Model Questions and Answers

Q1. Explain the significance of macro economics in business decisions? Or Explain the
interface of macro economics with business and industry?

Answer:
1. It explains price determination and the allocation of resources.
2. It has direct relevance in business decision-making.
3. It serves as a guide for business’ production planning.
4. It serves as a basis for prediction.
5. It teaches the art of economizing.
6. It is useful in determination of economic policies of the Government.
7. It serves as the basis for welfare economics.
8. It explains the phenomena of International Trade.

Managerial Economists act as operations researchers and systems analysts in the

management services department of large business firms usually in the private sector. Their
job lies in designing the course of operations to maintain and improve the ‘systems’ of the
firm in terms of productivity, market share, load factor percentage and so on and prepare
reports for helping the decision makers to cope with current as well as anticipated future
problems. In modern business, managers constantly face the major problem of choice
among alternative ways of producing goods and allied business decisions. Managerial
economists assist them in making a rational choice.
A Managerial economist is an economic adviser to a firm or businessman. A firm or
entrepreneur, in the course of its/his business operations, has to take a number of decisions
which are vital to the survival and growth of the business. Such decisions may pertain to the
nature of the product to be produced, the quantity, quality, cost, price and its distribution,
planning and diversification of business, renewal of worn out equipments and machinery,
modernization, etc. The Managerial economist helps the businessman or the manager in
arriving at correct decisions. In short, the business economist while helping in the decision
making process, measures a number of micro and macro variables by applying intelligently
certain quantitative and qualitative techniques to the practical aspects and problems
encountered by a business firm in its
business activity. Forecasting is a fundamental activity of the Managerial economist.
Indeed a business economist is greatly helpful to the management by virtue of his studies of
economic analysis. He is an effective model builder. He deals with the business problems in
a sharp manner with a deep probing.

A Managerial economist in a business firm may carry on a wide range of

duties, such as:
• Demand estimation and forecasting.
• Preparation of business forecasts; to provide forecasts of changes in costs and business
conditions based on market research and policy analysis.
• Analysis of the market survey to determine the nature and extent of competition.
• Analysing the issues and problems of the concerned industry.
• Assisting the business planning process of the firm.
• Discovering new and possible fields of business endeavour and its cost-benefit analysis as
well as feasibility studies.
• Advising on pricing, investment and capital budgeting policies.
• Evaluation of capital budgets.
• Building micro and macro economic models of particular aspects of the firm’s activities
that are useful in solving specific business problems. Most models may be prediction
oriented.
• Directing economic research activity.
• Briefing the management on current domestic and global economic issues and challenges.

Q2. Explain the difference between Micro economics and macro economics?
Answer:

Parameter Micro Economics Macro Economics

Economic Unit It is the study of It is the study of economy as a
individual economic units whole
of an economy and its aggregates.

Scope It deals with individual It deals with aggregates like

income, national
individual prices and income, general price level and
individual national
output, etc. output, etc.

Central Its Central problem is price Its central problem is

Problem determination and allocation determination of
of level of income and
resources employment.

Main tools Its main tools are demand Its main tools are aggregate
and supply of a particular demand and
commodity/factor. aggregate supply of economy as
a
whole.

Use It helps to solve the central It helps to solve the central

problem problem of
of what, how and for whom to full employment of resources
produce in the economy in the
economy.

Equilibrium It discusses how equilibrium It is concerned with the

Analysis of a determination of
consumer, a producer or an equilibrium level of income
industry and
is attained. employment of the economy

Determinants Price is the main determinant Price is the main determinant

of of
Micro economic problems Micro economic problems

Limitation It is based on unrealistic it is assumed that there is a full

assumptions, i.e. In employment in the society
microeconomics which is
not at all possible.
It has been analyzed that
 'Fallacy of
Composition' involves, which
sometimes doesn't proves true
because it
is possible that what is true for
aggregate may not be true for
individuals too.

