2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

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Karnataka 2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

2nd PUC Economics Introduction to Micro Economics One Mark Questions and Answers

Question 1.
What do you mean by Economics?
Answer:
The term ‘Economics’ is derived from the Greek words ‘OIKOS” and “NOMOS which mean Household and management respectively. It studies the problem of choice at the individual social, national and international levels.

Question 2.
Define an economy.
Answer:
An economy is a mechanism through which the scarce resources are prioritized and organized for the production of goods and services. It also refers to a geographical-area where economic activities take place.

Question 3.
Why does an economic problem arise?
Answer:
An economic problem arises because of limited resources and unlimited wants and alternative uses of resources. While trying to allocate limited resources to satisfy unlimited wants, the problem of choice arises.

Question 4.
What is Planned economy?
Answer:
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.

Question 5.
What is a Market economy?
Answer:
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. Example, USA.

Question 6.
What do you mean by mixed economy?
Answer:
A mixed economy is that economy in which we can see co-existence of both private and public sector enterprises. It is a combination of both Socialistic and Capitalistic features.

Question 7.
What is Positive economics?
Answer:
The Positive Economics is the study of ‘what was’ and ‘what is’ under the given set of circumstances. It deals with the scientific explanation of the working of the economy.

Question 8.
What is Normative Economics?
Answer:
The Normative Economics studies ‘what ought to be’. It explains about ‘what should be and should not be done’.

Question 9.
Define Micro Economics.
Answer:
Micro economics is the study of the economic actions of individuals and small groups of individuals. According to Boulding, “It is the study of particular firms, particular households, individual prices, wages, income, individual industries, particular commodities”.

Question 10.
Who first coined the terms ‘Micro’ and ‘Macro’ Economics?
Answer:
Prof.Ragner Frisch, the Nobel Prize winner in Economics (1920), coined the words Micro and Macro Economics for the first time.

Question 11.
Is the study of a sugar factory, a Micro-Economic study or a Macro-Economic study?
Answer:
The study of a Sugar factory is a Micro-Economic study.

Question 12.
What is Deductive Method of Economics?
Answer:
It is one of the methods of study of economics in which the conclusions are drawn from the general to the particular or from the universal to the individual.

2nd PUC Economics Introduction to Micro Economics Two Marks Questions and Answers

Question 1.
What is an economic problem and why does it arise?
Answer:
An economic problem is the problem of choice which arises because of limited resources and unlimited wants and the alternative uses of resources. The scarcity of resources is the main cause for this economic problem.

Question 2.
What are the basic functions of an economy?
Answer:
The basic functions of any economy are Production, Consumption, Distribution, Exchange, Economic planning and Social welfare.

Question 3.
Name the basic problems of an economy.
Answer:
The basic problems of an economy are What to produce, How to produce and for Whom to produce.

Question 4.
Name the types of economics.
Answer:
The types of economies are

Socialistic or Centrally planned Economy
Capitalistic or Market Economy and
Mixed Economy.

Question 5.
Give two examples of Centrally Planned economy.
Answer:
The Centrally planned or Socialistic economies are North Korea, Cuba, Russia, China and Vietnam.

Question 6.
Give two examples of a Capitalistic Economy.
Answer:
The examples for Capitalistic or Market Economy are USA, Japan, Australia, UK etc.

Question 7.
mention any two differences between Positive and Normative Economics.
Answer:

Positive Economics.	Normative Economics
The Positive Economics is the study of ‘what was’ and ‘what is’ under the given set of circumstances.	Here we study how the different mechanisms function.
It deals with the scientific explanation of the working of the economy.	Here we study how the different mechanisms function.
Here we study how the different mechanisms function.	Here we try to understand that whether the mechanisms are desirable or not.

Question 8.
Write any four practical importances of Micro-Economics.
Answer:

It helps in allocation of resources.
Provides solution to the problem of choice.
Helps in formulating various.economic policies.
Explains determination of the price.
Helps to know the working of an economy.

Question 9:
Mention any two limitations of Micro Economics.
Answer:

It has unrealistic assumptions.
It is based on unrealistic analysis.
Narrow in scope.

Question 10:
What is Inductive Method of Economics?
Answer:
It is the process of reasoning from a part to the whole, from particular to general or from individual to the universal.

2nd PUC Economics Introduction to Micro Economics Five Marks Questions and Answers

Question 1.
What is a centrally planned economy? How does it solve basic problems?
Answer:
A centrally 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.

