UNIT 1 Micro anp Macro Economics : AN INTRODUCTION AND GENERAL ECONOMY Mixed economy is composed of s ‘The goods and services which help in the production of other goods and services are goods. Ans. 1. Few, 2. Micro, 3. Changes, 4.Complement, 5. Macro, 6. Production, 7. Socialism, Capitalism, 8. Intermediate Q.3.State trueor false: 1, Production possibility curve is convex towards main point. 2. Central problem in the capitalist economy is solved by price mechanism. Objective Type Questions Q. 1. Choose the correct answers : 1. Micro-economics is the study of: (MP.2019) (a) Individual economic units (b)As a whole (©) Both individual and aggregate (d) None of these. 2. Indian economy is : (@) Centrally planned economy (b) Market economy (©) Mixed economy (@) None of these 3. Who used the word ‘micro’ for the first time : (2) Marshall () Boulding (©) Keynes (@) Ragnar Frisch. 4. Who said economics is the ‘Science of wealth’ : (a) Prof Robbins (b) Prof. IK. Mehta (© Prof. Marshall (@ Prof. Adam Smith. 5. What is the shape of production possibility curve : (@) Concave to the origin () Concave (© Straight line (a) None of the above. 6. The reason for downward shape of production possibility curve is : (@) Increasing opportunity cost (b) Decreasing opportunity cost (©) Same opportunity cost (@) Negative opportunity cost. 7. The point of optimum utilisation of resourees lies on which side of PPC curve: (a) Towards left (b) Towards right _(c) Inside (6) Upwards, 8 Who is the Father of modern economics : (MP 2022) (@) John Maynard Keynes (®) Prof. J. K. Mehta (©) Marshall (@)Adam Smith. Ans. 1. (6), 2. (©), 3. @), 4. @, 5. @), 6.0), 7.0), 8. @. Q.2. Fill in the blanks = 1. Every person has quantity of goods. Dee economics is the study of individual economic units. 3. Opportunity cost in production list. 4. Micro and Macro-economies are.. 5. Economic growth is related to 6. Economy is a group of .. 1. 8 /18] Vugbodh Pariksha Bodh An economy can be capitalist, socialist or opportunist. Today all economics of the world are almost mixed economics. Macro-economics is the study of the problems of unemployment, price inflation et. In socialism, the feeling of personal profit is prominent. The idealistic economy teaches how a system has to function, Opportunity cost is also called economic cost. 1.Palso, 2. True, 3.False, 4, True, 5. True, 6, False, 7, False, 8. False. |. Match the following : ww oy The mechanism of micro-economics (a) Capitalist economy Basie financial problem (b) All resources are efficiently used No state inteference (©) Price analysis No restrictions on trade (d) Limitation and election Main assumptions of production _(¢) Open economy possibility curve 6. Macro economic theories explain _(f). Of the whole economy. (MP 2019) the problems Ans. 1. (@), 2. (@), 3. (0), 4. @), 5. (b), 6. (D. Q.5. Answer the following in one word/sentence : Which economy is adopted in India ? ‘What is the production possibility curve towards its origin ? ‘The governmentalization of exploitation is the fault of which economy ? The struggle class is the speciality of which economy ? Which economy has limited the scope of private sector ? What is the heart of all the institutions of capitalism ? What are central problems of an economy known as ? Based on priorities, who determines the production area and quantity of production ? What is opportunity cost ? (MP 2022) Ans. 1. Mixed economy, 2. Concave, 3. Socialist, 4. Capitalism, 5. Socialism, 6. Profit, 7. Basic work, 8. Central Planning Authority, 9. The profit derived from next best alternative. Very Short Answer Type Questions Q. 1. Write any three characteristics of Capitalistic Economy. Ans. Following are the characteristics of Capitalistic Economy = 1. Private property : All factors of production are owned and controlled by private individual, every individual has right to acquire own property in his own name. 2. Profit motive : All the economic decisions are dominated by profit motive. Profitis the main goal of this economy. The capitalist produces only those commodities which enable him to earn profit. : 3. Price mechanism : The capitalist economy is known as government by Price ‘Mechanism. It means all economic decisions are taken on the basis of demand and supply. ‘There is no central authority to take decisions. Q.2. Write any three characteristics of Mixed Economy. Ans. Following are the characteristics of Mixed Econom: 1, Equal existence of private and public sector : In the Mixed Economy both private and public sectors are given equal importance, PI AMey (MP 2022) ee vere pF ve PRI AveClass X11 | 19 Economics (M. P-) 3. Co-existence of public and private sector industries : In this economy the public and private sectors function together. It means economic activities are partly carried out by the government sector and partly by the private sector: Q.3. Write any three causes of rise of Economic Problems. Ans. Causes of rise of Economic Problems are as follows : 1. Unlimited wants : Human wants are unlimited. As we satisfy one want many new wants come up. Wants are not only unlimited. They are recurring in nature also. _ 2. Different priorities : All wants are not equally important. Some are more important some are less. Man satisfy his different wants in order of his priority. 3. Limited means : Problem arises because wants are unlimited and means to fulfill them are limited. The supply of resources is inadequate in relation to the known desire of individuals. 