a firm and is not related to normal
profits.
(c) Zero economic profits signify that the firm is earning only normal rate of return (= normal
profits).
(d) A normal return to management or capital is the minimum payment necessary to keep those
resources from moving to some other firm or industry. Thus, the firm is having positive opportunity
cost.
(e) As (b) is not correct, (e) is not the answer.
19. Answer : (d) <
TOP >
Reason : Out-of-pocket (explicit) costs, indirect costs, private costs and fixed costs are all
recorded in the books of accounts of the company as payments are made to outsiders who supply labor
services, materials, power, transportation, etc. Implicit costs are not entered in the books of accounts,
which include costs of self-owned, self-employed resources and time cost, etc.
(a) Out-of-pocket (explicit) costs are those costs that require payment of money to outsiders. All outhttp://
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of-pocket costs are entered in the books of accounts of a company.
(b) Indirect costs: The costs/expenses that cannot easily and accurately be separated and attributed to
individual units of production, except on arbitrary basis are called indirect costs. Although they are
indirect, they are recorded in the books since payment is made.
(c) Private costs are those that accrue directly to the individuals/firms engaged in a business activity.
All private costs excluding implicit costs are recorded in the books.
(d) Implicit costs: include costs of self-owned, self-employed resources and time costs. They are not
recorded in the books because no payment is made towards these costs.
(e) Fixed costs are explicit in nature and are recorded in the books.
Hence, (d) is the answer.
20. Answer : (e) <
TOP >
Reason : An expansionary monetary policy ??increase in money supply ??decrease in interest
rate ??increase in consumption and investment ??increase in aggregate demand ??increase in output
and employment level ??increase in price level.
When money supply is increased, the aggregate demand increases that in turn lead to
demand pull inflation. When inflation is anticipated, labors may demand higher wages, which may
result in wage push inflation. Supply stock inflation happens when there is a sudden drop in the supply
of goods and services because of varied reasons. An expansionary monetary policy does not cause
supply shock inflation
Hence the correct answer is (e).
21. Answer : (e) <
TOP >
Reason : (a) Normally, marginal cost falls initially, reaches a minimum and then gradually
increases after some point with the increase of output.
(b) Average variable cost falls initially, reaches a minimum and then gradually increases after some
point with the increase of output.
(c) As TFC remains constant, AFC falls continuously with the increase in output.
(d) Total variable costs increases with increase of output.
(e) The correct answer (e) because none of the above remains constant with the increase of quantity
of output.
22. Answer : (a) <
TOP >
Reason : Perfect competition refers to a market where there are large number of sellers and
buyers. There should be free exit and entry in the market should be. As this is possible only in
sugarcane cultivation, the answer is (a).
23. Answer : (c) <
TOP >
Reason : Diseconomies of scale refer to the forces causing the average cost of production to
increase as the output increases. Therefore the answer is (c).
24. Answer : (b) <
TOP >
Reason : (a) True. In perfect competition there are many sellers and buyers
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(b) Not true. In perfect competition firms do not have any price making power as there are many
sellers and the product is homogeneous.
(c) True. In perfect competition product sold by all the firms is assumed to be homogeneous.
(d) True. In perfect competition entry and exit of firms is free.
(e) True. In perfect competition buyers and sellers have access unlimited information which is
available free of cost.
25. Answer : (d) <
TOP >
Reason : C = 8 + 0.7Y
S = –8 + 0.3Y
At equilibrium, S = I
–8 + 0.3Y = 22
0.3Y = 30
??Y = 100
26. Answer : (d) <
TOP >
Reason : At break-even level of disposable income, savings are zero.
??S = –300 + 0.25Yd = 0
0.25 Yd = 300
Yd = = 1200.
27. Answer : (c) <
TOP >
Reason : The difference between marginal revenue gained by a firm and the marginal cost
incurred for producing the good indicates the additional profit the firm has gained by selling one
additional unit; which is known as marginal profit.
a. Net revenue = Total revenue – Total cost = Profits. Hence is not the correct answer.
b. Average revenue = Total revenue/Quantity sold.
c. Marginal profit = Marginal revenue – marginal cost
d. Marginal revenue = change in total revenue/change in units sold.
