II PUC ECONOMICS STUDY MATERIAL

PART – 1 MICRO ECONOMICS

1. INTRODUCTION
TFRMINOMICS (TERMS OF ECONOMICS)

Simple economy is a closed economy in which there is no government or external trade or savings.
Central problems of an economy means the allocation of scarce resources and the distribution of
the final goods and services are the central problems of an economy.
Market is a set of arrangements which allow people to buy and sell commodities freely.
Economy/Economic system is a mechanism through which the scarce resources are prioritized and
organized for the production of goods and services. .
Mixed economy means the economy where some important decisions are taken by the
government and the economic activities are by and large conducted through the market.
I Choose the correct answer: (1 mark each)
1. The scarce resources of an economy have
(a) Competing usages (b) Single usages
(c) Unlimited usages (d) None of the above
2. Which of the following is an example of micro economic study?
(a) National income (b) Consumer behaviour
(c) Unemployment (d) Foreign trade
3. Which of the following is a micro economic variable?
(a) Individual demand (b) Aggregate demand
(c) Firms output (d) Price of a good
4. Central problems of an economy includes
(a) What to produce (b) How to produce
(c) For whom to produce (d) All of the above
5. Traditionally, the subject-matter of economics has been studied under the following broad branches.
(a) Micro & Macro economics (b) Positive & Normative
(c) Deductive and Inductive (d) None of the above

II Fill in the blanks: (1 mark each)

6. Scarcity of resources gives raise to the …………………….. (problem of choice)(Mar 2019)
7. In a Centrally Planned Economy all important decisions are made by ……………………. (govt)
8. …………………… is a set of arrangements where economic agents can freely exchange their
endowments or products with each other. (Market)
9. In reality, all economies are ………………… (Mixed economies)(July2019)

III . Match the following: (1 mark each)

A B Ans
1 Market economy a Government 1-b
2 Service of a teacher b Private ownership 2-c
3 Centrally Planned Economy c Skill 3-a
4 Positive Economics d Evaluate the Mechanism 4-e
5 Normative Economics e Functioning of Mechanism 5-d

1 Shashidhara .J, Lecturer, Don Bosco PU College, CTA , Ph: 8861979407

II PUC ECONOMICS STUDY MATERIAL

IV Answer the following questions in a sentence/ word each: (1 mark)

10. Why does the problem of choice arise?
Ans: The problem of choice arises due to the scarcity of resources.
11. What is market economy?
Ans: Market economy is an economy in which all economic activities are organized through the market.
12. What do you mean by Centrally Planned Economy?
Ans: Centrally Planned Economy is an economy where all important decisions are made by the
government.
13. Give the meaning of micro economics.
Ans: In Micro economics, we study the behavior of individual economic agents in the market for
different goods and services.
14. What do you mean by positive economics?
Ans: In Positive economics, we study how the different mechanisms function.
15. What is normative economics?
Ans: In Normative economics, we study how the different mechanisms evaluate.

V Answer the following questions in 4 sentences each: (2 marks each)

16. Mention the central problems of an economy.
Ans: The central problems of an economy are:
a) What to produce? (What is produced and in what quantities?)
b) How to produce? (How are these goods produced?)
c) For whom to produce? (For whom are these goods produced?)
17. Distinguish between Micro and Macro economics.
Micro economics Macro economics
1. It is the study of individual economic agents of 1. It is study of aggregate economic agents of the
an economy. economy as a whole.
2. It has a narrow scope with individual market, 2. It has a very wide scope covering economy as a
price, firms, utility, etc. whole like national income, employment, and
output.
18. Distinguish between positive and normative economics.
Positive economics Normative economics
1 It studies how the different mechanisms 1 It evaluates whether different mechanisms are
function to solve economic problems. desirable or not.
2 Positive statements describe ‘What is’ or 2 Normative statements describe ‘What ought
‘What was’ under given circumstances. to be’ under given circumstances.
19. 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 amount of resources and technological knowledge’ is called the “Production possibility set”.
20. What is opportunity cost?(Economic cost)
Ans: Opportunity cost of some activity is the gain foregone from the second best activity.
(‘A cost of having a little more of one good in terms of the amount of the other good that has to be
foregone’ is called Opportunity cost.)
21. What is Production Possibility Frontier (PPF)?
Ans: Production Possibility Frontier is “the curve that gives the possibilities of the combinations of two
different goods that can be produced when the resources of the economy are fully utilized.
(The curve that gives the maximum amount of one good that can be produced in the economy for any
given amount of other good and vice-versa).

