NCERT Solutions for class 12th Economics Part A Chapter 1 Introduction

NCERT Textbook Questions Solved

Question 1. Discuss the central problems in an Economy.

Ans. What to Produce:
It is a standard knowledge that resources are scarce in relation of human needs. We cannot produce all goods as much as we wish to produce. Allocation of resources and the consequent problem of choice require that we decide what to produce and what not. It involves two-fold decisions:

Firstly, the economy has to decide what goods and services are to be produced. For instance, which of the consumer goods like sugar, cloth, wheat, ghee, etc. are to be produced and which of the capital goods like machines, tractors etc. are to be produced.
When an economy has taken a decision as to what goods or services are to be produced, then it has to decide about its quantity. How much of consumer goods and how much of capital goods are to be produced.

Guiding Principle: Such a combination of goods should be produced which gives maximum aggregate utility.

  • How to Produce? How to produce means how to organize production. This problem is concerned with the choice of technique of production. Broadly, there are two techniques of production:

Labour Intensive Techniques: Under this technique, quantity of labour is used more than capital.

Capital Intensive Technique: Under this technique, quantity of capital is used more than labour. An economy must decide as to which technique is to be used in a given industry so that efficient production is obtained.

Guiding Principle: That technique of production should be chosen which gives least cost combination.

For Whom to Produce?

This is the question of how to distribute the product among the various sections of the society. National product is the total output generated by the firms. The total output ultimately flows to the households in the form of income, i.e., their wages, rent profits or interest. There are millions of people in a society. Each one cannot get sufficient income to satisfy all his wants. This raises the problem of distribution of national product among different households. In economics, the problem of distribution of national product is studied under the Theory of Distribution. According to Karl Marx the distribution of national income should be on the basis of “from each according to one’s ability; to each according to one’s needs”.

Guiding Principle: National Income should be distributed in such a way that no one can be made better off without making anyone else worse off.

Question 2. What do you mean by production possibility of an economy?

Ans. Production possibility set refers to different combinations of two goods that can be produced from a given amount of resource and a given stock of technological knowledge. In other words, it refers to the possible combinations of production for an economy.

Question 3. What is production possibility frontier?

Ans. 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. There is a maximum limit to the amount of goods and services which an economy can produce with the given resources and the sate of technology. The resources can be used to produce various alternative goods which are called production possibilities and the curve showing different production possibilities is called production possibility curve.
Assumptions: Assumptions underlying production possibility curve are:

1. Economy produces only two goods, X and Y. (Examples of goods X any Y can be gun and butter, wheat and sugarcane, cricket bats and tennis rackets or anything else.)

2. Amount of resource available in an economy are given and fixed.

3. Resources are not specific, i.e. they can be shifted from the production of one good to the other good.

4. Resources are fully employed, i.e., there is no wastage of Resources. Resources are not lying idle.

5. State of technology in an economy is given and remains unchanged.

6. Resources are efficiently employed.

Example:
Suppose an economy decides to produce only two goods, namely wheat and cloth, with its available resources and given technology. If all the resources are used for the production of wheat alone then 100 lakh tones of wheat can be produced. On the contrary, if all the resources are used for the production of cloth alone then 4,000 bales of cloth can be produced. If the economy produces both the goods, then within these limits, various combinations of two goods can be produced.
The table given shows different possibilities of production of wheat and cloth. It is called Production possibility schedule.

Basic Properties of PPC: Production possibility Curve Slopes Downward to the right: Production possibility Curve slopes downwards from left to right. It is because in a situation of fuller utilization of the given resources, production of both the goods cannot be increased. More of good-X can be produced only with less of good-Y.
Production possibility Curve is Concave to the Point of Origin: Any curve is concave to the origin if it has an increasing slope. PPF has an increasing slope. The slope of PPF is Marginal Opportunity cost or MRTxy which keeps increasing. But the question arises why does MOC keep increasing? A simple answer to this question is that resources can be shifted from the production of one good to the production of other good but resources are not equally efficient in the production of both the goods. Initially those resources are transferred which are more efficient in production of good-2 but gradually even those resources have to be transferred which are more efficient in the production of good-1. Opportunity cost of producing every additional units of good-X tends to increase in terms of the loss of production of good-Y.

Microeconomics and Macroeconomics
The above schedule shows that if production is carried out under ‘A’ combination, then 100 lakh tones of wheat alone will be produced without any production of cloth.
On the contrary, if production is obtained under ‘E’ combination then 4,000 bales of cloth alone will be produced without any production of wheat. Besides these extreme limits, there are many alternative possibilities of production of wheat and cloth. Representing these various production possibilities on a graph, we get production possibilities on a graph, we get
Production possibility curve as in figure. The quantity of cloth is represented on X-axis (horizontal axis) and wheat on Y-axis (vertical axis). It is the Production possibility or transformation Curve. Point F represents unattainable combinations and point G inside the curve shows inefficient use of resources.

Question 4.Discuss the subject matter of economics.

Ans. Subject matter of economics has been divided under two branches:

1. Microeconomics: Adam Smith is considered to be founder of the field of microeconomics. The term ‘micro’ has been derived from Greek word ‘Mikros’ which means ‘small’ Microeconomics deals with analysis of behaviour and economic actions of small and individual units of the economy, like a
particular consumer, a firm or a small group of individual units. The concept of microeconomics is very important as it supplies the foundation for most of our understanding of the functioning of an economy.
Microeconomics is that part of economic theory, which studies the behaviour of individual units of an economy. For example, Individual income, Individual output, price of a commodity, etc. Demand and supply are the main tools of Microeconomics.

2. Macroeconomics: The term ‘macro’ has been derived from the Greek word ‘macros’ which means ‘Large’. So, macroeconomics deals with overall performance of the economy. It is concerned with study of problems of the economy like inflation, unemployment, poverty, etc.
Macroeconomics is that part of economic theory which studies the behaviour of aggregates of the economy as a whole. For example, National income, aggregate output, aggregate consumption, etc. Its main tools are aggregate demand and aggregate supply.

Question 5. Distinguish between a centrally planned economy and a market economy.

Ans. Differences between a centrally planned economy and a market economy are summarized in the table given below:

Question 6. What do you understand by positive economic analysis?

Ans. The positive statements describe what was, what is and what would be under the given set of circumstances. All these statements are capable of empirical verification. On the basis of their empirical verification, we can find out the degree of truth in such statements. These statements do not pass any value judgment. There is no value judgment or an issue of debate in the statement that means they are scarce in relation to human want. Also, there is no value judgment in the statement that consumers tend to maximize their satisfaction and the
producers tend to maximize their profits. All these are positive statements. A positive science does not offer any suggestion about facts.

Question 7. What do you understand by normative economic analysis?

Ans. Normative statements describe ‘What ought to be’. Its objective is to determine the norms or aims. These statements pronounce value judgment. These are opinions relating to right or wrong of a particular policy matter, and are always a matter of debate. When we are studying a problem and its related issues which are subject to verification, like the extent of poverty and unemployment we are referring to positive economics. On the other hand, when we are offering suggestions to solve the problem (which are not subject to verification, like for example the suggestion of reservation in jobs the problem of poverty) we are referring to normative economics.

Question 8. Distinguish between Micro and macroeconomics.

Ans. Difference between Microeconomics and Macroeconomics

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