Approach While analyzing any The macroeconomics takes a

economy, top-down
microeconomics takes a approach into the
bottom-up consideration.
approach,

Example Examples are: individual Examples are: National

income, income, national
individual savings, price savings, general price level,
determination of a aggregate
commodity, demand, aggregate supply,
individual firm's output, poverty,
consumer's unemployment etc.
equilibrium

Q3.What are the various economic systems? Explain the essential features of each one of
them?Which economic system do you prefer and why?
Anwer:

An economic system is an organized way in which a country allocates resources and

distributes goods and services across the whole nation or a given geographic area. It is
includes the combination of several institutions, entities, agencies, decision-making
processes and patterns of consumption that make up the economic structure of a specific
community. Hence it is a type of social system.

An economic system defines how all the entities in an economy interact. Defining them
today is much more complicated than it used to be. Ancient systems were relatively simple
– trade was carried out using barter and there were very few treaties and rules of
engagement.

Types of economic system are :

Economic systems can be divided by the way they allocate economic inputs
and how they make decisions regarding the use of inputs. The various types of
economic systems are:

1. Capitalism
2. Socialism
3. Mixed economy

1. Capitalism : Capitalism is an economic system in which means of production are

privately owned and operated for profit,usually in competitive markets.
 Subject to certain restrictions,individuals are free to decide where to invest, what to
produce or sell, and what prices to charge.there is no limit tot the range of their efforts in
terms of assets, sales, and profits, or the number of customers,employees, and investors or
whether they operate in local, regional,national or international markets.

Note: A capitalist economic system is one characterized by free

markets and the absence of government intervention in the
economy.

Main features of capitalist economy:

(i) Private Property:

In this economy private property is allowed. All means of production like machines,
implements, mines and factories etc. come under private property.

(ii) Price Mechanism:

Capitalist economy is gained by price mechanism. Here prices are determined by the
interaction of demand and supply without the interference of any kind by the government
or any other external forces.

(iii) Freedom of Enterprise:

In this system every individual is independent to his means of production in any occupation
that one likes.

(iv) Sovereignty of that consumer:

Under this system, consumer plays the most vital role. The entire production pattern is
based on the desires, wishes and the demand of the consumer.

(v) Profit Motive:

The maximisation of profit is the main motive of the producer. Profit guides the production
in this type of economy.

(vi) No Government Interference:

Under capitalistic system, government does not interfere in day-to-day economic activities.
This means producers and consumers are free to take decisions.

(vii) Democratic:

The capitalistic system is more democratic in comparison to other economic systems as

there are more changes to chancel according to new environments of the economy.

(viii) Self-Interest:

The inspiring force in this system is self-interest. It leads to hard work and to earn
maximum income by satisfying their consumers.

2. Socialism:socialism is an economic system where everyone in the society equally owns

the factors of production. The ownership is acquired through a democratically elected
government.

“Socialism refers to the government ownership of the means of production,

planning by the government and income distribution”-Samuelson.

Socialist means the system under which economic system is controlled and regulated by the
government so as to ensure welfare and equal opportunity to the people in a society.

It is applied to an economic system in which property is held in common and not

individually, and relationships are governed by a political hierarchy. Individuals in
positions of authority make decisions in the name of the collective group.

Socialism's mantra is, “From each according to his ability to each according to
his contribution”.

Everyone in the society receives a share of the production based on how much each has
contributed. That motivates them to work long hours if they want to receive more.workers
receive their share after a percentage has been deducted for the common good.

Features of Socialism

(i) Collective Ownership:

In socialism, all means of production are owned by the community, i.e., Government, and
no individual can hold private property beyond certain limit. Therefore, it is government
who utilises these resources in the interest of social welfare.

(ii) Economic, Social and Political Equality:

Under socialism, there is almost equality between rich and poor. There is no problem of
class struggle.

(iii) Economic Planning:

Under socialism, government fixes certain objectives. In order to achieve these objectives,
government adopts economic planning. All types of decisions regarding the central
problems of an economy are taken in the economic plans. There is a Central Planning
Authority, who plans for the economy.

