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What is the difference between microeconomics and macroeconomics?
Distinction between Microeconomics and Macroeconomics.
Briefly put (i) Microeconomics is the study of individual economic units like a consumer, a firm (producer) whereas macroeconomics is the study of economy as a whole and its aggregates like national income, total employment, general price level.
(ii) Central problems of microeconomics is price determination and allocation of resources but that of macroeconomics is determination of level of income and employment.
(iii) Main tools of microeconomics are demand and supply of the particular commodity/ factor whereas tools of macroeconomics are aggregate demand and aggregate supply of the whole economy.
(iv) Microeconomics analyses how equilibrium of a consumer, a producer or an industry is attained but macroeconomics is concerned with determination of economy's equilibrium level of income, employment and output.
(v) Microeconomics deals with determination of prices of individual goods and individual factors of production but macroeconomics deals with general price level and nation's incomes.
(vi) Microeconomics explains how resources are allocated and how total production is distributed among cooperating factors of production but macroeconomics explains how productive capacity and national income of a country increase overtime.
Briefly state meaning of the following terms as used in economics.
1. Economy (D 2010 C), 2. Goods, 3. Services, 4. Wants, 5. Resources,
6. Households, 7. Firms, 8. Commodities, 9. Production, 10. Consumption
1. Economy. 'An economy is a system by which people get their living' — A.G. Brown. People earn incomes by rendering productive services so as to get goods and services for satisfaction of their wants. Thus an economy is a system that (i) helps to produce goods and services, and (ii) enables people to earn income for buying goods and services. Hence all such institutions and organisations operating in a defined area which produce goods and services and enable people to earn incomes are collectively called an economy. It is an integrated system of economic activities concerning consumption, production, exchange and distribution of wealth.
2. Goods. All physical and tangible things (objects) which are used to satisfy peoples' wants and have economic value (i.e., command price) are called goods., e.g. shirts, shoes, books, pens, chairs etc.
3. Services. Services are non-material (intangible) goods, which cannot be seen, touched, stored or shifted and have power to satisfy people's wants and needs, e.g., services of manager, doctor, teacher, chowkidar etc. Services are tasks performed for someone and have economic value.
4. Wants. Wants are mere desires to possess irrespective of price and capacity to buy the object (commodity) whereas demand is an effective desire backed by purchasing power to buy the commodity at a particular price.
5. Resources. Goods and services which are used to produce other goods and services are called resources. These are categorised as natural resources (land), human resources (labour and entrepreneur) and manufactured resources (capital). Land, labour, capital and entrepreneur are conventionally called factors of production.
6. Households. A household is an institutional unit (a family unit) whose main activity is consumption. Households supply factor services to firms. It is a group of persons normally living together and taking food from a common kitchen.
7. Firms. A firm is an institutional unit which produces goods and services for the market. It is also called an enterprise owned and operated by an individual or by group of individuals.
8. Commodities. Goods and services for sale in the market are called commodities. Mind, goods denote material goods whereas services denote non-material goods but the term commodities include both goods and services.
9. Production. Production is an activity which produces material goods and services. Alternatively production is a process through which inputs are transformed into output (finished product). Mind, the term 'product' denotes both goods and services.
10. Consumption. The process of using up of goods and services for direct satisfaction of individual or collective human wants is called consumption.
Explain central problems with the help of PP curve. How does PP curve help in explaining the central problems?
Central problems and PP curve. PP curve helps in solving central problems of an economy as explained below.
(i) Why is PP curve downward sloping from left to right? (D 2006C)
(ii) Why does PP curve look concave to the origin?
(i) PP curve slopes down. Why? PP curve slopes down from left to right because in presence of scarcity of resources more of one good can be produced only if resources are withdrawn from production of other good. In other words production of one good can be increased only after sacrificing some quantity of other good. For example in the marginal opportunity cost schedule given in Q. 1.12 we find in combination B that 1 lakh ton of wheat is produced by sacrificing production of 1 (= 15 - 14) thousand tanks and in combination C, the same amount of wheat is produced by sacrificing 2 (= 14 - 12) thousand tanks. In other words as production of one good (here wheat) increases that of other good (here tanks) falls. It is so because resources are fixed (limited) and production of both the goods can't be increased. As a result PP curve slopes down from left to the right as shown in Fig. 1.1 and Fig. 1.2.
