1

MICROECONOMICS
(Part – A) CH-1 – INTRODUCTION
I. Choose the correct answer (each question carries 1 mark)
1. The scarce resources of an economy have ____________.
(a) Competing usages (b) Single usages (c) Unlimited usages (d) Limited usage
2. Which of the following in an example of micro economic study?
(a) National income (b) Consumer Behavior (c) Unemployment (d) Foreign trade
3. Central problems of an economy include ___________.
(a) What to produce (b) How to produce (c) For whom to produce (d) All of the above
4. Traditionally, the subject matter of economics has been studied under the following
broad branches.
(a) Micro and Macro Economics (b) Positive and Normative (c) Deductive and Inductive
(d) Market & Mixed economy.

II. Fill in the blanks (each question carries 1 mark)

1. Scarcity of resources gives rise to Problem of choice.
2. In a centrally planned economy all important decisions are made by the Government.
3. Market is a set of arrangements where economic agents can freely exchange.
4. In reality all economies are Mixed Economies.

III. Match the following (each question carries 1 mark)

A B Answer
1. Market economy a. Government b. Private ownership
2. Service of Teachers b. Private ownership c. Skill
3. Centrally planned economy c. Skill a. Government
4. Positive economics d. Evaluation of Mechanism e. Functioning of Mechanism
5. Normative economics e. Functioning of Mechanism d. Evaluation of Mechanism

IV. Answer the following questions in a sentence/word. (each question carries 1 mark)
1. Why does the problem of choice arise?
An economic problem arises because of limited resources, unlimited wants which is
further put to alternative uses (Multiple uses).
2. What is Market economy?
A market economy is where economic decisions related to economic activities are taken by
private entrepreneurs. Example – USA, UK, Japan, Singapore etc.
3. What do you mean by production possibility Set?
Production possibility set also called as Production possibility schedule it is a tabular
representation of all possible combination of 2 goods that can be produced in an economy
with given amount of resources and level technology.
4. What does a combination below the Production Possibility Frontier indicate?

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |

 2

The combinations below the Production Possibility Frontier indicate that all or some of the
resources are either under-utilized in a wasteful manner or unutilized.
5. Give the meaning of Microeconomics.
Micro economics is a branch of economics that studies the behavior of individual economic
agents or entities regarding their decision making and the allocation of resources.
Example − Individual income, savings, profits earned by a firm etc.
V. Answer the following in 4 sentences. (each question carries 2 marks)
1. Mention the central problems of an economy.
The central problems of an economy are as follows:
a) What to produce and in what quantities?
b) How to produce?
c) For whom to produce?
2. List out the basic economic activities.
Production, consumption, Distribution and exchange of goods and services are the basic
Economic activities.
3. What is Production possibility frontier?
The production possibility frontier is a graphical representation of all possible combination
of the 2 goods that can be produced in an economy with given amount of resources and
level of technology.
4. What do you mean by mixed economy? Give an example.
Mixed economies are where both public and private sectors co-exist. Example- India,
Pakistan, Sri Lanka etc.
5. Distinguish between positive and normative economics.
𝐏𝐨𝐬𝐢𝐭𝐢𝐯𝐞 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜𝐬 Normative Economics
a) It is an objective approach a) It is a subjective approach
b)They are fact based statements which b) They are opinion-based statements which
studies ‘what was’ and ‘what it is’. studies ‘what ought to be’.
c)It explains the functioning of c) It evaluates the mechanism.
mechanism.
d)Descriptive in nature. d) Prescriptive in nature.
e)Does not pass value judgements. e) Passes value judgements.
6. State the differences between Micro and Macroeconomics.
𝐌𝐢𝐜𝐫𝐨 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜𝐬 𝐌𝐚𝐜𝐫𝐨 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜𝐬
a) It is a study of individual entities a) It is the study of aggregates or entire economy
b) It has narrow scope b) It has wider scope
c)Slicing method of study c) Lumping method of study
d) It is the price theory d) It is known as income and employment theory
e) It studies the partial equilibrium e) It studies the general equilibrium in the economy
in the economy
VI. Answer the following question in 12 sentences. (each question carries 4 marks)

