Economics

CA CPT
GENERAL ECONOMICS
AN INTRODUCTION TO MICROECONOMICS
CHAPTER - 1
1.1 DEFINITIONS OF ECONOMICS
TABLE OF CONTENT
1.2 MICROECONOMICS & MACROECONOMICS 1.3 NATURE OF ECONOMICS 1.4 METHODS OF STUDY 1.5 CENTRAL / BASIC / FUNDAMENTAL ECONOMIC
PROBLEMS
1.6 ECONOMIC SYSTEMS

1.6.1 CAPITALISM 1.6.2 SOCIALISM 1.6.3 MIXED ECONOMY 1.7 PRODUCTION POSSIBILITY CURVE
FOUNTAINHEAD
CA - CPT
GENERAL ECONOMICS- MICRO
1.1
CHAPTER - 1
1.1 DEFINITIONS OF ECONOMICS

All important definitions of economics are classified in the following four categories
Economics as a Science of Wealth Adam Smith for the first time in 1776 in his book An Inquiry into the Nature and the Causes of the Wealth of Nations systematically defined economics as a science which studies acquisition, accumulation and expenditure of wealth. Many other classical economists like J B Say also defined economics as a study of wealth. Following are the important merits of defining economics as a science of wealth Creation of wealth is a very important problem faced by each and every individual. Creation of wealth is also a very important problem faced by each and every nation of the world. Without creating more wealth it would not be possible for countries to address the problems of unemployment, poverty, inequalities, etc. Thus it goes to the merit of Smith for having addressed the problem of economic growth right in the eighteenth century.
Following are important limitations of this category of definition Adam Smith and other classical economists concentrated only on material wealth and ignored creation of services (immaterial wealth). Too much focus was given on the production of wealth and the problem of social welfare was completely ignored.
Economics as a Science of Welfare/Material Well-being Alfred Marshall defined economics as a Science of Welfare. According to him Smiths definition was incomplete and inadequate as he did not answer the question wealth creation for whom? By emphasizing too much on wealth, Smith had completely neglected the importance of man in economics. Marshall tried to correct this mistake by stating that wealth is only secondary and human welfare is of prime importance. Wealth is a means to improve social welfare. He thus made economics primarily a study of man. He was supported by economists like A C Pigou. Marhsalls definition Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus, it is on the one side a study of wealth and on the other and more important side a part of the study of man.
Following are the merits of this group of definition
This definition is more wider and comprehensive as it encompasses the aspect of social welfare. It makes economics a social science. Following are the demerits of this group of definition Marshall and others ignored the importance of services in contributing to improvement of social welfare. According to Robbins the very concept of welfare is very not very clear. Economics as a Science of Choice-making/Scarcity Prof. Lionel Robbins in 1931 in his book Nature and Significance of Economics defined economics as a science which studies the problem of choice-making or scarcity. The problem of choice making arises because
FOUNTAINHEAD
CA - CPT
1.2
CHAPTER - 1
Human wants are unlimited. When one want is satisfied, second crops up. When second is satisfied, third emerges and so on. There is no end to this. Not only human beings want more and more they also look for variety. Resources to satisfy unlimited wants are limited/scarce. Both physical resources and monetary resources are limited. Limited resources have alternative uses. For example, a hundred rupee note can be used to purchase many commodities. Similarly, on a two acre land, either a hospital can be constructed or a multiplex. Therefore, man or a society has to make a choice regarding the best use of the given resource. Following are the important merits of Robbins definition Robbins made economics a real science by basing it on the objective facts of economic agents trying to optimize certain objective under given constraints. For example, consumers try to maximize satisfaction/utility with limited budget and given prices of commodities. He did not distinguish between material and immaterial welfare. Following are important limitations of Robbins definition He is blamed for making economics completely impersonal and colorless. By emphasizing only on positive aspects, he completely ignored the normative role that economics has to play to become instrumental in enhancing social welfare. Robbins also ignored macro aspects like determination of national income, business cycles, unemployment, etc. He has said nothing about the problems of growth and development. He talks only of optimum of allocation of resources and not about increment in them. Economic problems sometimes can arise due to abundance also. For example, problems arising out of population explosion or unemployment arising due to recession (overproduction). Economics as a Science of Growth and Development A modern definition of economics has been given by the Nobel Prize winner Paul A Samuelson. According to him economics studies the dynamic problems of growth and development. His definition is stated as Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of society. Samuelsons definition is more or less same as Robbins in content but it considers an important macro problem faced by all countries of the world, namely, growth which is a key to solving problems of unemployment, poverty and inequalities.
Multiple Choice Questions

