“Economic Questions for Competitive Exams”


(Part I)
Question : What is Economics?
Answer :Many leaders have defined economics on their won words
Lionel Robbins :defines economics as a science of scarcity. Prof. Robbins in his book Nature and Significance of Economic Science states, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”.
Paul A. Samuelsondefines economics as “the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society.”
Question :What is microeconomics?
Answer : Microeconomics is defined as the study of behaviour of individual decision-making units, such as consumers, resource owners and firms. It is also known as Price Theory.
Question : Importance of microeconomics?
Answer : Microeconomics has both theoretical and practical importance. It solves the three central problems of an economy, i.e., what, how and for whom to produce.
Question : Major topics of Microeconomics
Answer : Product Pricing
a. Theory of Demand
b. Theory of Supply
Factor pricing
a.       Wages
b.      Rent
c.       Interest
d.      Profit
Welfare economics
Question : Limitations of Microeconomics
Answer : Microeconomics fails to explain the functioning of an economy as a whole. It cannot explain unemployment, poverty, illiteracy and other problems prevailing in the country.
Question : What is Macroeconomics?
Answer : It is the study of overall economic phenomena, such as problem of full employment, GNP, savings, investment, aggregate consumption, aggregate investment, economic growth, etc. It is also known as Theory of Income and Employment
Question : Importance of macroeconomics?
Answer : The study of macroeconomics is used to solve many problems of an economy like, monetary problems, economic fluctuations, general unemployment, inflation, disequilibrium in the balance of payment position, etc.
Question : Major topics of Macroeconomics
Answer :
a.       Theory of income and employment
b.      Theory of general price level and inflation
c.       Theory of economics
d.      Theory of distribution
Question : Limitations of Macroeconomics
Answer : Macroeconomics ignores structural changes in an individual unit of the aggregate. The conclusions drawn on the basis of aggregate variables may be misleading.
Question : Difference between Microeconomics and Macroeconomics
Answer :
Microeconomics is that part of economic theory which studies the behaviour of individual units of an
Macroeconomics is that part of economic theory which studies the behaviour of aggregates of the economy as a whole.
Analytical tools
Demand and supply
Aggregate demand and aggregate supply
Determine price of a commodity or factors of production.
Determine income and employment level of the economy.
All the macro variables to be constant, i.e., it assumes that national income, consumption, saving, etc. are constant.
All the micro variables, like decisions of households and firms, prices of individual products, etc. are constant.
Price Theory
Income and Employment Theory
Individual demand, Firm’s output
National Income, National Output.
Question : Economics as a Positive Science (Robbins)
Answer : Positive economics deals with what is or how an economics problem facing a society is actually solved.
Question : Economics as a Normative Science (Alfred Marshall and Pigou)
Answer : Normative economics deals with what ought to beor how an economic problem should be solved.
Question : Difference between Positive and Normative Economics
Answer :
Sl. No.
Positive economics
Normative economics
Expresses what is
Expresses what should be
Based on cause and effect of facts
Based on ethics
Deals with actual or realistic situation
Deals with idealistic situation
Can be verified with actual data
Can’t verify with actual data
Value judgements are not given as it is neutral between ends.
Value judgments are given.
It deals with how economic problem is solved
It deals with how economic problems should be solved
Adam smith and his followers
Marshall, Pigou, Hicks, Kaldor
Observe these examples:
 (a) What determines the price rise?
 (b)  Government has adopted policies to reduce unemployment.
 (c)  The rate of inflation in India is 6 per cent.
 (d) Chemistry.
Compare these examples:
 (a) What is a fair price rise?
 (b)  Unemployment is worse than inflation.
 (c)  The rate of inflation should not be more than 6 per cent.
 (d) Ethics.
Question : What is Economy?
Answer : An economy is a system in which people earn their living by performing different economic activities like production, consumption and investment.
Question : What is economic problem?
Answer : According to Prof. Robbins, “the economic problem is the problem of choice or the problem of economising, i.e., it is the problem of fuller and efficient utilisation of the limited resources to satisfy maximum number of wants.
Question : Causes of Economic Problems
Answer :
1.      Unlimited wants
2.      Limited economics resources
3.      Alternative uses of resources
According to Samuelson, there are three fundamental and interdependent problems in an economic organisation—what, how and for whom
Question : What is Production Possibility Curve (PPC)
Answer : Production possibility curve (PPC) shows the various alternative combinations of goods and services that an economy can produce when the resources are all fully and efficiently employed. PPC shows the obtainable options.
 Production Possibility Curve (PPC)
Production Possibility Curve (PPC)
 Question : Explain the shape of the production possibility frontier.
Answer :
(a) PPC is downward sloping. The downward slope of PPC means that if the country wants to produce more of one good, it has to produce less of the other good.
(b) PPC is concave to the point of origin. Concave shape of PPC implies that slope of PPC increases. Slope of PPC is defined as the quantity of good Y given up in exchange for additional unit of good X. 
Production Possibility Curve Formula for MRT or MOC
Production Possibility Curve Formula for MRT or MOC
 (a) Specific use of resources. That is, resources are not equally suited for the production of both the goods: and
(b) There is a difference in the proportions in which the factors are used in the production of both the goods.
Question :Shifts in Production Possibility Curve (PPC)
Answer :The shift in PPC can be observed when there is new stock of resources are discovered and new development in the present technology of production and policy changes to cope up the production.
Shift in PPC, Development, Policy, Technology
Shift in PPC
I.                   In this graph we can observe the development of technology to boost production
II.                Here targeted policy has been made to increase production of Good X.
Question : Why PPC Curve is also called as Opportunity cost curve ?
Answer :PPC is also called opportunity cost curve because slope of the curve at each and every point measures opportunity cost of one commodity in terms of alternative commodity given up. The rate of this sacrifice is called the Marginal Opportunity Cost of the expanding good.
Production Possibility Curve (PPC) as Opportunity Curve
Production Possibility Curve (PPC) as Opportunity Curve
 Here we can see that, decrease in the output of food will increase the output of cloth. It means that change in amount of food production becomes opportunity cost of producing clothing.
Question : What is Marginal Rate of Transformation (MRT).
Answer : Marginal opportunity cost is opportunity cost of good X gained in terms of good Y given up. It is also called Marginal Rate of Transformation (MRT).
Increasing, decreasing and Constant Marginal Rate of Transformation
Increasing, decreasing and Constant Marginal Rate of Transformation
Question : Connection between PPC and Economic Problem
Answer :
1.      Allocation of Resources
a.       What to Produce?
b.      How Much to Produce?
c.       For whom to produce?
2.      Full Utilisation of Resources
3.      Economic Efficiency
4.      Economic Growth
All points on the PPC is the answer for all the questions emerged while handling Economic Problems. In case Economic Growth All points outside the PPC is the scope for growth and developmental ideas.
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