Introduction 1.

21

REVISION OF KEY POINTS

Economy is a system which provides people with the means to work and earn a living
Scarcity refers to a situation in which resources are insufficient to meet all the human wants.
Economising of resources refers to making optimum use of the available resources.
Economic problem is a problem of choice involving satisfaction of unlimited wants out of limited
resources having alternative uses.
Economics is a social science which studies the way, a society chooses to use its limited resources, which
have altemative uses, to produce goóds and services and to distribute them among different groups of people.
Two branches of Economics are Microeconomics and Macroeconomics
economy.
() Microeconomics is that part of economic theory which studies behaviour of individual units of an
(ii) Macroeconomics is that part of economic theory which studies the behaviour of aggregates of the
economy as a whole.
Positive Economics deals with what are the economic problems and how are they actually solved. For
example, India is an overpopulated country or prices are constantly rising.
Normative Economics deals with what ought to be or how the economic problems should be solved.
For example, India should not be an overpopulated country or prices should not rise.
Distinction between Microeconomics and Macroeconomics
(a) Microeconomics studies the economic behaviour of individual units, whereas, macroeconomics studies
the economy as a whole.
(b) Main tools of microeconomics are demand and supply. whereas, main tools of macroeconomics are
aggregate demand and aggregate supply.
(c)Basicobjective of microeconomics is price determination, whereas, basic objective of macroeconomics
is determination of equilibrium level of income and employment.
(a) The aggregates of microeconomics have limited degree of aggregation as compared to aggregates of
macroeconomics.
Major Central Problems are:
()What to produce: lt refers to selection of goods and services and quantity to be produced of each
selected commodity.
(i) How to produce: It deals with the selection of technique, i.e. to use labour intensive or capital intensive
technique for the production of goods and services.
(i) For whom to produce: This problem relates to the distribution of produced goods and services among
the individuals within the economy
Opportunity Cost is the cost of the next best alternative foregone.
Production possibility frontier (PPF) refers to a graphical representation of all the possible
combinations of two goods that can be produced with the given resources and technology.
() PPF slopes downwards as more of one good can be produced only by taking resources away from
the production of another good.
(i) PPF is concave shaped because of increasing marginal rate of transiormation (MRT), i.e. more and
more units of one commodity are sacrificed to gain an additional unit of another commodity.
(i) All Points inside PPFare inefficient. Points onthe curve are efficient. Points outside the curve are impossible.
(iv) Rotation of PPF occurs when there is a change in technology or resources for one commodity onily.
() Shift in PPF occurs when there is a change in technology or resources for both the goods. PPF shitts
towards right in case of an increase in resources or technological upgradation. PPF shifts towards left
when there is a decrease in resources or technological degradation.
 Introductory Microeconomics
1.22

Synonyms or Similar Terms of this Chapter

Positive Economics Positive Science
Normative Economics Normative Science
Microeconomics Price Theory
Macroeconomics Income and Employment Theory
Production Possibility Frontier (PPF) Production Possibility Curve (PPC)
Production Possibility Boundary
Transformation Curve
Transformation Boundary
Transformation Frontier

HOTS HIGHER ORDER THINKING SKILLS QUESTIONS

Q.1. Although water is useful, yet it is cheap. On the contrary, diamond is not much of
use, still t is very
expensive. Give an economic reason for this paradox.
Ans. The economic reason for this paradox is scarcity. Although water is useful, yet is
it cheapp due to its
abundance in the economy. Diamonds are very expensive because they are scarce and people
are ready
to pay a high price.
Q.2. "Only scarce goods attract price." Comment.
Ans. The given statement is correct. All resources are not scarce in the economy. For example, the air we
breathe is abundant in relation to wants. Such goods are available free of cost. These goods are krnown as
Non-Economic Goods. On the other hand, some goods are scarce in relation to their wants. For example,
petrol, electricity, etoc. are scarce in relation to wants. These goods command price and are known as
Economic Goods. So, it is rightly said that only scarce goods attract price.
a.3. What does the slope of PPF indicate?
Ans. PPFis a downward sloping concave shaped curve.
() ts downward slope indicates that more of one good can be produced only by taking resources away
from the production of another good.
(i) ts concave shape indicates that more and more units of one commodity have to be sacrificed to
gain an additional unit of another commodity.
a.4. "Scarcity and Choice go together". Comment.
Ans. We live in a world of scarcity. All of us want better food, clothing, housing, schooling, entertainment
etc. But resources are not enough to meet all our wants. Even the richest economy (like U.S.A.) cannot
satisfy al the needs of people. It means, scarcity of resources is a common feature of every economy
and it gives rise to the problem of choice, i.e. how to make the best possible use of available resources. If
resources were available in plenty, there would not have been any problem of choice. Hence,
economics
is concerned with the problem of choice under the conditions of scarcity.
Q.5. "An economy always produces on, but not inside, a
PPF", Defend or refute
Ans. The given statement is refuted. An economyY
operates on PPF only when resources are Resources are fully
fully and efficiently utilized. It means, if there is and efficiently utilised
unemployment or inefficient use of resources,
then the economy may operate inside the
PPF So, the economy may operate at point'H'
(Fig. 1.14), in addition to the points on the curve
AB on PPF Resources are underutilised
or inefficiently utilised

Good X

Fig. 1.14
Introduction 1 3

Q.6. Alot of people died and many factories were destroyed in an earthquake. How will t affect the PPF
of the economy?
Ans. PPF of the economy will shilt to the left from PP to P,P, (rofor Fig. 1.8). happens because the number
IN

resources in
of possible combinations available with the economy has decreased, due to destruction of
the economy.
Q.7. Massive unemployment will shift the PPF to the left. Defend or refute.
of economy to
Ans. The given statement is refuted. Massive unemployment does not decrease the capacity
inside the PPF,
produce. So, there will be no shift of PPF However, economy will operate at some point
due to unutilisation of hunan resources.
Q.8. On the basis of given diagram, answer the following questions:
() On the production possibility curve AE, the economy
if

decides to produce 50 million tonnes of wheat, then how 00

many tanks it can produce?
(i) If there is growth in resources, what will happen to the 2 .G

production possibility curve?

