Question Bank for Economics - BALLB

Semester 1 (Mumbai University)

Module 1: Introduction to Economics
Question 1: Define Economics. Discuss the nature and scope of Economics.

Answer: Economics is the social science that studies the production, distribution, and
consumption of goods and services. It focuses on how individuals, businesses, governments,
and nations make choices on allocating resources to satisfy their needs and wants.

The nature of Economics can be classified into two broad categories:

1. Microeconomics: Deals with individual economic units such as consumers, firms,

and industries.
2. Macroeconomics: Focuses on aggregate economic issues such as national income,
inflation, and unemployment.

The scope of Economics includes:

 Consumption: Study of how individuals make decisions to maximize satisfaction.

 Production: Examination of how goods and services are created.
 Distribution: Analysis of how income and wealth are distributed among different
sections of society.
 Exchange: Understanding how goods and services are traded.

Example: A baker producing bread needs to decide how many loaves to bake daily to
maximize profit while satisfying customer demand. This involves understanding costs,
pricing, and customer preferences.

Question 2: Explain the concept of opportunity cost with examples.

Answer: Opportunity cost is the value of the next best alternative foregone when a decision
is made. It reflects the trade-offs involved in choosing one option over another.

Key Points:

1. Definition: Opportunity cost is not always measured in monetary terms but in terms
of utility or benefit lost.
2. Importance: It helps in decision-making by highlighting the potential cost of
different choices.

Example:
  A student decides to spend two hours studying Economics instead of working a part-
time job that pays Rs. 200 per hour. The opportunity cost of studying is Rs. 400 (the
income they could have earned).
 A farmer uses land to grow wheat instead of rice. The opportunity cost is the profit
they would have made by cultivating rice.

Opportunity cost emphasizes the importance of efficient resource allocation to maximize

overall benefits.

Question 3: Differentiate between positive and normative economics.

Answer: Economics can be classified into two main branches:

1. Positive Economics: Deals with objective analysis and facts. It explains "what is"
and does not involve value judgments.
2. Normative Economics: Involves value judgments and prescribes "what ought to be."

Differences:

 Nature: Positive economics is descriptive, while normative economics is

prescriptive.
 Example of Positive Statement: "India’s GDP grew by 6.5% last year."
 Example of Normative Statement: "The government should focus on reducing
unemployment to improve living standards."

Example in Action:

 A positive economist may analyze the effect of a tax increase on consumer spending.
 A normative economist may recommend lowering taxes to stimulate the economy.

Understanding the distinction helps policymakers balance facts with ethical considerations.

Question 4: What is demand? Explain the law of demand with exceptions.

Answer: Demand refers to the quantity of a good or service that consumers are willing and
able to purchase at various prices during a given period.

The Law of Demand:

 States that, ceteris paribus (all else being equal), as the price of a good decreases, the
quantity demanded increases, and vice versa.
 Reason: Higher prices reduce affordability, while lower prices increase it.

Exceptions to the Law of Demand:

 1. Giffen Goods: Inferior goods where an increase in price leads to higher demand due
to the income effect outweighing the substitution effect.
o Example: Staple foods like bread or rice in low-income households.
2. Veblen Goods: Luxury goods where higher prices increase their desirability as a
status symbol.
o Example: Designer handbags.
3. Speculative Demand: When consumers expect prices to rise further, they may buy
more despite price increases.
o Example: Gold.

Module 2: Demand, Supply, and Market Equilibrium

Question 31: Define supply and explain the law of supply with examples.

Answer: Supply refers to the quantity of a good or service that producers are willing and able
to sell at various prices during a given period.

The Law of Supply:

 States that, ceteris paribus, as the price of a good increases, the quantity supplied also
increases, and vice versa.
 Reason: Higher prices incentivize producers to supply more to maximize profits.

Example:

 A farmer produces 100 kg of tomatoes when the price is Rs. 20/kg. If the price rises
to Rs. 30/kg, the farmer increases production to 150 kg to take advantage of the
higher price.
 A tech company launches more models of a smartphone when demand and prices rise.

The law of supply assumes no significant changes in factors like production technology or
input costs.

Question 32: What is market equilibrium? Explain with the help of a

diagram.

Answer: Market equilibrium occurs when the quantity demanded equals the quantity
supplied at a specific price level. At this point, there is no excess demand or supply, and the
market is in balance.