1. Find the correct match : a. An enquiry into the nature and causes of the wealth of the nation : A.C.Pigou b. Science which deals with wealth : Alfred Marshall c. Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses : Robbins d. The range of our enquiry becomes restricted to that part of social welfare that can be
CA - CPT GENERAL ECONOMICS- MICRO 1.3
FOUNTAINHEAD
CHAPTER - 1
brought directly or indirectly into relation with the measuring rod of money : Adam Smith 2. The law of scarcity : a. does not apply to rich, developed countries b. applies only to the less developed countries c. implies that consumers wants will be satisfied in a socialistic system d. implies that consumers wants will never be completely satisfied 3. Who expressed the view that Economics is neutral between ends? a. Robbins b. Marshall c. Pigou d. Adam Smith 4. Which of the following is the best general definition of the study of Economics? a. Inflation and unemployment in a growing economy b. Business decision making under foreign competition c. Individual and social choice in the face of scarcity d. The best way to invest in the stock market 5. What implication(s) does resource scarcity have for the satisfaction of wants? a. Not all wants can be satisfied b. We will never be faced with the need to make choices c. We must develop ways to decrease our individual wants d. The discovery of new natural resources is necessary to increase our ability to satisfy wants 6. Rational decision making requires that : a. ones choices be arrived at logically and without error b. ones choices be consistent with ones goals c. ones choices never vary d. one makes choices that do not involve trade-offs 7. Economics, according to Lionel Robbins, is a a. normative science b. applied science c. positive science d. experimental science 8. Economic goods are considered scarce resources because they a. cannot be increased in quantity b. do not exist in adequate quantity to satisfy social requirements c. are of primary importance in satisfying social requirements d. are limited to man made goods 9. Choice is created by the a. abundance of resources b. urgency of needs c. non-availability of resources d. scarcity of resources 10. Consider the following and decide which, if any, economy is without scarcity : a. The pre-independent Indian economy, where most people were farmers b. mythical economy where everybody is a billionaire c. Any economy where income is distributed equally among its people d. None of the above 11. The term Economics owes its origin to the Greek word
FOUNTAINHEAD CA - CPT GENERAL ECONOMICS- MICRO 1.4
CHAPTER - 1
12.
13.
14.
15.
16.
17.
18.
19.
a. Aikonomia b. Wikonomia c. Oikonomia d. None of the above Oikonomia means a. Industry b. Management of household c. Services d. none of these Adam smith published his masterpiece An Enquiry into the Nature and Causes of Wealth of Nations in the year a. 1776 b. 1786 c. 1756 d. 1766 Adam Smith defined Economics in term of: a. The science of welfare b. The science of scarcity c. The science of wealth d. The science of wealth and welfare Lionel Robbins Published his famous book Nature and Significance of Economics in the year a. 1935 b. 1933 c. 1931 d. 1937 According to Economics is the the study of how in a civilized society cone obtains the share of what other people have produced and of how the total product of society changes and is determined a. Jacob Viner b. Henry Smith c. Pigou d. Paul A. Samuelson Economics may be defined as the science that explains _____________. a. the choices that we make as we cope with scarcity b. the decisions made by politicians c. the decisions made by households d. all human behavior Scarcity is a situation in which ______________________. a. wants exceed the resources available to satisfy them b. something is being wasted c. people are poor d. none of the above Who among the following gave the definition of Economics as the Science which deals with wealth? a. J.M. Keynes b. H.C. Dickinson c. Henry Smith d. J. B. Say
FOUNTAINHEAD
CHAPTER - 1
1.2 MICROECONOMICS & MACROECONOMICS

