CEM ncn mitraa anit erence (2016) The best alternative that we forego, or give up, when we make a choice or a lecision is called the Opportunity ty cost of that decision. When asked how much watching a movie costs, most people cite the ticket price eu ae a ate ue oc) ee cee Lore es PRE een ee ake eR ea) done with the same money and time Peo nun a mee OP Ua eR Me Cn Dyce eee Chey 4@ earned by working full-time instead of going to college 7Fr If a firm purchases a new piece of equipment for 2,00,000, it does so 2 because it expects that equipment ‘ to generate more profit. There is an opportunity cost, however, because that 2,00,000 could have been deposited in an interest- earning account PoP sromuos aired eis ge a Ol ater e rte) Pee racer Pane NUnit eas Rec Sr ee ean rae eed Renee pss Opportunity costs arise because et eee erie Moree means limitedQ10. Why does the society face the trade-off between efficiency and equality? Explain. (2017) In other words, Efficiency refers to the Equality refers to how the pie is divide societies face a trad e-off between effi (fairness) e of the economic pie and to individual slices. onoy (productivity) andl equity Whenever a society focuses on production, they gain efficiency, but that makes the distribution of income and resources less fair throughout the population, so they lose equity — — — This provides an incentive for people to work because productivity is rewarded, but the consequence is more poverty, as those who are less productive will not be allocated much income. Therefore the opportunity cost of increased efficiency is less equality and vice versaQ11. Explain the short-run trade off between inflation and unemployment. Ans. The short-run effects of monetary injections are as follows: Q eet Ru aot col nC (Inflation) stimulates the ens eseea Se Cucihas Poe PCat! eerie LivetveNimmanenctes CUS Ac) , et aL Sco More hiring means reer eee lower unemployment ae CRUE Usa eo G) a larger quantity of goods: Buea rs)Q12. Explain the Circular Flow of Income model with the help of a diagram. Or Use an economic made! to show the flow of money and goods and services through markets among households and firms? J ‘ 1=9) CMe cea Pe eee aac Mk tutcrMat cy una Pie Ewen sie ie lancaster UC) Lee sna coche tn bats such as labour, land and capital (buildings and machines) 5 MT Rat ees Um yr) 's own the factors of production and consume all the goods ECR carece tir aut ued el ecu acc Tors see cu eee ee a A a CMe eee ar eaten Sue eyIn the markets for the factors of production, eC Ue Oe Whiges mers, Teese ree “ef CRS Re rele es od Histon De RC nrc eas ‘organizing the economic transactions that occur Pee oun eur ie ead Ne eo Leck Cea aes) The inner loop represents the flows of inputs and ‘outputs. The households sell the use of their labour, land and capital to the firms in the markets for the factors of production Scene eeu) Poa RL eo SOO eS ra) factors of production, such as wages. What is left Se eu a eC) RieRevenue Factors of Wages seat es, rent profit production Markets for Spendi “goods and Roce — Firms sell ses é ._ Labour, land] “Markets for and capital factors of production * Households buy Tacome. “Firms sell —> Flow of inputs and outputs ——+ Flow of money Very Important Model of Circular EconomyAns. The Production Possibility Frontier (PPF is a graph that shows PRU edn ir me ee ce Me Cea mobile phones-that the economy can possibly produce given the PE enero eer Mean arene lee tee etna Peek ee nk cena ten a tay Paste en ances anaes un Seed iG et ura eee ee cemetary fa RA nee eee Riu ied aintIf ituses all its resources in the mobile phone industry, it produces 3,000 mobile phones and no cameras. The two endpoints of the production possibility frontier represent these extreme possibilities More likely, the economy divides its resources between the Prete ices tie Rceeetu eset Reuitmte tit phones , it can produce 600 cameras and 2,200 mobile phones, figure by point A or by moving some of the factors of o the camera industry from the mobile phone industry, the produce 700 cameras and 2,000 mobile phones, by point B Quantity of mobile phones produced | 3,000 _~ Production Possibility Frontier 1,000 Quantity of cameras producedRTs ea RUN tA Ue One Cen team keUa ee es eek) aU eee hee cree eae srs nee eee ecko ence CCR eaten Crucis CC Pris elearning eae som er ret The production possibility frontier shows one trade-off