HARISH.B, M.A. [Link]. LL.

B, PGDM, K-SET

MICRO ECONOMICS
CHAPTER-1 - INTRODUCTION

I. Choose the correct answer (each question carries 1 mark)

1. The scarce resources of an economy have
(a) Competing usages (b) Single usages
(c) Unlimited usages (d) Limited usage
Ans: (a) Competing usages
2. Which of the following in an example of micro economic study?
(a) National income (b) Consumer Behaviour
(c) Unemployment (d) Foreign trade
Ans: (b) Consumer behaviour
4. Central problems of an economy includes
(a) What to produce (b) How to produce
(c) For whom to produce (d) All the above
Ans: (d) All the above
5. Traditionally, the subject matter of economics has been studied under the following broad
branches.
(a) Micro and macro Economics (b) Positive and Normative
(c) Deductive and Inductive (d) Market & Mixed economy
Ans: (a) Micro and Macro Economics.
II. Fill in the blanks (each questions carries 1 marks)
1. Scarcity of resources gives raise to.....................
Ans: Problem of choice
2. In a centrally planned economy all important decisions are made by ………………
Ans: Government
3. __________is a set of arrangements where economic agents can freely exchange.
Ans: Market
4. In reality all economies are …………………..
Ans: Mixed Economies.
III. Match the following (each question carries 1 mark)

1. Market economy a. Government

2. Service of Teachers b. Private ownership
3. Centrally planned economy c. Skill
4. Positive economics d. Evaluation of Mechanism
5. Normative economics e. Functioning of Mechanism
Ans: 1-b; 2-c; 3-a; 4-e; 5-d;
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IV. Answer the following questions in a sentence/word. (each question carries 1 mark)

1. Why does the problem of choice arise?

Ans: An economic problem arises because of limited resources, unlimited wants and alternative
uses of resources.
2. What is market economy?
Ans: A market economy is that economy where economic decisions are undertaken on the basis
of market mechanism by the private entrepreneurs. It is also known as capitalistic economy.
3. What do you mean by production possibility Set?
Ans: The collection of all possible combinations of the goods and services that can be produced
from a given resources and technological knowledge is called the production possibility set
4. What does a combination below the Production Possibility Frontier indicate?
Ans: The combinations below the Production Possibility Frontier indicates that all or some of the
resources are either underemployed or are utilised in a wasteful fashion.
5. Give the meaning of micro economics.
Micro economics studies small units of an economy.

V. Answer the following in 4 sentences. (each question carries 2 marks)

1. Mention the central problems of an economy.
Ans: The central problems of an economy are as follows:
a) What goods are to be produced and in what quantities?
b) How the goods are to be produced?
c) For whom the goods are to be produced?
2. List out the basic economic activities.
Ans: Production, consumption, Distribution and exchange of goods and services are the basic
economic activities.
3. What is production possibility frontier?
Ans: The production possibility frontier gives the combinations of two commodities that can be
produced when the resources of the economy are fully utilized. It is also called as Production
possibility curve (PPC).
4. What do you mean by mixed economy? Give an example.
Ans: Mixed economies are those where some important decisions are taken by the government and
the economic activities are by and large conducted through the market. That means, it is the
economy where both public and private sectors co-exist. Example India, Pakistan etc.
5. Distinguish between positive and normative economics.
Positive Economics Normative Economics

• Here we study how the different • Here we study whether the different
mechanisms function. mechanisms are desirable or not.
• It deals with the scientific explanation of • It explains about ‘what should be and
the working of the economy. should not be done’.
• Focus on functioning of mechanism • Focus on evaluation of mechanisms.
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2. State the differences between Micro and Macroeconomics.

Micro Economics Macro Economics

• It studies small/individual units • It studies in large/aggregates.

• Its scope is narrow • Its scope is wider
• Follows slicing method • Follows lumping method

VI. Answer the following question in 12 sentences. (each question carries 4 mark)

1. Briefly explain how the family farm, weaver and Teacher can use their resources to fulfill
their needs in a simple economy.
Ans: People in the society need many goods and services in their everyday life including food,
clothing, shelter, transport facilities, postal services and various other services like that of teachers
and doctors. In fact, the list of goods and services that any individual needs is so large that no
individual in society has all the things he needs.
Every individual has some amount of only a few of the goods and services that he would like to
use. A family farm may own a plot of land, some grains, farming implements, may be a pair of
bullocks and also the labour services of the family members.
A weaver may have some yarn, some cotton and other instruments required for weaving cloth.
The teacher in the local school has the skills required to impart education to the students.
Each of these decision making units can produce some goods or services by using the resources
that it has and use part of the produce to obtain the many other goods and services which it needs.
For instance, the family farm can produce corn, use part of the produce for consumption
purposes and procure clothing, housing and various services in exchange for the rest of the produce.
Similarly, the weaver can get the goods and services that he wants in exchange for the cloth he
produces in his yarn. The teacher can earn some money by teaching students in the school and use
the money for obtaining the goods and services that he wants.
Thus, each individual can use his resources o fulfill his needs. It is said that no individual has
unlimited resources compared to his needs. The quantity of corn that the family farm can produce is
limited by the quantity of resources it has and hence the amount of different goods and services that
it can procure in exchange of corn is also limited. As a result, the family is forced to make a choice
between the different goods and services that are available. It can have more of a good or service
only by giving up some amounts of other goods or services.

