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INTRODUCTION TO MICRO
ECONOMICS
Wealth definition of economics & its main drawbacks.

Adam Smith who is known as father of Economics defined economics
as the Science of Wealth. In his book “An Enquiry into the Nature
and Causes of Wealth of Nations.”(1776) he said that economics is
the study of factors which determine the wealth of a country and its
growth. In his view the most important objective of political economy
of every country is to increase the prosperity and power of the country.
In other words, according to Adam Smith the wealth and affluence of
a nation constitute the subject matter of economics. Such a view is a
expressed by other scholars also.
Wealth Definitions of Economics
Adam Smith
Economics inquires into the factors that determine wealth of the
country and its growth.
J.B.Say.
Economics is the science that deals with wealth.
N.W.Senior
The subject treated by economics is not happiness but wealth.
F.A..Walker
Economics is the name of that part of knowledge which relates to
wealth.
1 J.S.Mill
Economics is the practical science of production and distribution of
wealth.
INTRODUCTION TO MICRO ECONOMICS 1
Compiled by R.K.SHAH
Evaluation of wealth definitions :
We can say certain points in favour of the classical school.
(1) It goes to the credit of Adam Smith and other classical writers that they have given the
status of a science to economics.
(2) They have given so much importance to wealth because it is required not only for
providing for physical subsistence to human beings but also for raising their standard
of living.
(3) They have made it clear that in the final analysis, the standard of living of people
depends upon production as well as distribution of wealth.
(4) Most of the developing countries face very acute problems of poverty, unemployment
and underemployment which can be effectively tackled only by producing more wealth
and properly distributing it.
Criticisms :
The main points of criticisms of the wealth definition may be mentioned as follows:
(1) The writers like Adam Smith and others gave too much importance to material wealth
and neglected non material wealth. These definitions did not take into account the role
of services in the satisfaction of human wants.
(2) The definitions ignore the human welfare while laying too much emphasis on the
production of material wealth.
Conclusion :
All these criticisms made economics a highly unpopular science and therefore it was
necessary to redefine economics in terms of human welfare. This task was later on taken
over by the neo-classical writers like Marshall, Pigou etc. who defined economics as the
science of human welfare.
Economics is a science of Material Well Being - Marshall and Pigou.
Economics got the status of a science with the publication of Adam Smith’s famous treatise
“An Enquiry Into the Nature and Causes of Wealth of Nations” in 1776. In this book, he
defined economics as the science of wealth. This definition is known as wealth definition.
Similar definitions were by given J.B.Say, Nassau senior and other classical writers also.
However it came to be severely criticised at the hands of religious writers like Ruskin and
Carlyle. They described economics as Bread and Butter science, Horrible science, Pig
philosophy etc. So it was necessary to give a human twist to the definition of Economics.
This was done by Prof. Marshall and his disciples like Beveridge, Cannan and Pigou.
2 MICRO ECONOMICS (CPT)
According to Marshall “Economics is, on one side, the study of wealth, and on the other and
the more important side, the study of Man”. In his opinion, Political Economy or Economics
is a study of mankind in its ordinary business of life. It examines that part of individual and
social action which is most closely connected with attainment of and use of material requisites
of well being.
Prof. Marshall’s definition is known as welfare definition because he has related economics
to the study of the factors leading to material welfare of the community.
Prof. Pigou defines economics in more or less the same manner. In his view “The range of
our inquiry becomes restricted to that part of social welfare that can be brought directly or
indirectly into relation with measuring rod of money”.
Prof. Pigou’s definition is perhaps the true representative of welfare definitions. It is
concerned with social welfare but with only that part of social welfare which can be brought
in relation with measuring rod of money. In other words, it is not concerned with spiritual
welfare but with the happiness that people derive from consumption of physical goods and
services that can be purchased from the market with the use of money.
Criticisms :
Marshall’s and Pigou’s definitions of Economics are wider and more comprehensive as
they take into account the aspect of social welfare. But their definitions have their share of
criticism. Their definitions are criticised on the following grounds.
(i) Economics is concerned with not only material things but also with immaterial things
like services of singes, teachers, actors etc. Marshall and Pigou chose to ignore them.
(ii) Robbins criticised the welfare definition on the ground that it is very difficult to state
which things would lead to welfare and which will not. He is of the view that we
would study in Economics all those goods and services which carry a price whether
they promote welfare or not.
In conclusion we can say that Robbins is a great critic of welfare definitions. His own
definition of economics moves around the concept of scarcity.
Robbins’ definition or Scarcity definition of Economics or ‘Economics is
the science of choice making’. Discuss.
Different writers have given different definitions of economics. However among all the
definitions, the definition given by Prof. Lionell Robbins of London school of Economics
has become the most acceptable one.

`
According to Robbins,” Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses”. Thus according
to Prof. Robbins economics is basically a study of economic problems. It is the study of
economic choice. This definition can be explained as follows:
1. Economics is a science : According to Robbins economics is a science. It is a positive
science. It is descriptive and not prescriptive. It is concerned with analysis and not
with advice. It is neutral between ends. It studies economic problems. The following
points explain why such problems arise.
2. Human Wants Are Unlimited : Human wants or ends are unlimited. Man is a bundle
of desires. As soon as one want is satisfied another want crops up. It is for this reason
that people have to constantly undertake economic activities or income earning activities.
Also it is to be noted that the same wants go on arising again and again. The wants also
go on continuously increasing with the advancement of human civilization.
3. Differing urgency : Different human wants are of differing urgency. Their intensities
are different. Some of them are felt more urgently than the others and therefore a choice
is to be made from among wants. One has to decide which want should be satisfied
first and which next. This choice is one aspect of the economic problem.
4. Resources Are Limited : The resources are those things, which are used for producing
goods and services for the satisfaction of human wants. They include various factors of
production and other productive inputs. These things are scarce i.e. they are limited in
relation to their demand. If resources were also unlimited as the wants are, then probably
the economic problem would not have arisen.
5. Resources have alternative uses : The resources are capable of being put to alternative
uses. e.g. A piece of land can be used as a playground, factory land, housing site or for
a garden. It is to be decided that to which use the land is to be put. This is true for other
factors of production also. This problem is another aspect of economic problem. The
two aspects of economic problem can be explained as under:

The Nature of economic problem
How to use resources How to use the income received

so as to get maximum on various wants so as to get
income? maximum satisfaction?
Maximization of satisfaction
through an efficient use
of resources.
6. Problem of choice : Thus economic problem is basically a problem of choice. However

it is to be understood very clearly that all problems of choice are not economic problems
e.g. if a person has to decide whether he should go to a temple or to a public garden for
evening recreation then that problem of choice is not an economic problem. But if a
person has ` 500 and he has to decide whether he should use it for buying a watch or a
pair of shoes then it is an economic problem as it is concerned with satisfaction of wants
through the use of money. It is for this reason that Prof. Robbins defines economics as a
science of choice making. Such a view has been put forward also by writers like
Wicksteed and Scitovscy.
Criticisms :
1. Very wide definition : According to the critics, Robbins’ definition is too wide because
it covers all types of economic problems.
2. Very narrow definition : From another angle, the scarcity definition is very narrow. It
has reduced the entire economics to merely price theory as the basic idea of the definition
is that we have to pay for various goods and services because factors of production are
scarce and therefore a cost is to be incurred on producing goods, and prices are to be
paid for them.
3. Narrow scope of Economics : Robbins’ definition takes into account only the allocative
aspects of economics and neglects other areas of study like National Income.
Employment, Growth, etc. In other words, it neglects Macro economics and Economics
of growth.
4. No explanation of Unemployment problem : If resources are scarce then why the labour
should remain unemployed. Robbins’ definition has no answer to this question.
5. No human touch : It ignores the normative aspects of economics and as such has no
human touch.
6. Implicit concept of welfare : Prof. Robbins criticises Prof. Marshall’s welfare definition.
However when he talks about using the scarce resources with alternative uses in such
a manner that satisfaction or output is maximized then indirectly he talks about welfare
only.
Definition of economics given by Samuelson - Science of Dynamic Growth and
Development.
Prof. Paul Samuelson, a professor of Economics at the Massachusettes Institute of Technology
has given the following definition of Economics.
“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 to distribute them among various people and groups of society.”
The definition of Economics given by the Prof. Samuelson is an ideal combination of various
definitions given by the earlier writers.
1. Like Smith’s definition, it recognizes that economics is the science concerned with the
production of wealth.
2. Like Marshall’s definition, it recognizes that the goods produced are for the consumption
of people and yet he does not bring the idea of material welfare in the picture.
3. Like Robbins’ definition, it accepts the fact that the resources are capable of being put
to alternative uses and so one has to make a choice with regard to their use.
4. It is a dynamic definition. It is not concerned with the present production but also with
the production of goods in the future. So it is concerned not only with the allocation of
resources under the present conditions but also as between the present and the future.
So here one has to deal with the determination of the priorities of the society.
5. It is equally applicable to a money-using economy as to a non-money using economy.
Samuelson’s definition of Economics is a dynamic definition. It draws our attention to
the problems of growth and development.
Economics is a Science as well as an art.
Economics is a social science. A science can be defined as a systematic body of knowledge.
The ultimate purpose of any science is search of knowledge and development of various
generalizations and principles through observations and research. A science can be learnt
and taught. If these criteria are applied then economics is a science.

