Class 12 Economics Short Questions With Answers (Part - 2) - Introduction to Micro Economics

Q.11. What is a planned economy? 
Ans. A planned economy is one in which the central authority, usually the government, decides what to produce, how to produce and for whom to produce. The government plans allocation of resources and production targets with the aim of promoting social welfare, equitable distribution and efficient use of resources.

Q.12. Why does the problem of what to produce arise? Explain
Ans.The problem of what to produce arises as the economy has limited resources. Because of the scarcity of resources producers are unable to produce everything in the desired quantity, but they will have to make a choice. This involves two decisions: which kinds of goods should be produced and in what quantities each good should be produced.

Q.13. Why do problems related to the allocation of resources in an economy arise? Explain.   
Ans. Problems of resource allocation arise because of two basic features of resources:    
(a) Resources are Limited: Resources used to produce goods and services are finite. Limited resources are incapable of satisfying unlimited human wants .
(b) Limited Resources have Alternative Uses: The same resources can be used for different productive activities. Since resources have competing uses, choices must be made about their best possible application. Together, scarcity and alternative uses force societies to decide how to allocate resources among many possible uses.

Q.14. Why is the Production Possibility Curve downward-sloping? 
Ans. The Production Possibility Curve (PPC) slopes downward from left to right because increasing the output of one good requires giving up some of the other good. This trade-off exists under fuller utilisation of the given resources. The downward slope reflects the opportunity cost of shifting resources from producing one good to producing another.
Example: More of good X can be produced only with less of good Y as resources are scarce.

Q.15. What does a leftward shift of a Production Possibility Curve indicate? 
Ans. A leftward shift of the Production Possibility Curve indicates a decline in the economy's production capacity. This means the economy can produce less of both goods than before. Such a shift may be caused by loss of resources, natural disasters, war, or a fall in productivity.

Q.16. What does a rightward shift of a Production Possibility Curve indicate? 
Ans. A rightward shift of the Production Possibility Curve indicates economic growth: the economy can produce more of both goods. This occurs when the quantity or quality of resources increases or when there is technological improvement that raises productive capacity.

Q.17. When does the Production Possibility Curve shift outward to the right? 
Ans. The Production Possibility Curve shifts outward to the right when there is technological progress or an increase in the supply of resources available to an economy, or when both occur. 

Q.18. Why is the Production Possibility Curve concave to the origin?
Ans. The PPC is concave to the origin because of increasing marginal opportunity cost. Resources are not equally suitable for producing every good. When resources are reallocated to produce more of one good, increasingly larger amounts of the other good must be sacrificed. This rising opportunity cost makes the curve bowed outwards.

Q.19. Why Production Possibility Curve is also called the transformation curve? 
Ans. The Production Possibility Curve is also called the transformation curve because it shows the trade-off between two goods. Movement along the curve represents transforming the economy's resources from the production of one good to the production of another. The curve  illustrates how resources must be reallocated to transform output from one combination to another.

Q.20. What is macroeconomics? 
Ans. Macroeconomics is the branch of economics that studies the behaviour of the economy as a whole. It deals with aggregate variables such as national income, total employment, inflation, economic growth and the effects of fiscal and monetary policies on the entire economy.

Q.21. Why is the study of consumer equilibrium a subject matter of microeconomics?
Ans. Consumer equilibrium is a subject matter of microeconomics because it examines the choices and behaviour of an individual consumer. It studies how a single consumer allocates income among different goods to maximise satisfaction, taking prices and budget constraints into account.  

Q.22. Name any one variable of study in microeconomics. 
Ans. In microeconomics, the price of a good or service is a key variable that influences how much consumers are willing to buy and how much producers are willing to sell.

For example, if the price of apples rises, consumers may buy fewer apples while producers are encouraged to sell more. Price changes affect supply, demand and overall market equilibrium.

Q.23. Is the study of the cotton textile industry a macroeconomic study or a microeconomic study?
Ans. The study of the cotton textile industry is a microeconomic study because it focuses on a specific industry rather than the economy as a whole. It examines production processes, costs, pricing, supply and demand, and competition within that industry - all topics of microeconomics.

Q.24. What do you understand by macroeconomics? 
Ans. Macroeconomics is the branch of economics that studies the overall functioning and performance of an economy. It focuses on aggregates such as national income, total employment, inflation, economic growth and government policies that influence these aggregates, rather than on individual firms or markets.

Q.25. Write three points on the distinction between micro and macroeconomics. 
Ans. The following points explain the difference between microeconomics and macroeconomics:

Q.26. The production in an economy is below its potential due to unemployment. The government starts employment generation schemes. Explain its effect using the Production Possibility Curve.
Ans. When production is below potential because of unemployment, the economy is operating at a point inside the Production Possibility Curve (PPC). Employment generation schemes raise employment and lead to better use of available resources. As more people work, output increases and the economy moves from a point inside the PPC towards a point on the PPC, showing improved efficiency.
However, the PPC itself does not shift outward unless there is an increase in resources or an improvement in technology. Employment schemes improve utilisation of existing resources, so the economy moves to the frontier but the curve remains in the same position unless capacity expands.
Thus, the economy moves from point 'a' inside the PPC to any point on the PPC as shown in the diagram.