(iv) No Competition:

Unlike capitalistic economy, there is no cut throat competition. It means lack of

competition as state is the sole entrepreneur.

(v) Positive Role of Government:

In socialism, government plays significant role in decision making. Thus, government has
complete control over economic activities like distribution, exchange, consumption,
investment and foreign trade etc.

(vi) Work and Wages According to Ability and Needs:

In socialistic economy, work is according to ability and wage according to need. It is said
that under socialism “from each according to his ability to each according to his needs, is
socialism.”

(vi) Maximum Social Welfare:

The sole objective of socialism is the maximum social welfare of the society. It means that
there is no scope of exploitation of labour class. Government keeps a close eye on the needs
of the poor masses while formulating plans.

3. Mixed Economy: Any economy in which private corporate enterprises and public
sector enterprises exist side-by-side, and decisions taken through market mechanism are
supplemented by some form of partial planning, is to be described as mixed economy.
Mixed economy refers to the economic system where the economic activities are
directed by both private and the government.

“Mixed economy is that economy in which both government and private individuals
exercise economic control.” –Murad.

It is a golden mixture of capitalism and socialism. Under this system there is freedom of
economic activities and government interferences for the social welfare. Hence it is a blend
of both the economies. The concept of mixed economy is of recent origin.

The developing countries like India have adopted mixed economy to accelerate the pace of
economic development. Even the developed countries like UK, USA, etc. have also adopted
‘Mixed Capitalist System’. According to Prof. Samuelson, “Mixed economy is that economy
in which both public and private sectors cooperate.” According to Murad, “Mixed economy
is that economy in which both government and private individuals exercise economic
control.”

Features of Mixed Economy:

(i) Co-existence of Private and Public Sector:

Under this system there is co-existence of public and private sectors. In public sector,
industries like defence, power, energy, basic industries etc., are set up. On the other hand,
in private sector all the consumer goods industries, agriculture, small-scale industries are
developed. The government encourages both the sectors to develop simultaneously.

(ii) Personal Freedom:

Under mixed economy, there is full freedom of choice of occupation, although consumer
does not get complete liberty but at the same time government can regulate prices in public
interest through public distribution system.
(iii) Private Property is allowed:

In mixed economy, private property is allowed. However, here it must be remembered that
there must be equal distribution of wealth and income. It must be ensured that the profit
and property may not concentrate in a few pockets.

(iv) Economic Planning:

In a mixed economy, government always tries to promote economic development of the

country. For this purpose, economic planning is adopted. Thus, economic planning is very
essential under this system.

(v) Price Mechanism and Controlled Price:

Under this system, price mechanism and regulated price operate simultaneously. In
consumer goods industries price mechanism is generally followed. However, at the time of
big shortages or during national emergencies prices are controlled and public distribution
system has to be made effective.

(vi) Profit Motive and Social Welfare:

In mixed economy system, there are both profit motive like capitalism and social welfare as
in socialist economy.

(vii) Check on Economic Inequalities:

In this system, government takes several measures to reduce the gap between rich and poor
through progressive taxation on income and wealth. The subsidies are given to the poor
people and also job opportunities are provided to them. Other steps like concessions, old
age pension, free medical facilities and free education are also taken to improve the
standard of poor people. Hence, all these help to reduce economic inequalities.

(viii) Control of Monopoly Power:

Under this system, government takes huge initiatives to control monopoly practices among
the private entrepreneurs through effective legislative measures. Besides, government can
also fake over these services in the public interest.

I prefer Capitalism system of economy:

Capitalism is an economic model where there is private ownership of the means of

production and their operation is for profit. Some characteristics of capitalistic societies are
competitive markets, private property, capital accumulation, price system, voluntary
exchange of goods and services. It is also called a free market enterprise.

While many countries like UK, USA follow capitalism, the government does have some
control or say over the markets and the way they operate. An unbridled capitalism have
taken extreme cases of private ownership of means of production and have had some
negative effects on the social aspects of many societies. Things such as slavery and
colonialism are examples of unbridled or uncontrolled or unregulated capitalistic activities.
I’m a fan of a capitalist society. I believe the government should not overly control the
means of production, but I do believe that the government has to regulate it and ensure that
it doesn’t adversely affect the social aspects of a nation.

