| © University question papers PUSS eS EC sue By aa RS OSE UE semester course Rees PSC OPEC SS ELIS a Pa "SYLLABUS Chapter 1. Problem of Scarcity and Choice Chapter 2. Demand and Supply, Chapter 3. Elasticity of Demand Suppty Tw. = Ld — = A oS Chapter 4. Applications of [Link] Supply Ani We cj és i a — wo —— Chapter 5. Consumer Theory=Cardinal Uti ty Analysis Chapter 6. Ordinal’Utility Theory—Indifference Curve Approach Chapter 7. Law of Production and Economies of Scale Chapter 8, Isoquant Curve and Producer’s Equilibrium Chapter 9. Behaviour of Cost and Revenue Chapter 10. Market Structure and Theory of Perfect Competition University Question Papers (with answers) 9000 1 10 | } 18 | » P 46 62 | 67) Q1 | proble Ans Te cir satisfy availa 86 | have | | called P-1 | altern onwards show; choos _ choos | Olev {may | _ of ecc “all o Gove | (Exan | decid _ indiv | them _ other |(in Chapter 1 PROBLEM OF SCARCITY AND. CHOICE 62 67 Q.1. Explain the concept of opportunity cost and discuss how it relates to the problem of choice between alternatives. [2010 () ‘Ans. Scarcity means limitation of the availability of resources in relation to their wants. That means the available resources are not enough to completely satisfy all the wants. If we decide and choose which want to satisfy with the available resources, then there are other wants we have to leave unsatisfied. We have to forgo something in order to satisfy a want. The want that is forgone is called the ‘opportunity cost’. It is also known as ‘the next best alternative’ or alternative cost. The concept of scarcity, choice and opportunity cost can be shown in many ways at different levels. For an individual, it may involve choosing the best from the choices available. For example, a student may have to choose between doing A levels and going for a diploma right after finishing O levels. Choosing one option means the other option has to be forgone. A firm may have to choose between different production methods. Each and every level of economic agent (individuals, firms or government) has to make the choices as all of them are confronted with central economic problem of the scarcity. Governments have to decide on the best possible way to allocate resources (Example—where and what kind of factories must be built), the firms have to decide how to maximize profit (what is the most efficient way to produce goods) and individuals have to decide how to maximize their welfare (which goods will give them most satisfaction). In the process of making this choice they have to give up other alternatives, so the concept of opportunity cost is applicable for each and every level of economic agents. Q. 2. Write a short note on Production Possibility Curve. How does it help in understanding the central problems of an economy? [2010 (R); 2010 (E) ‘Ans, The production possibility curve represents graphically alternative pro- duction possibilities open to an economy. The productive resources of the 1 762m Shiv Das DELHI UNIVERSITY SERIES eee tion of ¥é v = community cai ed for the produc eco sI Ree ree aaere ‘choice has to be made beeen Sean can be produced, In other words, the economy hay goods a id produce and in what quantities. If it is decleos points represe: possibilities n possibility curv it. For example, goods can neit goods, the production of certain other g00 ton and wheat. We su et that the ecomomy can produce to commoditieg ONS TT. no changin | because at that the productive resources are being fully uh’ roduction possibilities. ‘i ving table gives the various Pp’ resources avai technology. The following table gi i Beseitilies The’ centeal Alternative eal 0% GE ices ep Cotton rs ~ i in “ tals) @ What | (in ‘000 quintals) (in ons Ds (i) How 1 0 techne 1 iu (ii) How 2 12 make 3 9 How muck 4 5 upon (a) the 5 0 capital whic If all available resources are employed efficiency io for the production of wheat, 15,000 | Se quintals of it can be produced. If, on the Ee Be eb: other hand, all available resources are B ee ae utilized for the production of cotton, 5000 4, es con i quintals are produced. These are the two production extremes represented by A and F and in . & , production between them are the situations = Q3. - represented by B,C, D and E. At B, the 4 7 scarcity, ¢ economy can produce 14,000 quintals of |= 5 E on this cu wheat and 1,000 quintals of cotton. AtC, 3 A the production possibilities are 12,000 Explain quintals of wheat and 2,000 quintals of 5 A a eaen me Poel cotton, as we move from A to F, we give Cotton (i000 quintals) (a) M up some units of wheat for some units of Pe cotton. For instance, moving from A to B, we sacrifice 1,000 quintals of wheat to __(®) N produce 1,000 quintals of cotton, and so on. As we move from A to F, we ANS: sacrifice increasing amounts of cotton. This means that, in a full-employment _ P0blem economy, more and more of one good can, be obtained only by reducing the | __\- S& Production of another good. This is due to the basic fact that the economy's Services Tesources are limited, The given figure illustrates the production possibilities set | O™® © out in the above table. ; commo In this figure, AF i the production possibility curve, also called the production | *® 8 possibility frontier, which shows the various combinations of the two gonds which) 2-03 the economy