1. Withthehelpofanexample,definemicroeconomics.

Ans.MicroEconomicsisthatbranchofeconomicsinwhicheconomicproblemsare

studiedatindividuallevele.g.thebehaviourofconsumer,firms,etc.

2. Definemacroeconomicswiththehelpofanexample.

Ans.Macroeconomicsisthatbranchofeconomicswhichstudiestheeconomyasawhole

anditsaggregatese.g.Nationalincome,thelevelofemployment.

3. Defineopportunitycost.

Ans.Fortheselectionofanopportunity,thesacrificeofnextbestalternativeuseiscalled

opportunitycost.

4. Whydoesaneconomicproblemarise?

Ans.Aneconomicproblemarisesduetoscarcityofresourceshavingalternativeusesin

relationtounlimitedwants.

5. Writetwocharacteristicsofresources.

Ans.Resourcesarescarce(limited)andtheyhavealternativeuses.

6. Whatdoyoumeanbyscarcity?

Ans.Scarcityreferstoasituationinwhichdemandismorethansupply

7. Whatdoyoumeanbymarginalopportunitycost?

Ans.Marginalrateoftransformation(MRT)istheratioofonegoodsacrificedtoincrease

onemoreunitoftheothergood.

8. Whatdoyoumeanbyaneconomy?

Ans.Aneconomyisaneconomicorganisationwhichprovidessourcestoearnlivelihood.

9. Whyisthereaneedforeconomizingofresources?

Ans.Becauseresourcesarelimited.

10. Whydoeseconomicproblemarise?

Ans.Itarisesmainlybecauseofscarcityofresources.

11. WhyisPPCdownwardslopingfromlefttoright?

Ans.Becauseinsituationoffullemploymentofresources,productionofonegoodcanbe

Very Short Answer Type Questions(1 Mark)

Chapter-1Introduction to Economics

increasedonlywithlessofothergood.

12. WhatdoesarightwardshiftofPPCindicate?

Ans.TherightwardshiftofPPCindicatesgrowthofresourcesortechnologicalprogress.

13. Whydoestheproblemofchoicearise?

Ans.Relativescarcityofresourceshavingalternativeusesinrelationtounlimitedwants,

givesrisetoaneconomicproblem.

14. WhydoesPPClookconcavetotheorigin?

Ans.PPCisconcavetotheoriginbecauseofincreasingmarginalrateoftransformation

(orincreasingmarginalopportunitycost).

15. WhichfactorleadtoashiftofPPCtowardsrighthandside?

Ans.GrowthofresourcesortechnologicalprogressleadstoashiftofPPCtowardsright-

handside.

16. WhatdoesapointbelowPPCindicate?

Ans.Itshowsinefficient/underutilizationofresources.

17. WhatdoesslopeofPPCshow?

Ans.NegativeslopeofPPCshowsthatinordertoproducemoreunitsofonegood,some

unitsoftheothergoodmustbesacrificed.

18. Whenallocationofresourcesisconsideredasinefficient?

Ans.Allocationofresourcesisconsideredasinefficientwheneconomyperformsbelow

thePPCcurve.

1. DrawPPCandshowthefollowings:-

a. Fullemploymentofresources,

b. Underutilisationofresources,and

c. Growthofresources.

Ans.

a. Fullemploymentofresources-ApointanywhereonthePPC,showstheefficientuse

orfullemploymentofresources.

b. Underutilisationofresources-Apointanywhereinsideofthecurve,shows

inefficient/underutilisationofresources.

c. Growthofresources–ItreferstotheshiftinPPC.Ifmoreresourcesaregenerated,the

levelofproductionwillincrease.InthefigureitisrepresentedbyashiftinPPCfrom

PPtoP’P’.

2. WhydoesPPClookconcavetotheorigin?Explain.

Ans.PPClooksconcavetotheoriginbecauseofincreasingmarginalrateof

transformation/substitution(orincreasingmarginalopportunitycost).Itmeansthat

moreandmoreunitsofcommodity‘y’aretobesacrificed,togeteachadditionalunitof

commodity‘x’.

Short Answer Type Questions(3-4 Marks)

3. WhatdoesaPPCshow?Whenwillitshifttotheright?

Ans.ProductionPossibilityCurveshowsthedifferentcombinationsoftwogoodswhich

aneconomycanproducewithavailabletechnologyandresources.