MICROECONOMICS: It is that branch of economics which studies the behavior of individual economic agents (consumers, firms or investors). The whole of microeconomics can be divided into three main segments Commodity/Product pricing (demand and supply analysis) Factor pricing (theory of distribution) Welfare theory (from a micro view point) MACROECONOMICS: It is that branch of economics which studies the behavior of aggregated economic variables. In other words, it is the study of an economy as a whole. The whole of macroeconomics can be divided into four main segments Theory of income and employment (Classical versus Keynesian debate) [including theory of business fluctuations/business cycles Theory of general price level / inflation Theory of growth and development and Macro theory of distribution (relative shares of wages and profits) DISTINCTION BETWEEN MICRO AND MACRO ECONOMICS: The study of forest can be compared to the study of macroeconomics whereas study of the components that make up forest (a tree, an insect, a pond, an animal, etc.) can be compared to the study of microeconomics. Study of both is equally important. Knowing one without the knowledge of the other will never allow one to grasp the functioning of the economy. Both are interdependent. Because ultimately micro makes macro or macro is made up of micro. Changes at micro level affect the macro picture. At the same time macro level changes affect the micro constituents. However, there is no watertight compartment of what is micro and what is macro. It all depends on the situation in which one is dealing with a particular topic. Study of Indian economy is macro but when Indian economy is studied as a component of global economy it becomes a micro study. Also, results of one may not be applicable to the other. As an illustration, saving is private virtue but a public vice. So what is good at micro level can become totally adverse at the macro level. Similarly, what is good and desirable at the macro level may be very undesirable at micro level. As an instance, deficits in budgets are sometimes a matter of luxury for the government (since they can increase growth in the short run) but an individual cannot afford to be in deficit so far as his family budget is concerned. Following are important points of difference between micro and macroeconomics.
MICROECONOMICS It studies the behavior of individual economic units. It is partial equilibrium analysis. It is basically concerned with price and output determination in an industry independent of those in other industries. MACROECONOMICS It studies the behavior of aggregated economic units. It is general equilibrium analysis. It is basically concerned with output, employment and price determination in an economy and it takes into account the disturbance in equilibrium price and output in one market which could lead to a disturbance in the equilibrium prices and quantities in all other markets. Individual demand, price of a product, profit Aggregate demand, general price level, national of a firm, etc. are some topics studied in income, etc. are some topics studied in microeconomics macroeconomics.
CHAPTER - 1

1. Macroeconomics is also called_______economics. a. Applied b. Aggregate c. Experimental d. none of the above An example of positive economic analysis would be : a. an analysis of the relationship between the price of food and the quantity purchased b. determining how much income each person should be guaranteed c. determining the fair price for food d. deciding how to distribute the output of the economy A study of how increases in the corporate income tax rate will affect the national unemployment rate is an example of a. macro-economics b. descriptive economics c. micro-economics d. normative economics Which of the following does not suggest a macro approach for India? a. Determining the GNP of India b. Finding the causes of failure of X and co c. Identifying the causes of inflation in India d. Analyst the causes of failure of industry in providing large scale employment From the national point of view which of the following indicates micro approach? a. Per capita income of India b. Underemployment in agricultural sector c. Lock out in TELCO d. Total savings in India Which of the following is not a subject matter of micro-economies? a. The price of mangoes b. The cost of producing a fire truck for the fire department of Delhi, India c. The quantity of mangoes produced for the mangoes market d. The national economys annual rate of growth The branch of economic theory that deals with the problem of allocation of resources is
a. micro-economic theory b. macro-economic theory c. econometrics d. none of the above
2.
3.
4.
5.
6.
7.
8.
Macro Economics is the study of ________________________. a. all aspects of scarcity b. the national economy and the global economy as a whole c. big businesses d. the decisions of individual businesses and people
FOUNTAINHEAD
CA - CPT
1.7
CHAPTER - 1
1.3 NATURE OF ECONOMICS

Economics as a Science: A subject or a discipline is considered as a science if it fulfills the following four important criteria It studies cause and effect relationship between variables in a systematic way; Variables in the discipline can be subject to measurement; The subject has its own methodological apparatus or methods of study and The subject should have the ability to forecast Subjecting economics to this four criteria test, it is observed that it fulfills all the four requirements It studies cause and effect relationships (as in law of demand or in quantity theory of money); All variables in economics are measurable (mostly in terms of money); Induction and deduction are two methods of study employed by economists to prove their hypotheses and Forecasting of economic variables is not only possible but is employed usefully. It needs to be mentioned here that although economics is a science it is not hard core or perfect science like physics or chemistry because the subject matter of study in economics is human behavior which is highly erratic and unpredictable. Not only this, opinions about a particular event differ from one economist to the other. Economics as an Art: An art is practice of knowledge. In other words, it is the application of science to solve problems. Science is theoretical but art is practical. Economics is an art because its theoretical knowledge can be applied to solve real life economic problems like poverty, inflation, unemployment, inequalities, etc. Finance minister, economists, managerial economist (at a firm level), etc. practice the subject to find optimal solutions. Economics as a Positive Science: A positive science (also known as descriptive science) answers the question what it is and why it is? In other words, it studies cause and effect relationship between variables. It describes the events as they happen and analyses the reasons behind it. As a positive science, economics analyses many such cause and effect relationships which ultimately take the form of laws and theories. As an example, the statement an increase in money supply will cause inflation is a positive statement. Economics as a Normative Science: A normative science (also known as prescriptive science) answers the question what it should be or what it ought to be? It involves value judgments or opinions. It is concerned with what is ethical or unethical. It is ultimately concerned with welfare propositions. As an example, the statement inflation should be controlled at any cost because it has the potential to widen inequalities is a normative statement. Here an opinion of someone is expressed as regards the issue of inflation.