2 Shashidhara .J, Lecturer, Don Bosco PU College, CTA , Ph: 8861979407

II PUC ECONOMICS STUDY MATERIAL

VI Answer the following questions in 12 sentences each: (4 marks each)

22. Briefly explain the Production Possibility Frontier (PPF).
Ans: Production Possibility Frontier is “the curve that gives the possibilities of the combinations of two
different goods that can be produced when the resources of the economy are fully utilized.
Assumptions of PPF:
Assume that there are two goods produced in the economy.
The available resources are fixed.
These resources are fully and efficiently utilized.
Technology of production doesn’t change.
There is an application of marginal rate of transformation.
Explanation through a Schedule and PPF curve:
Possibilities Corn (in MTs) Cotton (in MTs)
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0

As in the above table, economy at combination ‘A’ can produce maximum of cotton only, as
decreasing of cotton production we can increase corn production up to ‘E’ where more of corn can
produce than cotton

In the above diagram, points A,B.C,D

and E are on the PPF of various possible
combinations of two goods like corn and
cotton with efficient utilization of
resources and technology. Point ‘F’ shows
under utilization of resources and
technology and point ‘G’ shows
unattainable combination.

23. Briefly explain the central problems of an economy.

Ans: Every economy whether simple or complex, capitalist or controlled or mixed, developed or under
developed, will have to solve the following three fundamental problems:
a) What is produced and in what quantities? (What to produce?) is “the problem of choice of goods and
in what quantities”. Every society wants many numbers of goods and services. Since resources are limited,
every society must decide on how much of each of the many possible goods and services it will produce.
Whether to produce more of food, clothing, housing or luxury goods? More of agricultural goods or
industrial goods, more resources used in education, health or in building military services, which will
increase production and consumption tomorrow.
b) How are these goods produced? (How to produce?) is “the problem of choice of resources between
labour and technology to produce goods and services”. Every society has to decide whether to use more
labour or more machines. Which technology to be adopt in the production of goods and services?

3 Shashidhara .J, Lecturer, Don Bosco PU College, CTA , Ph: 8861979407

II PUC ECONOMICS STUDY MATERIAL

c) For whom are these goods produced? (For whom to produce?) is “the problem of how to distribute
the final goods and services. How should the products of the economy be distributed among the
individuals in the economy? Among the individuals in the economy, can know, who gets more and who
gets less? Are all people getting elementary education and health freely in the economy?
24. Write a short note on a centrally planned economy.
Ans: Centrally Planned Economy is “an economy where the government or the central authority plans all
the important activities in the economy”.
For example, China, Vietnam, North Korea, etc.
Here, all important decisions of production, consumption and exchange of goods and services are made
by the government. The central authority tries to allocate resources and distribution of the final
combination of goods and services that are desirable for society as a whole. For example, an economy
found that, education or health services are essential for the prosperity and well-being of the economy as a
whole. Practically, if these services are produced inadequate, then the government should induce the
individuals to produce or the government may itself decide to produce them.
If some people in the economy get so little in the final mix of goods and services produced in the
economy is their survival a problem. Then the central authority may intervene and try to achieve an
equitable distribution of the final mix of goods and services among all people in the economy.

25. Write a short note on market economy.

Ans: The Market Economy is “an economy in which all economic activities are organized through the
market in the economy”.
For example, USA, Japan, Australia, etc.
Market is an arrangement which allows people to buy and sell commodities freely. There are some
forces which bring the coordination between the activities of millions of isolated individuals in a market
system. In a market economy, all goods and services at a price are exchanged. If the buyers demand more
of a certain good, the prices of that good will rise. This signals to the producers of that good that the
society as a whole wants more of that good than is currently being produced and the producers of the
good are likely to increase their production.
Thus, the prices of goods and services send important information to all the individuals across the
market and help to achieve coordination in a market system. So, in a market system, the central problems
regarding how much and what to produce are solved through the coordination of economic activities
brought about by the price signals in the market.
26. Distinguish between positive and normative economics. (July2019)
Ans: Differences between positive economics and normative economics are as follows:
Positive economics Normative economics
1 It analyses the functioning of mechanisms to 1 It evaluates whether different mechanisms are
solve economic problems. desirable or not.
2 Positive statements describe ‘What is’ or 2 Normative statements describe ‘What ought
‘What was’ under given circumstances. to be’ under given circumstances.
3 It analyses the economic issues in scientific 3 It explains the economic issues in an ideal
method. method.
4 It cannot pass value judgements. 4 It will pronounce value judgements.
5 It doesn’t advocate solutions to economic 5 It advocates solutions to economic problems.
problems.

4 Shashidhara .J, Lecturer, Don Bosco PU College, CTA , Ph: 8861979407