The type of economy to be followed is best determined by the respective nations. It will
depend on their history, their populations, the distribution of wealth and resources and the
cultural situations of a nation. India follows a mix of socialism and capitalism where the
latter is becoming more prominent since India’s liberalization in 1991. But India does retain
some aspects of socialism as the Indian citizens feel that some aspects of it are important
for the social cohesion and progress of the nation.
Q4.Free market economy enables allocation of resources promotes innovation and injects
dynamism in the industry. Substantiate this statement highlighting the significance of free
market economy?

Answer: Free market economy enables allocation of resources promotes innovation and
injects dynamism in the industry.

free market economics has been the most powerful, nonreligious force for good in the
history of the world. Free market economics has lifted billions of people worldwide out of
poverty in the past two generations alone. It has brought consumers an embarrassment of
riches worth of product variety. It rewards talented people for talents that dictators or
central planners would never have even thought to exploit. This column reviews ten great
reasons to be very thankful for the wonders of free market economics.

1. Median income is really rising

Claims of stagnant middle class wages generally rely on either the use of very flawed data
rather than official government statistics, or misuse of government statistics. As the
Manhattan Institute’s Scott Winship has repeatedly shown, properly measured incomes
have risen rather steadily with labor productivity, as would be expected. Using data from
the Current Population Survey and the Congressional Budget Office, Winship shows that
from 1967 to 2009 median household income rose by more than $20,000. Given that
median income growth was slowly positive since 2009 until growing rapidly in 2015, the
$20,000 gain has increased since 2009, so that when more updated data are released, the
cumulative gain since 1967 will be more like $22,000 for the median household. These
rising wages are thanks to a free labor market where employers have to compete for
workers by offering competitive wages.

2. Free trade saves us trillions

While free trade is currently a losing issue politically, the economic reality is that allowing
the free market to extend past national boundaries allows people in both trading partners
to increase the benefits of free markets. By exploiting more differences in comparative
advantage and the differences in tastes, preferences, resources, and talents worldwide,
American consumers save hundreds of billions of dollars per year on the goods we
purchase. In addition, we gain variety in our purchases, such as the ability of buy fresh fruit
in the winter. Yes, some workers may temporarily lose jobs and see wages rise more slowly
thanks to the increased competition trade brings, but on average we save much more in
lower prices than we lose in lower wages.
3. Free markets know what we want

Free markets miraculously supply almost all our wants without an obvious mechanism that
lets them know what to make and where to deliver it. Through the wonder of the infamous
invisible hand, we vote with our dollars every day by how we spend our money and the
market continually adjusts to meet those needs as efficiently and inexpensively as possible.
The average supermarket, for example, contains 50,000 different items for sale and has an
inventory control system and supply chain so responsive to consumer demand that on any
given day 99.8 percent or more of those items are there waiting for you to buy them.

4. Innovators are rewarded, consumers benefit

Economic rewards to innovators encourage businesses to invent things consumers don’t

even know we need. Nobody knew she needed an iPhone, Velcro, Post-It notes, blind-spot
warning systems, or fitness trackers until somebody invented them. More innovations than
we can recall proved to be things that we didn’t need and those innovators did not receive
an economic reward. However, the rewards to those who correctly guess the mood of
enough consumers are sufficient to make many of them rich. This encourages innovation
and enriches consumers by much more than any financial rewards to the innovators
themselves.

5. Failed businesses are punished, economic growth accelerated

Economic judgments also put out of business those making things consumers don’t want.
This is a benefit of free markets because when a business disappears it frees up resources to
be redeployed to the production of things society values more highly. This is exactly what
the government frequently gets wrong when it bails out failing businesses under the
mistaken pretext of protecting jobs. Bailing out failing companies traps resources and
capital in a low growth sector that could have been more profitably used in higher growth
areas of the economy. In other words, stopping business failures slows down economic
growth; let them die and watch new businesses rise from the ashes.