28. Answer : (b) <
TOP >
Reason : When the consumer is in equilibrium,
=
??3 =
Py = 25.
29. Answer : (c) <
TOP >
Reason : Slope of the isoquant at any point is its MRTSLK. If MRTSLK is constant, the resulting
isoquant is a straight line. And isoquants are negatively sloped.
(a) If isoquant is concave to the origin, MRTSLK is increasing. Hence (a) is not the answer.
(b) If isoquant is convex to the origin, MRTSLK is decreasing. Hence (b) is not the answer.
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(c) As the isoquant is a straight line with negative slope, this indicates a constant MRTSLK.
Hence (c) is the answer.
(d) Is not the answer though the isoquant is a straight line as it is positively sloped.
(e) If two inputs are used in a fixed proportion, the isoquant is L-shaped.
30. Answer : (a) <
TOP >
Reason : WPI is the most widely used price index in India as it is available for most
commodities. 435commodities are covered in this. CPI on the other hand reflects the cost of living of a
particular group in the population. These groups are industrial workers, urban, non-rural employees and
agricultural labor. Though GDP deflator is a better index for inflation, it is available with a time lag of
about one year.
Part B: Problems
1. a. The inputs level will be optimum when MPi/Pi = MPj/Pj
Where MP is the marginal productivity of the factor input and P is price of the factor.
For KLL,
Category of labor MP (lights per week) Price (Rs.) MP/P
Unskilled workers 800 400 2.00
Factory technicians 900 600 1.50
Machinists 1100 700 1.57
Electricians 1200 800 1.50
For KLL the current level of labor input is not optimal as marginal output per rupee spent on unskilled
workers is more than other categories of labor.
b. For the current level of output cost can be minimized by employing more of unskilled workers and
machinists and employing less of factory technicians and electricians.
< TOP >
2. The demand function is Q = 7500 – 1500PA + 3.5Y + 150PC + 10 AA
At the current values, the quantity demanded is:
= 7500 – 1500(2.5) + 3.5(3000) + 150(3) + 10(30)
= 15000 packets.
Price elasticity of demand =
From the given demand function = –1500
Therefore, price elasticity of demand = –1500 ??2.5/15000
= – 0.25
Income elasticity of demand =
Where = 3.5 (from the given demand function)
Therefore, income elasticity of demand = 3.5 ??3000/15000 = 0.7
Promotional elasticity of demand =
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Where = 10
Therefore, promotional elasticity of demand = 10 ??= 0.02
Option 1: Alpine can increase its sales by reducing the price.
Therefore, the new price should be equal to
17250 = 7500 –1500PA +3.5(3000) + 150(3) + 10(30)
17250 = 18750 – 1500PA
1500PA = 1500
PA = 1
Option 2 : Alpine can increase its sales by increasing promotional campaigns.
17250 = 7500 –1500(2.5) +3.5(3000) + 150(3) +10AA
17250 = 14700 + 10AA
AE = 255
< TOP >
3. a. NDPMP = GDPFC - Depreciation + Indirect Taxes - Subsidies
Depreciation = Gross domestic investment – Net domestic investment
= 12,000 – 8,000
= 4,000 MUC.
??NDPMP = 50,000 – 4,000+6,000 – 1,000
= 51,000 MUC.
b. NFIA = NNPMP – NDPMP
NNPMP = NNPFC + Indirect Taxes – Subsidies
= 47,000 + 6,000– 1000
= 52,000 MUC.
??NFIA = 52,000– 51,000
= 1,000 MUC.
c. Personal Income (PI) = NI – Corporate profit + Dividends + Transfer Payments
= 47,000 – 10,000 + 400 + 500
= 37,900 MUC.
d. Personal Savings = Personal Disposable Income (PDI)–Personal consumption expenditure
PDI = PI – Personal tax payments
= 37,900 – 5,000
= 32,900 MUC
??Personal savings (PS) = 32,900– 25,000
= 7,900 MUC.