Here, the basic economic problems are solved as follows:
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 for whom to produce, the goods and services are produced to help those people who are suffering from hunger or shortage though there is a loss.
It gives importance to the quality of life rather than quantity of production.
It focuses the resources on rapid economic development.

Question 2:
Write a short note on Market Economy.
Answer:
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, Australia, UK and other countries we can see Market Economic systems.

In market economy, private individuals own the factors of production. Here, profit is the sole motive. There is least intervention by the 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 the 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 of “How the goods are to be produced”, is determined by the competition among different entrepreneurs. They select the least cost combination of technology so that they can get more returns with less cost.

In Market Economy, the/problem of “For whom to produce”, is decided on the basis of purchasing power of consumers. The producers produce commodities for the rich as they can afford to pay more but poorer sections of the society get neglected.

In Market Economy, profits and losses play a predominant role in growth and development of every producer.

Question 3.
Explain the nature of Mixed Economy. How does it differ from Market Economy?
Answer:
A Mixed Economy is that economy in which we can see co-existence of both private and public sector enterprises. It is the combination of Socialistic and Capitalistic features. The best example for this is India.

In a Mixed Economic system, the resources are owned by both the Government and Private individuals. Here, some areas of economic activities are totally governed by the Government and other sectors are open to the private sector also.

The Government involves in those activities which promote maximum social and economic welfare without any profit motive. The Private sector functions with the intention of maximizing profits. Here we find dual pricing system. For example, the supply of Rice through Government Fair Price shojis is low when compared to the private provision stores.

In this type of economy, the Government takes the responsibility to run certain essential sectors like Railways, Printing of currency notes, Atomic energy, public parks etc. Here, the basic problems are solved both by Public and Private Sectors.

Regarding what to produce,-consumers play a main role. But, the Government also interferes by imposing tax or giving subsidy. The problem of how to produce, the private sector will follow the least cost effective technology to maximize profit and public sector will select , the technology on the basis of composition of resources. The problem of for whom to produce depends on both the purchasing power of consumers and the Government policy towards weaker sections of society.

Mixed Economy	Market Economy
(i) It is that economy where we can see both Public and Private Sector functioning.	(i)It is that economy where we can see only Private sector operating.
(ii)Price mechanism do not play much role	(ii)Price mechanism plays a major role.
(iii)It is a partially restricted economy	(iii)It is free economy
(iv)Both Private and Public Sector leads the economy.	(iv)Private sector leads the economy
(v)It is both profit motive and welfare motive.	(v)It is profit motive only

Question 4.
Is Economics Positive or Normative? Discuss.
Answer:
Positive Economics .

1. The positive economics is the study of ‘what was’ and ‘what is’ under the given set of circumstances. It is concerned with how the economy performs the basic functions of what to produce, how to produce and for whom to produce. It explains how the economy takes decisions about consumption, production and exchange of goods.

2. It deals with the scientific explanation of the working of the economy. It analyses every issue of economics from a positive perspective without passing any value judgments. It deals with the cause and effect relationship of economic variables.

Normative Economics:

1.The Normative economics studies ‘what ought to be’. It explains about ‘what should be and should not be done’. Here we try to understand that whether the mechanisms are desirable ornot. The normative economic statements are sometime called matters of op.nion or statements of value.

2. The advice given by various economists are mostly as per normative economics.
In India, Economic Advisers who are appointed by the Government are responsible for advising the Prime Minister as to which of the policies are good and beneficial to the country’s economy and which are bad and detrimental on the whole.

Economics is both Positive and Normative:

1. But, Economics is both a positive and normative science. The study of economics involves both scientific investigation and policy analysis. Economists first use science to explain the world and understand how the economy works, later policies are explored for the economic development.

Question 5.
What method would you prefer to formulate an economic theory?
Answer:
Economic theories are statements of economic tendencies of people. While developing economic theories, the Economists formulate assumptions. So, economic theory derives generalizations of economic facts through two methods: They are as follows:

Deductive Method: This method was developed by David Recardo, J.S.Mill, T.R.Malthus, Alfred Marshall and others. This method is also called as Analytical method.

under this method, the conclusions are drawn from the universal to the individual or from general to the particular. This method derives new conclusions from assumptions. It is also called as ‘Scientific Method’. It includes four stages viz.,

Identification of the hypothesis to be tested.
Generations of predictions from the hypothesis.
Conducting experiments to check whether the predictions are correct.
Confirming the hypothesis.