Economics - a science : Like any other Science, economics is also a systematic body of
knowledge.
 It is a social science, and its main field of study is the economic behaviour of
individual;
 It has developed various laws such as law of demand, law of supply etc.
 They examine causal relationship between various variables. Scientific principles
have universal validity.
 The deductions and principles of economics are also largely applicable in all the
countries. Like any other science Economics also uses deductive as well as inductive
methods of reasoning and develops various principles. It has its own methodology.
 The function of the Science is to explain various phenomena. Economics tries to explain
various economic events.
 It has an ability to forecast like the other sciences.
Thus according to one view, economics is a science. However according to some people
this opinion is not correct because
 the economists do not have uniform opinion about a particular event.
 the human behaviour which is the subject matter of economics is highly unpredictable.
 money which is used as a major of outcomes in economics is not an independent
variable.
 correct predictions based on the behaviour of economic units are not possible.
Economics - an art : Economics is an art also due to following reasons.
 like any other art it is a practice.
 the direct application of principles of economics is not possible.
 in different situations subjective judgements are to be used for solving the economic
problems.
In conclusion we can quote Prof. Samuelson who says that “Economics is the oldest of the
arts and the newest of the sciences.”
Deductive and inductive methods of logic for studying a science.
Methods of Study. There are two methods which are commonly used in any scientific inquiry
- deductive and inductive.

Deductive Method : This method of reasoning tries to deduce conclusions from certain
fundamental assumptions or accepted axioms or truths established and handed down
from generation to generation. This method is also known as subjective method, a priori
method, or axiomatic method.
The logic of this method proceeds from the general to the particular. For example, we see
that all the people who are born die sooner or later. So we can say that all people are
mortal.
This method is called abstract, hypothetical or a priori because it is based on abstract
reasoning and not on actual facts.
Steps in deductive method :
The principal steps in the process of deriving economic generalisations through deductive
logic are
(a) perception of the problem
(b) defining the technical terms and making appropriate assumptions
(c) deducing hypothesis and
(d) testing of hypotheses deduced.
Many theories and generalizations have been established in economics with the help of
deductive method such as
 the law of demand
 the law of supply
 the law of diminishing marginal utility
 the law of diminishing returns etc.
Limitations of the method : But this method also suffers from certain handicaps such as
(i) assumptions generally turn out to be untrue or partially true (ii) valid conclusions
cannot be drawn in the absence of proper knowledge of the whole situation and (ii) it is
dangerous to claim universal validity for the economic generalizations so deduced.
Inductive Method : This method is also known as objective method, scientific method, or
empirical method.
Under this method conclusions are drawn on the basis of collection and analysis of facts
relevant to the inquiry. The logic in this case proceeds from the particular to the general.
For example, if we collect data and find that majority of people smoking continuously are
afflicted by cancer then we can say that there is a close relationship between smoking and
cancer.

Steps in inductive method :
The principal steps in this method are
(i) perception of the problem
(ii) collection, classification and analysis of data by using appropriate statistical techniques
(iii) finding out the reasons for the relationship established through statistical analysis
and to set rules for the verification of the principals.
In this method there is no testing of hypothesis. Many principles in macro-economics
have been obtained through inductive method such as Quantity theory of money describing
the factors which determine price level in an economy, the nature of consumption function
describing the relationship between income and consumption etc.
Inductive method is increasingly being used because
(i) statistical induction leads to precise, exact and measurable conclusions
(ii) it explains the importance of relativity of economic laws
(iii) it shows that generalizations are valid only under certain conditions.
Limitations of the method :
But this method suffers from (i) risk of hurried conclusions having being drawn from an
insufficient number of facts (ii) difficulties involved in the collection of facts (iii) the fact
that observation and experimentation have very limited application in a science that deals
with human activities.
Conclusion : However, the two methods are not exclusive and are used side by side in
any scientific inquiry. Conclusions drawn from the deductive method of reasoning and
are verified by inductive method of observing concrete facts of life. For example, the
hypothesis of rationality may be tested and verified by the observation of the behaviour
of people.
Micro and Macro-economics.
Micro-economics and Macro-economics are two separate and yet complementary branches.
According to the traditional view, there are five components of the subject matter of
economics namely production, consumption, exchange, distribution and public finance.
However according to the modern writers, there are only two branches of economics namely
the micro-and the macro economics. The following diagrams give an idea about the
components of micro and macro economics.

Micro Economics
Theory Theory Theory

of of of
commodity factor economic
pricing pricing, welfare
Rent Wages Interest Profit

Theory of Theory Theories Theories Theories Theories
Demand of costs
&
production
Macro Economics
Theory of Theory Theory of

employment of Business
and output Growth cycles Theories
of
Theories of population
International
trade
Macro
Theory of economic
general price Distribution
level & theories
inflation

Micro economics : The micro-economics is developed by Prof Alfred Marshall. It is that
branch of economics which studies the problem at the level of the individual units. Literally
speaking “Micro” means Millionth. In other words micro means a very small part. The
following topics are covered by micro economics.
1. Commodity pricing
2. Factor pricing : The theories of rent, wages, interest and profit.
3. Cost of production and supply
4. Consumer behaviour : The laws of utility, law of demand etc.
5. The economic conditions of a section of people.
6. Theory of firm
7. Economics of welfare
Micro economics is also known as Price-Theory.
Macro economics :The macro-economics is developed by Lord Keynes. It is that branch of
economics which studies the problems at the macro or the aggregate level. The topics such
as the following are covered by macro economics.
1. National income and output
2. General price level
3. Balance of trade and balance of payment
4. Theories of international trade and exchange rate.
5. Savings and investment.
6. Employment and economic growth.
7. Business cycles.
8. Macro economic distribution and poverty.
Relationship between Micro and Macro Economics : It is merely for the sake of convenience
of the study that we make a distinction between micro economics and macro-economics.
Otherwise they are closely related. Some times there may seem to be contradiction between
the two but there really speaking exists a close relationship between the two. The events
taking place at the micro-economic level have their effects at the macro economic level and
vice versa.

Economics as Positive Science and Economics as Normative Science
(i) Positive Science : As stated above, Economics is a science. But the question arises
whether it is a positive science or a normative science. A positive or pure science
analyses cause and effect relationship between variables but it does not pass value
judgment. In other words, it states what is and not what ought to be. Professor Robbins
emphasised the positive aspects of science but Marshall and Pigou have considered
the ethical aspects of science which obviously are normative.
Positive Economics is the one that simply states facts and uses empirical evidence.
An example of positive statement is: “According to the law of demand, a lower price
will yield more quantity sold”.
According to Robbins, Economics is concerned only with the study of the economic
decisions of individuals and the society as positive facts but not with the ethics of
these decisions. Economics should be neutral between ends. It is not for economists
to pass value judgments and make pronouncements on the goodness or otherwise of
human decisions. An individual with a limited amount of money may use it for
buying liquor and not milk, but that is entirely his business. A community may use
its limited resources for making guns rather than butter, but it is no concern of the
economists to condemn or appreciate this policy. Economics only studies facts and
makes generalisations from them.
It is a pure and positive science, which excludes from its scope the normative aspect
of human behaviour.
Complete neutrality between ends is, however, neither feasible nor desirable. It is
because in many matters the economist has to suggest measures for achieving certain
socially desirable ends. For example, when he suggests the adoption of certain policies
for increasing employment and raising the rates of wages, he is making value
judgments; or that the exploitation of labour and the state of unemployment are bad
and steps should be taken to remove them. Similarly, when he states that the limited
resources of the economy should not be used in the way they are being used and
should be used in a different way; that the choice between ends is wrong and should
be altered, etc. he is making value judgments.
(ii) Normative Science : As normative science, Economics involves value judgments. It is
prescriptive in nature and describes ‘what should be the things’. Normative
Economics is the one that takes values into account, and results in statements like:
“This tax should be reduced.” For example, the questions like what should be the

level of national income, what should be the wage rate, how the fruits of national
product be distributed among people - all fall within the scope of normative science.
Thus, normative economics is concerned with welfare propositions. Some economists
are of the view that value judgments by different individuals will be different and
thus for deriving laws or theories, it should not be used.
To conclude, we may say that while laying down laws or theories, Economics may
be treated as pure and positive Economics, but as a tool of practical application it
must have some normative goals in view.
VARIOUS FUNDAMENTAL PROBLEMS OF AN ECONOMY

The basic characteristic of every economic system is the scarcity of resources in relation
to human needs, and to decide the use of such resources in alternative ways to meet the
ends. Accordingly, every economy is faced with certain basic or fundamental problems
which it must try to solve within its socio-economic framework. These fundamental
problems are:
(i) What to produce?
(ii) How to produce?
(iii) For whom to produce?
(iv) The choice between current consumption and future growth through saving and
investment.
(1) What to Produce?
We know that an economy does not have enough resources to produce everything
required by it. So, it must decide what to produce and what not to produce. When some
goods are not produced, some wants of the society remain unsatisfied. The decisions
regarding the wants to be satisfied and the goods and services to be produced are
interrelated and are not independent of the other. This is called allocation of productive
resources. If some factors of production are employed in the production of product X,
they are not, to the extent being employed in the production of product Y. Therefore, the
society not only has to decide what to produce but also to decide how much to produce.
(2) How to Produce?
This is a problem of the allocation of productive resources in the production of various
goods and services. E.g., when an economy decides to produce product X, it has also to
work out exactly how much of labour, capital, land, etc., would go into its production.

The exact proportion of factors of production used in the production of an item is called
the technique of production of that item. For example, there are goods which are produced
by using more of labour than capital. In such cases labour intensive techniques of
production are said to be in use. On the other hand, if more of capital goes into the
production of an item, then we say that it is being produced by a capital intensive technique.
For any country, choice of technique of production depends upon the relative availability
of factors of production. Generally, the labour surplus underdeveloped countries choose
labour intensive techniques and capital surplus developed countries choose the capital
intensive techniques.
(3) For whom to Produce ?
A society consists of large number of individuals and households. All the output of
consumption goods and services in the country is ultimately for their use only. Therefore,
these goods and services are to distributed amongst individual and households which
requires determining the share of these individuals and households. In a free market
economy the income of each individual is determined by the amounts of different
productive resources owned and supplied by him to the market and their prices. In a
socialist economy, on the other hand, the state makes all efforts to reduce inequalities by
shifting the ownership of means of production to the Government. Here the incomes of
individual members are related to their work performance. Moreover, the state assures
some basic necessities for every one as a result of which there is an element of social
justice in income distribution. An individual can get additional income only by putting
additional work.
(4) Problem of Growth
Every economic system tries to increase its stock of productive resources. For this purpose
it has to save a part of its national income from current consumption and use it for the
purpose of capital formation which can lead to an increase in the stock of productive
assets. Thus, capital formation is a necessary and important function of an economy both
for its survival and its growth. Stock of productive resources of an economy keeps on
decreasing due to depreciation. Therefore, in any economy growth requires that some
part of national income is continuously saved and invested.

