Long Answer Questions: Introduction to Microeconomics | Economics Class 11 - Commerce PDF Download

Q1:What is the production possibility frontier?
Ans: Production possibility frontier:

• The production possibility frontier is a curve that depicts all possible combinations of two goods that can be produced in a given economy with given resources and technology.
• The production possibility frontier is also known as the transformation curve or the production possibility curve.
• Due to scarce and finite resources, the production of a commodity could only be increased if there is a reduction in the other commodity. Hence, the PPC curve is concave.

Assumptions
The PP curve concept is founded on the following assumptions:

• The economy's resource base is fixed.
• The technology is pre-installed and unmodified.
• The resources are effective and fully utilised.
• In the production of all goods, all resources are not equally efficient.

Diagram:

In the diagram, there are different combinations of good X and good Y, that is combination A,B,C and D which could be produced when the the resources in the economy are optimally and fully utilised. Any point on or below the production possibility frontier gives a combination of goods that could be produced given the resources and technology, however any combination under the PPC (Point E) signifies the underutilization or wasteful utilisation of resources.
Shifts in Production Possibility Curve.

• Reasons:
  • Changes in resources. 
  • Changes in manufacturing technology for both goods.
• Rightward shift:
  Production Possibility Curve shift to the right indicates an increase in resources or technological advancement. Example skilled labour, technological advancements, and increased land productivity are all factors that are contributing to increased productivity.
• Leftward shift:
  Production Possibility Curve shift to the left indicates a decrease in resources or a deterioration in technology in the economy. Example unskilled labour, technological obsolescence, and decreased land productivity are all factors that are contributing to decreased productivity.

Q2: Draw a production possibility curve and mark the following situations.
a. Underutilization of resources
b. Full employment of resources
c. Growth of resources
Ans: Before the diagram, the explanations are:
a. Underutilization of resources : Underutilization of resources refers to a situation in which resources are used inefficiently during the production process. A point located below the production possibility curve indicates underutilization or inefficient resource utilization. The actual output is less than the potential output in this case. The examples of underutilization are shown below.

• Labor illiteracy
• Inefficient or partial utilization of resources such as machines

b. Full employment of resources: Full employment refers to an economic situation in which all available labor resources are used as efficiently as possible. Full employment represents the maximum amount of skilled and unskilled labor that an economy can employ at any given time.
c. Growth of resources : Growth is defined as an increase in an economy's output over a period of time, with a minimum of two consecutive quarters.
The second definition of economic growth is an increase in what an economy can produce if all of its scarce resources are used. An increase in an economy's productive potential can be demonstrated by an outward shift in the production possibility frontier of the economy (PPF).
Production possibility curve depicting all the above situations: It refers to a curve that depicts the many production possibilities that can be realized with the available resources and technology.
In the diagram given below:

• Every point on the PP curve, such as ABCDEF, denotes full employment of resources and efficient resource usage. 
• Any point below or inside the PP curve, such as G, indicates underutilization of resources. 
• Any point above PP curves such as H shows growth of resources.

If the economy commits all of its resources to the production of commodity wheat, it can generate 14 units, but commodity cloth’s output will be zero. Commodity cloth and wheat may have a variety of production options. If we wish to increase the output of cloth , we must reduce the output of commodity wheat, and vice versa.

Q3: What is the difference between a planned economy and market economy?
Ans: The difference between a planned economy and market economy is as follows:



Q4: Explain the central problem of the choice of products to be produced.
Ans: What to produce:
This problem involves two issues, mainly:

• The choice regarding the choice of products.
• The quantity of the chosen product.

Since there is a choice problem, the economy must decide which goods and services to produce, as the resources are limited and scarce in an economy, hence an optimum decision needs to be taken in respect to the choice as well the quantities of goods and services. The problem of choice mainly exists between consumer goods and capital goods.
For example, which consumer goods, such as wheat, rice, and cloth, and which capital goods, such as machines and tools, are to be produced.
When an economy decides what goods or services to produce, it must also decide on their quantity. Hence, it is not about choosing to produce either of the two, it is about deciding the quantity of each of them. If a decision is taken regarding more production of consumer goods, then it will have an impact on the quality of life of the current generation, whereas if capital goods are produced in more quantity, it will impact the production capacities of the future. Hence a decision needs to be made that takes into consideration both the present and the future generations.