Itwouldshifttowardsright-handsideincaseofgrowthofresourcesortechnological

progress.

4. DoesproductiontakeplaceonlyonthePPcurve?

Ans.Yesandno,both.Yes,ifthegivenresourcesarefullyandefficientlyutilized.No,if

theresourcesareunderutilizedorinefficientlyutilizedorboth.

Refertotheabovefigure;onapointanywhereonthePPCtheresourcesarefullyand

efficientlyemployed.OnpointU,belowthePPCoranyotherpointbutbelowthePPC,the

resourcesareeitherunderutilizedorinefficientlyutilisedorboth.Anypointbelowthe

PPcurvethushighlightstheproblemofunemploymentandinefficiencyintheeconomy.

5. Whydoesaneconomicproblemarise?Explain.

Ans.Reasons-

1. Unlimitedwants-Humanwantsgoonmultiplyingwiththeexpansionofeducation,

knowledge,scientificadvancementandeconomicgrowth.Amancannotsatisfyallof

hiswantsandthereforehehastomakeachoiceinorderofurgency.

2. Limitedresources-Theresourcesarelimitedinrelationtoneedforthem.Itisthe

maincauseofeconomicproblem.

3. Alternativeuseofresources-Aresourcecanbeutilizedinadifferentwayandfor

differentpurposes.Thereforechoicehastobemadeamongdifferentusesof

resources.

6. CalculateMRTXYatdifferentproductionpossibilitiesfromthefollowing

hypotheticaldata.DrawaPPConthebasisoftheschedule.

Productionpossibilities CommodityX CommodityY

A 0 15

B 1 14

C 2 12

D 3 9

E 4 5

F 5 O

Ans.

ProductionpossibilitySchedule

Production

possibilities

Commodity

X

Commodity

Y

MarginalRateof

Transformation

(MRT)=ΔY/ΔX

A 0 15 -------------

B 1 14 1X:1Y

C 2 12 2X:1Y

D 3 9 3X:1Y

E 4 5 4X:1Y

F 5 0 5X:1Y

ProductionpossibilityCurve

7. Whyisaproductionpossibilitiescurveconcave?Explain.

Ans.TheproductionpossibilitycurvebeingconcavemeansthatMRTincreasesaswe

movedownwardalongthecurve.MRTincreasesbecauseitisassumedthatnoresource

isequallyefficientinproductionofallgoods.Asresourcesaretransferredfromonegood

toanother,less&lessefficientresourceshavetobeemployed.Thisraisescostandraises

MRT.

8. Explainpropertiesofaproductionpossibilitiescurve.

Ans.Therearetwopropertiesofaproductionpossibilitiescurve.

a. Downwardsloping:Itisbecauseasmorequantityofonegoodisproducedsome

quantityoftheothergoodmustbesacrificed.

b. Concavetotheorigin:Itisbecausethemarginalrateoftransformationincreasesas

moreofonegoodisproduced.

9. Explaintheproblemof‘whattoproduce’.

Ans.Aneconomycanproducedifferentpossiblecombinationsofgoods&serviceswith

givenresources.Theproblemisthat,outofthesedifferentcombinations,which

combinationisproduced.Ifproductionofonegoodincreasesthenlessresourceswillbe

availableforothergoods.

10. Whatis‘MarginalRateoftransformation’?Explainwiththehelpofanexample.

Ans.MRTistherateatwhichtheunitsofonegoodhavetobesacrificedtoproduceone

moreunitoftheothergoodinatwogoodseconomySupposeaneconomyproducesonly

twogoodsXandY.Furthersupposethatbyemployingtheseresourcesfullyand

efficiently,theeconomyproduces1X+10Y.Iftheeconomydecidestoproduce2X,ithas

tocutdownproductionofYby2units.Then2Yistheopportunitycostofproducing1X.

Then2Y:1XistheMRT.

11. Explaintheproblem‘Howtoproduce’.

Ans.Broadly,therearetwotechniquesofproduction.

a. LabourintensiveTechnique:Underthistechnique,productiondependsmoreon

theuseoflabour.

b. CapitalIntensiveTechnique:Underthistechnique,productiondependsmoreon

theuseofmachines(calledcapital)efficienttechniqueofproductionisthatwhich

usesminimumpossibleinputsforagivenamountofoutput.Sothat,costperunitof

outputisminimised.