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |

 3

1. Briefly explain how the family farm, weaver and Teacher can use their resources to
fulfill their needs in a simple economy.
Simple economy is a closed economy where there is existence of Barter system and
community practices subsistence living where goods and services are produced for self-
consumption and not for trading purpose.
People in society need many goods and services for their everyday life including food,
Clothing, shelter and various other services. In fact, resources are scarce and no individual in
society has everything. Every individual has some amount of only a few goods and services
and must exchange for the other resources by giving up certain resources.
Let us illustrate the functioning of a simple economy with an example –
Assume a farmer owns a plot of land, some grains, farming implements, and a pair of
bullocks and family members as agricultural labourers. A weaver may have some yarn, fabric,
needle and other instruments required for weaving cloth. A teacher in a local school has skills
required to impart education to the students.
Each of these is a decision-making unit who produce some goods or services with their
available resources; a part of the produce is used to obtain the other goods and services.
For instance, Farmer produces corn and use part of the produce for consumption and procure
clothing, housing and various services in exchange for the rest of the produce.
Similarly, the weaver gets the goods and services in exchange for the cloth he produces.
Teacher renders service by teaching basic skills in school and obtains other goods and
services in return.
Thus, everyone uses resources to fulfill their needs, no individual has unlimited resources
compared to their wants. The quantity of corn that the farmer produces is limited and it is also
used to procure different goods and services in exchange. As a result, the family is forced to
make a choice between the different goods and services that are available. It can have more of
a good or service only by giving up some amount of other goods or services.
2. What are the central problems of an economy? Explain.
Human wants are unlimited; resources to satisfy them are limited. The limited resources are
further put into alternative uses which give rise to the problem of choice. Every economy
whether developed or underdeveloped faces three basic economic problems viz., What to
produce, how to produce and for whom to produce.
a) What to Produce and in what quantities?
This is a problem of production regarding choosing commodities. Every country must decide
which goods to be produced and in what quantities. Whether more guns should be produced
or more food grains should be grown or whether more capital goods like machines, tools, etc.,
should be produced or more consumer goods (electrical goods, daily usable products etc.)
will be produced. What goods are to be produced and in what quantity depends on the
economic system of the country.

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |

 4

Policy makers’ access to the available resources predicts and forecasts the growing trend and
demand for the resource and takes decisions regarding commodity looking into the current
situation.
b) How to Produce?
This is the problem of choosing technology. For example, cotton cloth can be produced with
either handloom or power looms. Production of cloth with handloom requires more labour
and production with power loom use of more machines. It involves selecting technology to
produce goods and services.
There are two types of techniques of production-
(a) Labour intensive technology – In the process of production more labourers are used
compared to machines.
(b) Capital intensive technology – In the process of production more machines are used
compared to labourers.
An economy decides whether production is based on labour intensive or capital-intensive
technology depending on the availability of resources and least cost technology.
b) For whom to produce?
This is a problem of distribution regarding choosing the target group. The economy cannot
satisfy all the wants of the people; it refers to how an economy distributes its goods and
services among the population. Government policies consider income equality and ensure
essential goods reach weaker sections of society through PDS, whereas private sector
operates based on market mechanism in the open market.
3. Explain the production possibility frontier.
The production possibility curve is a graphical medium of highlighting the central problem
of ‘What to produce’. To decide what to produce and in what quantities, it is first
necessary to know what is obtainable. The PPC curve shows the options that are
obtainable based on following assumptions:
• The resources available are fixed
• The technology remains same
• The resources are fully employed
• The resources are efficiently employed.
𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐏𝐨𝐬𝐬𝐢𝐛𝐢𝐥𝐢𝐭𝐲 𝐒𝐜𝐡𝐞𝐝𝐮𝐥𝐞: A PPS is a tabular representation of all possible
combination of 2 goods that can be produced with a given level of resources and
technology.
Let us assume that there are only 2 goods produced in an economy i. e. Guns and Butter, the
problem of choice between a War good and a Civilian good. Suppose all the resources are
engaged in the productionof Guns, there will be a maximum amount of Guns that can be
produced, let it be 𝟏𝟓 𝐮𝐧𝐢𝐭𝐬. On the extreme end suppose all the resources are employed
in the production of Butter alone, the maximum amount of butter produced assume to be

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |

 5

𝟓 𝐮𝐧𝐢𝐭𝐬. In between the resources can be partly used for the production of guns and
partly for production of butter.