Meaning and nature of Production Possibility Curve. (or Production possibility
frontier or transformation curve)
The concept of production possibility curve is useful in understanding the problems of
scarcity common to all the countries and all the economic systems. No economy can
produce all the goods it requires and therefore, a choice has to be made between various
goods and services that can be produced. Increasing the production of some goods means
a corresponding decrease in the production of some other goods. This is because the
resources are always scarce. This fundamental problem can be illustrated with the help of
a simple curve known as production possibility curve.
Definition :
The production possibility curve can be defined as the curve which shows the maximum
amount of output of any two goods that an economy can produce under the given
conditions of technology and at the full employment level of its resources.
Assumptions :
A production possibility curve is drawn on the following assumptions:
(i) The country has to choose between alternative combinations of only two goods X
and Y.
(ii) The productive resources of the country are given and they are fully employed.
(iii) These productive resources are capable of producing both the goods X and Y.
However, when the more of X is to be produced the country will have to produce the
less of Y and vice-versa. Thus, the basic theme of the PPC is scarcity and opportunity
cost.
(iv) Different units of the productive resources are imperfect substitutes with regard to
production of the two goods. This means that some units are more efficient in
producing X and some others are more efficient in producing Y. Now, when we start
producing the commodity X. we employ those units which are more suitable for
producing X and least suitable for producing Y. When production of X is to be
increased more and more units of productive resources would have to be transferred
from the production of Y. But these units are relatively less suitable for the production
of X and are more productive in the production of Y. So, more and more units of Y
would have to be sacrificed to secure each additional unit of X. This explains the
concave shape of the PPC which is given in the following diagram. In the technical
language of economics this is known as ‘Increasing marginal rate of transformation’
or increasing opportunity cost.

Production possibility curve : The following diagram would explain the meaning of
production possibility curve.
Important points about PCC :

1 The country can produce either only Y or only X. However some units of one commodity
would have to be sacrificed for producing some units of the other commodity. This is
nothing else but the simple principle of opportunity cost.
2 The country can produce any combination on the PPC which would mean the full
employment of the resources. E.g. the combination A,B,C,D and ,F.
3 The country can as well produce any combination within the PPC. However, it would
mean that the country is not making the full use of its resources. E.g. point R in the diagram.
This kind of under employment equilibrium is the result of inefficiencies of three kinds:
a. Productive inefficiency
b. Allocative inefficiency
c. X inefficiency
4 Under the given conditions of technology and availability of factors the country cannot
produce any combination outside the PPC. E.g. combinations K and H.
5. The economy would move from the point R to any of the points on the PPC when there is
decrease in unemployment of labour and other resources.
6. The PPC would move on the right hand side when there is an increase in saving, investment,
capital formation or improvement in technology or discovery of new resources or increase
in foreign investment or improvement in the quality and efficiency of factors of production.
7. The PPC would move on the left hand side when the productive ability of the economy
decreases due to the factors such as war, earthquake, or natural calamity of that kind.

Economic growth and shift in Production Possibility Curve
All points on PPC curve show that goods and services are produced at least cost and no
resource is wasted i.e. an economy is productively efficient. But that does not mean there
is no scope of progress. When the economy makes progress in technology, that is, when
scientists and engineers discover new and better ways of doing things, the production
possibilities curve will shift outward and to the right showing that more of both goods
can be produced than before.
Fig. : Shift in PPC due to economic growth

Figure shows that technological progress allows the society to produce more of both
goods with a given and fixed amount of resources. Thus, with P’ P’, more amount of
wheat and cloth can be produced than before with the given amount of inputs. It is to be
noted that if the economy is producing at point R (in previous fig.), then it is not using its
resources fully i.e. its resources are unemployed. A Shift from inside the PPC (Say R) to
anywhere on the PPC (Say to B) indicates that the resources which were lying unutilised
are now being utilised fully. But a movement from one PPC to another PPC on the right
indicates economic growth of the economy.
This movement becomes possible because of an improvement in the overall technology,
greater capital formation, an increase in the population growth etc.
Features of a capitalist society
The capitalist society is known by various other names such as free enterprise economy,
free market economy, free economy, laissez faire etc. This kind of economic system is found
in the countries like Germany, Japan, USA, UK etc. However these economies are also not
perfectly identical and yet they are basically capitalist societies.

Definition : A free market economy can be defined as the one where there is, private
ownership of means of production and where production related decisions are taken by
Profit motivated private producers who produce goods and services on the basis of their
market demand.
Features : Now let us see various features of such an economy.
1. Private ownership of means of production : The factors of production are privately
owned. The private owners use these factors of production in various activities in such
a manner that they are able to maximize their profits.
2 Competition : This is another most important feature of a free capitalist society. There
is competition in all the spheres of economic activities. There is competition among
producers to sell goods, among buyers to acquire scarce goods and among factors to
get jobs. It is due to this that the prices of goods and services and of factors are determined
by the forces of demand & supply.
3. Profit Motive: Profit motive is the motivating force in a free market economy. All the
decisions such as what to produce, where, how, how much etc. are taken on the basis of
profit considerations only.
4. Economic freedoms : There cannot be competition without economic freedoms. There
are freedoms of production, consumption, occupation, saving and investment. These
freedoms along with the competition lead to a rational allocation of resources.
5 Production according to demand : In a free market capitalist society the production of
goods and services takes place according to the choice of private buyers who are
regarded as the sovereign or supreme authority. This is because profits of private
producers would be maximized only when they produce goods for which the buyers
are reedy to pay. Therefore consumer is regarded as the king in a capitalist society.
6. Market mechanism : The prices of goods and services and of factors of production are
determined by a free play of forces of demand and supply. The resources of the
community are allocated as between the various activities by the forces of demand and
supply operating into economy
7. Very unequal distribution of income : Over and above the functional inequalities there
are property oriented inequalities also and income distribution is highly regressive.
8. Limited role of the state : In a true free market economy, there is a Laissez faire. The
state either does not play any role in the economy or its role is confined to the activities
like law and order, defence, public services etc.

Merits of Capitalist economy:
1. To attract the consumer the producer will bring out newer and finer varieties of goods.
2. The existence of private property and the driving force of profit motive results in
high standard of living.
3. Capitalism works automatically through the price mechanism.
4. The freedom of enterprise results in maximum efficiency in production.
5. All activities under capitalism enjoy the maximum amount of liberty and freedom.
6. Under capitalism freedom of choice brings maximum satisfaction to consumers
7. Capitalism preserves fundamental rights such as right to freedom and right to private
property.
8. It rewards men of initiative and enterprise.
9. Country as a whole benefits through growth of business talents, development of

research, etc.
Demerits of Capitalism
1. In capitalism the enormous wealth produced is approtioned by a few. This causes

rich, richer and poor, poorer.
2. Welfare is not protected under capitalism, because here the aim is profit and not the
welfare of the people.
3. Economic instability in terms of over production, economic depression,

unemployment, etc., is very common under capitalism.
4. The producer spends huge amounts of money on advertisement and sale promotion
activities like fair, exhibitions etc.
5. Class conflict arises between employer and employee. They will be paid low wages
and this leads to strikes and lock-outs.
6. Productive resources are misused under capitalism. They are used for the production
of luxuries as they will bring high profits.
7. Capitalism leads to the formation of monopolies.
8. There is no security of employment under capitalism.

How do capitalist economies solve the basic economic problems ?
As we know the fundamental problems before any economic systems are what to produce,
how much to produce, for whom to produce, how to distribute and how to allocate the
economic resources between the present and the future. Different economic systems adopt
different techniques and approaches to solve these problems. It is the market mechanism
that solves these problems. Market mechanism which is also known as price mechanism
means a free play of impersonal forces of demand and supply in the open market which
decides the prices of commodities and factors of production and ultimately diverts the
scarce economic resources into the most profitable channels. The following paragraphs
would explain how a capitalist economy secures a solution to the above described
problems.
Deciding what to produce : The aim of an entrepreneur is to earn as much profits as
possible. This causes businessmen to compete with one another to produce those goods
which consumers wish to buy. Thus, if consumers want more cars, there will be an increase
in the demand for cars and as a result their prices will increase. A rise in the price of cars,
cost remaining the same, will lead to more profits. This will induce producers to produce
more cars. On the other hand, if the consumers’ demand for cloth decreases, its price
would fall and profits would go down and hence its production would also go down.
Thus, more of cars and less of cloth will be produced in such an economy. Thus, in a
capitalist economy (like the USA, UK, and Germany) the question regarding what to
produce is ultimately decided by consumers who show their preference by spending on
the goods which they want. This power of consumers to guide the factors of production
into the production of goods that they want is known as consumer’s sovereignty.
Deciding how to produce : An entrepreneur will produce his goods with that technique
of production which renders his cost of production minimum. If labour is relatively cheap
he will use labour intensive method and if capital is relatively cheap he will use capital
intensive method. Thus, the relative prices of factors of production help in deciding how
to produce.
Deciding how much to produce : A capitalist producer will produce goods in accordance
with the size of market demand. This is because if he produces more than the market
demand he will have to sell his output at a reduced price. On the other hand if he produces
less than the market demand he will have to forego the profit opportunity and therefore
the volume of demand is a signal for the producers to decide the quantity of the output to
be produced.

