NCERT Solutions for Class 12

Social Science (Economics)

Chapter 1- Microeconomics

1. Discuss the central problems of an economy.

Ans: An economy is a collection of organisations and structures that help or hinder
the production and distribution of commodities and services in a given society. Due
to the diversity of wants, the scarcity of resources, and the problems of choice, every
economy faces three major issues. This scarcity puts a premium on making the
greatest use of the available resources in order to meet the seemingly endless
demands.
The following are the three major economic issues:
1. Issues with resource allocation.
2. Issues with resource utilisation that is complete and more efficient.
3. Issues with resource growth.
1. One of the most important difficulties that every economy face is resource
allocation:
a. What to produce: There is an endless number of demands in an economy, but only
a finite number of resources that can be put to various purposes. The economy can't
make all kinds of products, both consumer and producer goods. As a result, the
economy must decide what types of commodities and services will be produced, as
well as how much of each.
b. How much to produce: It's a difficulty of choosing a method of production. There
are two sorts of production techniques: -
 Labour-intensive: This is a production method that emphasises labour over capital.
 Capital-intensive: In this strategy, capital is utilised more than labour.
c. From whom to produce: This is a challenge addressing the allocation of
manufactured items among different social groupings. There are two aspects to it:
i. Personal distribution: the allocation of national income based on who owns the
production factors.
ii. Functional distribution: When national revenue or production is allocated among
various factors of production, such as land, labour, capital, and entrepreneurship, for
the goal of providing rent, wages, interest, and profit.
2. Problem relating to the efficient use and fuller utilisation of resources: The term
"production efficiency" refers to the ability to produce the most quantity of goods
and services with the resources available. Because resources are already few in
contrast to demand, an economy must ensure that its resources are not squandered
by underutilization.

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3. Problem relating to resource growth: It has to do with boosting the economy's
production capacity in order to boost output volume. Technological innovation can
help us reach this goal. Underdeveloped countries continue to suffer from slow
resource expansion. Aside from better use, these countries should aim to increase
their productive capacities by exploring more resource availability and developing
better strategies for their utilisation.

2. What do you mean by the production possibilities of an economy?

Ans: The myriad potential combinations of commodities and services that a specific
economy can generate with the given technology/stock of technical knowledge and
utilising the available resources completely and efficiently are referred to as an
economy's production possibilities. In other terms, it refers to a variety of possible
bundles of goods and services that can be created together while maximising the use
of available technology and resources.

3. What is a production possibility frontier?

Ans: The production possibility frontier (PPF) is a curve that depicts the possible
combinations of two items that an economy can generate with current technology
and fully utilised resources. It's also known as the production possibility curve (PPC)
since it depicts the upper limit of what can be produced with current resources.
A
B
Z
Good 2
C

F
D

E Good 1

All of the points on the PPC, i.e., curve AE, are linked to various quantities of good
1 and good 2 created by fully and efficiently utilising the available resources. Any
point below the curve, such as F, represents inefficiency or underutilization of
resources. Any point outside the curve, such as Z, represents an overabundance of
resources and technology.
As we raise the production of Good 1, the production of Good 2 decreases due to the
economy's limited resources. It signifies those resources are transferred from the

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production of Good 2 to the production of Good 1, i.e., one commodity is turned into
the other by transferring resources rather than physically changing. As a result, it's
also known as a 'transformation curve.'
As a result, PPF or PPC refers to a graphical representation of all potential
combinations of two items that can be manufactured with the available resources
and technology.

4. Discuss the subject matter of economics.

Ans: Economics is a subject in and of itself. Economics describes how a person
allocates his limited resources to meet his seemingly limitless desires. Economic
theory is separated into two branches: Microeconomics and Macroeconomics.
According to Ragnar Frisch's hypothesis, this division was established only after
1930.
Microeconomics is the study of particular economic units, such as consumer and
business behaviour. Microeconomics is the study of how people use the resources
they have to the best of their abilities in order to achieve their rational goals.
It's also the study of supply and demand, and how their interactions influence the
prices of various goods and services. Microeconomics aids in the resolution of an
economy's three main issues.
It's also known as the Price Theory because it's primarily concerned with how prices
are set in commodity and factor markets. The main instruments of analysis are
demand and supply in this case. Individual income and expenditure are its primary
tools.
Since it encompasses the calculation of wages, rent, interest, and profit, it is also
known as Factor theory or micro theory of distribution.
Macroeconomics refers to the study of the economy as a whole. It focuses on how
to aggregate metrics, such as aggregate demand, aggregate supply, and overall price
level, are determined and how they evolve over time. It's also known as the Income
and Employment Theory because it's primarily concerned with how income and
employment levels are determined. Macroeconomics aids in the analysis and
resolution of issues such as unemployment, inflation, BOP disequilibrium, poverty,
and so on. The main instruments of analysis are aggregate demand and aggregate
supply.