1. Which of the following is a normative statement? a. Planned economies allocate resources via government departments b. Most transitional economies have experienced problems of falling output and rising prices over the past decade c. There is a greater degree of consumer sovereignty in market economies than planned
FOUNTAINHEAD
CHAPTER - 1
2.
3.
economies d. Reducing inequality should be a major priority for mixed economies Ram : My corn harvest this year is poor. Krishan : Dont worry. Price increases will compensate for the fall in quantity supplied. Vinod : Climate affects crop yields. Some years are bad, others are good. Madhur : The Government ought to guarantee that our income will not fall. In this conversation, the normative statement is made by a. Ram b. Krishan c. Vinod d. Madhur The task of economic science is to _________________________. a. save the earth from the overuse of natural resources b. help us to understand how the economic world works c. tell us what is good for us d. make moral choices about things like drugs
1.4 METHODS OF STUDY

In Economics, there are two methods of deriving generalizations or laws which are discussed in detail hereunder: DEDUCTIVE METHOD It is also known as abstract / analytical / a priori method. Under this method, laws are deduced by using logic. The logic in this method proceeds from general to particular. This method is based on abstract reasoning and not on facts. For example, it is assumed that human beings behave rationally so on this basis we can derive the conclusion that an investor in the share market will purchase shares of a company when they are cheap and sell it when their price increases. Following are the steps used in this method Perception of the problem Defining the technical terms and making appropriate assumptions Deducing hypothesis Testing of hypothesis deduced.
Important limitations of this method are Assumptions may turn out be untrue / partially true Conclusions may not be very strong as they are not based on the facts and It is dangerous to claim universal validity for the economic generalizations so deduced.
INDUCTIVE METHOD In this method conclusions are drawn on the basis of collection and analysis of facts relevant to the inquiry. The generalizations are based on observation of individual examples. The logic in this method proceeds from the particular to the general. Following are important steps to be followed in this method Perception of the problem Collection, classification and analysis of data by using appropriate statistical techniques Finding out the reasons for the relationship established through statistical analysis
FOUNTAINHEAD
CA - CPT
1.9
Following are important advantages of using this method It leads to precise, exact and measurable conclusions It shows that generalizations are valid only under certain conditions
CHAPTER - 1
Following are important limitations of this method Risk of hurried conclusions having being drawn from an insufficient number of facts Difficulties involved in the collection of facts Observation and experimentation have a very limited scope in social science.
In the end it may be important to note that the two methods are not mutually exclusive and are used side by side in any scientific inquiry. Conclusions drawn from the deductive method of reasoning are verified by inductive method of observing concrete facts.

1. Under inductive method, the logic proceeds from: a. General to particular b. Positive to normative c. Normative to positive d. Particular to general
1.5 CENTRAL/ BASIC/ FUNDAMENTAL ECONOMIC PROBLEMS