Deciding for whom to produce : Goods and services in a capitalist economy will be
produced for those who have the buying capacity. The buying capacity of an individual
depends upon his income. How much income he will be able to make depends not only
on the amount of work he does and the prices of the factors he owns but also on how
much property he owns. Higher the income, higher will be his buying capacity and higher
generally will be his demand for goods in general. Thus the idea of consumers sovereignty
is limited only to the rich buyers.
Deciding about consumption, saving and investment : These three factors are decided
by the rate of interest in the market. If the market rate of interest is high then the people
would consume less and save more. But at a high rate of interest the business would
invest less. The reverse would be the case when the rate of interest is low. At a certain rate
of interest the saving and investment would be come equal. Thus it is the rate of interest
or the price of capital which decides the volume of the consumption, the saving and the
investment.
Features of a socialist economy
There are two major forms of economic systems namely capitalist society and socialist society
The socialist society is also known by the names of planned economy, controlled economy
or collectivist economy.
A collectivistic socialist economy is the one where the factors of production are owned by
the society (or the state) and where production of goods and services takes place according
to the needs of the society as per the economic and social priorities decided by the state.
Features : The following are the features of a socialist society.
1. Collective ownership of factors of production : The factors of production belong to
the society at large. It is the state which controls the factors of production on behalf of
the society.
2. Absence of market mechanism : The economic freedoms that we see in a free market
capitalist society are absent here. The place of the free market is taken by planning
commission or planning ministry. It is the planning commission which takes the
decisions such as what to produce, where to produce, how much etc.
3. Production according to needs of the society : The production in a socialist economy
takes place according to the needs of the society. The production is not profit-motivated
but socially motivated. The planning commission decides the things to be produced in
the light of the priorities decided by the state.

4. State is a major body : While the state is regarded as a body of minor importance in a
capitalist society, the state is an all-powerful body in a socialist economy. It is the state
that decides the things to be produced, the employment of resources etc.
5. Less inequalities : Compared with a capitalist economy, the inequalities of incomes
are less in a socialist economy. This is because these economies are full employment
economies. Moreover property oriented inequalities are absent here. Also the state
provides various amenities like education, health etc. at highly subsidized prices.
6. Classless Society : A truly socialist society does not have classes like “the rich” and
“the poor” or “the haves” and the “have nots”. There is only one class in such a society
and that is the working class. All the members of the society get equal opportunities
irrespective of caste, creed, race, religion etc.
7. Welfare State : The state operates with the objective of a welfare state. The govt.
constantly tries to promote social welfare through various social security measures.
8. Absence of consumer’s sovereignty : The consumers do not have the freedom of deciding
what to consume as their consumption pattern is decided by the state.
9. No freedom of enterprise : All the factors of production belong to the state and therefore
the entrepreneurial role is performed by the state.
10. Allocation of resources through planning : The economic resources are employed in
the various activities according to plan targets laid down by the planning commission.
Merits of Socialism
1. Equitable distribution of wealth and income and provision of equal opportunities
for all help to maintain social justice.
2. In socialistic economy there will be better utilization of resources and it ensures the
maximum production. Socialist economy means planned economy.
3. Waste of all kinds is avoided through strict economic planning.
4. In planned economy unemployment is removed, business fluctuation are eliminated
and stability is brought about and maintained.
5. The absence of profit motive helps the community to develop a co-operative mentality
and avoids classwar.
6. Socialism ensures right to work and minimum standard of living to people.
7. Under socialisms the labourers and consumers are protected from the exploitation
by the employer and monopolies respectively.

Demerits of Socialism
1. Socialism involves the predominance of bureaucracy. Moreover, there may also be
corruption, redtapism, favouritism, etc.
2. It restricts the freedom of individuals as there is state ownership of the material means
of production and state direction and control of economic activity.
3. Socialism takes away such right as the right of private property.
4. It will not provide necessary incentive to hard work in the form of profit.
5. There is no proper basis for cost calculation. In the absence of such practice, the most
economic and scientific allocation of resources and the efficient functioning of the
economic system are impossible.
6. State monopolies created by socialism will sometime become uncontrollable. This
will be more dangerous than the private monopolies under capitalism.
7. Under socialism the consumers have no freedom of choice. Therefore, what state
produces has to be accepted by the consumers.
8. The extreme form of socialism is not at all practicable.
The features of a mixed economy
A mixed economy is the one which combines important features both of a capitalist society
and a socialist society. Its main features are as under :
1. Existence of three sectors : Generally in a modern mixed economy there are three
sectors. They are as under :
a. Private sector : In this sector production and distribution are managed and
controlled by private individuals and groups. Industries in this sector are based
on self-interest and profit motive. The system of private property exists and
personal initiative is given full scope. However private enterprise may be
regulated by the government directly and or indirectly by a number of policy
instruments.
b. Public sector : Industries in this sector are not primarily profit-oriented but are
set up by the State for the welfare of the community.
c. Combined sector : This is the sector in which both the government and the private
enterprises have equal access, and join hands to produce a commodity, leading
to the establishment of joint sector.

2. Limited Planning : Secondly, a mixed economy is a planned economy. However
planning in a mixed economy is limited only for the public sector. It is not as wide
and comprehensive as we would find in a socialist economy. It is not madantory
planning. It is planning by inducement. It is financial planning. The Government
tries to achieve certain objectives of its economic policy through planning. Moreover
the government takes necessary steps to create conditions leading to development in
the private sector. Allocation of resources in a mixed economy should be better since
it attempts to combine the productive efficiency of capitalism and distributive justice
of socialism.
3. Balanced regional development : Thirdly, in a mixed economy balanced regional
development is expected. Public sector enterprises may be located in the backward
regions so as to ensure its development. Further by way of subsidies and other incentives
private sector may be lured to establish and develop industries in backward regions.
4. Dual pricing system : In this type of economy there is dual pricing system. In the
private sector the prices of goods and services are determined by the forces of demand
and supply, while in public sector it is the state which determines the prices of
various products. The state reserves the right to fix the prices of certain essential and
basic commodities even when they are produced by the private enterprises. This is
done to protect the interests of the common citizens.
Merits of Mixed Economy
1. Mixed economy secures the merits of both capitalism and socialism while avoiding
the evils of both.
2. Mixed economy protects individual freedom. Under the system, individuals have
the freedom of consumption, choice of occupation, freedom of enterprise and freedom
of expression.
3. Price mechanism is allowed to operate under mixed economy.
4. Reducing the inequalities of wealth and class struggle is one of the aims of mixed
economy.
5. Economic fluctuations can be avoided due to centrally planned economy.
6. Mixed economy helps under-developed countries to have rapid and balanced
economic development.

Demerits of Mixed Economy
1. Mixed economy is difficult to operate. Balancing and adjusting the public and private
sector is often difficult.
2. Excessive controls and heavy taxes are likely to prevail under mixed economy. These
will discourage production in the private sector.
3. Problems of red-tapism, nepotism, favouritism, officialdom, etc. are also found in
this type of economic system.
4. Mixed economy is described by Schumpeter as “Capitalism in the oxygen tent”.
According to him it is only a trick of the capitalists to cheat the working class by
offering them some temporary advantage like social security, uplift of the depressed
classes, etc.

REMEMBER THE FOLLOWING POINTS
Definitions of Economics
 Adam.Smith is known as father of economics.
 Wealth definitions of economics are given by Adam Smith, J.B.Say and other classical
writers.
 Welfare definitions of economics are given by Marshall, Pigou and other neo-classical
writers.
 Robbins has given the scarcity definition of economics.
 Samuelson has given the growth definition of economics.
 Scarcity is a relative term which means that all the wants of all the people can never
be satisfied.
 The concept of scarcity is applicable to the poor as well as the rich countries.
 According to Robbins economics is a science of choice making.
 According to Robbins economics is a positive or pure science while according to
Marshall and Pigou economics is a normative science.
 A normative science is the one which is concerned with moral or value judgments.
 A positive science is the one which is concerned with objective truths and analysis of
cause and effect relationship between various variables. It does not consider the ethical
aspects of any law.
 According to Robbins economics should be neutral between ends which means that
the economists have no right to pass value judgements regarding human economic
decisions.
 Rational decision making is the fundamental premises of economics. It means that
individuals choose that alternative for which they believe that their economic gain
would be the greatest.
 Rational decision making is requires that choice of an economic unit should be
consistent with its goal.
Methods of Studying Economics
 There are two methods of studying any science namely deductive method and
inductive method.
 The deductive method is known as a priori method, axiomatic method or subjective
method. It is based upon abstract reasoning and not upon actual facts. It goes from

general to particular.
 The Inductive method is known as scientific method, empirical method or objective
method. It is based upon actual experiments and data. It goes from particular to
general.
Micro Economics and Macro Economics
 According to the modern writers the economics is divided into two parts namely
micro economics and macro economics.
 Micro economics is also known is price theory and it is concerned with allocation of
economic resources at the level of individual economic units.
 Micro Economics is also known as price theory. It studies allocation of resources at
the level of individuals and firms.
 Macro economics was developed by Keynes. Macro economics is also known as theory
of income and employment. It is concerned with the allocation of resources at the
national level. It is concerned with aggregates.
Central Economic Problems
 There are five central economic problems before any economy; what to produce,
how to produce, how to distribute, how to provide for growth and the division of
production of private and public goods. However, when to produce is not an
economic problem.
 Economics is a science as well as an art.
Economic systems
 There are three most important features of a capitalist economy; private property,
allocation of resources through market and production of goods and services according
to the choice of private consumers.
 There are three most important features of a socialist economy; collective ownership
of means of production, allocation of resources through centralised planning and
production of goods and services according to the needs of the community.
 There are three most important features of a mixed economy; co-existence of private
sector and public sector, limited economic planning and presence of economic controls
side by side economic freedoms.
 The greatest limitation of allocating resources through the use of market system is
that economic resources are wasted.
 In capitalist society production takes place according to market demand while in
socialist economy it takes place according to need of the society.
 In a mixed economy there is planning by inducement or financial planning.
 In a mixed economy the role of the state is that of preventing undesirable competition
and promoting a rational allocation of resources.
 In a mixed economy the public sector and private sector exist side by side and both
of them are complementary.
 In a mixed economy there is a dual system of pricing.
 Consumer’s sovereignty is found in a free market economy and it means that the
allocation of resources as between various activities is decided by consumer’s choices
and preferences.
 In socialist society cost benefit analysis is used to decide allocation of resources.
 In capitalist society the national income is more unevenly distributed than in socialist
society.
Production possibility curve :