(ii) Which point in the diagram represents underutilisation of
resources?
(iv) Which of the points in diagram is an unattainable
combination? 50X
ldentify the point at which the economy will operate
if
(V) Wheat (in million tonnes)
resources are fully and efficiently utilised.
Ans. (i) Zero Tanks.
() The production possibility curve will shiit towards right.
(ii) PointF
iv) Point G.
(v) lf resOurces are fully and efticiently utilized, then economy can operate at any point (like points A,
B, C, Dor E) on the production possibility curve.

ldentify the following as Microeconomic study and Macroeconomic study: Production of a sugar
(i)
Q.9.
mill; (i) Inflation rate; (i) Car Industry; (iv) Supply of money; (v) Wage determination in a company:
(ix) Foreign
(vi) Allocation of resources; (vii) Household expenditure; (vii) Aggregate demand;
exchange rate; (x) Market demand for apples.
Ans. Microeconomic Study: (); (i); (0), (vi), (vi); (x). Macroeconomic Study: (i), (iv), (vii), (ix).
Q. 10. Why do problems related to allocation of resources in an economy arise? Explain.
Ans. What to produce, how to produce and for whom to produce are the problems related to allocation of
resources in an economy. These arise because resources are scarce and have alternative uses. The
economy has to decide which possible goods and services it wil produce. It has to decide whether to use
more labour or more machines. It has also to decide atbout the distribution of goods among individuals.
a.11. Production in an economy is below its potential due to unemployment. Government stats employment
generation schemes. Explain its effect using production possibilities curve.
OR
Asa result of various programmes started by the government, more employment opportunities have
been created. What will be its effect on production possibilities frontier? Explain.
Ans. Production below the potential means that total production in the economy is somewhere below the
production possibility curve PP, for example at point U in the diagram.
 Microeconomics
Introductory

1.24 Y

Good Y

Ol
GoodX
produoction is
since the below potential
employment generation schemes,
and reach
When govemment starts attempt to remove unemployment and
economy moves forward in its
due to unemployment, the forward towards the PP curve.
is
the potential. The movement
curve concave? Explain. transtormation
Q. 12. Why is production
possibility
origin because ofincreasing marginal rate of
concave to the another
Ans. Prooduction Possibility
Curve is
are sacrificed to gain an additional unit of
one commodity
(MRT), ie. more and more units of
As
commodity resource is equally efficient in production of all goods
that no employed.
MRT increases because it is assumed and less efficient resources have to be
toanother, less
resourcesare transferred from one good
This raises cost and raises MRT
Transformation? Explain with help of an example.
Q. 13. What is Marginal Rate of more unit of the other
rateat which the units of onegood have to be sacrificed to produce one
Ans. MRTis the
good in a two goods economy that by employing these
an economy produces only two goods X and Y. Further suppose
Suppose 10Y. IF the economy decides to produce
2X,
efficiently, the economy produces 1X+
resources fully and 1X. Then 2Y:1X
it has to cut down production of by 2 units.
Y Then 2Y is the opportunity cost ofproducing
is the MRT
Q. 14. Why does the problem of 'what produce'
to arise? Explain.
alternative uses. Since many goods and services can
Ans. It arises because resources are scarce and have
that which of these should be produced.
be produced from these resources, the problem is
Explain.
Q. 15. Why does the problem of 'how to produce' arise?
production. Broadly, the choice is between capital
Ans. tarises due to availability of alternative techniques of
which one to employ.
intensive techniques and labour-intensive techniques. The problem is that
What will be the impact of recently launched 'Clean India Mission' (Swachh
Bharat Mission) on the
Q.16.
Production Possibilities curve of the economy and why?
Ans. Cleanliness reduces chances of people falling ill and, thus can ensure better health. This in turn will reduce
forced absenteeism from work, raise efficiency level and thus raise country's production potential. Rise
in this potential shifts PP curve to the right.

a.17. What will likely be the impact of large scale outflow of foreign capital of Production Possibilities
curve of the economy and why?
Ans. Large scale outfiow of foreign capital from the economy will reduce resources and thus production potential
of the country will fal. Fall in production potential in turn will shift the PP Curve downwards.
a. 18. Whatis likely to be the impact of "Make in India'"'appeal to the foreign investors by the Prime Minister
of India, on the production possibilities frontier of India? Explain.
Ans. Make in India' appeal signifies invitation to foreign producers to produce in India. This will lead to increase
in resources thus raising production potential of the country. As a result PP Gurve ill shift upwards.
Introduction 1.25

Q. 19. What is likely to be the impact of efforts towards reducing unemployment on the production potential
of the economy? Explain.
Ans. Reducing unemployment has no effect on the production potential of the country. Itis because production
potential is determined assuming full employment.
Unemployment indicated that the country is operating below potential. Reducing unemployment simply
helps in reaching potential.
Q.20. What will be the impact of "Education for All campaign" (Sarv Shiksha Abhiyan) on the Production
Possibilities Curve of the Indian economy and why?
Ans. Education raises efficiency by making a worker a skilled worker. This willincrease production potential
shifting the PP curve upwards.
a.21. Explain the effects of floods in Jammu and Kashmir on its production possibilities frontier.
Ans. Floods have damaged and reduced resources. Since potential production declines the production
possibility frontier shifts to the left.
will t
a.22. The Government establishes a large number of Institutes of science and technology. How
affect the production possibility frontier? Explain.
Ans. Bythese institutes skill development will improve. This would result in increase in the production potential
of the country So the PP will shift to the right.
Q.23. Do rich countries also face central problems? Give reasons for your answer.
unlimited.
Ans. Yes, even in rich countries, resources are scarce, having alternative uses and wants are
Q.24. Assuming that no resource is equally efficient in production of all goods, name the
curve which
shows production potential of the economy. Explain, giving reasons, properties.
its
Two Properties of PPF
Ans. The curve is called Production Possibilities Frontier (PPF). Discuss the following
(i) PPFis downward sloping; (ii) PPF is Concave Shaped.

