Test: Introduction To Economics - 2 - UPSC MCQ

One of the characteristics of economic resources is scarcity. The other characteristic is that they have alternative uses.

Economic resources are essential for producing goods and services. Here are some key points about their characteristics:

• Scarcity: Resources are limited in supply.
• Alternative Uses: Resources can be used in different ways to produce various goods and services.
• Every society must decide how to allocate these scarce resources effectively.
• Choices must be made about which goods and services to produce based on societal needs.

Understanding these characteristics helps in understanding the fundamental economic problem of choice.

Normative economics is a branch of economics that focuses on what ought to be rather than what is. It involves making value judgments about economic fairness and the goals of public policy.

• Value Judgments: Normative economics expresses opinions on how economic outcomes should be.
• Policy Goals: It evaluates what the objectives of public policy should aim to achieve.
• Comparison with Positive Economics: Unlike positive economics, which describes how the economy functions, normative economics is concerned with how it should function.

Understanding normative economics helps in assessing the desirability of various economic policies and outcomes.

A decision-making unit (DMU) refers to an individual or a group involved in making choices to achieve common goals. This unit can include:

• A single person
• A household
• A firm
• Any other organisation

Each DMU shares the risks associated with their decisions and aims to optimise their resources. Resources include:

• Goods - tangible items that satisfy needs, such as food and clothing.
• Services - intangible actions that fulfil needs, like education and healthcare.

Due to limited resources, DMUs must make choices, often sacrificing one good or service for another. For example:

• A family may choose a larger home over more farmland.
• A student might forgo leisure activities to invest in education.

Ultimately, every DMU uses its available resources to meet its needs, understanding that no one has unlimited resources compared to their desires.

The Production Possibilities Curve (PPC) illustrates a two-good economy by plotting the production of one good on the x-axis and the other on the y-axis. The curve represents the various combinations of outputs that can be produced using the best available technology and all resources. Key points to note include:

• Points inside the PPC indicate inefficiency, meaning resources are not fully utilised.
• Points outside the PPC are unattainable with current resources.
• The curve shows the maximum production capacity for each good, highlighting the trade-offs between them.

For instance, if all resources are dedicated to producing corn, the maximum output is 4 units. Conversely, if all resources are used for cotton, up to 10 units can be produced. Various combinations, such as 1 unit of corn and 9 units of cotton, are also possible.

Ultimately, the PPC helps societies determine how to allocate their scarce resources among different goods and services, reflecting the trade-offs involved in production decisions.

The Production Possibility Curve (PPC) is concave to the origin. This shape indicates that as we increase the production of one good, the opportunity cost of producing additional units of that good rises. This is due to the increasing marginal rate of transformation.

Key points about the PPC:

• The PPC illustrates the maximum combinations of two goods that can be produced with available resources.
• A point on the curve indicates efficient resource use, while a point below the curve shows underutilisation.
• As resources are shifted from one good to another, the cost of producing more of one good increases, demonstrating the concept of opportunity cost.

This understanding of the PPC is essential in economics, as it helps explain the trade-offs involved in production decisions.

Economic cost refers to the total value of all resources used in production, including both explicit and implicit costs. It is important for comparing different choices in economics. Here are some key points about economic cost:

• Definition: Economic cost includes the value of all resources that are sacrificed when choosing one option over another.
• Opportunity cost: This is a crucial aspect of economic cost, representing what is forgone when selecting one alternative instead of another.
• Application: The concept applies to both individuals and societies, helping to make informed decisions about resource allocation.
• Importance: Understanding economic cost aids in evaluating the efficiency and prudence of various courses of action.

In a centrally planned economy, the central authority, typically the government, is responsible for addressing key economic issues. This involves:

• The government makes all significant decisions regarding the production, exchange, and consumption of goods and services.
• It aims to allocate resources effectively to meet societal needs, ensuring that essential services, like education and healthcare, are adequately provided.
• If certain goods or services are underproduced, the government may encourage production or directly supply these goods.
• In cases of extreme inequality, the central authority may intervene to promote a fair distribution of resources.

Thus, the central authority plays a crucial role in solving the fundamental economic problems of 'what, how, and for whom to produce' through comprehensive planning.

In a market economy, the central problems are solved by

In a market economy, central problems are addressed primarily through the market mechanism. This involves:

• Deciding what goods to produce based on consumer demand.
• Determining the quantities of goods to be produced.
• Selecting the methods of production that are most efficient.
• Distributing the output according to market forces.

The market operates on the principles of demand and supply, where:

• If demand for a product increases, its price typically rises.
• This price change signals producers to adjust their output accordingly.

Alternatively, some problems can be addressed through economic planning, where a central authority makes decisions regarding production and distribution. However, in a market economy, the emphasis is on the free interaction of individuals to solve these issues.

The statement is incorrect because an economy does not always produce on the Production Possibility Curve (PPC). It can produce inside the PPC when:

• Resources are underutilised.
• Resources are being used inefficiently.

In such cases, the economy is not maximising its potential output of goods and services.

The study of jute industry is a macroeconomic study.

This statement is false because:

• Macroeconomics examines the economy as a whole, focusing on aggregate measures.
• The jute industry is a specific sector, which falls under microeconomics.
• Microeconomics studies individual markets and the behaviour of economic agents.

Thus, the jute industry is not a macroeconomic study.

The market price of a commodity is determined where the demand curve intersects the supply curve. This point represents the balance between the forces of demand and supply.

Microeconomics is the branch of economics that examines the behaviour of individuals and firms in making decisions about the allocation of scarce resources. It focuses on:

• The interactions between individuals and firms.
• The decisions made regarding resource allocation.
• How prices are determined based on these interactions.

Since price determination involves individual choices and market interactions, it is a key topic in microeconomics.

The study of general price level is a macroeconomic study.

The study of economics is divided into two main branches: microeconomics and macroeconomics.

• Microeconomics focuses on individual economic agents, such as consumers and producers, and how they interact in specific markets.
• Macroeconomics looks at the economy as a whole, examining aggregate measures like total output, employment, and the general price level.

Key points about macroeconomics:

• It analyses how different sectors of the economy relate to each other.
• It seeks to understand how aggregate measures are determined and how they change over time.
• Important questions include:
• What is the level of total output?
• How is total output determined?
• What causes changes in total output?
• Are resources, like labour, fully employed?
• What factors lead to unemployment?
• Why do prices fluctuate?

Thus, the general price level is indeed a crucial aspect of macroeconomics.

The correct option is A. Market Economy

In a market economy:

• Consumers and producers make decisions based on the forces of supply and demand.
• Prices fluctuate according to how much of a product is available and how much people want it.
• Competition among businesses often leads to better quality and prices for consumers.

Any allocation of resources results in the production of goods and services.

When resources are allocated, the following occurs:

• Production: Resources are transformed into goods and services.
• Consumption: The produced goods and services are consumed by individuals.
• Choice: Societies must decide how to allocate limited resources effectively.

In essence, every allocation leads to:

• A specific mix of goods and services based on resource availability.
• Trade-offs, as choosing one option often means sacrificing another.
• Determination of what to produce, how to produce, and for whom to produce.

Thus, the allocation of resources is crucial for achieving desired outcomes in any economy.

POSITIVE ECONOMICS is often referred to as "WHAT IS" economics, focusing on variables as they are. It examines the current and past occurrences in an economy to make predictions about the future.

Key points about positive economics include:

• It relies on factual data and observable events.
• For example, stating that increasing interest rates will lead to higher savings is a positive economic statement.
• Another example is how government actions affect inflation by increasing the money supply.