 A production possibility curve (transformation curve) is a curve showing the
maximum quantities of any two goods that an economy can produce under the
conditions of full employment and a given state of technology.
 The opportunity cost arises due to scarcity of factors of production.
 A production possibility curve (transformation curve) is having a negative slope
because of scarcity of resources. It means that one commodity X cannot be produced
more without some other commodity Y being produced less.
 A production possibility curve (transformation curve) is concave to the origin because
of increasing marginal rate of transformation or increasing opportunity cost.
 A production possibility curve would be downward sloping straight line (linear curve)
when the opportunity cost is constant.
 The opportunity cost is also known as trade off. It means the quantity of any one
commodity sacrificed to obtain more of some other commodity.
 All the points on a production possibility curve show full employment.
 All the points within the production possibility curve show less than full employment.
 When there is a movement from within the production possibility curve towards the
production possibility curve it indicates decreasing unemployment and increasing
productive efficiency.
 The production possibility curve would move on the right hand side when there is
an increase in the quantity of the factors or their quality or when there is an
improvement in the technology.
 The various events like a war, an earthquake or any natural calamity would move
the economy from a point on the production possibility curve to a point within the
production possibility curve.
 The central problem in economics is that of allocating the scarce economic resources
in such a manner that maximum number of wants of maximum number of people
can be satisfied.
 Productive efficiency is a situation where the goods and services are produced at the
minimum possible cost and there is full utilisation of resources.
 Capital intensive technique would get chosen in a capital surplus economy and
labour intensive would get chosen in a labour surplus economy.

NOTE : OVER AND ABOVE THE CPT

QUESTIONS THE STUDENTS ARE
ALSO ADVISED TO PREPARE
THE FOLLOWING QUESTIONS
INTRODUCTION TO MICRO ECONOMICS
1. The meaning of the word ‘economic”is most closely connected with the word
(a) Free (b) Scarce

(c) Unlimited (d) Restricted
2. Which of the following is a normative statement

(a) Planned economies allocate (b) Reducing inequality should be a major
resources via government priority for mixed economies
departments
(c) There is greater degree of (d) Most economies have experienced
consumer sovereignty in market problems of falling output and rising
economies prices
3. Economic resources are :
(a) Limited (b) Unlimited
(c) Restricted (d) Unrestricted

4. The word economics is derived from the language:
(a) Latin (b) German
(c) French (d) Greek.

5. Wealth definition of economics was given by :
(a) Marshall (b) Samuelson
(c) Adam Smith (d) Robbins

6. Who gave material welfare definition of economics?
(a) J.B. Say (b) Smith
(c) Marshall (d) Senior

7. Who gave scarcity definition?
(a) Cannan (b) Bentham

(c) Marshall (d) Robbins
8. Who propounded Growth-Oriented definition of economics?
(a) Marshall (b) Walker

(c) Benham (d) Samuelson
9. According to Robbins, Economics is the study of :
(a) Wealth (b) Material well-being

(c) Choice making (d) Growth and development
10. Economics is described by ___________ as a science of growth and development.
(a) Marshall (b) Keynes

(c) Paul A. Samuelson (d) Robbins
11. Economics is
(a) Science only (b) Science and an art both

(c) An art (d) None of the above
12. The study of economics is divided into
(a) Deductive and inductive (b) Micro and macro economics

(c) Positive and Normative (d) An art and science
13. According to Marshall Economics is
(a) Neutral between ends (b) Study of growth and development

(c) Study of material well-being
(d) Study of wealth
14. There is need of central planning authority in

(a) Capitalistic system (b) Socialistic economy
(c) In monopoly market (d) None of the above
15. Competitive market structure and inequality of wealth are main features of
(a) Mixed Economy (b) Socialistic Economy
(c) Capitalistic Economy (d) None of the above.

16. Which of the following is related to Micro-Economics?
(a) Inflation in the Economy (b Problem of Unemployment
(c) National Income (d) Income from the Railways.
17. Right of private property is found in
(a) Socialism (b) Capitalism
(c) Mixed economy (d) None of these.
18. Positive economics means
(a) study of economic progress (b) economics based upon mathematics
(c) economics which is free from (d) economics which studies the
value judgments positive aspects of economics
19. Scarcity means
(a) shortage (b) goods are hoarded by the traders
(c) a situation where goods are to (d) non availability of goods
be paid for during war period
20. Micro economics is the study of
(a) micro biological elements (b) individual economic units
(c) is the study of national income (d) is the study of prices and exchange rates
and employment
21. Ceteris Paribus means
(a) certain principles (b) people behave rationally
(c) central government takes (d) Other things remaining unchanged
principal decisions
22. The concept of per capita income is the concept of
(a) Public economics (b) international economics
(c) micro economics (d) macro economics
23. The word macro economics was used by
(a) Samuel son (b) Robbins
(c) Keynes (d) Lipsey
24. Which of the following is an economics activity ?
(a) Seeing T.V. (b) Teaching one’s own son at home
(c) Medical Facilities rendered by a (d) A housewife preparing food
charitable hospital for the household

25. Deductive method of study is known as
(a) subjective method (b) a priori method
(c) axiomatic method (d) all the three
26. Inductive method of study is known as
(a) scientific method (b) empirical method
(c) objective method (d) all the three
27. Economic laws can be compared with the laws of
(a) physics (b) Biology
(c) chemistry (d) tides
28. The main use of models is
(a) to analyse (b) to predict
(c) to describe functional relations (d) all the three
29. Adam Smith has given the concept of
(a) Welfare state (b) economic man
(c) progressive government (d) international unity
30. Theories of commodity and factor prices are a part of
(a) general economics (b) public economics
(c) micro economics (d) macro economics
31. Problems of inflation, business cycles and economic growth are studied in
(a) monetary economics (b) fiscal economics

(c) internal economics (d) macro economics
32. In capitalist societies the resources are allocated among economic activities through
(a) government (b) planning commission

(c) big business houses (d) market forces
33. State which of the following refers to the macro economic approach from a national angle :
(a) Per capita income of the country (b) Capital-output ratio in steel industry
(c) Income from the railways. (d) Unemployment among the educated
people.

34. Which of the following can be regarded as the laws of economics ?
(a) There is a direct proportionate (b) Prices are determined by total

change in the price level with a demand and total supply in the market.
change in the supply of money.
(c) After a point, the marginal increase (d) all the three
in output shows a falling tendency
with every increase in one or more
of the factors of production.

35. A free market economy does not always guarantee a rational allocation of resources because
of
(a) differences in the interest of the (b) government intervention
buyers and sellers

(c) private monopolies (d) market imperfections
36. A mixed economy is a combination of
(a) private property and government (b) private sector and public sector
property
(c) domestic sector and international (d) capitalistic economy and socialist
sector economy
37. India has adopted
(a) socialist economy (b) capitalistic economy
(c) mixed economy (d) Russian type economy

38. A capitalistic economy is also known as
(a) free economy (b) market economy
(c) laissez faire (d) all the three

39. In a mixed economy the role of the government is
(a) to promote economic development (b) to promot economic welfare
(c) to promote basic and heavy (d) all the three

industries in the public sector

40. In a mixed economy there is
(a) competition between public (b) no competition between public

sector and private sector sector and private sector
(c) cooperation and complementarity (d) competition for securing
between the two sectors government assistance

41. The guiding force in a capitalistic economy is
(a) market (b) competition
(c) private poverty (d) profit motive ultimate

42. The ultimate role of the government in a modern capitalistic economy is to
(a) control private sector (b) promote public sector
(c) establish social justice (d) all the above

43. India has adopted mixed economy since
(a) 1948 (b) 1956
(c) 1977 (d) 1980

44. In capitalistic economy production is undertaken according to
(a) estimated profits (b) guidlines given by the government
(c) anticipated demand (d) forecasts prepared by the planning

commission
45. Price mechanism in a socialist economy has a
(a) primary role (b) complementary role
(c) secondary role (d) none of the above

46. Economic laws are
(a) very accqurate (b) less accqurate than the laws of other
social sciences
(c) less accqurate than the laws of (d) universal

physical sciences
47. Consumer is regarded as a king in
(a) all economies (b) socialist economies

(c) mixed economies (d) capitalistic economies

48. Economic inequalities are more in a capitalistic society due to
(a) private property and law (b) ineqaulity of opportunity

of inheritance
(c) inequality of resouces (d) all the three
49. Economics is a Science which deals with wealth was referred by:
(a) Alfred Marshal (b) J. B. Say
(c) Adam Smith (d) A.C. Pigou
50. In Economics, the central economic problem means:
(a) Output is restricted to the limited (b) Consumers do not have as much
availability of resources money as they would wish

(c) There will always be certain level (d) Resources are not always allocated
of unemployment in an optimum way
51. The other names of ......................... method are abstract, analytical and a priori method.
(a) Inductive method (b) Economic method
(c) Deductive method (d) Name of the above
52. All points on PPC show that goods and services are produced at:
(a) Least cost and some resources (b) High cost and no resources are wasted
are wasted
(c) Least cost and no resources are (d) Moderate cost and no resources are
wasted wasted
53. Which of the following is a cause of an economic problem
(a) Scarcity of Resources (b) Unlimited wants
(c) Alternative uses (d) All of the above
54. Scarecity definition of economics is given by :
(a) Alfred Marshall (b) J B Say
(c) Allen and Hicks (d) Robbins