Q. 25. Explain the concepts of Opportunity Cost and Marginal Rate of Transformation using a
production
efficient in production of
possibility schedule based on the assumption that no resource equallyis
all goods.
Y.
Ans. Suppose the only two goods produced are X and

Combinations X(Units) Y(Units) MRT(AY:AX)

20
B 18 2Y:1X
2 14 4Y:1X
C
D 6Y:1X
4 0 8Y:1X
Opportunity Cost refers to the quantity of one good foregone to obtain more quantity of the other good.
units of Y to obtain one
For example, when we move from combination A to B, the economy foregoes 2
more units of X. So, opportunity cost of obtaining 1X is 2Y.
MAT means quantity of one good sacrified to produce an additional unit of the other good. For
example,
when we move from combination B to C, the MAT is 4Y:1X. MAT increases as to produce more of good
Y.
X, we need to transfer less and less efficient resources from good

Q.26. Why does the problem of choice arise for producers and for consumers?
uses.
Ans. The problem of choice arises for producers because resources are limited and have alternative
The problem of choice arises for the consumers because their wants are unlimited while
resources to
fulfil these wants are limited.
Q. 27. The following news item was printed in the Indian Express: "Centre increases number of
work days
under MGNREGA". As per the news, the Central Government will increase the number workdays
of
1.26 Introductory Microeconomics
under the rural job guarantee schome from 100 to 150 in drought-affected areas. How would it
affect the PPC of the economy.
Ans. There will be no effect on PPC as thero is no incrgase in the productive capacity of the economy. However,
actual level of employment and output will increase due to increase in workdayS
Q. 28. Explain the
shape of a production possibility frontier.
SOduction Possitbilty Frontier (PPF) is a downward sloping, concave curve. It shows increasing Marginal
te ofTransfomation (MRT) as more quantity of one good is produced by reducing quantity of the other
This behaviour of the MRT is based on the assumplion that all less and less efficient resources
d.
ve to be transterred to the production of the
other good which raises marginal cost, iLe. MAT
Q.29. State the problems relating to'allocation of resources' in an economy.
Ans. The three problems of allocation of resources are:
1. What goods to
produce and in what quantities?
2. How. i.e. by which technology, to produce?
3. For whom to produce?
Q.30. Economic slow down in some parts of the world has adversely affected demand for Indian exports.
What will be its effect on the production possibilities frontier of India? Explain.
Ans. There will be no effect on Production Possibility
Frontier (PPF) because PPF shows only what a country
can potentially produce and not what it actually produces. Slow
down by reducing demand for exports,
may ultimately bring down output. Assuming that the
country's actual production is somewhere on the
PPF slow down may result in the country producing at a point somewhere
Q.31. ldentify the following as
below the PPF
Positive Statements and Normative Statements:
) People should save more for their future.
i) In India, pollution is increasing at an alarming
rate.
(ii) The Government should impose heavy
taxes on rich people.
(iv) Smoking should be discouraged
in the world.
(v) In India, tax rate slabs increase with
increase in income.
(vi) Higher interest rates induces
people to save more out of their income.
(vii) High taxes on cigarettes
discourage smoking
(vii) Government should put more efforts to
reduce pollution.
Ans. Positive Statements: (i), (v), (vi); (vi);
Normative Statements: (i), (i), (iv),
Q. 32. 'An economy may (vii).
operate inside the PPC even if
refute. there is full employment of
resources' Defend or
Ans. The given statement is defended.
When the resources are not
operate inside the PPC even if there full utilised efficiently, then an economy
is employment of resources. may
a. 33. ldentify and discuss the nature of following
the newspaper reports in terms of
economic analysis: positive or normative
() "India jumped 23 points in the World
in 2 years."- The Economic
Bank's ease of doing business
Times. index to 77th place, highest
(ii) "Government should
further liberalise the business
(ii) The autonomy of the central rules"-The Economic Times.
bank of a country should
(iv) Nominal Gross Domestic be maintained as per
Product (GDP) is calculated the law.
() Government should try to control on the basis of 'current
the rising fiscal deficit. year prices'.
(vi) Real Gross Domestic
Product (GDP) is calculated
(vi) Consumer price index on the basis of
presents a more realistic 'base year price'.
the wholesale price Index. picture of the inflation
rate in a country, than
(vii) Subsidies should
be offered very carefully.
Introduction 1.27
Ans. Positive Statement: (), (iv), (vi), (vi). Aeason: t deals with a real life situation, justifiable by facis
Normative Statement: (i), (i), (). (vi). Reason: t deals with a situation as it'ought to be'
Q.34. Fill in the blanks with appropriate words:
() The Marginal Rate of Transformation (MRT) is constant. The Production Possiility Curve, so
formed, would be . to the origin.
() deals with study of cotton textile industry.
(ii) ndia should take steps to control rising population'. It is an example of statement.
(iv) The basic reason for economic problem in all economies is . of resources.
(v) A Production Possibility Curve (PPC) would be convex to the origin if Marginal Rate of
Transformation (MRT) is
The cost of next best alternative foregone is called as.
(vi)
Ans. (0 Straight line; (i) Microeconomics: (il) Normative; (iv) Scarcity: (v) MAT is declining: (vi) Opportunity
Cost.
Q.35. "Problem of resource allocation would not arise, if resources do not have alternative uses" Defend
or refute the statement with valid arguments.
Ans. Yes, the given statement is correct. The economic problem of
resource allocation arises because resources
are scare and can be put to alternate uses. Ifa resource can be put only to a specific use then the problem
of resource allocation would not arise
a. 36. Complete the table and comment on shape of Production Possibility Curve:
Good X Good Y MarginalRate of
Possibilities Transformation (MRT)
units) (units)
20
B 6Y:1X
C 9 ?
D 4Y:1X
E 4 2
5 2Y:1X
Ans.
Good MarginalRate of
Possibilities Good X
(units) w.wp (units) Transformation (MRT)
20
14 6Y:1X
C 9 5Y:1X
D Y:1X
E 2 3Y:1X
2Y:1X
Production Possibility Curve (PPC) is convex shaped due to decreasing MAT, i.e. less and less units of
Commodity Y are sacrificed to gain an additional unit of commodity X.
a. 37. Gulf countries have acquired more capital goods by selling oil to various countries. What would be
its impact on Production Possibility Curve
Ans. Due to increase in capital goods, production capacily of the Gulf countries willincrease. As a result,
Production Possibilly Curve will shift towards right.
a. 38. After completing the BBA, Kanishk wants to do job, while his parents want him to pursue higher
studies. What is the opportunity cost of opting for higher studies instead of doing a job?
Ans. Opportunity cost is the salary that Kanishk would have earned in doing the job.
 1.28 Introductory Microeconomics

