ECO CH-1

Chapter 1 –  Introduction to Micro Economics

Important Points

Definition of Economics

“Economics is an enquiry into the nature and causes of the generation of the wealth of a nation.” Adam Smith

“Economics is a science which deals with wealth.” JB Say

“One side it is the study of wealth but on the other and more important side, a part of the study of man.” Alfred Marshall

“The range of our enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money.” AC Pigou

“Economics is the science which studies human behavior as a relationship between ends and scarce menas which have alternative uses.” Lionel Robbins

 

Economics as a Science

Economics can be seen as a science because it uses scientific methods in its researches and investigations. Economics uses ‘Money’ as its measurement unit to measure the business and individual motives.

Economics as an Art

As an art, Economics can be understood as a knowledge stream which helps in solving practical problems relating to an economy in everyday life. As an art it puts knowledge into practice.

 

Economics – Positive and Normative Science

Economics is a Positive science because it deals with the question – “What is?” It means economics studies the problem in its true nature and take into consideration the real situation, facts and figures.

Economics is a Normative Science because it tries to answer the question – “What Should be?” It ventures into the dangerous zone by suggesting the possible solutions to a given economic problem. It examines the events from economic, ethical and social angles and judge the events accordingly.

 

 

Micro Economics and Macro Economics Analysis

Micro Economics deals with smaller units of an economy e.g. an individual bread maker, a single garment seller. Hence it may be defined as a branch of economics which studies about an individual unit rather a group of similar units.

Macro Economics on the other hand deals with the grouped units of an economy. It sees the economic activities from a larger perspective. It does not study the behaviour of a single unit rather it studies group of units like GDP, National Income, Balance of Payment, Government Budget etc.

 

Interdependence between Micro Economics and Macro Economics

As stated by Prof. Samuelson, “There is really no opposition between micro economics and macro economics. Both are absolutely vital. You are less than half educated if you understand the one while being ignorant of the other.”

Hence we can say that these two complement each other in such a way that one is incomplete without the other.

 

Central Problems of Economics

There are three basic economic problems which every economy faces:-

  1. What to Produce – The economy has scarce resources and the resources has multiple uses. So the economy has to make a choice between the goods to be produced. It has to decide what should be produced and in what quantity.
  2. How to Produce – There are two main alternatives available with the economy for carrying on the production activity. It may choose Labour Intensive technique (More labour and less capital) or Capital Intensive technique (More Capital less Labour).
  3. For Whom to Produce – Here the economy has to decide on the distribution of the goods and services to the various sections of the society.

 

Types of Economies

Mainly three types of economies exist:-

  1. Capitalist Economy – In this type of economy, the central problems are solved by the market forces of demand and supply and the government plays a minimal role. The factors of production function under private ownership. The whole economy works for profit motive. There exists a great inequality of income which results in a class struggle. The people are free to choose their area or field of economic activity.
  2. Socialist Economy – This type of economy is just opposite to the Capitalist economy. Here, all the factors of production are under the control of the Government of the central authority. Hence, welfare is the main motive behind all the economic activities. People are given guarantee in job (job security) by the government. Profit motive takes a back-seat here. Production of only those goods and services are undertaken which are decided by the government in accordance with the people’s choice. Government ensures economic equality for all.
  3. Mixed Economy – This type of economy has all the best features of the Capitalist Economy as well as Socialist Economy. The factors of production are jointly owned by the private forces and government. Both these sectors charge different prices for the goods manufactured by them. Government ensures the availability of the essential commodities at fair prices.

Production Possibility Curve

PPC is a famous method of showing the choice opted by a producer when the resources are limited and various combinations can be framed between the two products.

As shown in the diagram, any two products or resources or factors can be placed on the Y axis and X axis. The Curve shows the highest possible production of goods or service.

The curve is concave in shape because of the increasing Marginal Opportunity Cost.

The curve is downward sloping because increase in production of one product is possible only when the other is sacrificed.

 

Shifting of PPC

In a situation of technological improvement, capital infusion etc. the PPC tends to shift rightwards and in opposite case it shifts leftwards.

 

 

QUESTIONS FOR PRACTICE

  1. Which statement is matched correctly:
    1. An enquiry into the nature and causes of the wealth of the nation : A.C.Pigou.
    2. Science which deals with wealth : Alfred Marshall.
    3. Economics is the science which studies human behaviour as a relationship between ands and scarce means which have alternative uses : Robbins.
    4. The range of our enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the meansuring rode of money : Adam smith.

 

  1. The law of scarcity:
    1. Does not apply to rich, developed countries.
    2. Applies only to the less developed countries.
    3. Implies that consumers wants will be satisfied in a socialistic system.
    4. Implies that consumers wants will never be completely satisfied.

 

  1. “Economics is neutral between end.” Who said so ?
    1. Robbins
    2. Marshall
    3. Pigou
    4. Adam smith

 

  1. Which of the following statements defines the study of Economics the best?
    1. Inflation and unemployment in a growing economy.
    2. Business decision making under foreign competition.
    3. Individual and social choice in the face of scarcity.
    4. The best way to invest in the stock market.