Scarcity of resources is a universal problem. So every country or government or society has to answer the following questions which are popularly known as basic problems of an economy: What to produce and how much? Every society has to decide which goods and services are to be produced and in what quantities. Since resources are limited and have multiple uses, everything in infinite quantities cannot be produced. On the basis of priority of society this question has to be answered. How to produce? Once a decision is taken as to what and how much is to be produced, a society is to decide as to how to produce. This is a problem of choice of technique of production. A society has to decide whether to use labor-intensive method of production or capital-intensive method of production. The choice would depend on a number of factors availability of labor and capital; efficiency of labor and capital; relative prices of labor and capital; laws related to the use of labor, etc. For whom to produce? After having decided how to produce, a society will have to decide regarding how should the production be distributed among individuals. This is a problem of distribution or factor pricing since the share that an individual can take away from total output depends on the income that he earns either as a labor (wage) or landlord (rent) or capitalist (interest) or an entrepreneur (profit). How to speed up economic growth? A society is not only concerned with its present consumption but also looks for ways to increase its future consumption by increasing the production capacity. It will not use up all its resources for present consumption but set aside some for the future consumption. This brings in picture the question of what should be the savings and investment rate that ultimately go on to decide the growth rate. And there should be continuous increase in growth rates so that standard of living of people can rise.
FOUNTAINHEAD
CHAPTER - 1
How to ensure optimum utilization of resources? The story does not end by merely addressing the problem of how to accelerate growth but also to find out ways of optimally utilizing the resources, particularly addressing the problem of underemployment and unemployment.

1. The central problem in economics is that of a. comparing the success of command versus market economies b. guaranteering that production occurs in the most efficient manner c. guaranteering a minimum level of income for every citizen d. allocating scarce resources in such a manner that societys unlimited needs or wants are satisfied in the best possible manner Which is one of the future consequences of an increase in the current level of consumption in the India? a. Slower economic growth in the future b. Greater economic growth in the future c. No change in our economic growth rate d. Greater capital accumulation in the future Capital intensive technique would get chosen in a a. labour surplus economy b. capital surplus economy c. developed economy d. developing economy Labour intensive technique would get chosen in a a. labour surplus economy b. capital surplus economy c. developed economy d. developing economy Which of the following is not one of the four central questions that the study of economics is supposed to answer? a. Who produces what? b. When are goods produced? c. Who consumes what? d. How are goods produced? Larger production of ________________ goods would lead to higher production in future. a. consumer goods b. capital goods c. agricultural goods d. public goods
2.
3.
4.
5.
6.
1.6 ECONOMIC SYSTEM