NCERT QUESTIONS GUIDELINES

1. Discuss the central problems of an economy.
Hint: Discuss "What to produce, How to produce
and For whom to produce"
2. What do you mean by the production possibilities of an economy?
iInt Production possibilities of an economy refer to the different combinations of goods and services which
an econom)y can produce from a given amount of resources and a given level of technological knowledge
3. What is a production possibility frontier?
Fint: Production possibiltly frontier relers to a graphical representation of all the possible combinations of
two goods that can be produced with
the given resources and technology.
4. Discuss the subject matter of economics.
Hint: The subject-matter of economics is microeconomics and macroeconomics.
5. Distinguish between a centrally planned economy and a market economy.
Hint: Discuss "Market Economy Vs Centrally Planned Economy"
given in Power Booster Section.
6. What do you understand by positive economic analysis?
Hint: Positive Economics deals with what are the economic
problems and how are they actually solved.
7. What do you understand by normative economic analysis?
Hint: Normative Economics deals with what ought to be or how
the economic problems should be solved.
8. Distinguish between microeconomics and macroeconomics.
Hint: Discuss "Difference between Microeconomics and
Macroeconomics"given on Page No. 1.6.

OBJECTIVE QUESTIONS
FILL IN THE BLANKS

1. Scarcity refers to the limitation of in relation to

.
for a commodity.
2. deals with study of jute industry.
3. Science deals with what ought to be or how the economic problems should be
solved.
4. Microeconomics is that part of economic theory which studies the behaviour of
of an economy.
. units
5. is the cost of next best alternative foregone.
6. The problem of involves selection of goods and services to be
produced and the
quantity to be produced of each selected commodity.
7. Production Possibility Frontier is . shaped because of increasing marginal
transformation. rate of

8. Macroeconomics is also known as

9. is also known as Price Theory.

10. is a system which provides people with the means to

work and earn a living.
11. is that part of economic theory which studies the
behaviour of aggregates of the
economy as a whole.
Introduction 1.29

12. Economics deals with what are the ecoomic problems and how are they actually
solved
13. Production Possibility Frontier is convex shaped when marginal rate of transformation is
14. Two branches of Economics are. and.
15. Growth of resources shifts the production possibility frontier towards
16. The part of economics which deals with the question of what, how and for whom to produce is known
as.
17. The problem of, deals with technique of production.
18. PPF will shift towards when there is technological degradation in oase of both the
goodS.
Ans. 1. Supply, Demand, 2. Microeconomics, 3. Normative, 4. Individual, 5. Opportunity Cost,
6. What to Produce. 7. Concave, 8. IncomePositive,
and Empioyment Theory 9. Microeconomics
10. Economy, 11. Macroeconomics, 12. 13. Decreasing, 14. Microeconomios,
Macroeconomics, 15. Right, 16. Microeconomics, 17. How to Produce, 18. Left.

TRUE OR FALSE with REAsONS

1. The problem of 'how to produce involves choice between consumer goods and capital goods.
False. The problem of how to produce' deals with choice of technique to be used for production of goods
and senvices.
Economy always operates on production possibility frontier.
False. Economy operates on productionpossibility frontier (PPF) only when resources are fully and efficiently
any point inside PPF
utilised. If resources are not fully and efficiently utilized, then economy operates at
3. Macroeconomics deals with study of cotton textile industry.
So, it is studied under
False. Cotton textile industry is a micro concept as it is one of the part of industry.
microeconomics.
4. If the economy is operating inside the production possibility frontier, it indicates that the economy is
saving resources for growth and expansion in future.
False. It indicates that there is underutilisation or inefficient use of resources.
are found only in the developing economies like India and Bangladesh and not in
5. Central problems
developed countries like USA.
and developing economies) as every
False. Central problems are found in all economies (both developed
economy faces problem of scarcity of resources.
6. Production possibility frontier shifts towards right when an economy moves from a situation of
underutilization to fuller utilization of resources.
False. Production possibility frontier (PPF) will remain at its original position. Rather, economy will now
operate on the PPE
Economy can never operate outside the production possibility frontier with the given resources and
technology.
True, as all points outside production possibility frontier are unattainable.
possibility frontier is concave shaped as production of one good can be increased
only by
8. Production
reducing quantity of another good.
False. Production possibility frontier is concave shaped due to increasing marginal opportunity cost.
9. The problem of price determination of a product comes under the purview of macroeconomics.
False. It comes under the purview of microeconomics.
1.30 Introductory Microeconomics
-
10. Growth of resources shifts the production possibility frontier towards right.
True. Growth of resources increases the capacity of economy to produce more. It shifts the production
possibility frontier towards right.
11. Microeconomics is concerned with study of problems of the economy like inflation or unempioyiment.
False. Macroeconomics is concerned with study of aggregates like inllation or unemployment.
12. Microeconomics and macroeconomics are independent branches of economics.
False. Microeconomics and macroeconomics are interdependent.
13. The opportunity cost of a machine which can produce only one product is high.
False. The opporturnity cost of such machinery will be zero as it has no alternative use.
14. Economising of resources refer to saving resources for future use.
False. It refers to making optimum or best possible use of available resources.
15. 'No Scarcity' means no economic problem.
True. lf there is no scarcity, then there would be no economic problem as scarcity is the basic reason
for

