Micro Economics
Chapter-1. Introduction
I Choose the correct answer (1 mark)
[Link] scarce resources of an economy have _________
a. Competing usages c. Unlimited usages
b. Single usages d. None of the above
Ans: a. Competing usages
2. Which of the following is an example of micro economic study?
a. National income c. Unemployment
b. Consumer behaviour d. Foreign trade
Ans: b. Consumer behaviour
[Link] problems of the economy includes ___________.
a. What to produce c. For whom to produce
b. How to produce. d. All of the above
Ans: d. All of the above
[Link], the subject matter of economics has been studied under the following
broad branches.
a. Micro and macroeconomics c. Deductive and inductive
b. Positive and normative d. None of the above
Ans: a. Micro and macroeconomics
II. Fill in the blanks (1 mark)
1. Scarcity of resources gives rise to the problem of choice.
2. In a centrally planned economy all important decisions are made by the
government.
3. Market economy Is a set of arrangements where economic agents can freely
exchange their endowments or products with each other.
4. In reality, all economies are mixed economies.
III. Match the following (1 mark)
A B
1. Market economy a. Government
2. Service of a teacher b. Private
3. Centrally planned economy c. Skill
4. Positive economics d. Evaluate the mechanism
5. Normative economics e. Functioning of mechanism
Answers: 1 -b, 2-c, 3-a, 4-e, 5-d
IV. Answer in a sentence / word (1 mark)
1. Why does the problem of choice arise?
Answer: The scarcity of resources and the alternative use of these resources gives
rise to the problem of choice.
2. What is market economy?
Answer: An economy in which economic decisions are taken through the market
mechanism i.e. demand and supply factors is called market economy.
3. What do you mean by centrally planned economy?
Answer: It is an economy in which all important decisions are taken by the
Government or the central planning authority.
4. Give the meaning of micro economics.
Answer: Micro economics studies the behaviour of individual economic units in
the economy.
5. What do you mean by positive economics?
Answer: The study of “what was” and “what is” under the given circumstances is
called positive economics.
6. What is normative economics?
Answer: The study of “what ought to be” is called normative economics.
V. Answer in four sentences each ( 2marks)
1. Mention the central problems of an economy.
Answer: Central problems of an economy are
a. What to produce and how much to produce.
b. How to produce.
c. For whom to produce.
2. Distinguish between micro and macro economics.
Micro Economics Macro Economics
It studies the behaviour of individual units It studies the behavior of aggregates of
of an economy the economy as a whole
It is a detailed study It is a brief study
It is also called as price theory It is also called income and employment
theory.
Here each individual agent thinks of his Here the aim is to get maximum welfare.
interest and welfare.
3. Distinguish between positive and normative economics.
Positive Economics Normative Economics
It is the study of “what was’ and It is the study of “what ought to
“what is” under given be” under given circumstances.
circumstances.
Here we study how different Here we study whether these
mechanisms function. mechanisms are desirable or not.
It does not pass value judgement. It passes value judgement.
It is descriptive. It is prescriptive.
4. What do you mean by production possibility set?
The collection of all possible combinations of the goods and services that can be
produced from the given amount of resources and a given stock of technological
knowledge is called production possibility set.
5. What is opportunity cost?
It is defined as the “the cost of next best alternative sacrificed in order to produce
that good”
Example: If we want to have more of one of the goods, we will have less of
the other good.
6. What is production possibility frontier?
It is a curve which depicts all possible combinations of two goods which an economy
can produce with the available resources and given technology.
Example : a producer can produce any one commodity (corn or cotton) when the
resources of the economy are fully utilized.
VI. Answer the following in 12 sentences each (4 marks)
1. Briefly explain how the family farm, weaver, teacher can use their resources
to fulfil their needs in a simple economy?
People in the society need many goods and services in their everyday life including
food, clothing, shelter, transport facilities like roads, railways, postal services and
various other services. Every individual has some amount of goods and services that
he would like to use.
A family farm: -A family farm may own a plot of land, some grains, farming
implements, maybe a pair of bullocks and also the labour services of the family
members. the family farm can produce corn and use part of the produce for
consumption purposes and in exchange of the rest of the produce can purchase
clothing, housing and various services.