can produce with a given amount of resources. The meine | cea possibility curve is also called transformation curve, because when were vision ratios one positon to another, we are really transforming one good i we move from give u shifting resources from one use to another. It into another by essenc is to be remembered that all themade | Costs hoices CHAPTER 1: PROBLEM OF SCARCITY AND CHOICE m 5 their pattern of cooperative advantage. The concept of i t can well be represented graphically. ss of Ser ae Production Possibility Boundary « “eUnattainale Combinations 203040 Clothing Clothing (a) Just attainable combinations (©) Points off the boundary The vertical axis measures food output and the horizontal axis output of clothing. It is possible for a society to produce alternative combinations of these two commodities by using all its resources (with existing technology). The following table shows the possible combinations of the two commodities a society is capable of producing when all its resources are fully and most efficiently employed. From Table below we see that when all the resources are used to produce only one commodity, say food, the maximum output is 35 units (measured in kilograms). Likewise, if all resources are used to produce only clothing— maximum output will be 50 units (measured in yards). These are two extreme possibilities. All other possibilities are also summarized in Table. ‘Alternative Combinations of Food and Clothing. Food output Clothing output Possibilities 35 0 a 33, 10 b 30 20 c 25 30, d 15 40 e 00 50 mp In the figure, we show a hypothetical economy which is using all its resources to produce only two commodities, say, food and clothing. The information contained in table can be represented graphically, as in figures (a) and (b) above. The different combinations of food and clothing are shown by points like a, b,c, d, e and f in figure (a). The focus of all such points is the production possibilities curve (PPC) of society. (i) Movement from a point within the curve to the frontier represents improvement in efficiency as both resources (shown on the PPF) are used more optimally. (if) whereas movement from a point on the frontier to another shows the trade off between production of one good with respect to the another when all resources are fully used. PPC describes all the possible combinations of any two commodities that can be produced by an economic system by using all resources with maximum.4m Shiv Das DELHI UNIVERSITY SERIES their pattern of coo} SI one f good, = more and more of one type of good, if 3, Specialization. As society produces mor sp , has ree crifice oF ciety Piyant, an increasing or a decreasing amoung 0 ice or give Up a CO y marginal opportunity costs of ‘on whether marginal roa other types of goods depending ane te apace mang or decreasing. since resources fend fo De #Poce rac) 4 tag constant, increasing a coe E viverted from one use £0 ante eo ncave to the “| words, opportu coetng slope. If opportunity cost remains constant wher origin showing increasing Slope. tige to another the PPC will be straight-lined| tal s are transferred from one use t0 2 resource: “| wt Marginal Dees PPC shows society's menu of choice, farginal Decision Making. No doubt ae but cateieuial “Js—Low does the society choose at which le PPC to Ss ler rtical axes anc produce? In effect, society begins at an extreme point undes verte a na | produces only one commodity then it gradually moves p+ int by Pe FPPC tovards the horizontal axis. Thus, it produces more of clothing by reducing) the production of food. At each point society is faced with a question: Do we e vertic mane produce at this point or move on to the next point, even though moving] clothing. It a P rill in giving up additional units of one commodity? Each move means) two commodit tint cet atlevee Bae the additional benefits it will derive will exceed the’ following be marginal opportunity cost it will incur. Society finally stops at a point where it] society 7 P: believes that the next move would cost more than the benefits it would receive.| efficiently emy Individuals also behave in the same way—by making marginal calculations. We). From Table | all trade-off one activity for another until the marginal opportunity cost of an| one commod additional amount of the first activity equals the marginal benefits of that Kilograms). L additional amount. This is known as decision making at the margin. When the) maximum ov additional production of some defence goods such as guns or the additional possibilities. quantity of some activities being considered, marginal (additional) opportunity | cost comes into play. Foo 5. The Irrelevance of Sunk Costs. The PPC also illustrates that choices made and costs incurred in the past do not influence current or future choices. Costs incurred in the past are known as sunk (or historical) costs. Marginal choices necessarily ignore past choices. For example, a society having selected a_ Particular point on the PPC, at which to In the fi to produc The inf figures (a shown by : is the pic esources. within « final poit 5 resource Point to note here is that, trade between two from a Cost ratios with respect to the of one g ‘eans that the PPCs of the two PPC d Ste lerwise gainful trade between be prod le two countries, we can study”