4, Means having alternative uses : Means are not only limited but they can also be used for different alternative uses e.g. wood may be used fuel, furniture, etc. Q. 4. What do you mean by Production Possibility Curve? Ans. A Production Possibility Curve is a curve which shows the various alternative production possibilites which can be produced with given resources and techniques of production. In this situation, if we want to increase the production of a particular commodity, then we have to reduce the production of some other commodity. This curve is also called as Transformation curve. Q. 5. Define Micro Economies and write any two characteristics. (MP 2022) Ans. According to Prof. Bouldings — “Micro Economics is the study of particular firm, particular household, individual prices, wages, incomes, individual industries and par- ticular commodities”. Characteristics : Refer to Long Answer Type Q. No. 3. Q. 6. What are the central problems of an economy ? (MP 2022) ‘Ans. Central problems of an economy are : 1, What to Produce. 2. How to Produce. 3. For whom to Produce. 4. Economic Development. 5. Achievement of Full employment. Q. 7. What is the subject matter of economics ? (MP 2022) ‘Ans. The subject matter of economics is consumption, production, exchange, distri- bution and revenue. Modern economics is divided into two parts : 1. Micro economic analysis. 2. Macro economic analysis. 1. Micro economic analysis : Micro economic analysis deals With individual eco- nomic units such as one firm, one consumer and one industry, etc. __ 2. Macro economic analysis : Macro economic analysis deals with all economic units or whole economy studied. For example : National Income, savings, total consump- tion, total income etc. Long Answer Type Questions Q. 1. What do you mean by macro-economics ? Write its two characteristics. ____ Ans. Macro-economics is the study of aggregate factors such as employment, infla- tion and gross domestic product and evaluating how they influence the economy as a whole. The characteristics of macro-economic are as follows : 1. Broader perspective : The concept of macro-economics is broader. In it small units are not given importance but with the help of it National and International economic problems.| 20 | Yugbodh Pariksha Bodh js given importance. For cx ios we study the monetary and fiscal po lems of national level like the effects op, ployment ete. If the effect of Jude that the 2. Broad analysis : In macro-economics broad analysis ample, under the subject matter of macro-economi cies of the government. It studies the general prob! monetary policy, fiscal policy, general price level, general ert 7 public finance and public expenditure is good on society then we can conc! effect of it is also good on each person of the society: Q. 2. Distinguish between micro-economics and De eam NE 019, -) Ans. Differences between Micro-economics and Macro-economics + S.] Basi ) FS RESe cll ain eectas Melroesnonles 1. | Meaning | Itis that branch of economics | It isthe branch of ‘economic science Which studies individual vari-_ | which studies aggregate economic ables like-individual demand, | variables like demand aggregate, 48- supply price etc. It studies the | gregate supply, general price level, behaviour of individual units | national income, total employment of the economy, like a firm, a | etc. industry ete. 2. | Scope Ithas a narrow scope because | It has a wider scope because here we of individual market. study about national and international market etc. Subject | Individual demand, individual | Here we study about aggregate dem- matter supply, individual income, | and, aggregate supply, national in- individual investment and come, economic growth, monetary individual consumption etc. _| policy and general price level, public revenue etc. 4.| Aim Its aims are to analyse the beha} Its aims at analysing the behaviour of Viour of an individual economy.| aggregates. Its objective is to study ‘The objective of micro-econo- | the problems, policies and principles mics is to study the principles, | relating to full employment. problems, policies. Concerning, the optimum allocation of resources. Q.3. Ans. The word ‘micro’ is originate‘ Micro-economics studies the economic actions of individuals. a particular firm, individual household, Define micro-economics and explain its characterist .d from the Greek word mikros; which means small. economy is divided into small individual parts /-e., wages, interest, profit etc. According to Chamberlin, Under this branch the whole “The micro model is built solely on the individual and deals with interpersonal relations only.” Following are the character 1. Study of i studies individual units. It helps to explain personal production, individual and helps in analysing the whole economic system. 2, Study of small variable : Micro-economic: variable. These variables have such li Fore.g., ristics of micro-economics : ual units : The first characteristics of micro-economies is that it || income (individual income), individual consumption etc. Micro-economics studies the individual problems gives importance to the study of small le influence that they do not affect the whole economy. ‘a single consumer by his consumption or a single producer by his production cannot have influence over the demand and supply of whole economic system.Economics (M. P.) = Class XII |21 3. Determination of individual price : Micro-economics is also called the price theory. Itdetermines the individual price of different products by analysing the demand and supply ie,, behaviour of buyers and sellers. 