5. Distinguish between a centrally planned economy and a market economy.

Ans:
Centrally Planned Economy
Things are managed by a central
authority in a centrally planned
economy with the goal of
accomplishing specific aims.
Market economy
Things are managed in a market
economy by capitalists who seek to
maximise profits.

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 Social welfare is the motive of
production.
Factors or means of production are
owned by the government, i.e., public
ownership.
The degree of income disparity is
modest.
Production is managed by a planning
process, which means that it is carried
out in accordance with government
plans.
From manufacturing through
distribution, the government plays the
most important role.
Profit making is the main motive.
The factors of production such as land,
labour, capital, and enterprise are all
privately owned.
There is a disparity in income
distribution.
The price mechanism, i.e., demand and
supply, governs production.
Private actors play the most important
role. They pick what to produce,
whereas the government's
responsibility is confined to upholding
the country's law and order.

6. What do you understand by positive economic analysis?

Ans: Positive economic analysis is the study of what is or how an economic problem
is solved via the examination of numerous positive statements and methods. To put
it another way, it's also known as a cause-and-effect relationship. It expresses "what
is."
These are true statements that explain what was, is, and will be in the future. These
assertions may be examined, proven, or disproven, and they are free of personal
value judgments. If someone states it's raining outside, for example, the truth of that
assertion can be checked. It is concerned with real-life or realistic issues. Economic
theory is regarded as pure science by economists such as Lionel Robbins. Other
instances include India being an overpopulated country with a diversified economy,
and so on.

7. What do you understand by normative economic analysis?

Ans:Normative economic analysis is the process of determining whether or not a
specific method is good. This analysis focuses on what should be the desired state
or how the economic problems should be addressed. It offers economic goals and
objectives, as well as what should be done to accomplish these goals and objectives.
We come across normative propositions in normative economic analysis that cannot
be evaluated because they require human value judgments. It is founded on ethics
and deals with idealistic issues.
For instance, the government should support private enterprises to increase the pace
of industrialization, as an illustration of this analysis. Economists such as Marshall,
Pigou, and others consider economics to be a normative science.

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8. Distinguish between microeconomics and macroeconomic.
Ans:
Points of Microeconomics Macroeconomics
Difference
1. Origin The word ‘micro’ comes The word macro originated
from the Greek word from the Greek ‘makros,’
‘micros,’ which means which means ’large.’ It's also
‘small.’ It's also known as known as the Income and
Price theory. Employment Theory.
2. Study Matters It investigates individual It investigates the economy
economic relationships or as a whole.
issues such as households,
businesses, and consumers.
3. Objective Its main goal is to examine It looks into the principles,
the principles, issues, and issues, and policies that go
policies that can be used to into achieving full
achieve the goal of optimal employment and expanding
resource allocation. productive capacity.
4. Deals with It is concerned with how It examines how different
consumers and producers economic sectors, such as
make decisions based on households, industries, the
their budget and other government, and the
factors. international community,
make decisions.
5. Method It employs the partial It employs the general
equilibrium method, which equilibrium method, which
involves achieving ensures that all markets in an
equilibrium in only one economy are in equilibrium.
market.
6. Variables Price, individual consumer Aggregate price, aggregate
demand, wages, rent, profit, demand, aggregate supply,
revenues, and other inflation, unemployment, and
microeconomic variables other macroeconomic
are all important. variables are important.
7. Theories 1. Consumer Behaviour 1. National Income Theory
and Demand Theory 2. Money Theory
2. Producer’s Behaviour 3. General Price Level and
and Supply Theory Inflation Theory
3. Price Determination 4. Employment Theory
Theory under various 5. International Trade Theory
Market Situations 6. Macro-distribution Theory
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 4. Factor 7. Economic Growth Theory
pricing/distribution theory
5. Economic Welfare
Theory

8. Main Problem Its main issues are price Its main issue is determining
determination and resource the economy's level of income
allocation. and employment.
9. Popularised by Alfred Marshal John Maynard Keynes

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