economic problem.
16. The part of economics which deals with the question of what, how and for whom to produce is known
as macroeconomics.
False. Microeconomics deals with the question of what, how and for whom to produce.
17. Production Possibility Curve shows the point at which the economy actually operates.
False. Production Possiblity Curve (PPO) does not show the point at which the economy wil actualy
operate. It only shows the maximum available possibilities, which an ecoomy can produce. The exact point
of operation depends on how well the resources of the economy are used.
MATCHING TYPE QUESTIONS
Q.1. From the set of statements given in Column and Column
l
lI, choose the correct pair of statements:
Column Column
(a) Microeconomics () Tools are aggregate demand and aggregate supply
(b) Normative Economics (i) Aims to determine the ideals
(c) Opportunity Cost (ii) Cost of best alternative
(d) Production possibility (iv) Convex shaped
frontier

Ans. (b) Normative Economics () Aims to determine the ideals

Q.2. Match the statements given under A with the correct options given under B.
(A) (B) wewA

i) Macroeconomics a. Aims to determine price of a commodity

b. Aims to determine income and employment level of the economy

Ans. () b.
Q.3. Match the statements given under A with the correct options given under B.
(A) (B
(i) Positive Economics a. It is suggestive in nature
Ci) Normative Economics b. It is not suggestive in nature
Introduction 1.31

Ans. (i) b; (i) a.

Q.4. Match the statements given under A with the correct options given under B.
(A) (B
(i) Opportunity Cost a. Technique to be used for production of goods and services
(ii) Positive Economics b. Concave Shaped

(ii) Production Possibility C. Cost of next best alternative foregone

Frontier
(iv) How to Produce d. Deals with how the economic problems are actually solved

Ans. () c; (i) d; (ii) b; (v) a.

Q.5. Match the statements given under A with the correct options given under B.
(A)

() Normative Economics a. Transformation Curve

(ii) Microeconomics b. Discovery of new natural resources
(ii) Growth of Resources C. It is suggestive in nature

(iv) What to Produce d. Cotton Industry

(v) Production Possibility e. Selection of goods and services to be produced
Frontier

Ans. (i) c; (i) d; (i) b; (iv) e; (v) a.

(MCQs) MULTIPLE CHOICE QUESTIONS and
(MRQS) MULTIPLE RESPONSE QUESTIONS

In the following Questions, there may be one or more than one correct answer.
You have to mark all the correct answers

1. The law of scarcity

(a) Does not apply to rich, developed countries.
(b) Applies only to the less developed countries.
(c) Implies that consumers want will be satisfied in a socialistic system.
(d) Implies that consumer's wants will never be completely satisfied.
2. Assume that a PPF for butter and guns is drawn so that it is a straight e. means:
It

(a) Less and less units of butter are sacrificed to gain an additional unit of gun.
(b) More and more units of butter are sacrificed to gain an additional unit of gun.
(c) Same units of butter are sacrificed to gain an additional unit of gun.
(d) None of these..
3. Which of these is not an assumption of PPC?
(a) Resources are not fully employed
(b) Resources in the economy are fixed
(c) There is no change in level of technology
(d) Resources are equally efficient in production of all products
4. In which situation, can PPC be a straight line:
(a) When MRT is decreasing (b) When MRT is increasing
(C)When MRT is constant (d) None of these
 Introductory Microeconomics
CS
1.32
of production
5. Which of these economic problem deals with technique
(b) How to
Produce
(a) What to Produce
(c) For whom to Produce (d) None of these
two job offers: (9
o wOTK as an
per month. He receives
b. Hamesh is working at a salary of 35,000 manager at a salary or k 25,000
at a salary of 30,000 per month;
R (i) To work as a sales
accountant
be
per month. In the given case, his opportunity cost will
(a) 25,000 (b) 30,000
(d) T65,000
(c) 35,000
7. PPF is concave to the origin because of:
(b) Diminishing MRT
(a) Increasing MRT
(d) None of these
(c) Constant MRT
8. An economy operate on PPF when there is: resources
(b) Inefficient use of
(a) Optimum utilisation of resources
(d) Fuller utilisation of
resources
(c) Underemployment of resources
to be produced:
Identity the central problem which deals with deciding the quantity of goods
9.
(b) How to Produce
(a) What to Produce
(d) None of these
(c) For whom to Produce
for a commodity.
10. Scarcity refers to limitation of. in relation to .
(b) Demand, Supply
(a) Demand, Sale
Supply, Demand (d) None of these
(c)
with the word:
11. The word 'Economics' is most closely connected
(b) Scarcity
(a) Free
(d) Restricted
(c) Unlimited

