Very Short Answer Type Questions
Question. Define macro economics with the help of an example.
Answer : Macro economics is that branch of economics which studies the economy as a whole and its aggregates e.g. National income, the level of employment.
Question. Why does an economic problem arise?
Answer : An economic problem arises due to scarcity of resources having alternative uses in relation to unlimited wants.
Question. What do you mean by scarcity?
Answer : Scarcity refers to a situation in which demand is more than supply
Question. What do you mean by an economy?
Answer : An economy is an economic organisation which provides sources to earn livelihood.
Question. Why does economic problem arise?
Answer : It arises mainly because of scarcity of resources.
Question. What does a rightward shift of PPC indicate?
Answer : The rightward shift of PPC indicates growth of resources or technological progress.
Question. Why does PPC look concave to the origin?
Answer : PPC is concave to the origin because of increasing marginal rate of transformation (or increasing marginal opportunity cost).
Question. What does a point below PPC indicate?
Answer : It shows inefficient/under utilization of resources.
Question. When allocation of resources is considered as inefficient?
Answer : Allocation of resources is considered as inefficient when economy performs below the PPC curve.
Short Answer Type Questions(3-4 Marks)
Question. Why does PPC look concave to the origin? Explain.
Answer : PPC looks concave to the origin because of increasing marginal rate of transformation/substitution (or increasing marginal opportunity cost). It means that more and more units of commodity ‘y’ are to be sacrificed, to get each additional unit of commodity ‘x’.
Question. Does production take place only on the PP curve?
Answer : Yes and no, both. Yes, if the given resources are fully and efficiently utilized. No, if the resources are underutilized or inefficiently utilized or both.
Refer to the above figure; on a point anywhere on the PPC the resources are fully and efficiently employed. On point U, below the PPC or any other point but below the PPC, the resources are either underutilized or inefficiently utilised or both. Any point below the PP curve thus highlights the problem of unemployment and inefficiency in the economy.
Question. Calculate MRTXY at different production possibilities from the following hypothetical data. Draw a PPC on the basis of the schedule.
Production possibility Curve
Question. Explain properties of a production possibilities curve.
Answer : There are two properties of a production possibilities curve.
a. Downward sloping : It is because as more quantity of one good is produced some quantity of the other good must be sacrificed.
b. Concave to the origin : It is because the marginal rate of transformation increases as more of one good is produced.
Question. What is ‘Marginal Rate of transformation’? Explain with the help of an example.
Answer : MRT is the rate at which the units of one good have to be sacrificed to produce one more unit of the other good in a two goods economy Suppose an economy produces only two goods X and Y. Further suppose that by employing these resources fully and efficiently, the economy produces 1X + 10Y. If the economy decides to produce 2X, it has to cut down production of Y by 2 units. Then 2Y is the opportunity cost of producing 1X.
Then 2Y:1X is the MRT.
Value Based Questions
Question. What is the opportunity cost of an input which has no alternative use?
Answer : The opportunity cost of such input is zero.
Question. In order to encourage tourism in Goa, Indian Airlines reduces the air fare to Goa.
How will it affect market demand curve for air travel to Goa?
Answer : There will be a downward movement along the same market demand curve for air travel to Goa. It happens because of decrease in the air fare.
Question. Trendz produces both jeans and shirts. How will an increase in the price of jeans affect the supply curve of shirts?
Answer : An increase in the price of jeans will make the production of jeans more attractive.
As a result Trendz will shift its resources from shirts to jeans.It will shift the supply curve of shirts towards left.
Question. ”Law of demand is a quantitative statement”. Comment.
Answer : Law of demand is only an indicative and not a quantitative statement. It indicates only the direction, in which the demand will change with a change in price. It says nothing about the magnitude of such a change. For example price of Pepsi rises from Rs 10 to Rs 12 per bottle, then, as per law of demand, we can say that the demand for Pepsi will fall. But the law does not give the actual amount by which the demand for Pepsi will decline.
Question. Why AR curve under monopolistic competition is more elastic than AR curve under monopoly?
Answer : The AR curve under monopolistic competition is more elastic because there exists close substitutes of the product sold by the monopolistic firm whereas under monopoly the AR curve is less elastic because there is non availability of close substitutes of the product sold by the monopoly firm.
Question. Why is number of firms small in an oligopoly market?
Answer : The main reason for small number of firms under Oligopoly is the Barriers to entry, which prevent entry of new firms into the industry. Patents, requirement of large capital, control over crucial raw materials, etc, are some some of the other reasons, which prevent new firms from entering into industry. As a result, there are few firms in an Oligopoly market.
Higher Order Thinking Skills
Question. What is meant by economizing the use of resources?
Answer : Economising the resources means that resources are to be used in a manner such that maximum output is realised per unit of output. It also means optimum utilisation of resources.
Question. What will be the shape of PPF when MRT is constant?
Answer : Shape of PPF will be a straight line sloping down ward.