 

  1. HHdkdkdkdkdkHow does resource scarcity affect the satisfaction of wants?
    1. Not all wants can be satisfied.
    2. We will never be faced with the need to make choices.
    3. We must develop ways to decrease our individual wants.
    4. The discovery of new natural resources is necessary to increase our ability to satisfy wants.

 

  1. Rational decision making requires that :
    1. One’s choices be arrived at logically and without error.
    2. One’s Choices be consistent with one’s goal.
    3. One’s Choices never vary.
    4. One makes choices that do not involve trade-offs.
  2. “Fundamental Premise of Economics” means?
    1. Natural resources will always be scare.
    2. Individuals are capable of establishing goals and acting in a manner consistent with achievement of those goals.
    3. Individuals choose the alternative for which they believe the net gains to be greatest.
    4. No matter what the circumstances, individual choice always involves a trade-off.

 

  1. Select among the options the normative statement?
    1. Planned economies allocate resources via government departments.
    2. Most transitional economies have experienced problems of failing output and rising prices over the past decade.
    3. There is a greater degree of consumer sovereignty in market economies than planned economies.
    4. Reducing inequality should be a major priority for mixed economies.

 

  1. Which statement is a normative one?
    1. Faster economics growth should result if an economy has a higher level of investment.
    2. Changing the level of interest rates is a better way of managing the economy than using taxation and government expenditure.
    3. Higher levels of unemployment will lead to higher levels of inflation.
    4. The average level of growth in the economy was faster in the 1990s than the 1980s.

 

  1. An example of ‘Positive’ economic analysis would be :
    1. An analysis of the relationship between the price of food and the quantity purchased.
    2. Determining how much income each person should be guaranteed.
    3. Determining the ‘fair’ price for food.
    4. Deciding how to distribute the output of the economy.

 

  1. Choose the correct statement :
    1. In deductive method logic proceeds from the particulars to the general.
    2. Micro and Macro-Economics are interdependent.
    3. In a capitalist economy the economic problems are solved by Planning Commission.
    4. Higher the prices lower is the quantity demanded of a product is a normative statement.

 

  1. A study of how increase in the corporate income tax rate will affect the national unemployment rate is an example of
    1. Macro-economics.
    2. Descriptive economics.
    3. Micro-economics.
    4. Normative economics.

 

  1. Which of the following does not suggest a macro approach for India?
    1. Determining the GNP of India.
    2. Finding the causes of failure of X and co.
    3. Identifying the causes of inflation in India.
    4. Analyse the causes of failure of industry in providing large scale employment.

 

  1. Economic goods are considered scarce resources because they
    1. Cannot be increased in quantity.
    2. Do not exist in adequate quantity to satisfy social requirements.
    3. Are of primary importance in satisfying social requirements.
    4. Are limited to man made goods.

 

  1. Choose from the national point of view the statement indicating micro approach?
    1. Per capital income of India.
    2. Underemployment in agricultural sector.
    3. Lock out in TELCO.
    4. Total savings in India.

 

  1. In a free market economy the allocation or resources is determined by
    1. Votes taken by consumers.
    2. A central planning authority.
    3. Consumer preference.
    4. The level of profits of firms.

 

  1. A capitalist economy uses _____________as the principal means of allocating resources.
    1. Demand
    2. Supply
    3. Efficiency
    4. Prices

 

  1. In a free market economy, when consumers increase their purchase of a good and the level of___________exceeds____________then prices tend to rise.
    1. Demand, supply
    2. Supply, demand
    3. Prices, demand
    4. Profits, supply.

 

  1. Which of the following would be considered a disadvantage of allocating resources using a market system?
    1. Income will tend to be unevenly distributed.
    2. Significant unemployment may occur.
    3. It cannot prevent the wastage of scarce economic resources.
    4. Profits will tend to be low.

 

  1. In a mixed economy,
    1. All economic decisions are taken by the central authority.
    2. All economic decisions are taken by private entrepreneurs.
    3. Economic decisions are partly taken by the state and partly by the private entrepreneurs.
    4. None of the above.

 

  1. The central problem in economics is that of
    1. Comparing the success of command versus market economies.
    2. Guaranteering that production occurs in the most efficient manner.
    3. Guaranteering a minimum level of income for every citizen.
    4. Allocating scarce resources in such a manner that society’s unlimited needs or wants are satisfied as well as possible.

 

  1. An economy achieves “productive efficiency” when :
    1. Resources are employed in their most highly valued uses.
    2. The bet resources are employed.
    3. The total number of goods produced is greater.
    4. Goods and services are produced at least cost and no resources are wasted.

 

  1. Which of the following illustrates a decrease in unemployment using the PPF?
    1. A movement down along the PPF.
    2. A rightward shift of the PPF.
    3. A movement from a point on the PPF to a point inside the PPF.
    4. A movement from a point inside the PPF to a point on the PPF.

 

  1. If the PPF is linear, i.e., a straight line, which of the following is true?
    1. As the production of a good increase, the opportunity cost of that good rises.
    2. As the production of a good increase, the opportunity cost of that good falls.
    3. Opportunity cost are constant.
    4. The economy is not at full employment when operating on the PPF.