< TOP >
4. High powered money = Monetary Liabilities of RBI + Government Money
Monetary liabilities of RBI = Financial Assets + Other Assets – Non-monetary liabilities
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Financial Assets = Credit to Government + Credit to
Banks + Credit to commercial sector + Net Foreign exchange assets
= 40,000 + 10,000 + 250+ 65,000
= Rs.1,15,250 crore
Other Assets = Rs.400 crore
Non-monetary liabilities = Government deposits + other nonmonetary
liabilities + Net worth
= 500 + 600 + 12,000 = Rs.13,100
Crore
?Monetary liabilities = 1,15,250 + 400 – 13,100= Rs.1,02,550
crore
Government money = 1,450
?High powered money (H) = 1,02,550 + 1,450 = Rs.1,04,000 crore
Money supply (Ms) = H ´ m
Money multiplier (m) =
= = = 3.714
?Money Supply
in the economy = 1,04,000 ´ 3.714
= Rs.3,86,256 crore.
< TOP >
5. a. Branding is one of the important means of differentiating a product. All the five brands in
Dabur’s straddle are household names in India. In fact the fast moving consumer goods industry is dominated
by brands, which is the most important differentiator in the industry. Dabur has also been effective in
associating brands with a theme like Vatika standing for herbal beauty.
Dabur can differentiate its products by improving the quality of its products or improving the services
associated with its products or providing its products at more convenient locations.
b. By altering characteristics of differentiated products, it is possible to produce a vast array of variations
on the general theme of that product. This is called brand proliferation. Advertising performs the useful
functions of informing buyers about their alternatives, thereby making markets work more smoothly.
Product differentiation is the unique characteristic of monopolistically competitive market as Dabur India is
facing. Dabur India is characterized by brand names continual product development and improvement. This
long-standing image allows the company to charge significantly higher prices for his product than those
charged for the rival brands.
Advertising and other costs incurred to sell more of a product without reducing its price must be added to
production costs to compute average cost of a product. Selling costs increase average cost and contribute to
higher prices.
Selling costs are costs incurred by a firm to influence the sales of its product. These cost include advertising
expenses, expenses for sales personnel, and other promotional expenses. When selling costs are added to
production costs, they increase the average cost of making goods available. This can be shown with the help
of a diagram.
Large advertising increases the average cost from AC0 to AC1.
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As a result of branding and advertising Dabur India produces more than it would otherwise. This reduces the
excess capacity. However it doesn’t benefit consumers because the price doesn’t fall to reflect the lower
average costs of production. Instead selling costs are added to production costs, resulting in the overall
increase in average cost.
< TOP >
6. a. Spending by the households (consumption expenditure) is an important component in any
economy. As equilibrium output in an economy (Y) is equal to aggregate demand (C+I+G+NX), changes in
any components of the aggregate demand would lead to multiple changes in the output (multiplier effect).
In both the economies, America and Japan, consumption expenditure is more than 50 percent of the GDP.
Americans with their high marginal propensity to consume kept the aggregate demand in the economy at a
high level thereby driving the economy to a higher growth path. Japanese, on the other hand had very high
marginal propensity to save, which kept the aggregate demand at a lower level leading to economic
stagnation.
b. One explanation for the fall in saving over the past two decades lies in a theory called the life-cycle
hypothesis. This supposes that during their working years individuals spend less than they earn, and thus
accumulate wealth, which they plan to draw on once they retire. So the more retired people there are in
relation to the number of workers, the lower the saving rate will be. The ratio of Japanese aged over 65 to
those of working age rose from 15% in 1980 to 28% in 2000. As this ratio increases, household savings in
the economy decline.
In Japan, when inflation soared in the 1970s, the erosion of the real value of wealth prompted households to save
more to rebuild their assets. As inflation fell, they needed to save less to maintain their real wealth. Therefore, as
inflation falls household savings may decrease.
< TOP >
Part C: Applied Theory
7. Hoping for a great demand for shopping spaces, the developers in the cities of Bangalore and Hyderabad are
building more number of shopping malls. It results in an increase in the supply of shopping spaces. When the total
supply is greater than the total demand, it leads to excess supply or glut.