55. The Law of Scarcity
(a) Does not apply to rich, developed (b) Does not apply to poor, under developed
countries countries
(c) Implies only to socialist economies. (d) Implies that all consumer wants will
never be completely satisfied.
56. The shape of PPC is concave due to
(a) Falling opportunity cost between (b) Rising opportunity cost between
two goods two goods
(c) Constant opportunity cost between (d) None of the above
two goods
57. Which of the following is not one of the features of capitalist economy?
(a) Right of private property (b) Freedom of choice by the consumers
(c) No profit, No Loss motive (d) Competition
58. The definition “Economics is the science which studies human behavior as a relationship between
ends and scarce means which have alternative uses” was given by
(a) J. B. Say (b) Alfred Marshal
(c) Robbins (d) Paul. A. Samuelson
59. Economics is ........................
(a) Not a normative Science (b) Not a positive Science.
(c) Partly Science and partly Art (d) Neither a normative nor a positive Science.
60. Who said “Economics is a science of dynamic growth and development?
(a) J. B. Say (b) Paul A. Samuelson
(c) Alfred Marshal (d) Robbins
61. Who Said “Economics should be neutral between ends”
(a) J. B. Say (b) Alfred Marshall
(c) Robbins (d) A. C. Pigou
62. If marginal opportunity cost is falling, the PPF would be
(a) Straight line (b) Concave
(c) Backward bending (d) Convex
63. Which of the following would result in a rightward shift of PPF?
(a) An increase in investment in (b) A reduction in unemployment rate
speculative activities by diverting
funds from other productive activities.
(c) The discovery of new gold reserves (d) increase in number of people taking
in the country leisure activities by taking early
retirement from their jobs
64. We mainly study the following in Micro Economics
(a) Location of a Industry (b) Study of firms
(c) Factor pricing (d) All of the above
65. When we study why saving rates are high or low, we are studying:
(a) Macro Economics (b) Micro Economics
(c) Both (a) and (b) (d) None of the above
66. In Micro Economics we study the Economic behaviour of
(a) An Individual (b) Firm
(c) Industry (d) All of the above
67. Which of the following statements is correct?
(a) As normative science, Economics (b) Robbins has made economics as a
involves value judgments form of welfare economics
(c) The Law of Demand is always true (d) None of the above
68. An economy achieves “ productive efficiency when
(a) The best quality goods are produced (b) The highly skillful resources in the
country are fully employed
(c) All resources are utilized and (d) None of the above
goods and services are produced
at least cost
69. Economic goods are goods which
(a) Cannot be increased in quantity (b) Obey the law of Micro Economics
(c) Are limited in supply and are scarce (d) Are limited to man-made goods.
70. Which of the following means an Economic activity?
(a) Production of Goods (b) Production of Services
(c) Consumption of Goods and Services (d) All of the above
71. Which economy Is now a myth only, as no country in the world is having that type of economy?
(a) Capitalist Economy (b) Socialist Economy
(c) Mixed Economy (d) None of the above
72. We mainly study the following in micro economics
(a) Location of a Industry (b) Study of firms
(c) Factor pricing (d) All of the above
73. When we study why saving rates are high or low, we are studying
(c) Econometrics (d) Both (a) and (b)

74. Which of the following Is not a central problem of the economy”
(a) How to produce? (b) When to produce?
(c) What to produce? (d) For whom to produce?
75. When we are studying how a producer fixes the prices of his products we are studying.
(c) Both Micro and Macro Economics (d) None of the above
76. Macro economics doesn’t include one example from the following:
(a) National Income and output (b) Study of firms
(c) General Price Level (d) Saving and Investment
77. Macro economics is the study of
(a) Inflation (b) Unemployment
(c) Growth (d) All of the above
78. The law of scracity :
(a) Doesn’t apply to rich, developed (b) Applies only to the less developed
countries countries
(c) implies that consumer wants will (d) Implies that consumer wants will
be satisfied in a mixed economy never be completely satisfied
(a) Economic laws are mere statement (b) Economics laws are as exact as
of tendencies physical lows
(c) Economics laws are permanent (d) All of the above
80. Right to own private property is found in :
(a) Socialism (b) Capitalism
(c) Mixed Economy (d) Both (b) and (c)
81. Questions like what should be the level of national income., what should be the wage rate fall
within the scope of:
(a) Positive Science (b) Normative Science
(c) Both (a) and (b) (d) None of the above
82. Which of the following is likely the cause an inward shift in a country’s PPC?
(a) Scientist discovering new (b) Workers getting job in making fly-over
techniques of production
(c) War destroying resources (d) The country finds new techniques
of the country of agricultural production.

CHAPTER 1
CLASS WORK
ANSWER KEYS
1 B 16 D 31 D 46 C 61 C 76 B
2 B 17 B 32 D 47 D 62 D 77 D
3 A 18 C 33 A 48 D 63 C 78 D
4 D 19 C 34 D 49 B 64 D 79 A
5 C 20 B 35 D 50 A 65 A 80 D
6 C 21 D 36 D 51 C 66 D 81 B
7 D 22 D 37 C 52 C 67 A 82 C
8 D 23 D 38 D 53 D 68 C
9 C 24 C 39 D 54 D 69 C
10 C 25 D 40 C 55 D 70 D
11 B 26 D 41 D 56 B 71 B
12 B 27 D 42 D 57 C 72 D
13 C 28 D 43 A 58 C 73 A
14 B 29 B 44 C 59 C 74 B
15 C 30 C 45 C 60 B 75 B

HOME WORK - 1
ECONOMICS
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 brought directly or indirectly into relation with
the measuring rode 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 end”?
1
(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) one’s choices be arrived at logically and without error.
(b) one’s choices be consistent with one’s goals.
(c) one’s choices never vary.
(d) one makes choices that do not involve trade-offs.
7. What is the “Fundamental Premise of Economics”?
(a) Natural resources will always be scare.
(b) Individuals are capable of establishing goals and acting in a manner consistent with
achievement of those goals.
(c) Individuals choose the alternative for which they believe the net gains to be the greatest.
(d) No matter what the circumstances, individual choice always involves a trade-off.
8. 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
economies.
(d) Reducing inequality should be a major priority for mixed economies.

9. Which of the following statements would you consider to be a normative one?
(a) Faster economic growth should result if an economy has a higher level of investment.
(b) Changing the level of interest rates is a better way of managing the economy than using
taxation and government expenditure.
(c) Higher levels of unemployment will lead to higher levels of inflation.
(d) The average level of growth in the economy was faster in the 1990s than the 1980s.
10. 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.
11. Identify the correct statement :
(a) In deductive method logic proceeds from the particular to the general.
(b) Micro and Macro-Economics are interdependent.
(c) In a capitalist economy, the economic problems are solved by Planning Commission.
(d) Higher the prices lower is the quantity demanded of a product is a normative statement.
12. 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.
13. 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) Analyse the causes of failure of industry in providing large scale employment.
14. 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.
15. From the national point of view which of the following indicates micro approach?
(a) Per capital income of India.
(b) Underemployment in agricultural sector.
(c) Lock out in TELCO.
(d) Total savings in India.
16. 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.
17. A capitalist economy uses ____________________ as the principal means of allocating resources.
(a) demand (b) supply
(c) efficiency (d) prices
18. 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.
19. Which of the following would be considered a disadvantage of allocating resources using a
market system?
(a) Income will tend to be unevenly distributed.
(b) Significant unemployment may occur.
(c) It cannot prevent the wastage of scarce economic resources.
(d) Profits will tend to be low.
20. 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.

21. 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 society’s unlimited needs or wants are
satisfied as well as possible.
22. Which of the following bundles of goods could not be produced with the resources the economy
currently has?
(a) a (b) b
(c) c (d) d
23. 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.

Use the figure at right to answer questions 24-26.
24. Which point on the PPF shows a “productively efficient” level of output?
(a) A (b) B
(c) C (d) All of the above.
25. 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.
26. 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.
27. 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.
28. 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.
29. 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.
30. During presidential election campaigns, candidates often promise both more “gun” and more
“butter” if they are elected. Assuming unemployment is not a problem, what possible assumption
are they making but not revealing to their audience?
(a) There will be a sufficient increase in the supply of natural resources used to produce “guns”
and “butter”.
(b) That there will be an improvement in the technology of both “gun” and “butter” production.
(c) That there will be an increase in the labour force.
(d) All of the above.
31. What 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.

Use the figure at right to answer questions 32-38.
32. Which of the following represents the concept of trade-offs?
(b) A movement from point U to point C.
(c) Point W.
(d) Point U.
33. 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.
34. 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.

35. 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.
36. Unemployment or underemployment of one or more resources is illustrated by production at

point :
(a) A. (b) C.
(c) U. (d) W.
37. 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.
38. 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 in time we have limited amounts of productive resources.
(c) Resource specialisation.
(d) Increasing opportunity costs.
39. Capital intensive technique would get chosen in a
(a) labour surplus economy.
(b) capital surplus economy.
(c) developed economy.
(d) developing economy.
40. Labour intensive technique would get chosen in a
(a) labour surplus economy. (b) capital surplus economy.
(c) developed economy. (d) developing economy.

