Q1: Discuss the central problems of an economy.
Ans: Every economy faces three central problems due to the scarce availability of resources. This scarcity challenges the best possible usage of these available resources to fulfil unlimited demands. The three central problems of an economy are as follows:
(i) What to produce and in what quantities?
(ii) How to produce?
(iii) For whom to produce?
Q2: What do you mean by the production possibilities of an economy?
Ans: Production possibilities of an economy imply those numerous alternative combinations of goods and services that a particular economy can produce with the given technology and employing the available resources fully and efficiently. In other words, it refers to various feasible bundles of goods and services that can be produced together by efficiently utilizing the given technology and available resources.
Q3: What is a production possibility frontier?
Ans: The production possibility frontier (PPF) refers to a curve that shows various alternative combinations of two goods that can be produced with efficient utilization of the given resources and technology. It is also called the production possibility curve (PPC).
PPCAll the points lying on the PPC that is, curve AE, are associated with different quantities of good 1 and good 2 produced by employing the available resources fully and in an efficient manner. Meanwhile, any point lying under the curve, like F, depicts inefficiency or underutilization of available resources. Meanwhile, any point lying outside the curve, like Z, depicts overutilization of the available endowment of resources and technology, making it non-feasible.
Q4: Discuss the subject matter of economics.
Ans: The subject matter of economics is subdivided into two core branches, microeconomics and macroeconomics. This division came into existence only after 1930, as per the suggestion by Ragnar Frisch. The domains of interest of these two branches of economics can be presented as follows:
(i) Microeconomics
(ii) Macroeconomics
Q5: Distinguish between a centrally planned economy and a market economy.
Ans:
Q7: What do you understand by normative economic analysis?
Ans: Normative economic analysis refers to the analysis in which we study whether a particular mechanism is desirable or not.
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