If the demand for shopping space remains the same, when there is an increase in the supply, it leads the
equilibrium price of shopping space to fall and the equilibrium quantity to rise. This can be explained with the
help of demand and supply curves. If the supply curve shifts to the right, the demand curve remaining the same,
the equilibrium price will fall and the equilibrium quantity will rise. This is shown in the figure:
In this figure, D0D0 is the initial demand curve for shopping space and S0S0 is the initial supply curve of shopping
space. They intersect at the point E0 where the initial equilibrium price is OP0 and the initial equilibrium quantity
is equal to OQ0. Suppose that the demand curve remains the same, but the supply shifts to the right to the new
position S1S1.At the price OP0, the sellers want to supply OQ2 amount of shopping space but the buyers demand
OQ0. So there is an excess supply of Q0Q2 in the market. It leads the equilibrium price to fall from P0 to P1 and
equilibrium quantity rises from Q0 to Q1.
< TOP >
8. Inflation is an increase in the general level of prices in an economy that is sustained over a period of time.
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The inflation rate is used to measure the rate of change in the overall price level of goods and services that we
typically consume.
Sources of inflation:
The price level generally increases when the aggregate demand for goods and services exceeds aggregate supply.
If such a situation persists for a long period of time, it leads to inflation. In other words, we can say that demandpull
factors create inflation in an economy. This is called demand-pull inflation. The main factors of demand pull
inflation can be summarized as increase in money supply, the government budget deficit, etc.
Inflation can also be caused by cost-push factors. When the cost of factors of production increases, the producers
or manufacturers that supply the goods and services reduce the supply. The aggregate demand for the goods and
services however remains the same. There is one major difference between demand-pull and cost-push inflation:
in demand inflation, the unemployment level remains at the minimum; in cost-push inflation, the unemployment
level increases to the maximum.
Demand-pull inflation
According to demand-pull inflation, the general rise in price level is because the demand for goods and services
exceeds the supply available at existing prices. In terms of AD-AS framework, the rightward shift in the AD curve
means an excess demand for goods and services at existing prices.
In figure 1, the AD increases to Y1 from Y0 because of the shift in the AD0 curve AD1.But at the price level P0 ,
the AS is Y0.Therefore, the excess demand is Y1– Y0.To eliminate the excess demand, the price level increases to
P1, where AD and AS are equal at Y2.
Figure 1
The factors causing a shift in the AD can be classified into real and monetary factors. Among the real factors are
fiscal actions like changes in the government spending and taxes. Among the monetary factors are changes in
money supply.
The real factors: The real factors which can cause a right ward shift in an AD curve are – an increase in the
government expenditure with no change in tax receipts, a decrease in the tax receipts with no increase in the
government spending, a rightward shift in the consumption function, investment function and export function.
The monetary factors: On the monetary side, demand-pull inflation may originate either through a decrease in the
demand for money or an increase in supply of money. A decrease in the demand for money or an increase in the
supply of money causes a rightward shift in the AD curve. In reality, a decrease in the demand of money is not
likely to originate inflation, but it is almost certain to intensify an ongoing inflation that has reached a rapid rate.
The greater the rate of inflation the costlier it becomes to hold money and smaller the amount of real balances the
public will want to hold at any level of real income and interest rate.
Cost Push Inflation
Cost-push theory of inflation explains the causes of inflation originating from the supply side.
In figure 2, when AS curve shifts leftward from AS0 to AS1, the price level increases from P0 to P1.
Figure 2
In cost push inflation theory, the causes for the leftward shift in the AS curve are identified as an increase in the
wage level not matched by the increase in the labor productivity, or an increase in the profit margins by those who
can exercise market power. Depending on the causes, there are three types of cost push inflation: wage- push
inflation, profit- push inflation and supply- shock inflation.
Wage push inflation occurs when trade unions demand an increase in the increase in the money wage at a rate that
is greater than the increase in productivity. This causes an increase in the labor cost per unit of output, and forces
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the producer to increase the price to cover the increased costs. This increase in price will lead to a higher cost of
living a fall in real wages. Again, workers will ask for a pay hike due to the fall in real wages. Wage push inflation
happens when a rise in the wage rate is accompanied by a rise in the price level.
Oligopolists and monopolists may, in their drive to increase profits, increase their prices more than the increase in
their costs. This is possible only in imperfect markets. Possibilities for this type of inflation are greater when the
prices of goods and services are administers by sellers.
Supply shock inflation arises from an increase in the cost of raw materials or shortages that occur as a result of
natural calamities like drought, flood, disease etc. Supply shocks lead to a drastic reduction in the supply of goods
and services.
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