Key Points:

1. Equilibrium Price: The price at which the market clears.

2. Equilibrium Quantity: The quantity exchanged at the equilibrium price.
Example:

 In the market for oranges, the equilibrium price is Rs. 50/kg, where 1,000 kg are
demanded and supplied.
 If the price rises to Rs. 60/kg, a surplus occurs as supply exceeds demand.
Conversely, if the price drops to Rs. 40/kg, a shortage occurs as demand exceeds
supply.

Diagram Explanation: A graph showing the intersection of the demand and supply curves
represents equilibrium. The x-axis measures quantity, and the y-axis measures price.

Question Set

Introduction to Economics

1. What is economics?
Economics is the study of how individuals, businesses, and societies allocate limited
resources to satisfy unlimited wants. It addresses the problems of scarcity and
decision-making. For example, a country may have limited money to spend and must
decide whether to invest in healthcare or education. Economists analyze such
decisions to promote efficient resource utilization.
2. Distinguish between microeconomics and macroeconomics.
Microeconomics studies individual units like households and firms, focusing on
supply, demand, and pricing. Macroeconomics examines the economy as a whole,
analyzing GDP, inflation, and unemployment. For instance, microeconomics explains
the pricing of a smartphone, while macroeconomics studies India's annual GDP
growth rate.
3. What is the law of demand?
The law of demand states that, ceteris paribus, as the price of a good decreases, its
quantity demanded increases, and vice versa. For instance, if the price of movie
tickets drops from ₹300 to ₹150, more people are likely to watch movies in theaters.
4. Define the concept of scarcity.
Scarcity means resources are limited compared to the unlimited human wants. For
example, water scarcity in drought-prone areas forces people to prioritize its use for
drinking over agriculture or sanitation.
5. What are the primary branches of economics?
Economics has two main branches: microeconomics and macroeconomics.
Microeconomics deals with individual behavior, while macroeconomics addresses
national and global economic issues like inflation and trade.

Economic Systems

6. What is a planned economy?

A planned economy is one where the government controls and regulates production,
distribution, and prices. For example, in Cuba, the state decides how resources are
allocated.
7. What are the characteristics of a capitalist economy?
In a capitalist economy, private individuals own resources and production is guided
 by profit motives. For instance, in the USA, most businesses are privately owned, and
competition determines market prices.
8. What is a mixed economy?
A mixed economy combines elements of capitalism and socialism. Both private and
public sectors coexist. For example, India allows private businesses but also has
government control in key areas like defense and railways.
9. Explain the role of government in a socialist economy.
In a socialist economy, the government owns and controls resources to ensure
equitable distribution. For example, China's government actively regulates industries
to avoid wealth disparities.
10. What is the difference between free-market and command economies?
Free-market economies rely on individual choices, with minimal government
interference, while command economies have central planning by the government.
For example, the USA represents a free-market system, while North Korea is a
command economy.

Fundamental Economic Problems

11. What are the central problems of an economy?

Every economy faces three central problems: what to produce, how to produce, and
for whom to produce. For example, should a country allocate resources to luxury cars
(for the wealthy) or public transportation (for the masses)?
12. How does an economy decide 'what to produce'?
The choice of what to produce depends on societal needs, resource availability, and
profit motives. For example, during a pandemic, an economy may prioritize
producing vaccines over luxury goods.
13. Explain 'how to produce' as an economic problem.
It involves deciding the production methods, whether labor-intensive or capital-
intensive. For example, agriculture in India is largely labor-intensive, while
developed countries use machinery.
14. What does 'for whom to produce' mean?
This refers to the allocation of goods among different sections of society. For
instance, affordable housing projects target low-income groups, while luxury villas
cater to the wealthy.
15. What is opportunity cost?
Opportunity cost is the value of the next best alternative forgone. For example, if a
law student chooses to intern instead of working a part-time job, the income from the
job becomes the opportunity cost.