12. A point outside the PPF indicates:

(b) Unutilisation of resources
(a) Fuller utilisation of resources
(c) Unattainable combination (d) None of these

13. Opportunity cost is the:

(a) Number of units sacrificed (b) Number of units gained
(c) Cost of next best alternative foregone (d) None of these
category of people who willultimately consume the goods
14. Which economic probleminvolves selection of
(a) How to produce (b) For whom to produce
(c) What to produce (a) None of these

15. Which of the following will lead to shift in PPF?

(a) Upgradation of Technology (b) Exploration of new oil reserves
(c) Massive unemployment (d) None of these

16. The fundamental economic problem being faced is:

(a) Unlimited human wants (b) Limited wants and unlimited resources
( c) Unlimited wants and scarcity of resources (d) Limited wants and limited resources

17. Which part of economic theory aims to determine income and employment level of the economy?
(a) Microeconomics (b) MacroeconomicCS
(c) Neither (a) nor (b) (d) Both (a) and (b)
Introduction 1.33
18. What will happen to PPF if there is technological upgradation in case of both the goods?
(a) Rightward shift in PPF (b) Loftward Shilt in PPF
(c) Rotation of PPF (d) None of thése

19. Answer the following questions with the help of following diagram:

Ol
X
Butter (in units)

() Which of the following point represents underutilisation of resources?

(a) G (b) E
c) A (d)F

(ii) Which of the following point represents fuller and efficient utilisation of resources?
(a) B (b) G
(c) F (d) None of these

(ii) Which of the following point shows unattainable combination?

(a) C (b)F
(c) G (d) A

20. Labour-intensive techniques are chosen in a:

(a) Labour-surplus economy (b) Capital-surplus economy
(c) Developed economy (d) Developing economy

21. Which of the following is related to Microeconomics?

(a) Jute Industry (b) Unemployment Problem
(c) National income (d) Income from Postal department

22. Which of the following is a cause of economic problem?

(a) Scarcity of Resources (b) Unlimited Wants
(c) Alternative Uses (d) All of these

23. Which of the following is a central problem of economy?

(a) How to Produce (b) When to Produce
(C) What to Produce (d) For whom to Produce

24. Which of the following illustrates a decrease in the unemployment using the PPC?
(a) A movement down along the PPC
(b) A rightward shift of the PPC
(C) A movement from a point on the PPC to a point inside the PPC
(d) A movement from a point insido the PPC to a polnt towards the PPC

25. The problem of What to produce' covers the issue relating to:
(a) What goods are to be produced (b) What quantities of goods to be produced
(c) Both (a) and (b) (d) Nelther (a) nor (b)
 Introductory Microeconom
omics
1.34
26. Consider the following table: D E
A B 4
Production Possibilities 3
1 2
Guns (Units) 4 0
Butter (Units) 10 9
2 to 3 unins units of butter.
)Ihe opportunity cost of increasing guns production from
(a) 7 (b) 2
(c) 4 (d) 3
(ii) All possibilities A to E deal with:
(b) Under-utilisation of
available resources
(a) Full use of available resources
(d) Demand for more
resources
(c) No use of available resources
of butter, then:
at some other point say G, the economy produces 2 units of guns and units
6
(11) If

(b) Economy would operate at a point

below PPE
(a) It represent under-utilization of resources
(c) Both (a) and (b) (d) Neither (a) nor (b)
(iv) above points A to E are depicted on a graph, then such PPF would be
If the
(a) Convex to the origin (b) Concave to the origin
(c) Straight line (d) Rectangular hyperbola
27. Economics is the study of:
aHow society manages its unlimited resources (b) How to reduce our wants until we are satisfied
(c) How society manages its Scarce resources (d) How to fully satisfy our limited wants
28. Which point on the following PPC shows a "productively efficient level of output?

.G

F
E
X
Butter (in units)
(a) A
(b) B
(c) E
(d) All of these
29. In deciding "How to produce", the economy
(a) Labour Intensive Techniques
should consider:
(c) Both (a) and (b) (b) Capital Intensive
(d) Neither (a)
Techniques
30. Opportunity Costs arise: nor (b)
(a) When there is only course
of action
(c) Both (a) and (b) b When there are two
(d) Neither (a) or more alternative course
31. Which of these statement is true nor (b)
(a) It shows various about production possibility
combinations of two curve?
(b) It shows various goods which yield same
combination of two level of satisfaction.
resources and technology. goods which an economy
(c) It shows various
can produce
combination of two with a given amount O
(d) It shows various goods which an economy
goods which an economy can produce with a given budget.
combination of two
can produce
with a given
time.
 1.35
Introduction

32. The Production Possibility Frontier is generally:

(a) Convex Shaped Downward Sloping (b) Concave Shaped Downward Sloping
(d) Neither (a) nor (b)
(c) Either (a) or (b)
India', there has been large inflow of foreign capital.
It will lead to the following change
33. Due to Make in
in PPC:

-----.. ..
X
X X Good X Good X
GoodX Good
(c) (d)
(a) (b)

34. The shift in PPC is caused due to:

X
Butter (units)

(a) Increase in resources for production of both the goods

(b) Increase in resources for production of butter only
(c) Increase in resources for production of guns only
(d) None of these
35. In case of decreasing MRT, the shape of PPC will be depicted
by the following diagram:
. Y

X A
>X >X O Good X O GoodX
.Good X
GoodX .

(b) (c) (d)

(a)
36. The following change in PPC is due to:

X
Good X
R (b) Destruction of Resources
aMassive Unemployment
(c) Increase in Resources (d) Fuller Utilisation of Resources
 Introductory Microeconom
nics
1.36
'Unattainable are
points of 'Underutilisation' and
37, In the order of sequence, the

F.

