Q.1. Explain how scarcity and choice go together.
Fig: Human wants are unlimited but resources are scarce
Ans.
- Scarcity and choice are fundamentally related because they are driving forces behind many economic human behaviours.
- Resources are limited and people are required to make choice among various alternative uses of resources.
- Every man on the Earth faces the problem of scarcity and choice. Even the richest person in the world has to face the problem of scarcity, in terms of time.
- Thus, it is true that scarcity and choice go together.
Q.2. What gives rise to an economic problem?
Ans
- Scarcity of Resources: Limited availability of resources relative to unlimited wants and needs.
- Unlimited Wants and Needs: Human desires for goods and services are virtually limitless.
- Alternative Uses of Resources: Resources can be used in different ways, leading to opportunity costs and trade-offs.
- Competition for Resources: Individuals, firms, and governments compete for scarce resources in the market.
- Limited Time Horizon: Decisions about resource allocation must be made within a finite time frame.
- Environmental Constraints: Environmental factors impose limits on resource availability and usage, influencing allocation decisions.
Q.3. What is meant by economic problem?
Ans.
- The economic problem arises from the scarcity of resources relative to unlimited wants and needs.
- It involves making choices about how to allocate limited resources efficiently among competing uses.
- The fundamental challenge is to satisfy endless desires for goods and services with finite resources.
- This requires prioritizing among alternative uses of scarce resources and considering opportunity costs.
- The economic problem is central to understanding resource allocation, production, consumption, and distribution in economies.
Q.4. Why does an economic problem arise?
Ans.
Scarcity of Resources: Resources are limited compared to the unlimited wants and needs of individuals and society, necessitating efficient resource allocation.
Unlimited Wants and Needs: Human desires for goods and services are limitless, driving an ever-expanding list of wants and needs.
Alternative Uses of Resources: Resources can be used in different ways, leading to opportunity costs and trade-offs in resource allocation decisions.
Competition for Resources: In market economies, individuals, firms, and governments compete for scarce resources, sometimes resulting in conflicts over distribution.
Limited Time Horizon: Time is finite, requiring decisions about resource allocation within a specific time frame, influencing consumption, investment, and production choices.
Environmental Constraints: Environmental factors limit resource availability and usage, raising concerns about sustainability and impacting economic decisions.
Q.5. Why is economic problem regarded as a problem of choice?
Ans.
Scarcity necessitates choice: Limited resources relative to unlimited wants require decisions on resource allocation.
Opportunity cost: Choices involve trade-offs, with the value of the next best alternative forgone.
Trade-offs: Decision-making requires prioritizing among alternatives, considering benefits and costs.
Decision-making process: Continuous evaluation of options based on preferences and priorities.
Limited resources, unlimited wants: Inability to satisfy all desires necessitates choosing which to fulfill and which to forgo.
Q.6. Why do problems related to allocation of resources in an economy arise? Explain.
Ans.
Scarcity: Limited resources compared to unlimited wants necessitate efficient resource allocation.
Competition: Individuals, firms, and governments compete for scarce resources, leading to allocation challenges.
Diverse Needs: Various sectors and individuals have different needs, requiring prioritization in resource allocation.
Changing Demands: Dynamic economic conditions and evolving consumer preferences necessitate adjustments in resource allocation over time.
External Factors: Environmental constraints and global events can disrupt resource availability and distribution, posing additional challenges in allocation.
Q.7. What are the main tools of economic analysis?
Ans.
Mathematical Models: Using mathematical equations to represent economic relationships and analyze data.
Graphical Analysis: Visual representation of economic concepts using graphs such as supply and demand curves.
Statistical Methods: Analyzing economic data using statistical techniques to identify patterns and trends.
Optimization Techniques: Maximizing or minimizing economic objectives subject to constraints using optimization methods.
Econometric Models: Statistical models that combine economic theory and empirical data to estimate relationships and make predictions.
Q.8. What is positive economics?
Ans.
Description: Positive economics involves describing and explaining economic phenomena based on facts and data.
Objective Analysis: It focuses on what is and seeks to understand economic behavior without making value judgments.
Empirical Testing: Positive economics relies on empirical evidence and observation to test economic theories and hypotheses.
Predictive Power: Its goal is to make accurate predictions about economic outcomes based on observable data and analysis.
Q.9. What is normative economics?
Ans.
Prescription: Normative economics involves making value judgments and recommending what ought to be done in the economy.
Subjective Analysis: It includes opinions, ideologies, and moral principles in evaluating economic policies and outcomes.
Policy Recommendations: Normative economics aims to provide guidance on how resources should be allocated and how economic issues should be addressed.
Value-Based: Normative statements are based on subjective beliefs about fairness, equity, and social welfare rather than purely objective analysis.
Q.10. What is a market economy?
Ans.
Decentralized Allocation: A market economy is characterized by decentralized decision-making, where resources are allocated through the interaction of supply and demand in markets.
Private Ownership: Most resources, such as land, labor, and capital, are owned and controlled by individuals and businesses rather than the government.
Profit Motive: Participants in a market economy are driven by the pursuit of profit, which serves as a key incentive for production and innovation.
Limited Government Intervention: Government intervention in a market economy is typically minimal, with regulations focused on ensuring fair competition and protecting property rights.
Price Mechanism: Prices play a crucial role in coordinating economic activities, signaling information about scarcity and guiding resource allocation decisions.
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