Demand and Supply

16. What is the law of supply?

The law of supply states that, ceteris paribus, an increase in the price of a good
increases its quantity supplied. For example, if the price of wheat rises, farmers are
likely to grow more wheat.
 17. Explain market equilibrium.
Market equilibrium occurs when demand equals supply, resulting in a stable price.
For instance, if 100 laptops are produced and exactly 100 are demanded, the market is
in equilibrium.
18. What factors affect demand?
Factors include income, preferences, prices of related goods, and future expectations.
For instance, if a popular legal book's price drops, its demand may rise among law
students.
19. What factors influence supply?
Supply is affected by production costs, technology, taxes, and subsidies. For example,
a subsidy on solar panels encourages their production.
20. What are substitutes and complements?
Substitutes are goods that can replace each other, like tea and coffee. Complements
are used together, like pens and paper. For example, if coffee becomes expensive,
people may buy more tea.

Economic Theories and Applications

21. Explain the concept of elasticity of demand.

Elasticity measures how demand changes with price changes. For instance, luxury
goods like branded bags have elastic demand, while necessities like rice are inelastic.
22. What is marginal utility?
Marginal utility refers to the additional satisfaction gained from consuming one more
unit of a good. For example, a student enjoys eating the first slice of pizza more than
the fourth slice.
23. Define GDP.
GDP, or Gross Domestic Product, is the total value of goods and services produced in
a country in a year. For example, India's GDP includes contributions from agriculture,
industries, and services.
24. What is inflation?
Inflation is the rise in general price levels over time. For example, if a book that cost
₹500 last year now costs ₹550, inflation has occurred.
25. What is the role of the Reserve Bank of India in the economy?
The RBI controls money supply, regulates banks, and ensures economic stability. For
instance, it adjusts interest rates to manage inflation.

Economic Development

26. What is economic growth?

Economic growth is the increase in a country's output of goods and services over
time. For example, when India’s GDP grows by 6% annually, it indicates economic
growth. Growth can be measured in real terms, adjusting for inflation.
27. How does economic development differ from economic growth?
Economic development is broader than economic growth. It includes improvements
in living standards, education, and health. For instance, a rise in GDP signifies
growth, but if it’s accompanied by reduced poverty, it reflects development.
28. What are the indicators of economic development?
Indicators include GDP per capita, literacy rate, life expectancy, and access to
 healthcare. For example, high literacy rates and better healthcare facilities indicate
economic development in Scandinavian countries.
29. What are the challenges of economic development?
Challenges include poverty, unemployment, income inequality, and environmental
degradation. For instance, rapid industrialization in developing nations often leads to
pollution and urban crowding.
30. Explain sustainable development.
Sustainable development ensures that resources are used to meet present needs
without compromising future generations. For example, renewable energy projects
like solar and wind power promote sustainability.

Globalization and Trade

31. What is globalization?

Globalization refers to the integration of economies worldwide through trade,
investment, and technology. For example, India exports IT services globally while
importing advanced machinery from other countries.
32. What are the benefits of globalization?
Benefits include access to foreign markets, technological advancement, and cultural
exchange. For instance, globalization enabled Indian law firms to collaborate with
international legal practices.
33. What are the drawbacks of globalization?
Drawbacks include income inequality, cultural erosion, and environmental concerns.
For example, local artisans often lose market share to cheaper, mass-produced goods
from abroad.
34. What is the role of WTO in international trade?
The World Trade Organization (WTO) ensures fair trade practices between nations.
For example, it helps resolve disputes when one country imposes unfair tariffs on
another’s goods.
35. Explain the concept of free trade.
Free trade allows countries to exchange goods and services without restrictions like
tariffs or quotas. For example, India's trade agreement with ASEAN reduces duties on
several products.

Welfare Economics

36. What is welfare economics?

Welfare economics studies how economic policies affect social welfare and resource
distribution. For instance, government subsidies on education improve social welfare
by increasing literacy.
37. What is the role of taxation in welfare economics?
Taxation funds public services like healthcare and education, promoting welfare. For
example, income taxes collected in India are used to run programs like Ayushman
Bharat.
38. What are public goods?
Public goods are non-excludable and non-rivalrous, like street lighting or national
 defense. For example, everyone benefits from a well-maintained public park without
diminishing its availability to others.
39. What is the Pareto efficiency?
Pareto efficiency occurs when resources are allocated so that no one can be made
better off without making someone else worse off. For example, reallocating seats in
a fully booked courtroom could reduce fairness.
40. How does the government promote social welfare?
Governments implement policies like subsidies, healthcare, and employment
programs to promote welfare. For instance, India's Mid-Day Meal Scheme improves
nutrition and school attendance among children.