E
>X
Good X
(a) A and F (b) Fand E
(c) DanddE (d) E and F
38. Which of the following is an assumption of Production Possibility Frontier
(a) Resources are not fully employed.
(b) Resources are not equally efficient for production of the two goods.
(c) Resources are not efficiently employed.
(d) Resources available are not fixed.
39. Macroeconomics focuses on all of the following except:
(a) Allocation of Resources (b) Inflation in the Economy
(c) Aggregate Demand (d) Jute Industry
40. Which of the following is an example of a Positive Economy:
(a) India is taking steps to control rising prices (b) There are inequalities of income in our economy
(c) India should not be an overpopulated country (d) Income inequalities should be reduced
41. The statements like 'Economy should control poliution' or 'Unemployment in the economy ought to be
reduced' fall within the scope of:
(a) Normative Statements (b) Positive Statements
(c) Both (a) and (b) (d) None of these
42. An economy has 2 alternatives of production from the available resources: (i) 20X + 1Y; or (i) 18X4
2Y. If the economy chooses the second alternative, then what is the MOC of producing Y:
(a) 1X (b) 2X
(c) 1Y (d) None of these
43. The Opportunity Cost arises:
(a) When there is just one alternative (b) When there are two or more alternatives
(c) Either (a) or (b) (d) None of these

44. In the context of rising prices, following statements are made by two people
Udit: Prices in the economy are continuously rising;
Shivam: The Government should take reasonable steps to control rising prices.
Identify the statements as Positive Statement and Normative Stateme
(a) Udit: Positive; Shivam: Normative (b) Udit: Normative; Shivam:
Positive
(c) Both are Positive Statements (d) Both are Normative
Statements
45. Production Possibility Frontier is:
(a) Downward Sloping (b) Concave Shaped
(d) Either (a) or (b)
(c) Both (a) and (b)
a6. In the given figure, the
movement on the production possibility curve from point A to point B
shows (Choose the correct alternative)
 1.37
Introduction
Good Y

O
GoodX

(a) Growth of all the resources in the economy.

(b) Underutilisation of resources
(c) Production of more units of Good X and less units of Good Y.
(d) Production of more units of Good Y and less units of Good X
period T, and T2
47. Inthe given figure X,Y, and X,Y2 are Production Possibility Curves in two different
P2 represent
respectively for Good X and Good Y. A, and A, represent actual outputs and P, and
potential outputs respectively in the two time periods.
Good Y

A Good XX

The change actual output of Goods X andY over the two periods would be represented by movement
in

from (Fill up the blank)

(a) A,to P2 (b) A, to P2
to Az (d) A, to A
(c) P
48. Shift from Point A on Production Possibility Curve x,Y, to Point B on XY, in the given figure indicates:
(Choose the correct alternative)
Good Y

--

GoodX
Ol

(a) Decrease in resources (b) Increase in resources

(c) Full and efficient utilisation of resources (d) Wastage of resources

49. Inthe given figure X,Y, and X,Y2 are Production Possibility Curves in two different time periods T
and T respectively. A, and A represent actual outputs in T, and T, periods respectively. P and Pa
are potential outputs in T, and T2 periods respectively.
 Introductory Microeconomin.
1.38
Good Y

P2
--

.A2
P
A 1

Good X
X X2
Dy a shift from
ne change in potential production over the two periods would be represented
- (Choose the correct alternative)
(a) P2 to A2 (b) A, to A2
(c) Aa to A (d) P, to P2
11. (6); 12. (c); 13. (C;
Ans. 1. (d); 2. (c); 3. (a), (d); 4. (c); 5. (b); 6. (b); 7. (a); 8. (a), (d); 9. (a); 10. (c);
(i d, ii a, ii c); 20. (a); 21. (a), (d); 22. (d):
14. (b); 15. (a), (b); 16. (c); 17. (b); 18. (a); 19. - - -

(i - d, ii a, ii C, iv b); 27. (C); 28. (d); 29. (c); 30. (b);

23. (a), (c), (d); 24. (d); 25. (c); 26. - -

31. (b); 32. (b); 33. (b); 34. (a); 35. (d); 36. (c); 37. (d); 38. (b); 39. (a), (d); 40. (a), (b);
41. (a); 42. (b); 43. (b); 44. (a); 45 (c); 46. (c); 47. (d); 48. (b); 49 (d)

REVISION| EXERCISE
(VSAQs) VERY SHORT ANSWER TYPE QUESTIONS (1 ark each)
Q. 1. VWhat is meant by scarcity?
Ans. Scarcity refers to limitation of supply in relation to the demand fora commodity.
Q. 2. What is the basic reason for economic problem in all economies?
Ans. The basic reason for economic problem in all economies is scarcity of resources.
Q.3. What is meant by economizing resourcesS?
Ans. Economizing of resources refers to making optimum use of the available resources.
Q.4. Define an economy.
Ans. Economy is a system which provides people with the means to work and earna living.
Q.5. What is meant by economic problem?
Ans. Economic problem is a problem of choice invoving satisfaction of unlimited wants out of limited resources
having alternative uses
a. 6. How is an economic problem, a choice-making activity?
Ans. An economic problem isa choice-making acivity Decause it requires a decision to make the best possible
use of limited resources to satisíy unlimited human wants.
Q.7. VWhy does an economic problem arise?
Ans. An economic problem arises because we nave o saisiy unlimited wants out of limited resources having
alternative uses,
Q. 8. State 2 features of resources that give rise to an economic problem.
The two features of resources that give risa to an economic problem are: (i) Resources are limited
(i) They have alternative uses.
a. 9. What is economics all about?
Ans. Economics Is all about making cholces in the presence of scarcity y
Q.10. Name the two important branches of Economics.
Ans. Microeconomlcs and Macrooconomlos.
Q. 11. Define microeconomics.
MicroeconomicS is that part of the economic theory which deals with
Ans. individual units of an economy
Introduction 1.39

a.12. Give two examples of Microeconomic studies.