4. Based on the concept of full-employment : While studying micro-economics the concept of full employment is taken into consideration. Q. 4. Write any four limitations of micro-economics. Ans. Following are the limitations of micro-economics : 1. Conclusions drawn are not accurate : What is true in the case of individual units may not be true in the case of aggregates. For example, individual saving is good but if the entire community starts saving more, effective demand will be reduced. 2. Based on unrealistic assumptions : Micro-economist assumes other things being equal, and is based on the assumption of full employment in society. This is unrealistic assumption. 3. Concentration on small parts : Instead of studying the total economy, micro- economics studies only small parts of it-It fails to enlighten us the collective functioning of the national economy. 4. Unable to analyse certain problems : There are certain economic problems which cannot be analysed with the aid of Micro-economics. For example, important problems relat- ing to public finance, monetary and fiscal policy etc., are beyond purview of micro-economics. Q.5. What is opportunity cost ? Explain with suitable example. Ans. Opportunity cost is defined as the value of a factor in its next best alternative use or itis the cost of foregone alternatives, or it can be defined as the value of the benefit that is sacrificed by choosing an alternative. We can also say that opportunity cost of any commodity is the amount of other goods which has been given up in order to produce that commodity. It is also known as opportunity lost or transfer eaming of a factor e.g., a person is working in college ‘A’ at the salary of %70,000/- per month, he has two more options to work : (i) To work in college “C” at % 65,000 per month. Gi) To work in college “D” at ® 62,000 per month. In this case opportunity cost of working in college “A” is € 65,000 ie., salary he would get in college “C” (cost of foregone alternative) because it is the value of next best altemative between college “C” and college “D”. ‘Thus, opportunity cost is very important concept in economics. It is because our re- sources are limited, we are always making choices from the available alternatives. Thus, the ‘opportunity cost of using a resource is defined as the value of the next best use to which that resource could be put. Q. 6. “Micro-economics and Macro-economics are not competitive to each other but complementary to each other”. Explain. Ans. Interdependence of micro and macro can be studied as follows : 1. Macro-economics depends on micro-economics : Macro-economics and micro- ‘economics depend on each other. Both are interdependent, macro-economics contributes to the microeconomics. For example, the theory of investment belongs to micro-economics. It is derived from the behaviour of the individual entrepreneur, The theory of aggregate investment function can also be derived from micro-economic theory of investment. Thus, we can say, that macro-economics depends on micro-economics.22 | Yugbodh Pariksha Bodh jes : Micro-economics depend upe,, 2. Micro-economies depends on macro-economt terest is a subject whic), macro-economics to a certain extent. For example, the rate of int belongs to microeconomics but itis influenced by maero-eeenan= aggregates. ‘Thus, micro-economics depends upon macro-economics. Conclusion : Macro and mieo-econorics bath ae hneriepende oe oh Neither is complete without the other. We must study macro-econamics Det Sal With average variables, such as national income and national output. We musts es Se ‘economies because national output and national income are eventually the result o ai 6f millions of business firms and individuals. Thus, we can conclude that both are comple. mentary to each other. Q. 7. Write four qualities of macro-economies. P Ans. The importance of macro-economics is clear from the following facts : 1, Helpful in making and executing governmental economic policies : The stud, of macro-economics is essential for formulation of the economic policies of the govern. ment. Government has to make policies of general level of production, general price leve| Macro-economists help in formulation of such policies. fee 2. Helpful for Miero-economics : The study of macro-economics is helpful for studying micro-economics. No micro-economic law can be formulated without studying macro-economies. x it 3. Measurement of economic development : Macro-economics deals with the ag. ‘gregates (output, consumption, income, capital formation) which help in measuring the eco. nomic development of the country. 4, Study of inflation and deflation : The study of aggregate demand and aggregate supply of currency enables us to analyse the rate of inflation and deflation in the country. By this we can get the idea of economic conditions and standard of living of people. Q.8 Explain the central problems of an economy. Ans. Every economy has to face certain basic problems for which it has to take deci. sions. These are called central problems of economy. These problems are: 1. What to Produce : It isa standard knowledge that resources are scarce in relation to human needs. We cannot produce all goods as much as we wish to produce. Allocation of resources and the consequent problem of choice requires that we decide What to produce and what not. We have to decide which wants are fo be taken on priority and which one can wait. It involves two fold decisions. (i) The economy has to decide what