6. Free markets match buyers and sellers

Free markets automatically pair up sellers and buyers. In a free market system, producers
rarely have to know, find, or ever meet the sellers of their products. Retailers stand between
producers and consumers. Banks stand between savers and borrowers. Stockbrokers and
real estate agents serve to match up those who want to sell and buy shares of stock or a
piece of property. Because some money can be made through performing these
matchmaking services, a free market allows customers to find the products they want
without finding the people making those products. This greatly lowers the transaction costs
for both buyers and sellers, making markets more efficient. The internet has only
accelerated the benefits gained in this regard, shrinking transaction costs ever further.

7. Competition keeps prices low

Competition among competing businesses keeps prices low. Inflation is mostly a problem
in the industries with the most government involvement (e.g., healthcare, education) while
industries that have more free market competition find businesses reluctant to raise prices
and always looking for cost efficiencies to gain an advantage over those competitors. Just
think about prices for computers, food, and clothes to realize the gains consumers capture
from robust competition in a free market.

8. Price signals work

Price signals tell people and businesses where to allocate their skills and efforts. A nursing
shortage is signaled to the labor market through employers advertising higher wages for
nurses, hopefully leading more people to go into that profession. High demand for a
popular product will lead businesses to bid higher to get a share of the limited supply,
encouraging producers to make more. Similarly, falling prices and wages tell producers and
workers what products and fields some of them should abandon. When you think about
how rarely the store is out of the item you want or has a huge overstock lingering on the
shelves for months on end, you realize how well price signals in a free market work.

9. Freedom

Free markets let you choose what work you want to do, who to work for, where to shop,
what to buy. Without free markets, some government agency or benevolent dictator would
have to match workers with jobs, producers with retailers, and retailers with customers.
Without free markets, you have no free choice. Thus, when we restrict free markets with
government regulations, people lose freedom: over what work to do, where and when to
shop, what to buy. Free markets, in contrast to government-controlled ones, let over one
hundred million workers choose from thousands of professions and three hundred million
consumers choose from millions of goods and services for sale every day.

10. Free markets make things work

Think about sectors of our society where things are not working: many government
agencies (like the DMV), healthcare, transportation systems, and K-12 education, for
example. Those areas are where we have the fewest markets and the most government
intervention. If you want low prices and high quality, keep government out of the way and
let free markets work.

Q.5 Explain the various goals of an economic system?

Answer: The economic policy is developed in every country to achieve some economic
goals. Following are the main economic goals which are widely known in the world.
I) Economic Growth: Economic growth is the increase in the goods and services
produced by an economy, typically a nation, over a long period of time. It is measured as
percentage increase in real gross domestic product (GDP) which is gross domestic product
(GDP) adjusted for inflation. GDP is the market value of all final goods and services
produced in an economy or nation.

II) Full Employment:The first definition of full employment would be the situation
where everyone willing to work at the going wage rate is able to get a job.This would imply
that unemployment is zero because if you are not willing to work then you should not be
counted as unemployed. To be classified as unemployed you would need to be actively
seeking work. This does not mean everyone of working age is in employment. Some adults
may leave the labour force, for example, women looking after children.
But, in practice, we never see 0% unemployment, and this can make full employment
hard to define. Generally, an unemployment rate of 3% or less would be considered to be
full employment.
III) Economic Efficiency: Well, economic efficiency is a state where every resource is
allocated optimally so that each person is served in the best possible way and inefficiency
and waste are minimized. While this is a general definition, lets look at some other factors
often used to describe this term.
i. Production of goods is at its lowest cost.
ii. One person cannot be helped, by means of reallocating the goods, without making
another person worse off.
iii. It indicates that there has been a balance between loss and benefit.

IV) Price level stability:Price stability in an economy means that the general price
level in an economy does not change much over time. In other words, prices neither go up
or down; there is no significant degree of inflation or deflation.
Price level stability denotes that consumer spending is not affected by inflation because
consumers do not worry that the value of money will change anytime soon. It is
important to separate the increase in the prices of individual goods or services from the
increase in the general price level.