Ans. (a) Demand of a commodity: (b) Price of commodity
Q. 13. DefineMacroeconomics.
Ans. Macroeconomics is that part of economic theory which studies the behaviour of the aggregates of
an
economy as a whole.
Q.14. Give two examples of macroeconomic studies.
Ans. (i) National income; (i) Price level.
Q. 15. Is the study of cotton textile industry a macroeconomic study or a microeconomic
study?
Ans. It isa microeconomic study as it is only a unit of industries.
Q.16. Why is the study of the problem of unemployment in India considered a
macroeconomic study?
to the Indian economy
Ans. The study of unemployment is considereda macroeconomic study as relates
it
as a whole.
Q.17. Is the study of general price level a macro economic study?
Ans. Yes, it is a macro economic study as general price level is an aggregate
of the economy.
Q. 18. What are the Central Problems of an Economy?
Ans. (i) What to Produce; (i) How to Produce; (ii) For whom to produce.
Q. 19. What is meant by the problem of "What to produce"?
to producead and the quantity to be produced
Ans. The problem involves selection of goods and services be
of each selected commodity.
Q. 20. What is meant by the problem of "How to produce"?
to use labour intensive or capital intensive
Ans. This problem deals with the selection of technique i.e. whether
technique in production of goods and services.
Q. 21. What is meant by the problem of "For whom to produce"?
among the individuals within the
Ans. This problem relates to the distribution ofproduced goods and services
economy
problems?
Q.22. Why the problems of what, how and for whom to produce are known as central
are the most basic problems of an
Ans. These problems are known as central problems because these
economy and all other problems revolve around them.
Q. 23. Define opportunity cost.
Ans. Opportunity cost is the cost of the next best alternative foregone.
Q.24. What is the opportunity cost of an input which has no alternative use?
Ans. The opportunity cost of such input is zero.
Q. 25. Why does production possibility curve look concave to the origin?
increasing marginal rate of
Ans. Production possibility curve looks concave to the origin because of
transformation.
Q. 26. What does a rightward shift of production possibility curve indicate?
Ans. Growth of resources.
Q.27. Give examples of Growth of resources'.
in labour force.
Ans. () nventions and innovations, (ii) Discovery of oil reserves, (ii) Increase
a. 28. When does a PPF shift to the right?
Ans. (i) Increase in resources; (ii) Technological upgradation.
Q.29. Give an example of decrease in resources.
Ans. Destruction of resources due to earthquake/cyclone.
Q.30. When is the fuller utilisation of available resources said to have taken place?
Ans. Fuler utilisation of available resources is said to take place when an
economy operates on any point lying
on the PPE
Q.31. What does increasing marginal opportunity cost along a PPF mean?
Increasing marginal opportunity cost along a PPFmean that for each additional increase the units of
in
Ans.
1.40 Introductory Microeconomics

a given commodity, more and more of units of another commodity are sacrificed.
Q.32. State two characteristics of the economic resources which give rise to economic problem
Ans. () Economic resources are scarce; (i) Economic resources have alternative uses.
to Work at a
Q.33. Harish earns R 10 lakhs per year from his business. He gets an offer from a company
salary of 8,40,000 per year. Determine opportunity cost of Harish.
Ans. The opportunity cost of Harish is 8,40,000, that he can earn in the next best aternative.
Q.34. Define 'Marginal Rate of Transformation'.
to produce one more
Ans. Marginal Rate of Transformation (MRT) is the ratio of units of one good sacrificed
unit of the other good.
Q.35. What do you mean by alternate uses of resources?
Ans. Alternate use of resources means that a resource can be put to more than
one use.
Q.36. How in any one way can an economy increase its production capacity?
Ans. Production capacity can be increased through upgradation in production technology.
Q.37. Acountry's resources are fully and efficiently employed. The problem of scarcity exists. What advice
will be given to raise the efficiency level of the human resource to fight scarcity?
Ans. Spread of education and trainirng
Q.38. Unemployment is reduced due to the measures taken by the government. State its economic value
in the context of production possibilities frontier.
Ans. The economic value of reduction in unemployment is that it will help the economy in realizing its production
potential.
a. 39. The government has started promoting foreign capital. What is its economic value in the context of
Production Possibilities Frontier?
Ans. twil increase inflow of foreign capital. HIs economic value is the rise in production potential due to increase
in resources.
Q. 40. Large number of technical training institutions
have been started by the government. State its
economic value in the context of production possibilities frontier.
Ans. The economic value of technical training is that it raises the production
potential of the country by raising
the efficiency of the labor.
Q.41. Name the economic value achieved through
the spread of education in the context of production
potential.
Ans. It wil result in increase in eficiency leading to economic
growth.
Q.42. Name the economic value achievable when attempts
are made to increase resources in the country.
Ans. Economic growth.
Q.43. State any two central problems under
'problem of allocation of resources'.
Ans. () What to produce and in what quantity: (ii) How to produce.
Q. 44. What does concavity of PPC indicate?
Ans. Concavity of PPC means that for every additional unit of one
good produced, more and more
another good is to be sacrificed. units of
Q.45. What is the effect on marginal rate of transformation
when we move downwards along a production
possibility curve?
Ans. Marginal Rale of Transformation increase while we move downwards
along a production possibility curve
(PPC)
Q. 46. Define normative economics with a suitable example.
Ans. Economics as a 'normative sclence' deals with situations of value judgements or
condition of 'what ought
to be'. Example: Indla should create more employment opportunities.
Q.47. State any one assumption for the construction of the curve that shows the possibilities of potential
production of two goods in an economy.