Chapter 1 – Introduction to Microeconomics
Q1. What is microeconomics?
Microeconomics is the branch of economics that studies individual units like consumers, firms, and markets to understand price determination, resource allocation, and economic decision-making.
Q2. How is microeconomics different from macroeconomics?
Microeconomics studies individual units; macroeconomics deals with aggregates like national income, inflation, and unemployment in the entire economy.
Q3. What is the scope of microeconomics?
It includes consumer behaviour, production, cost, revenue, market structures, and price determination of goods and services.
Q4. What is the central problem of an economy?
The central problem is scarcity of resources relative to wants, leading to issues of allocation, choice, and opportunity cost.
Q5. Name the three central problems of an economy.
- What to produce
- How to produce
- For whom to produce
Q6. What is meant by scarcity?
Scarcity means limited resources to satisfy unlimited human wants, requiring choices and prioritisation.
Q7. Define opportunity cost.
Opportunity cost is the value of the next best alternative foregone when a choice is made.
Q8. What is an economy?
An economy is a system that coordinates the production, distribution, and consumption of goods and services.
Q9. What is meant by economic activity?
Economic activity refers to actions related to production, distribution, and consumption undertaken to satisfy human wants.
Q10. What are resources?
Resources are inputs like land, labour, capital, and entrepreneurship used to produce goods and services.
Q11. What is a production possibility curve (PPC)?
PPC shows all possible combinations of two goods that can be produced with available resources and technology.
Q12. What does a point on the PPC indicate?
A point on the PPC indicates efficient use of resources and maximum possible output.
Q13. What does a point inside the PPC indicate?
It shows underutilisation of resources, meaning the economy is not operating efficiently.
Q14. What does a point outside the PPC mean?
It represents an unattainable combination with current resources and technology.
Q15. Why is the PPC concave to the origin?
Due to the law of increasing opportunity cost: as production of one good increases, more and more units of the other must be sacrificed.
Q16. What causes a shift in the PPC?
A shift occurs due to changes in resource availability or improvement in technology.
Q17. What are the types of economies?
- Capitalist economy
- Socialist economy
- Mixed economy
Q18. What is a capitalist economy?
An economy where private individuals own resources and production decisions are based on profit motives and market forces.
Q19. What is a socialist economy?
An economy where the government owns resources and takes all economic decisions to ensure social welfare.
Q20. What is a mixed economy?
An economy where both private and public sectors coexist, and economic decisions are taken by both individuals and the government.
Q21. What is the problem of ‘what to produce’?
It is about choosing which goods and services should be produced and in what quantities.
Q22. What is the problem of ‘how to produce’?
It deals with selecting the technique of production — labour-intensive or capital-intensive — depending on resource availability.
Q23. What is the problem of ‘for whom to produce’?
It relates to determining who will get how much of the total output — rich or poor, consumers or producers.
Q24. Define marginal rate of transformation (MRT).
MRT is the rate at which one good must be sacrificed to increase production of another good by one unit on the PPC.
Q25. What is positive economics?
Positive economics explains “what is” — it deals with facts, like the actual state of the economy without value judgments.
Q26. What is normative economics?
Normative economics involves value judgments and deals with “what ought to be” — like whether income should be redistributed.
Q27. What is a free good?
A free good is naturally abundant, has no opportunity cost, and is available without payment — e.g., air.
Q28. What is an economic good?
A good that is scarce, has opportunity cost, and involves human effort to obtain — e.g., food, clothing.
Q29. What is choice in economics?
Choice arises due to scarcity; we must decide which wants to satisfy with limited resources.
Q30. Why is economics called a science of choice?
Because it studies how individuals and societies make decisions to allocate scarce resources among competing needs.