41. Ram : My corn harvest this year is poor.
Krishan : Don’t 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
42. Consider the following and decide which, if any, economy is without scarcity :
(a) The pre-independent Indian economy, where most people were farmers.
(b) A mythical economy where everybody is a billionaire.
(c) Any economy where income is distributed equally among its people.
43. Which of the following is not a microe-conomic subject matter?
(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 economy’s annual rate of growth.
44. 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?
45. If the marginal (additional) opportunity cost is a constant then the PPC would be
(a) convex. (b) straight line.
(c) backward bending. (d) concave.
46. Larger production of goods would lead to higher production in future.
(a) consumer goods (b) capital goods

(c) agricultural goods (d) public goods
47. 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.
48. Which of the following is likely to cause an inward shift in a country’s 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.
49. The various combinations of goods that can be produced in any economy when it uses its
available sources and technology efficiently are depicted by
(a) demand curve. (b) production curve.
(c) supply curve. (d) production possibilities curve.
50. 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.
51. The term ‘Economics’ owes its origin to the Greek word
a. Aikonomia b. Wikonomia
c. Oikonomia d. None of the above
52. Oikonomia means
a. industry b. household
c. services d. none of these
53. Adam smith published his masterpiece “An enquiry into the nature and causes of wealth of
nation” in the year
a. 1776 b. 1786
c. 1756 d. 1766

54. The classical economists defined Economics as
a. The science of welfare b. The science of scarcity
c. The science of wealth d. The science of wealth and welfare
55. Lionel Robbins Published his famous book “Nature of significance of Economics” in the year
a. 1935 b. 1933
c. 1931 d. 1937
56. According to ————————— Economics is the “the study of how in a civilized society one
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
57. ‘Economics is what Economists do’ is given by
a. Jacob Viner b. Henry Smith
c. Pigou d. Paul A. Samuelson
58. In which economic system all the means of production are owned and controlled by private
individuals for profit.
a. socialism b. capitalism
c. mixed economy d. communism
59. 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
60. 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

61. Economic choices can be summarized in five big questions. They are________________.
a. what, how, who, where, and would you please
b. why not, what, how, when, and where
c. what, how, when, where, and why
d. what, how, when, where, and who.
62. When productivity increases _____________________.
a. prices rise
b. living standards improve
c. there are fewer good jobs
d. living standards deteriorate
63. 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
64. 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
65. Who among the following gave the definition of Economics as “Science which deals with wealth”?
a. J.M. Keynes b. H.C. Dickinson
c. Henry Smith d. J. B. Say
66. Production Possibilities curve is also know as
a. demand curve b. supply curve
c. indifference curve d. transformation curve

67. Socialist economy is a
a. planned economy b. mixed economy
c. profit oriented economy d. none of these
68. Freedom of choice is the advantage of
a. socialism b. capitalism
c. mixed economy d. communism
*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*

HOME WORK - 2
ECONOMICS
1. What implication 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.
Read the following paragraph and answer questions 2-3.
In 1940, Hitler’s air force bombed Rotterdam, a beautiful city in Holland.

Twenty five thousand homes, 1200 factories, 69 schools and 13 hospitals
were destroyed. Nearly 75,000 people became homeless and 1000 people
died. 35 % of the port was gutted by the German army.
2. The above destruction would mean:
(a) A complete wipe off of the Production Possibilities Curve (PPC) of

Rotterdam.
(b) An outward shift of the PPC of Rotterdam.
(c) An inward shift of the PPC of Rotterdam.
1
(d) A downward movement on the same PPC of Rotterdam.

3. If immediately after the war, Rotterdam rebuilt its port with the help of most up to date cranes,
docks and cargo handling technology. By the end of the reconstruction, ships were loading and
unloading faster and at lower cost than any where in the world. It became more efficient than
it was before the destruction. This means:
(a) Rotterdam has come back to its original PPC.

(b) Rotterdam has shifted to a higher PPC.
(c) Rotterdam has shifted to a lower PPC.
(d) Nothing can be said.

Read the following figure and answer questions 4-6.
4. Which of the following represents the concept of trade-offs?

(a) A movement from point (b) A movement from point
A to point B. U to point C.
(c) Point W. (d) Point U.
5. 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.

6. Unemployment or underemployment of one or more resources is illustrated by production at
point:
(a) A (b) C
(c) U (d) W
7. If the marginal (additional) opportunity cost is a constant then the PPC would be ————
(a) straight line (b) convex
(c) backward leading (d) concave
Figure 1 give the production possibilities frontier of an economy that produces two types of
goods, guns and bread. Read the figure and answer questions 8-10
8. Which point on the PPF shows a productively efficient level of output?
(a) A (b) B
(c) C (d) All of the above.
.A
. B . F
. C
. E
. D
9. Which of the following clearly represents a movement toward greater productive efficiency?
(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.
10. 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.
11. 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
brought directly or indirectly into relation with the measuring rode of money: Adam Smith.
12. Economic goods are goods which:
(a) Cannot be increased in quantity (b) Obey the law of Micro Economics
(c) Are limited in supply and are scarce (d) Are limited to man-made goods.
13. Which of the following means an Economic activity?
(a) Production of Goods (b) Production of Services
(c) Consumption of Goods and Services (d) All of the above
14. When we are studying how a producer fixes the prices of his products we are studying.
(c) Both Micro and Macro Economics (d) None of the above
15. Macro economics doesn’t include one example from the following:
(a) National Income and output (b) Study of firms
(c) General Price Level (d) Saving and Investment
16. An economy achieves “ productive efficiency” when:
(a) The best quality goods are produced
(b) The highly skillful resources in the country are fully employed
(c) All resources are utilized and goods and services are produced at least cost
(d) None of the above
17. Which of the following would not cause an economy’s production possibilities curve to shift to
the right?

(a) The discovery of new superconductivity materials which makes manufacturing more
efficient.
(b) A decrease in unemployment.
(c) Improvements in technology.
(d) Widespread application of irrigation to agricultural land.
18. In drawing a production possibilities curve, which of the following is (are) held constant?
(a) The supply of natural resources and the supply of labor.
(b) Technology and the educational attainment of the work force.
(c) Both (a) and (b).
19. Which of the following is not microeconomic subject matter?
(a) The price of apples.
(b) The cost of producing a fire truck for the fire department of Delhi, India
(c) The quantity of apples produced for the apple market.
(d) The national economy’s annual rate of growth.
20. 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 in time we have limited amounts of productive resources.
(c) Resource specialisation.
(d) Increasing opportunity costs.
21. Which of the following is correct?
(a) Normative economics is not concerned with value judgment.
(b) A market is a process that reconciles consumer decision, production decisions and labour
decisions.
(c) A mixed economy has a certain level of government intervention in the economy along
with private sector ownership of the economy.
(d) (b) and (c).
22. Which of the following is incorrect?
(a) The central problem in economics is that of allocating scarce resources in such a manner
that society’s unlimited needs are satisfied as well as possible.
(b) In mixed economy, the government and the private sector interact in solving the basic
economic questions.

(c) Microeconomics best describes the study of the behaviour of individual agents.
(d) An important theme in economics is that market systems are better than command
(socialistic) economies.
Questions 23 to 25 are based on Figure 1 which shows production possibilities curve (PPC) for
grape juice and wine.
23. The opportunity cost of increasing wine production from D to E is:

(a) 0 litres of grape juice. (b) 5 litres of grape juice.
(c) 1 litre of wine. (d) 0.2 litres of wine.
24. Assuming that the PPC does not shift, which of the following is true?
(a) Point A is desirable but is inefficient.
(b) Point D represents a more efficient allocation of resources than points A and F.
(c) Point H is desirable but is not attainable.
(d) If wine production equals 7 litres, the maximum amount of grape juice that can be produced
simultaneously is 28 litres.
25. The PPC in the diagram reflects:
(a) increasing opportunity cost of more wine production and constant opportunity cost of
more grape juice production.
(b) increasing opportunity cost of more wine production and decreasing opportunity cost of
more grape juice production.
(c) decreasing opportunity cost of more wine production and decreasing cost of more grape
juice production.
(d) increasing opportunity cost of more wine production and increasing cost of more grape
juice production.
(a) In a two-good economy, the production possibilities frontier reflects the maximum amount
of one good that can be produced when a given amount of the other good is produced.
(b) Microeconomics is the study of the behaviour of the economy as a whole.
(c) Positive economics focuses on welfare of the people of a society.
(a) Unlike normative economics, positive economics is based on objective analysis of economic
issues.
(b) The opportunity cost of a good is the quantity of other goods sacrificed to get another unit
of that good.
(c) Microeconomics emphasizes interactions in the economy as a whole.
28. Which of the following is incorrect?
(a) The production possibilities frontier shows the maximum combination of outputs that the
economy can produce using all the recourse available.
(b) Increasing opportunity cost implies a production possibility frontier concave to the origin.
(c) Free markets are the markets in which the governments do not intervene.
(d) All of the above are correct.
29. With the same amount of resources, a farmer can feed the following combinations of goats and
horses:
Goats Horses
Option I 168 44
Option II 150 50
Given the option available with him, what is the opportunity cost to the farmer of feeding one
horse?
(a) 1 goat. (b) 3 horses.
(c) 3 goats. (d) 18 goats.
30. Trade-offs are required because wants are unlimited and resources are ______________.
(a) economical (b) unlimited
(c) efficient (d) scarce
Read figure 1 and answer questions 31-33.
31. Refer to Figure 1. If the economy is operating at point C, the opportunity cost of producing an
additional 15 units of bacon is
(a) 40 units of eggs. (b) 10 units of eggs.
(c) 20 units of eggs. (d) 30 units of eggs.
32. Refer to Figure 1, if the economy was operating at E:
(a) the opportunity cost of 20 additional units of eggs is 10 units of bacon.
(b) the opportunity cost of 20 additional units of eggs is 20 units of bacon.
(c) the opportunity cost of 20 additional units of eggs is 30 units of bacon.
(d) 20 additional units of eggs can be produced with no impact on bacon production.
33. If the economy moves from point A to point D in Figure 1 then:
(a) the opportunity cost of eggs in terms of bacon falls.
(b) the opportunity cost of eggs in terms of bacon rises.