goods and seryices are to be produces ? For instance, which of the consumer goods like sugar, cloth wheat, ghee, etc. are to be produced and which of the capital goods like machines, tractors etc. are to be produced. Similarly, choice has also to be made between the production of war time goods like rifles, guns, tanks and peace time goods like bread or butter. (ii) When an economy has taken a decision as to what goods or services are to be Produced ? Then it has to decide about its quantity. How much of consumer goods and how much of capital goods are to be produced. eed 2. How to Produce : How to produce is the second offshoot of the problem of re- source allocation. How to produce means how to organize production. There are two tech- niques of production. (i) Labour intensive technique : Under this technique labour is used more than capital (ii) Capital intensive technique : Under this technique capital is used more than labour. An economy must decide as to which technique is to be used in a given industry so that efficient production is obtained. The goods and services should be produced efficientlyEconomics (M. P.) : Class XII | 23 3. For whom to produce : For whom to produce is the third major problem of resource allocation. While deciding. What to produce how much to produce and how to produce, the economy has the main problems as to how the production should be distributed among various sections of the society. The distribution should be made among various sections of the society in such a way that every section must get a fair and just share of the national wealth. The system of distribution of national wealth decides the standard or welfare of the society. Thus, the problem of distribution of production implies the problem of distribution of income. This problem has two aspects : (i) Personal distribution : How production or income generated through production be distributed among different individuals and households of the society. Gi Functional distribution : How income should be distributed among different factors of production (Land, Labour Capital and Entrepreneur) as their reward for the act of production. Thus, every economy faces the problem of allocating the limited resources to the production of various possible goods and services, and distributing the output among the individuals in the economy. Q. 9. What do you mean by production possibility ? Ans. Production possibility frontier is the graph depecting all the possible combina- tions of two goods that can be produced in an economy by making an efficient and full utilisation of all the resources and given state of technology. It is also known as the produc~ tion possibility curve (PPC). Q. 10. Distinguish between economic and non-economic activities. (Any four) (MP 2011, 19) Economic Activities Non economic activities are those activities which have noconcem with wealth. With wealth but are performed out of emotions and pleasure. These are done not for earning Economic activities are those activities which are concerned. ‘These activities are done for eaming wealth. These are always valid and legal. These are done for fulfilling the wants of man. These activities are measured by money. wealth but for other purposes. These are not always legal. These are done for fulfilling the desires and emotions. These activities are not measured by money. Q. 11. What do you understand by normative economic analysis? (MP 2020) Ans. Normative economic analysis discusses the economics of ‘what ought to be”. In normative economic analysis, the desirability of different mechanism is checked and recom- mendations are prescribed for making corrections, if necessary. It is an economic approach that analyses the consequences of economic behaviour, evaluates them as good or bad and may suggest a course of action. A rise in the prices of food grains will hit the poor very badly is an example of normative economic analysis, as it consists of value judgements.Economics (M. P.) : Class XII [25 employed and getting salary of Rs. 3000 per month. He shift his job and thus will loose Rs. 3000 per month from the service and it will be his opportunity cost. The concept explains that we will shift to alternative assignment when we are assured that we shall not get less then opportunity cost. Opportunity cost includes both explicit and implicit cost. Q-15. In solution of central problem possible in Mixed Economy ? Ans. In Mixed Economy both market economy and centrally planned economy play eawally importantrole. Thus what is to be produced, how much and for whom to be produced 's decided on the basis of price mechanism, etc as well as with the aim of social welfare. In nde n aa the Production is done withu the aim of profit butat some other areas the production 's done with the aim of welfare but at some other areas the production is dane with the aim of eaming profit. For example postal services are done with the aim of welfare while Production of steel is done with aim of earning profit. In this way solution of central ic possible in mixed economy. Q. 16. Write features of Production Possibility curve. Ans. Following are the features of Production Possibility curve : 1. The PPC is a downward sloping curve i.e. from left to right. This is PPC, because it indicates that, to increase the production of one commodity production of another has to be reduced. 0 5 10° 1 a5 ‘Wheat 0 tons) 2. The PPC stands concave to its point of origin on the graph which is a result of the increasing marginal rate of transformation. =