V) Economic Freedom: The freedom to prosper within a country without intervention

from a government or economic authority. Individuals are free to secure and protect
his/her human resources, labor and private property. Economic freedom is common in
capitalist economies and must incorporate other civil liberties to be deemed as truly free.

VI) Economic security:Economic security or financial security is the condition of having

stable income or other resources to support a standard of living now and in the foreseeable
future. It includes:
 probable continued solvency
 predictability of the future cash flow of a person or other economic entity, such as a
country.
 employment security or job security

Financial security more often refers to individual and family money management and
savings. Economic security tends to include the broader effect of a society's production
levels and monetary support for non-working citizens.

VII)An Equitable distribution of income:Government have to ensure the proper

distribution of income among people to lower the percentage of poverty level.A more
equitable distribution of income may help accelerate growth and promote economic
development. Equitable doesn’t mean equal distribution of income. It refers to the
distribution of income that is ‘fair,’ but the concept of ‘fair’ is subjective.

Distribution of wealth and income is the way in which the wealth and income of a nation
are divided among its population. Or the way in which the wealth and income of the world
are divided among nations.

An equitable distribution of wealth gives all citizens a fair opportunity to become

successful.

VIII)Balance of trade: The balance of trade measures net exports of goods and services
(NX).It is the value of exports – the value of imports.
 It forms the major component of the current account, although it ignores international
investment flows and current transfers.
 The balance of trade refers to both trade in goods (visibles) and services (Invisibles) –
Though people may refer to a specific balance of trade in goBOT is most often the largest
component of a country’s current account or Balance of Payment (BOP) and is a crucial
reflection of a country’s business scenario. Moreover, the BOP data also highlights key
inferences from the past performances, which help create better strategies for future. The
components contributing heavily to exports/imports can be readily identified and improved
upon.ods.

Q.6 Discuss the various resources of an economic system?

Answer: The various resources of an economic system

are:

A) Capital
B) Land
C) Entrepreneurship

Economic resources

Economic resource 1: Land

Land is an economic resource that includes all natural physical resources like gold, iron, silver,
oil etc. Some countries have very rich natural resources and by utilizing these resources they
enrich their economy to the peak.

Such as the oil and gas development of North Sea in Norway and Britain or the very high
productivity of vast area of farm lands in the United States and Canada. Some other developed
countries like Japan have smaller economic resources. Japan is the second largest economy of
the world but reliant on imported oil.

Economic resource 2: Labor

The human input in the production or manufacturing process is known as labor. Workers have
different work capacity. The work capacity of each worker is based on his own training,
education and work experience.

This work capacity is matters in the size and quality of work force. To achieve the economic
growth the raise in the quality and size of workforce is very essential.

Economic resource 3: Capital

In economics, Capital is a term that means investment in the capital goods. So, that can be used
to manufacture other goods and services in future.

Following are the factors of capital:

Fixed Capital
It includes new technologies, factories, buildings, machinery and other equipments.

Working Capital

It is the stock of finished goods or components or semi-finished goods or components. These

goods or components will be utilized in near future.

Capital productivity

New features of capital building, machinery or technology are commonly used to improve the
productivity of the labor. Such as the new ways of farming helps to enhance the productivity of
the agriculture sector and give more valuable jobs in this sector which motivates people to come
out for work.

Infrastructure

It is a stock of capital that is used to maintain the whole economic system. Such as roads, railway
tracks, airports etc.

Economic resource 4: Entrepreneurship

The Entrepreneur is person or individual who wants to supply the product to the market, in order
to make profit. Entrepreneurs usually invest their own capital in their business. This financial
capital is generally based on their savings and they take risks linked to their investments. This
risk-taking can be rewarded by the profit of the business. Entrepreneurship is, thus, an important
economic resource.

Following are the factors of Entrepreneurship:

Income

Wealth

Labor and Wages

Capital and Interest

Profit and Enterprise