(c) the opportunity cost of eggs in terms of bacon is constant.
(d) the economy becomes less efficient.
34. Point F in figure 1 represents:
(a) none of these answers.
(b) a combination of production that can be reached if we reduce the production of eggs by 20
units.
(c) a combination of production that can be reached if there is a sufficient advance in

technology.
(d) a combination of production that is inefficient because there are unemployed resources.
35. Which of the following represents a movement towards better utilisation of existing resources?
(b) A movement from point E to point B.
(c) A movement from point C to point B.
(d) A movement from point F to point B.
36. Economics is the study of
(a) how society manages its unlimited resources.
(b) how to reduce our wants until we are satisfied.
(c) how society manages its scarce resources.
(d) how to fully satisfy our unlimited wants
37. Which of the following statements is normative?

(a) Large government deficits cause an economy to grow more slowly.
(b) People work harder if the wage is higher.
(c) The unemployment rate should be lower.

(d) Printing too much money causes inflation.
38. Points outside the production possibilities curve are ____________________.
(a) attainable with the existing technology.
(b) not attainable with the existing resources and technology.
(c) inefficient.
(d) suggest that the country’s factors are underemployed.

39. Inductive method is ____ based on the observation of particular facts.
(a) never (b) seldomly
(c) alternatively (d) always
40. Price theory is an important constituent of _____ Economics.
(a) Micro (b) Macro
(c) Developmental (d) Welfare
41. Which of the following involve a trade-off?
(a) Taking a nap
(b) All of these answers involve trade-offs.
(c) Watching a football game on Saturday afternoon
(d) Going to university
(a) Robbins has made economics as a form of welfare economics
(b) The law of demand is always true
(c) All capital is wealth but all wealth is not capital
43. State which of the following represents macro from the national point of view.
(a) Turnover ratio of Reliance Ltd.
(b) Capital output ratio of Indian Industries
(c) Debt equity ratio of TELCO
(d) All the above
44. Which of the following can be regarded as law of economics?

(a) Ceteris Paribus, if the price of a commodity rises the quantity demanded of it will fall
(b) Higher the income, greater is the expenditure
(c) Taxes have no relation with the benefits which a person derives from the state
45. Which of the following is not an economic activity?
(a) A son looking after his ailing mother
(b) A chartered accountant doing his own practice
(c) A soldier serving at the border
(d) A former growing millets
46. Which of the following is an economic activity?
(a) Medical facilities rendered by a charitable dispensary
(b) Teaching one’s own nephew at home
(c) A housewife doing household duties
(d) Watching television
47. 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 granted
(c) determining the fair price for food
(d) deciding how to distribute the output of the economy
48. Which of the following does not suggest a macro approach for India ?
(a) Determining the GNP of India
(b) Identifying the causes of inflation in India
(c) Finding the causes of failure of X and Co.
(d) Analyse the causes of failure of industry in providing large scale employment
49. 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
50. 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?
51. Rational decision making requires that:
(a) one's choices be arrived at logically and without errors.

(b) one's choices be consistent with one's goals
(c) one's choices never vary
(d) one's makes choices that do not involve trade offs.
52. It is _____________ that deals with the problem of allocation of resources
(a) statistics (b) macro-economic theory
(c) econometrics (d) micro-economic theory
53. Which of the following falls under Micro Economics ?
(a) National Income (b) General Price level
(c) Factor Pricing. (d) National Saving and Investment
54. Which of the following steps relates only to deductive method in Economics?
(a) Testing of Hypothesis (b) Collection of data
(c) Classification of data (d) Perception of the problem
55. Which of the following statements is incorrect?
(a) The services of doctors, lawyers, teachers etc are termed as production
(b) Man cannot create matter
(c) Accumulation of capital does not depend solely on income
(a) As normative science, Economics involves value judgments
(b) Robbins has made economics as a form of welfare economics
(c) The Law of Demand is always true
57. Larger production of ——————goods would lead to higher production in future.
(a) Consumer goods (b) Capital goods
(c) Agricultural goods (d) Public goods
58. The average product of labour is maximized when marginal product of labour ——————.
(a) equals the average product of labour. (b) equals zero.
(c) is maximized. (d) none of the above.

Use Table 2 to answer questions 59-60
Table 2: Production Possibilities

Production A B C D E F
possibilities
Good A 0 1 2 3 4 5
Good B 30 28 24 18 10 0
59. According to Table 2, the opportunity cost of increasing Good A’s production from 2 to 4 units
is equal to:
(a) 10 units of B (b) 14 units of B
(c) 24 units of B (d) 2 units of B.
60. According to Table 2, the opportunity cost of increasing one unit of Good B from 10 units to 18
units is:
(a) 3 units of A. (b) 1 unit of A.
(c) 0.125 units of A. (d) 0.5 units of A.
61. Given the data in Table 2, as one moves from successively from point A to point B, C, D, E and
F, the opportunity cost of Good A:
(a) increases as more of good A is produced.
(b) decreases as more of good A is produced.
(c) remains constant.
(d) is always equal to one unit of B.
Read table 3 and answer Questions number 62-63
With the same amount of resources, a farmer can feed the following combinations of sheep and
cows:
Table 3
Sheep Cows
Option I 84 22
Option II 75 25
62. Given the options available to him, what is the opportunity cost to the farmer of feeding one
cow?

(a) 1 sheep (b) 3 sheep
(c) 9 cows. (d) 9 sheep.
63. Given the options available to him, what is the opportunity cost to the farmer of feeding one
sheep?
(a) 9 sheep. (b) 3 cows.
(c) 1/3 sheep. (d) 1/3 cow.
64. Economic laws are essentially _______ and ________.
(a) hypothetical, conditional (b) hypothetical, unconditional
(c) neutral, rigid (d) neutral, flexible
65. All points on PPC show that goods and services are produced at:
(a) Least cost and some resources are wasted
(b) High cost and no resources are wasted
(c) Least cost and no resources are wasted
(d) Moderate cost and no resources are wasted
66. The shape of PPC is concave due to:
(a) Falling opportunity cost between two goods
(b) Rising opportunity cost between two goods
(c) Constant opportunity cost between two goods
67. Which of the following is likely to cause an inward shift in a country’s PPC?
(a) Scientist discovering new techniques of production
(b) Workers getting job in making fly-over
(c) War destroying resources of the country
(d) The country finds new techniques of agricultural production

CHAPTER 1
HOME WORK 2
ANSWER KEYS
1 A 18 C 30 D 47 A 62 B
2 C 19 D 31 C 48 C 63 C
3 B 20 B 32 D 49 C 64 A
4 A 21 D 33 B 50 B 67 C
5 A 22 D 34 C 51 B 65 C
6 C 23 B 35 B 52 D 66 B
7 A 24 C 36 C 53 C 67 C
8 D 25 B 37 C 54 A
9 C 26 A 38 B 55 D
10 D 27 B 39 D 56 A
11 C 28 D 40 A 57 B
12 C 29 C 41 B 58 A
13 D 42 C 59 B
14 B 43 B 60 C
15 B 44 A 61 A
16 C 45 A
17 B 46 A

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INTRODUCTION TO MICRO

Wealth definition of economics & its main drawbacks.

INTRODUCTION TO MICRO ECONOMICS 3

4 MICRO ECONOMICS (CPT)

How to use resources How to use the income received

6. Problem of choice : Thus economic problem is basically a problem of choice. However

6 MICRO ECONOMICS (CPT)

INTRODUCTION TO MICRO ECONOMICS 7

8 MICRO ECONOMICS (CPT)

INTRODUCTION TO MICRO ECONOMICS 9

Theory Theory Theory

Rent Wages Interest Profit

Theory of Theory Theory of

10 MICRO ECONOMICS (CPT)

INTRODUCTION TO MICRO ECONOMICS 11

12 MICRO ECONOMICS (CPT)

VARIOUS FUNDAMENTAL PROBLEMS OF AN ECONOMY

INTRODUCTION TO MICRO ECONOMICS 13

14 MICRO ECONOMICS (CPT)

INTRODUCTION TO MICRO ECONOMICS 15

Important points about PCC :

16 MICRO ECONOMICS (CPT)

Fig. : Shift in PPC due to economic growth

INTRODUCTION TO MICRO ECONOMICS 17

18 MICRO ECONOMICS (CPT)

3. Capitalism works automatically through the price mechanism.

4. The freedom of enterprise results in maximum efficiency in production.

6. Under capitalism freedom of choice brings maximum satisfaction to consumers

8. It rewards men of initiative and enterprise.

9. Country as a whole benefits through growth of business talents, development of

1. In capitalism the enormous wealth produced is approtioned by a few. This causes

3. Economic instability in terms of over production, economic depression,

7. Capitalism leads to the formation of monopolies.

8. There is no security of employment under capitalism.

INTRODUCTION TO MICRO ECONOMICS 19

20 MICRO ECONOMICS (CPT)

INTRODUCTION TO MICRO ECONOMICS 21

22 MICRO ECONOMICS (CPT)

INTRODUCTION TO MICRO ECONOMICS 23

24 MICRO ECONOMICS (CPT)

INTRODUCTION TO MICRO ECONOMICS 25

26 MICRO ECONOMICS (CPT)

Production possibility curve :

INTRODUCTION TO MICRO ECONOMICS 29

NOTE : OVER AND ABOVE THE CPT

INTRODUCTION TO MICRO ECONOMICS

(a) Free (b) Scarce

2. Which of the following is a normative statement

(a) Limited (b) Unlimited

(c) Restricted (d) Unrestricted

(a) Latin (b) German

(c) French (d) Greek.

(a) Marshall (b) Samuelson

(c) Adam Smith (d) Robbins

(a) J.B. Say (b) Smith

(c) Marshall (d) Senior

30 MICRO ECONOMICS (CPT)

(a) Cannan (b) Bentham

8. Who propounded Growth-Oriented definition of economics?

(a) Marshall (b) Walker

9. According to Robbins, Economics is the study of :

(a) Wealth (b) Material well-being