(ii) Concave shape of PP curve. PP curve looks concave to the origin because of increasing marginal opportunity cost (or MRT). Increasing marginal cost implies that for producing an additional unit of a good, sacrifice of units of other good (i.e., opportunity cost) goes on increasing. MRT increases because it is assumed that no resource is equally efficient in production of all goods. So it becomes difficult to substitute resources specialised in production of one good (say tanks) to production of other good (say wheat). For instance in Production Possibility Cost Schedule given in Q. 1.12, we find for each increase of 1 lakh ton of wheat, sacrifice of tanks has been increasing successively from 1 thousand to 2 thousand; therefrom 2 to 3 thousand tanks and so on. This raises cost (marginal opportunity cost) which is technically called marginal rate of transformation (MRT). As a result of increasing MRT, shape of PP curve becomes concave to the origin.
In short PP curve becomes concave because marginal rate of transformation (marginal opportunity cost) rises as resources are diverted from production of one good to one other.
Note, (i) PP curve will be a straight line if sacrifice of units of other good is constant, i.e., if Marginal Opportunity Cost/MRT is constant, (ii) PP Curve will become convex if sacrifice of units of other good goes on decreasing.
Define marginal opportunity cost (MOC) along a PP curve.
Define marginal rate of transformation (MRT)?
What does increasing MOC along a PP curve mean?
(b) • Why does MOC increase?
(a) Marginal Opportunity Cost. MOC of a particular good (say wheat) along a PP curve is the amount of the other good (say tanks) which is sacrificed to produce an additional unit of that particular good. The rate of this sacrifice is called marginal opportunity cost of the expanding good. Rate of sacrifice is technically termed as marginal rate of transformation (MRT).
MRT is the ratio of units of one good (say, tanks) that needs to be sacrificed to produce one more unit of the other good (say, wheat). Symbolically :
|
MARGINAL OPPORTUNITY COST / MRT SCHEDULE |
|||||
|
Production Possibilities (or combinations) |
Wheat (W) (lakh tons) |
Tanks (T) (thousands) |
MOC of wheat (in thousand tanks) |
||
|
A |
0 |
15 |
— |
— |
|
|
B |
1 |
14 |
1·(= 15 - 14) |
1W : 1T |
|
|
C |
2 |
12 |
2·(= 14 - 12) |
1W : 2T |
|
|
D |
3 |
09 |
3·(= 12 - 9) |
1W : 3T |
|
|
E |
4 |
05 |
4·(= 9 - 5) |
1W : 4T |
|
|
F |
5 |
00 |
5·(= 5 - 0) |
1W : 5T |
|
A close look at the above table reveals that as production of wheat is increased, its marginal opportunity cost (MOC) in terms of tanks goes on increasing, i.e., MRT is rising. For example, when society moves from combination A to B, it sacrifices 1 (= 15 - 14) thousand tanks to produce 1 (= 1 - 0) lakh ton of wheat. Thus MOC of 1 lakh ton of wheat is 1 thousand tanks in the beginning, i.e., MRT = 1 : 1. Likewise in combinations C, D, E and F, MOC of producing 1 lakh ton of additional wheat is 2 (= 14 -12) thousand, 3(= 12 - 9) thousand, 4(= 9 - 5) thousand and 5(= 5 - 0) thousand tanks respectively. In short for every unit increase in production of wheat, more and more tanks are to be sacrificed, i.e., marginal opportunity cost, i.e., MRT goes on increasing. But why does MOC increase? Following are its two main reasons.
(b) Reasons for increasing marginal opportunity cost (or MRT)
(i) Operation of law of diminishing returns (or increasing cost). According to this law, if more and more units of a good are to be produced, the additional units will require more and more of factors units, i.e., cost of production of additional units of the good will increase.
(ii) Transferring resources from more productive to less productive uses. Various resources are specialised in production of different goods. When factors (resources) which are specialised for production of a particular good (say, workers manufacturing tanks) are transferred to the production of another good (say, production of wheat) for which they are less productive, some productivity is lost. Therefore, more of such resources (say workers) are needed to produce an additional unit of other good. This implies increase in marginal opportunity cost making the PP curve concave in shape.
Causes of shift. Following are two main reasons for rightward shift of PP curve :
(i) When resources of an economy increase. It may be in the form of discovery of new natural resources, availability of new machinery through saving and investment, and increase in skilled and unskilled labour through population growth. As a result more of two goods can be produced causing rightward shift of PPC.