Inductive Method: This method was advocated by Frederic List, Rosher and Hilde Brand. Inductive method is a process of reasoning from particular to general or from individual to the universal. It functions in four stages viz.,

Selection of an economic problem and defining the same clearly.
Collection of data using statistical techniques.
Analysing the data.
Observation and generalization to establish a general truth.

The inductive method is also called as historical method or concrete method and realistic method. In this method, we investigate particular facts or historical events and try to generalize the findings of the observation for the entire economic system.

It is concluded that both Deductive and inductive methods are e^ntial for the proper development of economic laws. According to Alfred Marshall, “Induction and deduction are both needed for scientific thought just as the right and left foot are both needed for walking”.

Question 6.
Explain the various limitations of Micro Economics.
Answer:
Micro Economics is the study of the economic actions of individuals and small groups of individuals. According to Boulding, “ It is the study of particular firms, particular households, individual prices, wages, income, individual industries, particular commodities”.
The major limitations of Micro Economics are as follows:

(a) Assumptions are unrealistic: The study of Micro-Economics assumes that ‘other tilings being constant’, which is not realistic. In fact, all factors are subject to change and not constant.

(b) Micro Economics is an unrealistic analysis: Micro-Economics uses static analysis. The conclusions drawn from Micro Economic analysis are not valid. For example, individual savings is good since it promotes individual economic prosperity. But if many people indulge in savings, it may lead to a fall in demand leading to less investment and causing unemployment.

(c) The assumption of full employment is incorrect: The microeconomics is based on the assumption of full employment i.e., all the resources are completely employed in production process, which is just imaginary and not correct.

(d) Laissez-faire policy (Minimum intervention of Government): The assumption of laissez faire policy is not practical in real world, where we see intervention of Government in economic activities.

(e) Ignores Macro economic analysis: The knowledge of an entire economy is very essential to the people as it includes all the economic elements. But the micro economics concentrates only on a small part of the whole economy.

(f) It is limited in scope: The scope of micro economics is limited and narrow. It does not include income theory, inflation, monetary policies etc. which are very important for economic analysis.

2nd PUC Economics Introduction to Micro Economics Ten Marks Questions and Answers

Question 1.
Discuss the basic problems of an economy.
Answer:
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’.

The problem of choice arising out of limited resources and unlimited wants is called economic problem. In every economy whether developed or underdeveloped, Capitalistic, 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 them in detail.

(a)What to Produce: Every country has to decide which goods are to be produced and in what quantities. Whether more guns should be produced or more foodgrains 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: 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 and capital. 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 society 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: Another important decision with economy has to take is for whom to produce. The economy cannot satisfy all wants of an 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.

Apart from above, an economy also faces other problems: they are as follows:

(a) The problem of economic efficiency: The efficient utilisation of existing resources of an economy has also become a major problem. The Optimum use of both natural and human resources is needed to prevent the wastage of these resources.

(b) The problem of full employment: Full employment means utilisation of resources to the fullest extent. Under utilisation of human resources leads to unemployment, disguised unemployment etc. If the natural resources are not used to the maximum, there is a wastage of potentiality of an economy.

(c) The problem of economic growth: Every nation wants to increase its Gross Domestic Product to achieve economic growth. This in turn improves the standard of living and reduces poverty and unemployment. Every economy has to increase its ability to produce more goods and services with the help of existing resources in order to achieve economic growth. But many developing countries are facing this problem of economic growth. So, the above are the basic problems of an economy common to all the economic systems of the world.

Question 2.
Explain the main types of Economic Systems.
Answer:
The main types of economic system are:

Socialistic/Centrally Planned Economy
Capitalistic/Market Economy and.
Mixed Economy.

1. Centrally Planned Economy or Socialistic Economy.
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. Here, the basic economic problems are solved as follows:

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 for whom to produce, the goods and services are produced with the welfare of people who are suffering from hunger in mind even though there may be a loss.
It gives importance to the quality of life rather than quantity of production.
It focuses the resources on rapid economic development.

2. Market Economy:
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, Australia, 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 the 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 of how the goods are to be produced is determined by the competition among different entrepreneurs. They select least cost effective combination of technologies so that they can get more returns for their investment.