A weaver:A weaver may have some yarn, some cotton and other instruments
required for weaving cloth. Weaver sells cloth for money in the market. Through that
income weaver fulfil his needs.
A Teacher: - The teacher has the skills required to impart education to the students.
The teacher can earn some money by teaching students in the school and use the
money for obtaining the goods and services that he wants.
Each individual can thus use his resources to fulfil his needs.
2. Briefly explain the central problems of an economy.
Every economy has to solve the following three fundamental economic problems
due to the prevalence of limited resources and unlimited wants.
a. What to produce and how much to produce:
Every society must decide how much of each of the many possible goods and
services it will produce. Whether to produce more of agricultural goods or
industrial products or whether to use more resources in education, health,
defence, etc. and what quantities these goods and services should be produced.
This can be depended on the economic system of the country.
b. How to produce :
The problem of how to produce is a problem relating to choice of technology.
There are two techniques of production,
labour-intensive technique- which more labour is used in production.
capital-intensive technique - which more capital is used.
Thus a society has to choose the right technique of production depending on the
resources and requirement.
c. For whom to produce :
The question is for whom are these goods produced? This question leads the
problem of distribution. Goods and services produced in an economy are consumed
by its citizens. The individuals may belong to the economically weaker or richer
sections of society.
Thus allocation of limited resources and the distribution of the final goods and
services are the central problems of the economy.
3. Write a short note on centrally planned economy.
In Centrally Planned Economy,all Economic activities are controlled by the
central government or central authority..
The government takes decisions about the allocation of resources with the
objective to attain maximum social welfare.
Profit maximization is not the major consideration here.
Government decides what to produce, how to produce and what prices are
to be fixed.
Those goods and services will be produced which the government finds
most useful for its society.
The socially most useful technique is adopted in this economy. For
example, in a situation of mass unemployment, labour intensive
technology will be preferred to reduce unemployment.
Goods will be produced preferably for the poor even if it implies loss.
China and Cuba are examples of this type of economy.
if the goods and services are not produced in adequate amount by the
individuals on their own, the government might try to induce the individuals
to produce , alternatively, the government may itself decide to produce the
goods and services.
4. Write a short note on market economy.
In a market economy private individuals own the factors of production. Here most of
the economic decisions are taken through market mechanism.
All the activities are organised through the market.
Profit is the sole motive and there is no interference by the government in
the economic activities.
Market economy is different from market place interaction may take in a
variety situation like super bazaar, telephone , internet.
Price of the commodities determined by demand from the consumers and
supply of the produces.
Determination of price helps to achieve co-ordination a market system.
The producers will produce those goods which are high in demand and less
in supply, i.e. goods which give high price and high profit for the producers.
How to produce is decided by adopting the most efficient methods of
productions. For whom to produce is decided by producing for the rich
people who can afford to pay high price.
This type of economy exists in USA, Japan and Australia.
Market economy Is a set of arrangements where economic agents can freely
exchange their endowments or products with each other.
5. Briefly explain the production possibility frontier
The scarce resources have alternative uses and every society has to determine
how to allocate its scarce resources to produce different goods and services.
Lets’ take an example. Consider an economy which can produce corn or cotton by
using its limited resources and given technologies.
Possibilities Corn Cotton
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0
The above table shows the collection of all possible combinations of the goods and
services that can be produced from a given amount of resources and stock of
technological knowledge. It is called Production Possibility Set of the economy.
It can be graphically illustrated in the form of a curve called the Production
Possibility frontier.
cotton
A
B
E
0 corn
In the above diagram, combination A and E shown that producer produces only one
commodity and combinations B,C and D producer can produce both the commodity.
Thus, the above production possibility frontier gives the combinations of corn and
cotton that can be produced when the resources of the economy are fully utilized.
If more resources are used in the production of corn, less resources are available
For production of cotton and vice versa. Every economy has to choose one of these
many production possibilities.
Opportunity cost of some activity is the gain foregone from the second best
activity
If we want to have more of one of the goods, we will have less of the other
good.
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