1. Explainthethreepropertiesofindifferencecurves.

Ans.Threepropertiesofindifferencecurvesareasfollow.

1. Slopesdownwardfromlefttoright:Toconsumemoreofonegoodtheconsumer

mustgiveupsomequantityoftheothergoodsothattotalutilityremainsthesame.

2. Convextowardstheorigin:MRSdeclinescontinuouslyduetotheoperationofthe

lawofdiminishingmarginalutility.

3. Higherindifferencecurvesrepresentshigherutility:Higherindifferencecurve

representlargebundleofgoods.Whichmeansmoreutilitybecauseofmonotonic

preference.

2. Explaintheconditionsofconsumer’sequilibriumusingindifferencecurveanalysis.

Usediagram.

Ans.Therearetwoconditionsforconsumer’sequilibrium.

(i)

(ii)MRSiscontinuouslyfalling.

Explanation:SupposetherearetwogoodsXandY.thefirstconditionofconsumer’s

equilibriumis

If .ItmeansconsumervaluesXmorethanwhatmarketvalues&willingto

givemorepricethanmarketpricehewillpurchasemoreofXthiscausefallinMRSandit

willcontinueuptothatwhen

If .ItmeansconsumervaluesXlessthanwhatmarketvalues.Consumeris

willingtogivelesspriceasmarketprice&hewillpurchaselessofX,bythisMRSwill

LongAnswer Type Questions (6 Marks)

increaseanditwillcontinuetill

(ii)UnlesstheMRSiscontinuouslyfallingtheequalitybetweentheMRSand willnot

beachieved.

ConsumerisinequilibriumatpointE

1. MassiveunemploymentwillshiftthePPFtotheleft.Defendorrefute.

Ans.Thegivenstatementisrefuted.Massiveunemploymentdoesnotdecreasethe

capacityofeconomytoproduce.So,therewillbenoshiftofPPF.However,1economy

willoperateatsomepointinsidethePPF,duetounutilisationofhumanresources.

2. Whatistheopportunitycostofaninputwhichhasnoalternativeuse?

Ans.Theopportunitycostofsuchinputiszero.

3. Utilityisdirectlylinkedwiththeusefulnessofacommodity.Isittrueorfalse?Give

reason.

Ans.False.Acommoditymaynotbeuseful,yetitmayhaveutilityforaparticular

person.Forexample,chewingtobaccoisharmfulforhealth,yetmanypeoplederivehigh

degreeofutilityfromit.

4. InordertoencouragetourisminGoa,IndianAirlinesreducestheairfaretoGoa.

HowwillitaffectmarketdemandcurveforairtraveltoGoa?

Ans.Therewillbeadownwardmovementalongthesamemarketdemandcurveforair

traveltoGoa.Ithappensbecauseofdecreaseintheairfare.

5. Atcertainlevelofoutput,themarginalcostofafirmisaboveitsmarginalrevenue

Canthisbeitsequilibriumoutput?

Ans.No,itcannotbeitsequilibriumoutputbecausethemarginalcostexceedsthe

marginalrevenue.Thefirmisrunningataloss.

6. Trendzproducesbothjeansandshirts.Howwillanincreaseinthepriceofjeans

affectthesupplycurveofshirts?

Ans.Anincreaseinthepriceofjeanswillmaketheproductionofjeansmoreattractive.

AsaresultTrendzwillshiftitsresourcesfromshirtstojeans.Itwillshiftthesupplycurve

ofshirtstowardsleft.

7. Aseveredroughtresultsinadrasticfallintheoutputofwheat.Analyzehowitwill

affectthemarketpriceofwheat.

Ans.Marketpriceofwheatwillincrease(duetodecreaseinsupply).

Value Based Questions

8. Whatwillbetheeffectonequilibriumpriceandequilibriumquantityoftelephone

instruments,ifChinaexportsalargenumberoftelephoneinstrumentstoIndia.

Ans.Equilibriumpricewillfallandequilibriumquantitywillrise(duetoincreasein

supply).

9. ‘Both,microeconomicsandmacroeconomicshavesamedegreeofaggregation’.

Defendorrefute.