(it) When there is improvement in technology. It happens as a result of work of scientists, engineers and inventors over a long period. Then more of two goods can be produced with the given amount of resources causing shift of PPC to the right.
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Can there be an economy without an economic problem?
(i) Unemployment of labour.
(ii) Inefficient or partial use of resources like machines.
(i) Increase in skilled and unskilled labour through population growth.
(ii) Development of new technique of production.
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Giving reasons, state whether the following statements are true or false.
1. Price determination of a commodity is a subject matter of macroeconomics.
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From the following PP Schedule, calculate MRT of good X:
Production possibilities : | A | B | C | D | E |
Production of good X (units) : | 0 | 1 | 2 | 3 | 4 |
Production of good Y (units) : | 14 | 13 | 11 | 8 | 3 |
Production of good | Production of good | MRT = ∆Y/∆X |
X (units) | Y (units) | |
0 | 14 | — |
1 | 13 | 1 : 1 |
2 | 11 | 2 : 1 |
3 | 8 | 3 : 1 |
4 | 3 | 4 : 1 |
(Mind, MRT of good X means amount of good Y to be sacrificed for producing an additional unit of good X)
(i) Resources are given (fixed).
(ii) Resources are fully and effectively employed.
(iii) Technology is given and remains unchanged.
(iv) Resources are not equally efficient in production of all products.
(a) (1) Availability of new equipment, (2) Increase in skilled and unskilled labour through population growth, and (3) Discovery of new natural resources are factors of growth of resources which shift PP curve rightward.
(b) (1) Wear and tear or breakdown of machinery, (2) Saturation of natural resources and (3) Technology becoming obsolete are factors of fall in resources which shift PP curve to the left.
(i) A typical PP curve is downward sloping from left to right.
(ii) A PP curve is generally concave to the origin because of increasing MRT.
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Draw a PP curve assuming marginal opportunity cost to the constant.
(Hint. PPC is downward sloping straight line.)
Solution not provided.
Draw a PP curve assuming marginal opportunity cost to the falling.
(Hint. PPC is convex.)
Solution not provided.
Solution not provided.
Solution not provided.
Solution not provided.
Solution not provided.
Explain with the help of a diagram the situation of inefficient and efficient utilisation of resources in an economy.
Solution not provided.
Solution not provided.
Calculate marginal opportunity cost of cloth in terms of sugar at different production possibilities from the following hypothetical data of a country.
|
Production possibilities |
Cloth (million metres) |
Sugar (million kg) |
||
|
A |
0 |
50 |
||
|
B |
1 |
45 |
||
|
C |
2 |
40 |
||
|
D |
3 |
35 |
||
|
E |
4 |
25 |
||
|
F |
5 |
20 |
||
Solution not provided.
|
T-shirts (in millions) |
Cell phones |
|
0 |
90,000 |
|
1 |
80,000 |
|
2 |
68,000 |
|
3 |
52,000 |
|
4 |
34,000 |
|
5 |
10,000 |
Solution not provided.
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(Hint. -, 10,000, 12,000, 16,000, 18,000, 24,000)Sponsor Area
Solution not rovided.
What is meant by economizing of resources?
Economising of resources means best possible use of available resources.
Solution not rovided.
Solution not rovided.
Solution not rovided.
Solution not provided.
Solution not provided.
Giving reason comment on the shape of Production Possibilities curve based on the
following schedule:
| Good X (units) | Good Y (units) |
| 0 | 10 |
| 1 | 9 |
| 2 | 7 |
| 3 | 4 |
| 4 | 0 |
Production Possibility Curve (PPC) will be concave to the origin because of the increasing
opportunity cost. As we move down along the PPC, to produce each additional unit of Good
X, more and more units of Good Y needs to be sacrificed. That is, as we move down along
the PPC, the opportunity cost increases. And this causes the concave shape of PPC.
What will be the impact of recently launched 'Clean India Mission' (Swachh Bharat
Mission) on the Production Possibilities curve of the economy and why?
Or
What will likely be the impact of large scale outflow of foreign capital on Production
Possibilities curve of the economy and why?
Production possibility curve is a graphical representation of the maximal mix of outputs
that an economy can achieve using its existing resources to full extent and in the most
efficient way. The mission of 'Clean India Mission' (Swachh Bharat Mission) will lead to
better waste-management technique. Consequently it leads to healthy India and increased
individual productivity. Both these factors will lead to better and efficient utilisation of
existing resources of an economy. Accordingly, the economy will move higher and closer
to initial PPC. This movement is being depicted in the below graph with the help of the
arrow from point P.