 

  1. Periods of less than full employment correspond to
    1. Points outside the PPF.
    2. Points inside the PPF.
    3. Points on the PPF.
    4. Either points inside or outside the PPF.

 

  1. Which of the following would not result in an rightward shift of the PPF?
    1. An increase in investment in capital stock.
    2. A reduction in the labour unemployment rate.
    3. The discovery of new oil deposits in india.
    4. An increase in the number of people taking management training course.

 

  1. During presidential election campaigns, candidates often promise both more “gun” and assumption are they making but not revealing to their audience?
    1. There will be sufficient increase in the supply of natural resources used to produce “guns” and “butter”.
    2. That there will be an improvement in the technology of both “gun” and “butter” production.
    3. That there will be an increase in the labour force.
    4. All of the above.

 

  1. Which of the following statements is a reason for the curvature or concavity of PPF?
    1. Falling unemployment as we move along the curve
      1. The economy having to produce less of one good in order to produce more of another good
      2. Opportunity costs increase as more of a good is produced
      3. None of the above.

 

  1. Which of the following is a reason for the negative slope of the PPF?
    1. The inverse relationship between the use of technology and the use of natural resources
    2. Scarcity; at any point in time we have limited amounts of productive resources
    3. Resource specialisation
    4. Increasing opportunity costs.

 

  1. Which of the following in not one of the four central questions that the study of economics is supposed to answer?
    1. Who produces what?
    2. When are good produced?
    3. Who consumes what?
    4. How are goods produced?

 

  1. If the marginal opportunity cost is a constant then the PPC would be
    1. Convex
    2. Straight line
    3. Backward bending
    4. Concave

 

 

  1. Larger production of _____________ goods would lead to higher production in future
    1. Consumer goods
    2. capital goods
    3. Agricultural goods
    4. Public goods

 

  1. Which of the following is likely to cause an inward shift in a country’s PPC?
    1. Earthquake destroying resources of the country
    2. Scientists discovering new machines
    3. Workers getting jobs in the new metro-project
    4. The country finds new reserves of crude oil

 

  1. How will you define a condition in which the people have the freedom to buy or not to buy the goods offered in the market place, and this ultimately affects the producer choice of producing goods
    1. Economic power of choice
    2. Consumer sovereignty
    3. Positive economy
    4. Producer sovereignty

 

  1. Normative economic is based on
  •            Ethical consideration
    • Facts and generalization
    • What is or what should be
    • All of these

 

  1. Under productive method, the logic proceeds from
  • General to particular
  • Particular to general
  • Both (a) and (b)
  • None of these

 

  1. Find the correct match
  • Science of wealth-L Robbins
  • Science of material well being-Marshal
  • Science of choice making-paul samuelson
  • Science of growth and development-Adam Smith

 

  1. The positive aspect of science given by
  • Alfred Marshall
  • C. Pigou
  • Adam Smith
  • Robbins

 

  1. Which of these is a part of micro economics?
  • Factor pricing
  • National income
  • Balance of payment
  • None of these

 

  1. Which one in the following is not correct?
  • There are limited wants
  • Means are scarce
  • Resources have alternative uses
  • Economics is science

 

  1. Micro economics is also known as
  • Public economics
  • Price theory
  • Income theory
  • Demand theory

 

  1. What will be the shape of PPC curve when marginal opportunity cost is constant?
  • Concave
  • Convex
  • Backward bending
  • Straight line

 

  1. Which one is the feature of Marshall’s definition?
  • Limited ends
  • Scarce means
  • Study of wealth as well as study of man
  • Study of allocation of resources

 

  1. Who defines economics in terms of Dynamic Growth and Development?
  • Robbins
  • Paul A Samuelson
  • Adam Smith
  • None of these

 

  1. A free market economy solve its central problems through
  • Planning authority
  • Market mechanism
  • Both (a) and (b)
  • None of these

 

  1. Normative aspect of economics is given by
  • Marshall
  • Robbins
  • Adam Smith
  • Samuelson

 

  1. Economics is the study of
  • How society manages its unlimited resources
  • How to reduce our wants until we are satisfied
  • How society manages its scarce resources
  • How to fully satisfy our unlimited wants

 

  1. According to Robbins, ‘means’ are
  • Scarce
  • Unlimited
  • Undefined
  • All of these

 

  1. A study of how increase in the corporate income tax rate will be affect the natural unemployment rate is an example of
  • Macro economics
  • Micro economics
  • Descriptive economics
  • Normative economics

 

  1. In which type of economy do consumers and producers make their choices based on the market force of demand and supply?
  • Open economy
  • Controlled economy
  • Command economy
  • Market economy

 

  1. Economics is the study of mankind in the ordinary business of life’ was given by
  • Adam Smith
  • Lord Robbins
  • Alfred Marshall
  • Samuelson

 

  1. The branch of economic theory that deals with the problem of allocation of resources is
  • Micro economics
  • Macro economics
  • Econometrics
  • None of these
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