1. Microeconomics is that branch of economics which studies economic problems (or economic issues)
relating to individual economic units like a consumer or a producer.
2. Economy is the sum total of economic activities directed towards the satisfaction of unlimited wants
using the scarce means.
3. Scarcity is a situation when demand for a good exceeds its supply even at a zero price.
4. Central problems are those problems which arise in every economy. At the micro level, these problems
are:
(i) What to produce? (ii) How to produce? and (iii) For whom to produce?
At the macro level, these are (i) problem of fuller utilisation of resources, and (ii) problem of growth of resources.
5. Mixed economy is the one in which both private and public sectors play a significant role in production
activity. Free play of the market forces is allowed but not without checks and balances by the government.
6. Market economy is the one in which decisions regarding what, how and for whom to produce are left to
the market forces of supply and demand.
7. Centrally planned economy is the one in which decisions regarding what, how and for whom to
produce are taken by some central authority.
8. Production possibility curve (or transformation curve) is a curve showing different possibilities of
producing a set of two goods with (i) the given resources, and (ii) given technology.
9. Opportunity cost refers to value of a factor in its next best (or second best) alternative use.
10. Marginal opportunity cost refers to loss of output of Good-Y for producing an additional unit of
Good-X, some resources are shifted from Good-Y to Good-X.
11. Marginal rate of transformation (MRT) is the same as marginal opportunity cost. It is estimated as
under: MRT= D D Y X Loss of output of Y Gain of output of X
= when some resources are shifted from Y to X é ë ê ù û ú
12. Macroeconomics is the study of economic relationships, economic problems or economic issues at the
level of economy as a whole, like the problem of inflation or of unemployment.
13. Those economic variables which are studied at the level of economy as a whole are known as macro
variables. Examples: GDP, Disposable Income, Household consumption, etc.
QUESTION SET-II
1. No. Microeconomics does deal with the aggregates. Example: market demand is the aggregation of
individual demand.
2. No. Opportunity cost is the value of a factor in its second best alternative use. It is implicit cost, not an
explicit cost. Explicit cost is paid-out cost.
3. No. PPC is always concave to the origin, as marginal opportunity cost (indicating slope of the curve)
must rise as more and more resources are shifted from Good-2 (on Y-axis) to Good-1 (on X-axis).
4. No. Every economy faces the central problems, though these are solved differently in different
economies. Because, scarcity of resources is common to all economies.
5. Yes. Scarcity is a situation when demand for a good exceeds its supply even at a zero price.
6. No. Marginal opportunity cost increases as resources are shifted from Use-1 to Use-2. This is in
accordance with the law of variable proportions.
7. Yes. PPC is drawn on the assumption of constant technology. Which is why PPC shifts in response to a
shift in technology.
8. No. Economising the use of resources means that resources are to be used in a manner such that
maximum output is realised per unit of input. It also means optimum utilisation of resources.
9. No. If resources are not fully utilised, total output in the economy will be less than the potential output
and we are inside the PPC.
10. No. If resources are not fully utilised (or are under-utilised) an economy may as well be inside the PPC.
QUESTION SET-III
1. No. Choice between consumer goods and capital goods refers to the problem of ‘what to produce’. 2. No. Choice between labour intensive technology and capital intensive technology refers to the problem
of ‘how to produce’.
3. No. Choice between ‘production for the poor’ and ‘production for the rich’ refers to the problem of ‘for
whom to produce’. It is a problem relating to choice of users of goods and services.
4. No. In a market economy central problems are solved through the free play of the market forces. 5. No. In a centrally planned economy decisions relating to ‘what, how and for whom to produce’ are
taken by some central authority of the government.
6. No. In a mixed economy both private and public sectors are engaged in the process of production. 7. In a mixed economy, problem of resource allocation, finds its solution through the market forces of
supply and demand, but not without checks and balances by the government.
8. No. Production possibility curve shows different combinations of two goods which can be produced
with the given resources on the assumptions that (i) resources are fully and efficiently utilised, and (ii) technique of production remains constant.
9. Yes. Because economic activity is related to the use of scarce means for the satisfaction of human wants. 10. Yes. A point below PPC points to under utilisation of resources. In such a situation actual output is less
than potential output.
QUESTION SET-IV
1. both private as well as public sectors play a significant role in production activity. 2. free play of the market forces.
3. central authority or the government.
4. a unit more of Good-2 is produced by shifting the resources from Good-1 to Good-2. 5. right.
6. under utilisation or inefficient utilisation of resources. 7. inside the PPC.
8. left. 9. right.
NUMERICALS
1. Opportunity cost = ™2,500 P.M. 2. Marginal rate of transformation = 2. 3. Marginal opportunity cost = 2 units. 4. Marginal opportunity cost = 80 units. 5. 10, 15, 20, 25, 30.
HOTS (Higher Order Thinking Skills)
1. False. With an efficient or fuller utilisation of resources, the economy operates on the PPC and cannot
shift to point beyond the PPC because PPC shows attainable combinations of two goods with given resources and technology.
2. False. Marginal opportunity cost = 5 units. Because,
Marginal opportunity cost = Loss of output of Good - 2 Gain of output of Good - 1 when some resources are shifted from Good-2 to Good-1.
3. False. When an economy moves from a situation of underemployment to full employment, the
economy is on PPC.
4. True. MRT is the same as marginal opportunity cost which is the slope of PPC.
5. False. Convexity of PPC to the origin points to decreasing slope of PPC and decreasing marginal
opportunity cost. However, PPC is always concave to the origin. Because marginal opportunity cost must rise as more and more resources are shifted from Use-1 to Use-2.
6. True. Problem of resource allocation arises because resources have alternative uses.
7. False. If a country is operating inside the PPC, it corresponds to under utilisation or inefficient
utilisation of resources.
8. True. It is possible to increase the production of Good-1 without any decrease in the production of
Good-2. Because, being inside the PPC points to a situation when resources are not fully utilized (or are not efficiently utilised).
9. False. Opportunity cost is the cost of a factor in its best alternative use. Accordingly, it is the minimum
cost of a factor, and therefore unavoidable.
10. Yes. Because resources may not be efficiently utilised.