OR
The large scale outflow of foreign capital will lead to a decrease in the availability of
resources, thereby shifting the Production Possibility Curve (PPC) from right to left that is
from AB to CD as shown in the following diagram. Hence, we can say that leftward shift of
PPC results in fall in output and resources.
Unemployment is reduced due to the measures taken by the government. State its economic value in the context of production possibilities frontier.
As initially, the production in the economy is below its potential due to unemployment, this suggests that the economy is operating at a point below the Production Possibility curve (PPC). As the government starts employment generation schemes, the unemployed resources get utilized. In a situation of full employment the economy would move to a point on the PPC. Hence, economic value is reflected in terms of increased output and income.
Explain the central problem 'for whom to produce.'
The problem for whom to produce refers to selection of the category of people who will ultimately consume the goods. Since resources are scarce in every economy, no society can satisfy all the wants of its people. Thus, a problem of choice arises. The economic problem of 'For whom to Produce' basically focuses on the distribution mix of the final goods and services produced. The distribution of the final goods and services is equivalent to the distribution of National Income (or National Product) among the factors of production such as land, labour, capital and entrepreneur.
The problem can be categorised under two main heads:
(i) Personal Distribution: It means how national income of an economy is distributed among different groups of people.
(ii) Functional Distribution: It involves deciding the share of different factors of production in the total national product of the country. Guiding Principle of ‘For whom to Produce’: Ensure that urgent wants of each productive factor are fulfilled to the maximum possible extent.
Production in an economy is below its potential due to unemployment. Government starts employment generation schemes. Explain its effect using production possibilities curve.
As initially, the production in the economy is below its potential due to unemployment, this suggests that the economy is operating at a point below the Production Possibility curve (PPC). As the government starts employment generation schemes, the unemployed resources get utilised. In a situation of full employment the economy would move to a point on the PPC.
Consider the example of the economy producing two goods- consumer goods and capital goods. Suppose AB is the Production Possibility Curve (PPC) depicting full-employment of resources.
Initially, suppose the economy is at point I (which is below the PPC) where, the economy is below the potential level. As employment in the economy rises, the economy starts moving at a point towards the PPC. At full employment, it will reach a point on the PPC such as point D.
Give meaning of an Economy.
Economy is the system of trade and industry by which the wealth of a country is made and used. It is a system which provides the people of society to earn a living.
What is opportunity cost? Explain with the help of a numerical example.
An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. In other words, the cost of enjoying more of one good in terms of sacrificing the benefit of another good is termed as opportunity cost of the additional unit of the good.
Example: We have Rs 15,000 with two choices a) to invest in the shares of a company XYZ or b) to make a fixed deposit which gives interest 9%. If the company XYZ gives a return of 15%, we will benefit when we invest in the shares as the alternative would be less profitable. However if company’s return is only 3% when we could have made a return of 9% from FD, then our opportunity cost is (9% - 3% = 6%).
What is a market economy?
In a market economy, all economic activities are organised through the market. It is an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning.
Why is a production possibilities curve concave? Explain.
Production Possibility Curve (PPC) is concave to the origin because of the increasing opportunity cost. As we move down along the PPC, to produce each additional unit of one good, more and more units of other good need to be sacrificed. That is, as we move down along the PPC, the opportunity cost increases. And this causes the concave shape of PPC.
In the above graph, AE represents the PPC for capital goods and consumer goods. Suppose the initial production point is B, where 1 unit of capital goods and 48 units of consumer goods are produced. To produce one additional unit of capital good, 4 units of consumer good must be sacrificed (point c). Thus at point c, the opportunity cost of one additional capital good is 4 units of consumer goods. On the other hand, at point D, the opportunity cost of producing one additional unit of capital good is 9 units of consumer goods. Thus, as we move down the PPC from point C to point D, the opportunity cost increases. This confirms the concave shape of PPC.
Why do central problems of an economy arise? Explain the central problem of “for whom to produce'?