2. What are the central problems of an economy? Explain.

Ans: An economic system or economy is a mechanism where the scarce resources are channelized
on priority to produce goods and services. These goods and services produced by all the sectors of
the economy determine the national income.
Generally, human wants are unlimited and resources to satisfy them are limited. If there was a
perfect match between human wants and availability of resources there would have been no scarcity,
no problem of choice and no economic problems at all. So, one has to select the most essential want
to be satisfied with limited resources. In economics, this problem is called ‘Problem of Choice’.
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The problem of choice arising out of limited resources and unlimited wants is called economic
problem. Every economy whether developed or underdeveloped, Capitalistic or socialistic or mixed
economy, there will be three basic economic problems viz., What to produce, How to produce and
For whom to produce. Let us discuss in detail.
a) What to Produce i.e., what is to be produced and in what quantities:: Every country has to
decide which goods are to be produced and in what quantities. Whether more guns should be
produced or more food grains should be grown or whether more capital goods like machines,
tools, etc., should be produced or more consumer goods (electrical goods, daily usable products
etc.) will be produced. What goods to be produced and in what quantity depends on the
economic system of the country. In socialistic economy, the Government decides and in
Capitalistic economy market forces decide and in mixed economy both the Government and
market forces provide solutions to this problem.
b) How to Produce i.e., how are goods produced?: There are various alternative techniques of
producing a product. For example, cotton cloth can be produced with either handloom or power
looms. Production of cloth with handloom requires more labour and production with power
loom use of more machines. It involves selection of technology to produce goods and services.
There are two types of techniques of production viz., (a) Labour intensive technology and (b)
capital intensive technology.
The firm has to decide whether production be based on labour intensive or capital intensive
techniques. Obviously, the choice of technology would depend on the availability of different factors of
production (land, labour, capital) and their relative prices (rent, wages, interest).
c) For whom to produce i.e., for whom are the goods to be produced: Another important
decision which an economy has to take is for whom to produce. The economy cannot satisfy all
wants of all the people. Therefore, it has to decide who should get how much of the total output
of goods and services. The society has to decide about the shares of different groups of people-
poor, middle class and the rich, in the national output.

Thus, every economy faces the problem of allocating the scarce resources to the
production of different possible goods and services and of distributing the produced goods and
services among the individuals within the economy. The allocation of scarce resources and the
distribution of the final goods and services are the central problems of any economy.

3. Explain the production possibility frontier.

Ans: The production possibility frontier is a graphical representation of the combinations of two
commodities (cotton and wheat) that can be produced when the resources of the economy are
fully utilized. It is also called as Production possibility curve (PPC) also known as
transformation curve.
It gives the combinations of cotton and wheat that can be produced when the resources of
the economy are fully utilized. The production possibility frontier can be explained with the help
of following table.
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Possibilities Cotton Wheat

A 10 0
B 8 1
C 5 2
D 2 3
E 0 4

As per the above table, if a country uses all its resources to grow cotton, it can grow a maximum
of 10 units, which is shown in combination A. Similarly, if all the resources are used to grow
wheat, it can grow a maximum of 4 units of wheat. If the resources are to be used to grow both
the commodities, the combinations of B, C or D can be chosen.
This can be graphically represented as follows:
y
A
B
C
Cotton D

E
O Wheat x

In the above diagram, the combinations A to E, lying on the production possibility curve
represent that a country can produce both the commodities with the help of available resources
and technology. If the points lying strictly below the production possibility curve, it represents a
combination of cotton and wheat, that will be produced when all or some of the resources are
either underemployed or are utilized in a wasteful fashion.
4. Write a short note on a centrally planned economy.
Ans: A planned economy also called as socialistic economy is that economy where the economic
activities are controlled by the central Government. Here, the Government takes decisions about
the allocation of resources in accordance with objectives to attain economic and social welfare.
Example, Russia, China, North Korea etc.
In a centrally planned economy, the basic economic problems are solved as follows:
In centrally planned economy, the Government takes decisions about the allocation of resources
in accordance with the predetermined goals and objectives to attain maximum social welfare.
Government decides what to produce, how to produce and what prices are to be fixed.
▪ Regarding what to produce, the Government may produce those goods and services
which are most useful for its society.
▪ Regarding how to produce, the most suitable technique in production is adopted
whether labour intensive or capital intensive in accordance with the situation in the
economy.
▪ Regarding whom to produce, the goods and services are produced to those people
who are suffering from hunger though there is a loss.
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▪ It gives importance to the quality of life rather than quantity of production.

▪ It focuses the resources on rapid economic development.

5. How does the market economy work?

Ans: A market economy also known as capitalistic economy is that economy in which
the economic decisions are undertaken on the basis of market mechanism by the private
entrepreneurs. It functions on demand and supply conditions. In USA, Japan, Autralia, UK and
other countries we can see Market Economic systems.
In market economy, private individuals own the factors of production. Here, the profit is
the main goal of business. There is least intervention of Government.
Price mechanism plays a major role in market economy. It is a balancing wheel of the
market mechanism. Prices coordinate decisions of the producers and consumers. The price is
determined by demand and supply in the market. No individual organization or Government is
responsible for the production and distribution or pricing of goods. All depend on market
mechanism.
Regarding basic problems of an economy, the problem of what to produce is solved on
the basis of demand and profit. The producers produce those products which bring more income.
The problem - how the goods are to be produced is determined by the competition among
different entrepreneurs. The select least cost combination of technology so that they can get
more returns with less cost.
In market economy, the problem of whom to produce is decided on the basis of
purchasing power of consumers. The producers produce commodities to the rich as they can
afford to pay more but poorer sections of the society are neglected.
In Market economy, profits and losses play a predominant role in growth and
development of every producer.

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