In Market Economy, the problem of for whom to produce is decided on the basis of the purchasing power of the consumers. The producers produce commodities for the rich who can afford to pay more but poorer sections of the society are neglected.

In Market Economy, profits and losses play a predominant role in the growth and development of every producer.

3. Mixed Economy:
A mixed economy is that economy in which we can see co-existence of both private and public sector enterprises. It is the combination of Socialistic and Capitalistic features. The best example is India.

In a mixed economic system, the resources are owned by both the Government and Private individuals. Here, some areas of economic activities are totally governed by the Government and other sectors are open to the private sector.

The Government involves in those activities which promote maximum social and economic welfare without any profit motive. The Private sector functions with the intention of maximizing profits. Here we find dual pricing system. For example, the supply of rice through Government Fair Price shops is low when compared to the private provision stores.

Regarding what to produce, consumers play the main role. But, the Government also interferes by imposing tax or giving subsidy. The problem of how to produce, the private sector will decide the best cost effective technology to maximize profits and public sector will select the technology on the basis of composition of resources. The problem of for whom to produce depends on both the purchasing’power of the consumers and the Government policy towards weaker sections of the society.

Question 3.
Explain the uses of Micro-Economics.
Answer:
Micro Economics is the study of the economic actions of individuals and small groups of . individuals. According to Boulding, “The study of particular firm, particular household, individual price, wage, income, individual industry, particular commodity, is Micro Economics.”

Micro Economics is an important method of economic analysis. It has both theoretical and practical importance.

(a) Helpful in the efficient employment of resources-allocation of resources: Micro Economics deals with the economizing of scarce resources with efficiency. The principal problem faced by modern Governments is the allocation of resources among competing wants. In this sense, Micro Economics is used by the Government in the efficient employment of resources and achieving economic growth With stability.

(b) Helps in understanding the working of the economy: Micro Economics is of utmost importance in understanding the working of a free economy. In such an economy, there is no agency to plan and coordinate the working of the economic system. The decisions like how to produce, what do produce etc., are taken by producers mid consumers without any outside influence.

(c) Provide tools for economic policies: Micro economics provides analytical tools for evaluating the economic policies of an Economy. Price mechanism or market mechanism is the tool which helps us in this respect. Micro Economics thus helps in formulating correct price policies.

(d) Useful in understanding the problems of Taxation: The study of micro economics helps in understanding some of the problems of taxation. It is used to explain the welfare implications of a tax. It studies the distribution of incidence of a commodity tax (excise duty/sales tax) between sellers and consumers.

(e) Helpful in International Trade: In the field of international trade, it is used to explain the gains from international trade, balance of payments and the determination of the foreign exchange rate.

(f) Helps us to know Market structure: The study of Micro Economics is useful in understanding the different market conditions like perfect competitive market, monopoly, duopoly, oligopoly etc.

(g) Construction and use of economic models: Micro Economics constructs and uses simple models for understanding the actual economic phenomena. It helps not only to describe the actual economic situation, but also suggests policies that would bring in the desired results;

(h) The basis of predictions: Micro Economic theory can be used as the basis for prediction. This does not mean that it will enable us to predict the future. It will enable the user to make conditional predictions.

(i) Solution to the problem of choice: The study of Micro Economics helps to find solution to the problem of choice by providing various guidelines for proper allocation of scarce
resources.

(j) Helps business executives: Micro Economics helps the business executives in the attainment of maximum productivity with existing resources. It is with its help that one is able to know the consumer demands and calculate the cost of production.

(k) Helps in formulation of economic planning: In order to solve the basic problems of an economy, conscious planning is required. The knowledge of micro economics helps the members of National Planning Commission to frame aims and objectives based on the availability of resources.

(l) Expands intellectual capacity of Human mind:- The study of economics helps individuals to develop their thinking and intelligence to take appropriate decisions in their daily life.

(m) To examine the conditions of economic welfare: Micro Economics can be used to examine the conditions of economic welfare. Welfare economics is related to maximization of social welfare. The study of Micro Economics may be the greatest help in raising the standard of living of the population.

(n) Helps different sections of the society: The knowledge of Micro Economics is very important to know the different sections of the society like poor, middle class, rich, male and female population, skilled and unskilled labourers etc. It helps us to understand the problems of these sections and to arrive at proper Solutions.
Thus, Micro Economics is considered as an efficient method of problem solving.