Distinguish between microeconomics and macroeconomics.
| Basis of difference | Micro Economics | Macro Economics |
| Meaning | Microeconomics is the study of economics at an individual, group or company level. | Macroeconomics, on the other hand, is the study of a national economy as a whole. |
| Focus | Microeconomics focuses on issues that affect individuals and companies. This could mean studying the supply and demand for a specific product, the production that an individual or business is capable of, or the effects of regulations on a business. | Macroeconomics focuses on issues that affect the economy as a whole. Some of the most common focuses of macroeconomics include unemployment rates, the gross domestic product of an economy, and the effects of exports and imports. |
| Example | An example of a microeconomic issue could be the effects of raising wages within a business. | where as in macroeconomics, a common issue is the effects of certain policies on the national or regional economy. |
Define Economy.
An economy is a system that helps to produce goods and services and enables people to earn their living.
What is the meaning of scarcity of resources?
Scarcity of resources means a shortage of resources as compared to its demand.
Write the meaning of Economic Problem.
Economic problem is the problem of making the choice of the use of scarce resources for satisfying unlimited human wants.
Define MRT.
Marginal Rate of Transformation (MRT) is the ratio of number of units of a good sacrificed to increase in one more unit of the other good.
MRT = ΔY/ΔX
Govt. has started promoting Foreign investments. What will be its economic value in the context of PPF?
Production will improve with more foreign investments. Thus PPF will shift rightward.
Explain the problem of 'what to produce'.
“What to produce” refers to the choice of the product to be produced by the society for that good which is in actual need of the society. We need to use the resources to produce goods & services, & the common resources are used to produce two different goods. For instance, during peacetime, the society can avoid producing Guns and can utilize more of the resources to produce other good which is actually needed by the society (say Trucks). This kind of situation arises to all the countries because the limited resources can’t be utilized to produce all the goods required by the society. Now, after deciding about the production of a good, the society needs to take decision the required quantity to be produced. This is inevitable as excess production may lead to the problem of overproduction and further to wastage of resources, and less production may lead to scarcity of the product which may further lead to the problems like inflation etc. Thus, the society needs to estimate the requirement of a good to be produced.
What is 'Marginal Rate of Transformation'? Explain with the help of an example.
MRT is the rate at which the units of one good have to be sacrificed to produce one more unit of the other good in a two goods economy. Suppose an economy produces only two goods X and Y. Further suppose that by employing these resources fully and efficiently, the economy produces 1X + 10Y. If the economy decides to produce 2X, it has to cut down production of Y by 2 units. Then 2Y is the opportunity cost of producing 1X. Then 2Y : 1X is the MRT.
Explain the problem 'How to produce'.
The central problem 'How to Produce' is the problem of choosing the appropriate technique of production for producing goods. There can be more than one method for producing a good. More labour and less capital (i.e., labour intensive technique) or more capital and less labour (i.e., capital intensive technique) can be used for the production of a good. Since resources are scarce, a decision has to be taken about which technique should be used on the basis of availability of resources.
Example: A given quantity of cloth can be manufactured by combining factors of production in different proportions, making it capital-intensive or labour intensive method.
For labourers working under MGNREGA Govt has increased minimum employment from 100 to 150 days. How will this affect real and potential level of production.
Real level of production will be increased by improvement in employment. But potential level of production will not increase (No shifting of PPC will take place). Reason being PPC is based on the assumption that available resources are fully utilised.
Explain the central problem 'for whom to produce'.
“For whom to Produce” refers to the choice of distribution that needs to be focused for the equal distribution of the resources for the benefits of large many people so as to reduce unequal distribution of the resources and create an egalitarian society. This problem is concerned with the personal and functional distribution of resources among the people in the society. The former refers to the distribution of GDP among the different sections of the society, while the latter refers to the distribution of factor incomes to the factor owners in lieu of their factor services towards the production of national output. This determines the purchasing power of the people & accordingly the goods & services are produced in the society.
Giving reason comment on the shape of Production Possibilities curve based on the following schedule:
| Good X (Units) | 0 | 1 | 2 | 3 | 4 |
| Good Y (Units) | 10 | 9 | 7 | 4 | 0 |
| Good X (units) | Good Y(units) | MRT |
| 0 | 10 | - |
| 1 | 9 | 1Y : 1X |
| 2 | 7 | 2Y : 1X |
| 3 | 4 | 3Y : 1X |
| 4 | 0 | 4Y : 1X |
Explain the effects of floods in Jammu and Kashmir on its production possibilities frontier.
Floods have damaged and reduced resources. Since potential production declines, the production possibility frontier shifts to the left.
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