Class 12 Economics Long Questions With Answers - Introduction (Macroeconomics)

Q1. What are macroeconomics and microeconomics, and what is the connection between the two? 

Ans:  

• Microeconomics involves studying how individuals and businesses make decisions about resources and pricing.
• It looks at supply and demand and other factors affecting prices.
• Macroeconomics studies a country's economy as a whole, not just individual businesses.
• Despite seeming distinct, microeconomics and macroeconomics are interconnected.
• Higher inflation, for instance, raises raw material costs for businesses, impacting end product prices for consumers.
• Professor Ackley notes the bidirectional relationship between macroeconomics and individual behavior theories.
• While microeconomic theories form the basis for collective ideas, macroeconomics also informs microeconomic understanding.
• Empirically stable macroeconomic patterns that challenge microeconomic theories can aid in understanding individual behavior.

Q2. Explain the scope of macroeconomics.

Ans: The scope of Macroeconomics is as follows: 

• To comprehend the operation of the economy: Understanding how the economy works require an understanding of macroeconomic variables. Macroeconomic challenges are related to the behaviour of total income, output, employment, and the overall price level of the economy.
• Economic Policies: Macroeconomics is especially useful for economic policy. Modern governments, particularly those in developing countries, are confronted with a plethora of domestic issues. For example, overcrowding, inflation, the balance of payments, general underproduction, and so on.
• Unemployment in General: Unemployment is thus, caused by a lack of effective demand. Total investment, total output, total income, and total consumption should all be increased to boost effective demand. As a result, macroeconomics is particularly important in studying the causes, consequences, and treatments of general unemployment.
• National Income: Understanding macroeconomics is essential for assessing the economy’s overall performance in terms of national income. When the Great Depression of the 1930s began, it became necessary to investigate the causes of general overproduction and general unemployment.
• Economic Growth: A subfield of macroeconomics focuses on growth, and is known as growth economics. Macroeconomic principles are used to assess an economy’s resources and capacities. To boost the economy’s overall level of economic development, plans for overall increases in national income, output, and employment are developed and implemented.

Q3. What are the different types of goods produced in an economy?

Ans: The different types of goods produced in an economy can be categorized as follows:

• Consumer Goods: These are items that people buy for personal use. When people have more money, they buy more of these goods, and when they have less money, they buy fewer. Examples include bread, biscuits, butter, jam, rice, fish, eggs, shoes, clothing, fans, books, and pens.
• Free Goods: These goods are available in unlimited quantities and are provided by nature for free. Examples include air, seawater, sunlight, and desert sand.
• Economic Goods: These are natural resources that are limited in supply and can be bought and sold in the market. Examples include vegetables, cereals, minerals, fruits, and fish.
• Substitute Goods: These are items that can replace each other. If the price of one item goes up, people may buy more of the substitute, and if the price goes down, they may buy less of the substitute. Examples include tea and coffee.
• Private Goods: These are goods owned by individuals or private companies. Examples include cars, houses, motorcycles, mobile phones, books, and televisions.
• Public Goods: These are goods owned by society, the general public, or the government. Examples include roads, bridges, hospitals, and government schools.
• Capital Goods: Also known as producer goods, these items are not used immediately but are used in the production of other goods. Examples include seeds, fertilizers, tools, machinery, and raw materials.

Q4. Define and explain the importance of ‘scarcity’ and ‘opportunity costs’ in economics.

Ans:

Scarcity
Scarcity is the situation where there are not enough resources to satisfy all the wants and needs of individuals or society. Any resource that costs something is considered scarce to some extent, but what really matters is relative scarcity.

• Scarcity is also known as "paucity."
• Economics studies how people use limited resources to fulfill their unlimited desires.
• The main idea in economics is that our world faces scarcity, meaning we cannot access all the resources we want. Hence, we must make choices.

Importance of Scarcity:

• Scarcity affects the levels of supply and demand in the economy.
• The production of goods and services depends on the scarcity of input resources. If resources are scarce, it becomes harder for producers to create the necessary amount of goods and services.

Opportunity Cost
Opportunity cost is the value of the next best alternative that we give up when we make a decision. It's the cost of what we forego to do something else.

• Economists define opportunity cost as the next best or highest valued alternative to the chosen option. For example, if we use resources to make one product, the opportunity cost is what we could have made instead.
• Opportunity costs occur when choosing between different alternatives. Every resource used in the economy has a limited quantity.
• This concept leads to the pricing of all goods and services. If resources weren't scarce, everything would be free, and there would be no opportunity cost of choosing one option over another. Because resources are limited, both customers and producers must consider opportunity costs when making decisions.

Q5. What are the different ways in which resources can be allocated, and what are their respective advantages and disadvantages?

Q7. What is the difference between microeconomics and macroeconomics?
Ans. Following points explain the difference between microeconomics and macroeconomics:

Q8. Describe the four major sectors in an economy according to the macroeconomic point of view.
Ans. Following are the four major sectors in an economy:
(a) Household Sector: By household sector, we mean a group of individuals who purchase goods and services for consumption.

(b) Firm/Production Sector: The production units are called firms. The firm sector includes all the units that buy factors of production from households.

(c) Government Sector: The role of the government sector includes framing laws, enforcing them and delivering justice. The government, in many instances, undertakes production apart from imposing taxes and spending money on building public infrastructure, running schools, colleges, providing health services, etc.

(d) External Sector: The external sector includes exports and imports of goods and services. Capital from foreign countries may also flow into the domestic country, or the domestic country may be ; exporting capital to foreign countries.

Q9. Describe the Great Depression of 1929.
Ans. The period from 1929 to 1933 is known as the Great Depression. This period witnessed tremendous decline in the level of output and employment in the countries of Europe and North America. It affected other countries of the world as well. The demand for goods in the market was low, many factories were lying idle and workers were thrown out of jobs. During this period, unemployment rate in USA rose from 3 per cent to 25 per cent while aggregate output fell by about 33%.
These events made the economists think about the functioning of the economy in a different way. In other words, we can say that macroeconomics was born as a result of the great depression.

Q10. Explain 3 phases of circular flow model?
Ans.

There are three types of phases of Circular flow.
(1) Production phase
(a) In this phase, firms produce goods and services with the help of factor services.
(b) If we study it in term of the quantity of goods and services produced, it is a Real Flow.
(c) But, it is a Money flow, if we study it in terms of the market value of the goods produced.

(2) Distribution Phase:
(a) Income phase. This phase involves the flow of factor income (rent, wages, interest and profits)
(b) It means the flow of income in the form of rent, interest, profit and wages, paid by producer sector to the household sector. It is a Money Flow.

(3) Disposition Phase:
(a) Disposition means expenditure made. This phase deals with expenditure on the purchase of goods and services by households and other sectors.
(b) This is a Money Flow from other sectors to the producer sector. These phases are illustrated in the figure given here.