Ans.Thegivenstatementisrefuted.

Microeconomicsinvolveslimiteddegreeofaggregation.Forexample,market

demand(microconcept)isderivedbyaggregatingindividualdemandsofallthe

buyersinparticularmarket.

Ontheotherhand,macroeconomicsinvolvesthehighestdegreeofaggregation.

Forexample,aggregatedemand(macroconcept)isderivedfortheentire

economy.Itmeans,microeconomicsandmacroeconomicsdifferindegreeof

aggregation.

10. ”Lawofdemandisaquantitativestatement”.Comment.

Ans.Lawofdemandisonlyanindicativeandnotaquantitativestatement.Itindicates

onlythedirection,inwhichthedemandwillchangewithachangeinprice.Itsays

nothingaboutthemagnitudeofsuchachange.ForexamplepriceofPepsirisesfromRs

10toRs12perbottle,then,asperlawofdemand,wecansaythatthedemandforPepsi

willfall.ButthelawdoesnotgivetheactualamountbywhichthedemandforPepsiwill

decline.

11. “MCcanbecalculatedbothfromtotalcostandtotalvariablecostandisnotaffected

bytotalfixedcost.”Discuss.

Ans.Thegivenstatementiscorrect.MCisnotatallaffectedbytotalfixedcost(TFC).MCis

additiontoTCorTVCwhenonemoreunitofoutputisproduced.AsTFCremainssame

withincreaseinoutput,MCisindependentoffixedcostandisaffectedjustbychangein

variablecosts.

12. WhyARcurveundermonopolisticcompetitionismoreelasticthanARcurveunder

monopoly?

Ans.TheARcurveundermonopolisticcompetitionismoreelasticbecausethereexists

closesubstitutesoftheproductsoldbythemonopolisticfirmwhereasundermonopoly

theARcurveislesselasticbecausethereisnonavailabilityofclosesubstitutesofthe

productsoldbythemonopolyfirm.

13. Howdoesafirmundermonopolisticcompetitionexercisepartialcontrolover

price?

Ans.Amonopolisticcompetitivefirmenjoyspartialcontroloverprice.Ithappens

becausebyincurringheavysellingcosts,thefirmisabletocreateadifferentiatedimage

ofitsproductinthemindsofconsumers.Productsaredifferentiatedonthebasisof

brand,size,color,shape,etc.Buyersareattractedtobuyaparticularproductevenata

relativelyhigherprice.

14. Whyisnumberoffirmssmallinanoligopolymarket?

Ans.ThemainreasonforsmallnumberoffirmsunderOligopolyistheBarrierstoentry,

whichprevententryofnewfirmsintotheindustry.Patents,requirementoflargecapital,

controlovercrucialrawmaterials,etc,aresomesomeoftheotherreasons,which

preventnewfirmsfromenteringintoindustry.Asaresult,therearefewfirmsinan

Oligopolymarket.

15. ”Demandandsupplyareliketwobladesofapairofscissors”.Comment.

Ans.Thegivenstatementiscorrect.Boththebladesofpairofscissorsareequally

importanttocutapieceofcloth.Similarly,bothdemandandsupplyareneedfor

determiningpriceinthemarket.Thereisnousefordemandforaproductifthereisno

supplyfortheproductandsupplyisnotneededifthereisnodemandfortheproduct.

Oneofthetwomayplaymoreactiveroleinpricedeterminationintheshortrun.But,

bothareneededtodeterminethepriceinthelongrun.

HigherOrderThinkingSkills

1. Whatismeantbyeconomizingtheuseofresources?

Ans.Economisingtheresourcesmeansthatresourcesaretobeusedinamannersuch

thatmaximumoutputisrealisedperunitofoutput.Italsomeansoptimumutilisationof

resources.

2. Whatdoyoumeanbyalternativeusesofresources?

Ans.Alternateuseofresourcesmean,morethan1usestowhicharesourcecanbeput.

3. WhatwillbetheshapeofPPFwhenMRTisconstant?

Ans.ShapeofPPFwillbeastraightlineslopingdownward.

4. UnemploymentinIndiaisasubjectmatterofMicroorMarcoeco.,givereason.

Ans.UnemploymentinIndiaisasubjectmatterofmacroeconomicsbecauseitrelatesto

economyaswhole.