An economic system is an arrangement of the economy (defining relations between consumers, firms and governments) to solve the basic economic problems. It aims at (i) increasing the availability of resources and (ii) minimizing or eliminating the wastage of resources. Basically there are three main types of economic systems adopted by different countries of the world
FOUNTAINHEAD
Capitalism / Free Market Economy / Laissez-faire Economy Socialism / Command Economy Mixed Economy
CHAPTER - 1
In the following section, we discuss the characteristics, working, advantages and disadvantages of each of these systems.
1.6.1 Capitalism
Features / Characteristics: The Right to Private Property: Productive resources like land, machines, factories, mines, etc. can be privately owned. The owners of these factors are free to use them as they like. Freedom of Enterprise: Everyone is free to pursue any economic activity that he likes. He is free to start any kind of business or take up any kind of job. Consumer Sovereignty: People are free to spend their income in the manner they like. They are free to purchase whatever they want. In such a system, generally producers will produce only those goods and services which are demanded by the people (this is the exact meaning of the word consumer sovereignty). Profit Motive: Profit making motive is the grease which drives the wheels of capitalism. It induces people to work and produce. Competition: There is competition both among buyers to obtain goods and among sellers to sell goods. Advertisements, price-cutting, discounts, etc. are popular methods adopted by sellers to increase their sales. Inequalities of Income: It has generally been observed that in capitalist countries there is a wide gap between haves (rich) and have-nots (poor) which is mainly due to unequal distribution of property. Working of Capitalist Economies: All important economic decisions and answers to basic economic problems are addressed by the price mechanism (demand and supply forces) or the market. What to Produce? The only objective of producers is to maximize profit. Therefore, in such an economy only those goods and services will be produced whose demand and therefore prices keep increasing? Producers will decrease or altogether stop production of those goods and services whose demand is decreasing. How to Produce? An entrepreneur will produce his goods with the least costly technique of production. If labor is relatively cheaper, he will employ labor-intensive method. If capital is relatively cheaper, he will employ capital-intensive method. By doing so cost of production can be reduced and profit maximized. Thus, the relative prices of factors help in deciding how to produce. For whom to produce? Goods and services in this system are produced only for those who have the buying capacity. The buying capacity of an individual, in turn depends upon his income which in turn depends on the amount of the factor he owns as well as the price of the factor.
CHAPTER - 1
How to Accelerate Growth? The decisions about savings depend upon the interest rates prevailing in the market which are determined by demand for and supply of money. Higher the interest rate, higher the savings and vice-versa. Similarly, investment decisions too depend upon interest rates and return on capital (profit expectation). Higher the return on capital, given the interest rate, the greater will be the investment in the economy. Moreover, it is the increasing rate of profit which encourages innovations in the economy. Merits Capitalism preserves fundamentals rights like right to freedom and right to private property. It works automatically through the price mechanism. Under capitalism freedom of choice brings maximum satisfaction to consumers. Newer and finer varieties of goods will become available. The freedom of enterprise results in maximum efficiency in production. It rewards men of initiative and enterprise. The existence of private property and the driving force of profit results in high standard of living. Country as a whole benefits through growth of business talents, research, etc. Demerits In capitalism the enormous wealth produced is taken away by a few. This results inequalities in income. Rich become richer and poor become more poor. Welfare of society is not protected under capitalism because the main objective of such a society is profit maximization and not welfare maximization. It leads to the formation of monopolies. Security of employment under capitalism is absent. Class conflict arises between employers and employees. Productive resources are misused under capitalism. They are used for the production of luxury goods as they bring in higher profits. Producers incur a huge sum of money on wasteful expenditure like advertisements. Economic instability (altering periods of prosperity and depression) is very common under capitalism.
1. 2. 3. 4. 5. 6. 7.
1. 2. 3. 4. 5. 6. 7. 8.
1.6.2 Socialism
Features / Characteristics: Collective Ownership of Resources: Factors of production in socialism are owned by the whole community represented by the state. As a result of social ownership, the driving force of economic activity is welfare maximization. Centrally Planned Economy: In this system, decisions like what to produce, how to produce, etc. are taken by the central authority which is responsible for setting and accomplishing socio-economic goals through planning. Certain Basic Guarantees: In socialism there is guarantee of freedom from hunger and the right to work. That is, the government will see to it that no one remains unemployed and that all get food to eat and survive. Relative Equality of Income: In this system, an attempt is made by the government to provide equal opportunities to all resulting in relative income equality.
CHAPTER - 1
Secondary Role of Price Mechanism: Price mechanism in socialism exists but it has only a secondary role, e.g., to secure disposal of accumulated stocks. Without the presence of profit motive, price mechanism loses its predominant role in economic decisions Merits Equitable distribution of wealth & income and provision of equal opportunities for all helps to achieve the supreme goal of social justice. Due to the presence of planned economic system, there will be better utilization of resources, maximum production and wastes of all kinds will be avoided. Due to the planned economy, the problem of unemployment will be minimized and business fluctuations are eliminated ensuring stable economic growth. Class war is absent. There is no exploitation of labor by employer. All in the society are guaranteed a minimum standard of living. There is no consumer exploitation due to the absence of monopolies Demerits Bureaucracy is predominant in socialism. This leads to corruption, red-tapism, nepotism, favoritism, etc. It restricts all types of freedom of individuals. It takes away the right to private property. It does not provide necessary incentive to hard work in form of profit. There is no proper basis for cost calculation. As a result, it is not possible to ensure efficient functioning of the economy as rational and scientific allocation of resources cannot take place. Freedom of choice to consumers is absent. They have to purchase whatever the state produces.
1. 2. 3. 4. 5. 6.
1. 2. 3. 4. 5. 6.
1.6.3 Mixed Economy

Features / Characteristics: Coexistence of Private & Public Sectors: Mixed economy is a compromise between socialism and capitalism. The aim is to have the best features of both socialism and capitalism while trying to exclude the demerits of the two. Here one finds the co-existence of public and private sectors. Private enterprise is possible because in this system there is freedom of private property. Profits are allowed to the private sector but it is regulated by the government directly or indirectly. The government also operates a number of enterprises but with the only objective of welfare maximization. Planned Economy: Planning is an inherent part of mixed economy. Here the planning is indicative. It provides signals to the private sector regarding the direction in which it is expected to move. Public sector enterprises have to work according to a plan and to achieve the objectives laid down for it. Balanced Regional Development: Government tries to achieve balanced regional development by providing various incentives like subsidies, tax holidays, etc. to private sector to set up their production units in backward regions. Dual System of Pricing: In this system, the prices of most important goods and services (LPG, Petrol, Fertilizers, Life Saving Medicines, etc.) affecting the welfare of the masses are fixed by the government. Whereas, prices of other goods and services (Cosmetics, Soft Drinks, Furniture, etc.) are fixed by the market mechanism of demand and supply.
CHAPTER - 1
1. 2. 3. 4. 5.
Merits Mixed economy protects individual freedoms like that of consumption, choice of occupation, freedom of enterprise, etc. Price mechanism is allowed to operate freely and therefore optimum allocation of resources gets ensured. An attempt is made by the government to reduce inequalities of income and wealth and avoid class wars. Due to planning economic fluctuations can be avoided. Mixed economy helps to achieve the goal of rapid and balanced economic development.
Demerits 1. Mixed economy is very difficult to operate as balancing the public sector and private sector is very difficult. Both the sectors have diametrically different objectives. 2. Excessive controls and regulation over the private sector will discourage it to achieve economic efficiency. 3. Problems of red-tapism, nepotism, favoritism, officialdom, etc. are present in this system.