Possibilities GUNS BUTTER

A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐏𝐨𝐬𝐬𝐢𝐛𝐢𝐥𝐢𝐭𝐲 𝐂𝐮𝐫𝐯𝐞: The production possibility frontier is a graphical
representation of all possible combination of 2 goods that an economy can
be produce with a given level of resources and technology. It is also called as
Transformation curve and Production Possibilty Frontier.

In the above graph, Production of Guns is measured on Y − axis and Butter on

X − axis, the combinations A to F on the Production possibility curve. Any combinations
of Guns and Butter can be produced between A and F, some amount of Guns
has to be reduced to produce one unit of extra Butter which is also called MRT −
Marginal rate of transformation due to which PPC is concave to the origin and
downward sloping. Any combination lying within the PPC represents a combination
where resources are under utilized butattainable shown by combination ′G′.
Any combination lying above the PPC represents a combination where resources are
unattainable shown by combination ′H ′ .
4. Write a short note on a centrally planned economy.
A planned economy also called as socialistic economy and Command economy, where
the economic decisions related to economic activities are controlled by the Central
Government. Example: Vietnam, Cuba, China, North Korea etc.

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |

 6

• In a Centrally planned economy, the Government owns the resources of the economy.
• Decisions regarding the allocation of resources is determined with the objective to
attain maximum social welfare.
• The prices for various goods and services are fixed by government called Administered
prices.
• Government decides what to produce, how to produce and for whom to produce.
Solution to the basic economic problem:
• Regarding what to produce, the Government may produce those goods and services
which are most useful for the society which improves the quality of life E. g. Health,
Education, Civic amenities etc.
• Regarding how to produce, the most suitable technique of production will be adopted
according to availability of resources and as per the situation in the economy e. g. during
mass unemployment labour intensive technique shall be preferred.
• Regarding whom to produce, the goods and services are produced to the weaker
sections of the society who are suffering from hunger and starvation.
5. How does the market economy work?
A Market economy is also known as Capitalistic economy, where economic decisions
related to economic activities is taken by the private entrepreneurs.
E. g. USA, Japan, Australia, UK etc. In market economy, private individuals own the factors
of production, their main objective is to earn maximum profits and also there is least
intervention of Government. Price for various goods and services through 2
market forces demand and supply in the market is called Price or Market mechanism.
Solution to the basic economic problems:
• Regarding what to produce −
The producers produce those goods which are high in demand and high priced which
attract high profits.
• Regarding How to produce −
The Producers chooses least cost technology to maximize the efficiency by earning
more returns with less cost.
• The problem of whom to produce is decided on the basis of purchasing power of
consumers. The producers produce commodities to the rich as they can afford to pay
more but poorer sections of the society are neglected. Therefore exists unequal
distribution of income
6. Explain differences between Micro and Macro Economics.
BASIS MICROECONOMICS MACROECONOMICS
Definition Microeconomics studies the Macroeconomics studies the
behaviour of individual entity or behaviour of the entire economy
units. based on aggregate.
Example Individual economic variables Aggregate economic variables such as
such as individual consumer, National income, Poverty,
producer, firm etc. Unemployment etc.

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |

 7

Method Slicing Method Lumping Method

Analysis Partial equilibrium analysis General equilibrium analysis
Assumption Ceteris Paribus
Laissez faire policy
Full employment of resources
Perfect competition
Scope Narrow scope includes intensive Wide scope includes extensive study.
study.
Variables Price, Demand, Supply, Employment, General price level,
production, Consumption etc. National income, labour economics,
distribution, money etc.
Significance Product price determination Maintaining stability in the general
through prices of factors of price level and resolving major
production in the economy. problems of the economy such as
inflation, deflation, reflation, poverty
and unemployment.
Pioneers Prof. Alfred Marshall Prof. J M Keynes

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |

 8

SURANA IND. PU COLLEGE, SOUTHEND CAMPUS |