UNIT
I
Introduction to Economics
The problem of choice arises
because of scarcity. And this is the main focal point of study in
economics.
Economic
Problem refers to the problem of choice arising from the use of limited
means to the satisfaction of various ends.
Why
does an economic problem arise?
An economic
problem arises primarily due to scarcity of resources.
The main
causes of economic problems are as follows :-
1. Human wants are
unlimited.
2. Limited means.
3. Alternative uses
Whereas means
are limited they have alternative uses as well
Central or Basic Problems of An Economy Which Arise Due to
Scarcity
1. What to Produce
If refers to
which goods and services will be produced and in what quantities with the
limited resources i.e. consumption goods or capital goods.
2.
How to Produce
It refers to
the choice of methods of production of goods & services i.e. whether labour
intensive or capital intensive technique is to be adopted taking into
consideration the proportion of capital and labour in an economy.
3.
For whom to Produce
It concerns
with the distribution of income & wealth which refers to who earns how much
or who has more assets than others.
How are fundamental problems solved in the capitalistic economy.
In a
market-oriented or capitalist economy, these fundamental problems are solved by
the market. There is a price, which is influenced by the market forces of
demand and supply. These forces guide which goods and how much is to be
produced and consumed
Production Possibility Curve And Opportunity Cost
It refers to
a curve which shows the various production possibilities that can be produced
with given resources and technology.
Production Commodity Commodity Marginal opportunity
A 0 15 -
B 1 14 15-14= 1
C 2 12 14-12=2
D 3 9 12-9=3
E 4 5 9-5=4
F 5 0 5-0=5
If the economy devotes all its resources to the production of
commodity B, it can produce 15 units but then the production of commodity A
will be zero. There can be a number of production possibilities of commodity A
& B. If we want to produce more commodity B, we have to reduce the output
of commodity A & vise versa.
Shape of PP
curve and marginal opportunity cost
1) A Production Possibility Curve is a
downward sloping curve.
In a full employment economy, more of one goods can be obtained
only by giving up the production of another goods. It is not possible to
increase the production of both of them with the given resources.
2) The shape of the production
possibility curve is concave to the origin.
The opportunity cost for a commodity is the amount of other
commodity that has been forgone in order to produce the first.
The marginal opportunity cost of a particular good along the PPC
is defined as the amount sacrificed of the other good per unit increase in the
production of the good in question. Increasing marginal opportunity cost
implies that PPC is concave.
Very
Short Answer Questions (marks each)
Q1. What
is economising resources ?
Ans. Efficient use of a
available scarce resources
Q2. Define
economic activity.
Ans. It is an activity performed with the
expectation of some remuneration either in the form of cash or in kind.
Q3. What
is micro economics?
Ans. It is the study of the behaviour of
individual economic units like determination of price, wages, income of
individuals and firms.
Q4. What
is macro economics?
Ans. It is a study of
aggregates of the economy as a whole. Eg. Level of income and output.
Q5. Why
does economic problem arise?
Ans. Economic problem
arises primarily due to scarcity of resources.
Q6. What
are the central basic problems of an economy?
Ans. a) What to produce?
b) How to produce?
c) For whom to produce?
Q7. Define
production possibility Curve?
Ans. It is a curve which shows all possible
combination of two which can be produced with the given resources and
technology.
Q8. What
is marginal opportunity cost?
Ans. Marginal opportunity cost of a good is the
amount of the other goods scarified for the production of an additional unit of
the former good.
Q9. What
is the problem of scarcity?
Ans. Scarcity refers to
the limited resources in relation to demand.
Q10. What
is an economic problem?
Ans. Economic problem is
the problem of making choice.
Short
Answer Questions ( 3&4 Marks)
Q1.
Explain the central problems of an
economy
Ans. a) What to produce?
It refers to
that what goods and services are produced and in what quantities.
b)
How to produce?
It refers to
the choice of methods of production of goods and Services.
c) For whom to
produce?
It refers to
the distribution of income and wealth .
Q2. Draw
a PPC curve and show the following:-
a) Growth of
resources. (b) Under utilization of
resources. (c) Fuller utilization of resources.
Ans.
Q3. Explain
opportunity cost with an example.
Ans. It refers to the value of the next best
activity Eg. Suppose a doctor braving private clinic in Delhi is earning Rs. 5
lakhs annually. There are two other alternatives for him.
One:- Joining a Govt. hospital in Bangalore earning
Rs. 4 lakhs annually .
Two:- Opening a clinic in his home town in
Mysore and earning 3 lakhs annually.
The opportunity cost will be joining Govt.
hospital in Bangalore.
Q4. Distinguish
between Micro Macro Economics.
Ans.
Microeconomics
|
Macroeconomics
|
1. It is the study of individual units of an economy
2. It deals with allocation of resources
3. It is also called price theory
|
1. It is the study of the whole economy
2. It deals with growth and development of resources
3. It is also called income theory
|
Q5. What
is opportunity cost? Calculate the marginal opportunity cost.
X :
|
0
|
1
|
2
|
3
|
4
|
5
|
Y :
|
90
|
85
|
75
|
60
|
40
|
10
|
Ans. The rate of sacrifice of one good to produce
another good is called Marginal opportunity cost.
X
|
0
|
1
|
2
|
3
|
4
|
5
|
Y
|
90
|
85
|
75
|
60
|
40
|
10
|
MOC
|
--
|
05
|
10
|
15
|
20
|
30
|
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