1. In a free market economy the allocation or resources is determined by a. votes taken by consumers b. a central planning authority c. consumer preference d. the level of profits of firms A capitalist economy uses ____________________ as the principal means of allocating resources. a. Demand b. Supply c. Efficiency d. prices In a free market economy, when consumers increase their purchase of a good and the level of ________________exceeds ______________ then prices tend to rise. a. demand, supply b. supply, demand c. prices, demand d. profits, supply Which of the following is considered as a disadvantage of allocating resources using the market system? a. Income will tend to be unevenly distributed b. People do not get goods of their choice c. Men of Initiative and enterprise are not rewarded d. Profits will tend to be low In a mixed economy, a. all economic decisions are taken by the central authority b. all economic decisions are taken by private entrepreneurs c. economic decisions are partly taken by the state and partly by the private entrepreneurs d. none of the above
2.
3.
4.
5.
FOUNTAINHEAD
CHAPTER - 1
6.
7.
8.
9.
10.
In an economy people have the freedom to buy or not to buy the goods offered in the market place, and this freedom to choose what they buy dictates what producers will ultimately produce. The key term defining this condition is a. economic power of choice b. consumer sovereignty c. positive economy d. producer sovereignty The economic system in which all the means of production are owned and controlled by private individuals for profit. a. Socialism b. Capitalism c. mixed economy d. communism When productivity increases _____________________. a. prices rise b. living standards improve c. there are fewer good jobs d. living standards deteriorate Socialist economy is a a. planned economy b. mixed economy c. profit oriented economy d. none of these Freedom of choice is the advantage of a. socialism b. capitalism c. mixed economy d. communism
1.7 PRODUCTION POSSIBILITY CURVE:

Introduction: Production Possibility Curve is a geometrical instrument to highlight the problem of scarcity in an economy. Meaning: Production possibility curve (PPC) [also known as production possibility frontier or transformation curve] shows all possible combinations of two commodities that a country can produce with its given resources and technology. It is assumed here that all the resources are being optimally utilized. We draw a PPC on the basis of the following dataCombinations Guns Houses Opportunity Cost A 1 90 B 2 85 5 C 3 75 10 D 4 60 15 E 5 40 20 Plotting the above combinations on a X-Y plane we get the PPC
CHAPTER - 1
Important points to be remembered about the diagram: PPC is concave to the origin due to increasing opportunity costs. Any point inside the PPC (like point F in the diagram) shows that the resources are underutilized. Any point outside the PPC (like point H in the diagram) is unattainable with the given resources or technology. Shifting of the PPC rightwards is known as the process of economic growth which is made possible by Increase in the quantity of resources and / or Improvement in the state of technology. Following diagram shows the process of economic growth:
FOUNTAINHEAD
CA - CPT
1.17
CHAPTER - 1

