Introduction to Economics Flashcards
What is an Economy?
A system which provides people with means to work and earn a living
What is Economics?
Economics is a body of knowledge which is concerned with individual and social choice in presence of scarcity.
What is Micro-Economics?
The branch of economics which deals with the analysis of scarcity and choice problems faced by an individual economic unit such as a consumer, a producer etc. is called Micro-Economics
What is Macro-Economics?
The branch of economics which deals with the behaviour of aggregates of the economy such as employment, national income etc. is known as Macro-Economics.
What is the differencce between Micro Economics and Macro Economics?
Basis of Distinction
Micro Economics
Macro Economics
- Meaning
Study of individual economic units.
Study of economy as whole or its aggregates.
- Tools
Main tools are demand and supply of a commodity/ factor inputs.
main tools are aggregate demand and aggregate supply of the whole economy.
- Central problems
Focuses on price-determination and allocation of resources.
Focuses on determination of national income and employment.
- Subject matter
Deals with prices of individual goods and factor inputs.
Deals with general price level.
Eg:-
Demand by a consumer, Production by a firm.
Rate of inflation, Level of employment.
Define Opportunity Cost
Opportunity cost is the value of the next best foregone alternative
Explain the meaning and causes of economic problems
Economic problem is the problem of choice-making in the presence of scarcity of resources.
Causes:-
a) Unlimited wants
b) Limited resources
c) Resources having alternative uses
What are the central problems of an economy?
The central problems of an economy are:
a) What to produce?
b) How to Produce?
c) For Whom to Produce?
Explain the central problem of ‘What to Produce’
The central problem of ‘What to produce’ deals with the problem of choice-making in two regards:
a) What goods and services are to be produced
b) In what quantity goods and services are to be produced.
As resources scarce, the problem becomes complex when choice is to be made across consumer goods and capital goods.
Consumer goods essential to promote quality of life. Capital goods are essential to increase production capacity.
This problem also deals with ‘quantity’ in which goods are to be produced. If more consumer goods are produced, present generation enjoys good quality of life. But less production of capital/producer goods would result in lower production capacity.
Explain the central problem of ‘How to Produce’?
The central problem of ‘How to Produce’ deals with making a choice in the type of ‘Technique of Production’ required to produce goods in the economy. Production techniques are in the form or:-
a) Labour-intensive technique: Greater use of labour than capital.
b) Capital-intensive technique: Greater use of capital (machines etc.) is used and less of labour.
Labour-intensive is less expensive and reduces unemployment whereas capital-intensive promotes efficiency and accelerates growth rate.
The choice between the labour-intensive and capital-intensive techniques becomes problem because the producers need to minimize their costs, and at the same time, maximize their efficiency.
Explain the central problem of ‘For Whom to Produce’?
The central problem of ‘For Whom to Produce’ deals with problem of distribution of income (or output) in economy. It has two aspects:
a) Functional Distribution: Functional or factoral distribution of income relates to the distribution of income among the factors of production, ie., wages for labour, rent for land etc.
b) Personal Distribution: It relates to the distribution of income among the owners of production.
The problem focuses on maintaining ‘equality’ in the society. It implies that the resources in the economy should be optimally utilized in order to promote equality in the society.
What is the Production Possibility Curve (PPC)/ Production Possibility Frontier (PPF) and what are its properties?
Production PossibilityProduction Possibility Curve graphically represents the various combinations of two goods which can be produced in an economy with the given amount of resources and technique, at a given time, assuming all the resources are fully utilised.
Its Properties are:
1) Downward Sloping - This is because to produce an additional unit of Good X, some units of Good Y will have to be sacrificed.
2) Concave Shaped - This is because of increasing marginal rate of transformation, i.e. as more and more units of Good X are produced, the rate at which Good Y will have to be sacrificed keeps on increasing.
3) Higher PPC, More Production - This is because more units of Good X and Good Y will be able to be produced when PPC shifts rightward.
What is the shape of PPC?
PPC is downward sloping, and concave shaped to the origin.
Why is PPC concave to the origin?
PPC is concave to origin because of increasing marginal rate of transformation.
The increasing marginal rate of transformation means that to produce an additional unit of a good, the rate at which the other good has to be sacrificed keeps on increasing. More and more units of good Y are sacrificed for producing an additional unit of good X.
Hence, since the sacrifice of units of other good goes on increasing, PPC looks concave to origin.
State two reasons for a rightward shift in PPC
Some reasons for a rightward shift in PPC are:-
a) Growth of resources
b) Improvement in technique of production.