that society faces. Once we have reached the efficient points on the frontier, the only way of producing more of one good is to produce less of the other. When the economy moves from point A to point B, for instance, society produces 100 moro cameras but atthe oxpence of producing 200 fewer mobile phones eh The coat of something ia what you give up to getit. This is called the opportunity cost. The Peete Sie CaaS Ga Re ee eee Ty terms of the other good. When society moves from point A to point B, it gives up 200 mobile Payee eae Cae ue ae CR ie Ot ce ee cm) ee eee) eee eclipse kee td between the outputs of different goods ata given time, but the trade off can change over reedQuantity of mobile phones produced BG 1,000 Quantity ofcameras Produced CU ect) beet tree are ea the mobile phone industry raises the number of mobile phones SMe eu ato Ree ues een) Pee esc ooe Petr) eterna ssa cameras, the economy can make eae ee aur) Cri eirissue eng mobile phones, it can still Pec tar eer em ctom etry Peat! But the rest of the production eee int Teen outward, as in the Figure. This eMen eee tere 9 Pune risen production from a point on the old frontier to a point on the new iedKeyra Draw and explain a production possibility frontier for an economy that produces milk and breads. What happens to this frontier if disease kills half of the economy's cows? PPFi Quantity of milk produced S Quantity of bread producedQ15. In an economy only two goods, com and wheat, are produced. Draw the production possibility curve for the economy if: (2014) Ans. Production Possibility Frontier The Production Possibility Frontier (PPF is a graph that shows the various combinations of output-for example, cameras and mobile phones-that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output. The given figure below shows this economy’s production possibility frontier. If the economy uses all its resources in the camera industry, it produces 1,000 cameras and no mobile phones If it uses all its resources in the mobile phone industry, it produces 3,000 mobile phones and no cameras. The two endpoints of the production possibility trontier represent these extreme possibilities More likely, the economy divides its resources between the two ie ene ikea ea Re Ree ee Ruled Saree9 it can produce 600 cameras and 2,200 mobile p ® figure by point A or by moving some of the factors of e camera industry from the mobile phone industry, the \ produce 700 cameras andl 2,000 mobile phones, by point B Quantity of mobile phones produced 3,000 neo eS Production enue c i Possibility 1,000 4D Frontier E 1 3 3 3 1,000 Quantity of carers producedMess need eee ec RUN eee ag the production possibility frontier, but it cannot produce at points outside the ee a ne See hl etree aetna cree ery from the scarce resources that are available. Points on (rather than inside) Sree eet se gin umes esc oad o ieter The production possibility frontier shows one trade-off that society faces. Once we have reached the efficient points on the frontier, the only way of producing more of one good is to produce less of the other. When the economy maves from point A to paint B, for instance, society produces 100. more cameras but at the expense of producing 200 fewer mobile phones, But NS a Rae aes ea production possibility frontier shows the opportunity cost of one good as measured in Soe Race eM eeu ue lo Me ee ee ROS iene Cetera eee aoe eae es Re Se aaa ee aa id Pee Ue te tsk accu Eee ea acre ec ake has rhcQuantity of mobile phones produced 4,000 3,000) 2,300] 2/200) 1,000) 8 100 Quant ah of cameras produced For any given number of cameras, the economy can make more mobile phones. If the Penge evade ering Perey eee aicec) ecru eae eur end point of the frontier stays the same Roper sees et Pee rss ee ete urea Neus sict eae tur te egies Pease uel curd Pee Ra tein tering Mer MISE eu cuen een) Ene in iret ert ery But the rest of the production possibility frontier shifts outward, as in the Figure. This Deen Mere eee iat Pease uy Pie Meek eee ar VW old frontier to a point on the new Pitsa) All the factors are equally effic production of corn and wheat For both commodities, all factors are equally efficient.b) Factors are not equally efficientin the production of corn and wheat. Why is the shape of the production possibility curve differentin both the cases? Suppose the production of corn is more efficient. “Breoin,