1. The central problem in economics is that of a. comparing the success of command versus market economies b. guaranteering that production occurs in the most efficient manner c. guaranteering a minimum level of income for every citizen d. allocating scarce resources in such a manner that societys unlimited needs or wants are satisfied in the best possible manner Which of the following bundles of goods cannot be produced with the resources the economy currently has? a. a b. b c. c d. d
2.
3.
4.
An economy achieves productive efficiency when : a. resources are employed in their most highly valued uses b. the best resources are employed c. the total number of goods produced is greatest d. goods and services are produced at least cost and no resources are wasted Which point on the PPF shows a productively efficient level of output? a. A b. B c. C d. All of the above
FOUNTAINHEAD
CA - CPT
1.18
5.
CHAPTER - 1
Which of the following clearly represents a movement toward greater productive efficiency? a. A movement from point A to point B b. A movement from point C to point D c. A movement from point F to point C d. A movement from point E to point B 6. Which of the following illustrates a decrease in unemployment using the PPF? a. A movement down along the PPF b. A rightward shift of the PPF c. A movement from a point on the PPF to a point inside the PPF d. A movement from a point inside the PPF to a point on the PPF 7. If the PPF is linear, i.e., a straight line, which of the following is true? a. As the production of a good increases, the opportunity cost of that good rises b. As the production of a good increases, the opportunity cost of that good falls c. Opportunity costs are constant d. The economy is not at full employment when operating on the PPF 8. Periods of less than full employment correspond to a. points outside the PPF b. points inside the PPF c. points on the PPF d. either points inside or outside the PPF 9. Which of the following would not result in an rightward shift of the PPF? a. an increase in investment in capital stock b. a reduction in the labour unemployment rate c. the discovery of new oil deposits in India d. an increase in the number of people taking management training courses 10. Which of the following represents the concept of trade-offs? a. A movement from point A to point B b. A movement from point U to point C c. Point W d. Point U
11. Which of the following would not move the PPF for this economy closer to point W? a. A decrease in the amount of unemployed labour resources b. A shift in preferences toward greater capital formation c. An improvement in the overall level of technology d. An increase in the population growth rate
CHAPTER - 1
12. Moving from point A to point D, what happens to the opportunity cost of producing each additional unit of consumer goods? a. It increases b. It decreases c. It remains constant d. It increase up to point B, then falls thereafter
13. What is the opportunity cost of moving from point A to point B? a. 100 units of capital goods b. 8 units of consumer goods c. 90 units of capital goods d. 10 units of capital goods
FOUNTAINHEAD
CA - CPT
1.20
CHAPTER - 1
14. Unemployment or underemployment of one or more resources is illustrated by production at point: a. A b. C c. U d. W
15. Which of the following is a reason for the curvature or bowed-out shape of the PPF? a. Falling unemployment as we move along the curve b. The economy having to produce less of one good in order to produce more of another good c. Opportunity costs increase as more of a good is produced d. None of the above
16. Which of the following is a reason for the negative slope of the PPF? a. The inverse relationship between the use of technology and the use of natural resources b. Scarcity at any point of time due to limited amounts of productive resources c. Resource specialization d. Increasing opportunity costs
FOUNTAINHEAD
CA - CPT
1.21
CHAPTER - 1
17. If the marginal (additional) opportunity cost is a constant, then the PPC would be a. Convex b. straight line c. backward bending d. concave 18. Which of the following is likely to cause an inward shift in a countrys PPC? a. Earthquake destroying resources of the country b. Scientists discovering new machines c. Workers getting jobs in the new metro project d. The country finds new reserves of crude oil 19. The various combinations of goods that can be produced in any economy when it uses its available resources and technology efficiently are depicted by a. demand curve b. production curve c. supply curve d. production possibilities curve 20. Production Possibilities curve is also known as a. demand curve b. supply curve c. indifference curve d. transformation curve
FOUNTAINHEAD
CA - CPT
1.22

Economics

Uploaded by

Document Information

Original Description:

Copyright

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Economics

Uploaded by

Copyright:

CA CPT

1.6 ECONOMIC SYSTEMS

GENERAL ECONOMICS- MICRO

1.1 DEFINITIONS OF ECONOMICS

Following are the merits of this group of definition

GENERAL ECONOMICS- MICRO

Multiple Choice Questions

1.2 MICROECONOMICS & MACROECONOMICS

Multiple Choice Questions

GENERAL ECONOMICS- MICRO

1.3 NATURE OF ECONOMICS

Multiple Choice Questions

1.4 METHODS OF STUDY

GENERAL ECONOMICS- MICRO

Multiple Choice Questions

1.5 CENTRAL/ BASIC/ FUNDAMENTAL ECONOMIC PROBLEMS

Multiple Choice Questions

1.6 ECONOMIC SYSTEM

1.6.3 Mixed Economy

Multiple Choice Questions

1.7 PRODUCTION POSSIBILITY CURVE:

GENERAL ECONOMICS- MICRO

Multiple Choice Questions

GENERAL ECONOMICS- MICRO

GENERAL ECONOMICS- MICRO

14. Unemployment or underemployment of one or more resources is illustrated by production at point: a. A b. C c. U d. W

GENERAL ECONOMICS- MICRO

GENERAL ECONOMICS- MICRO

You might also like