CBSE Class 12 Economics Introduction to Micro Economics Assignment

POINTS TO REMEMBER

♦ Study of Economics is divided into two branches
(a) Micro economics (b) Macro economics
♦ Micro economics studies the behaviour of individual economic units.
♦ Macro economics studies the behaviour of the economy as a whole.
♦ Economy is an Economic Organisation which provides sources to earn livelihood.
♦ Economic problem is the problem of allocation of limited resources available in the economy.
♦ Cause of economic problems are :
(a) Unlimited Human Wants (b) Limited Economic Resources
(c) Alternative uses of Resources.

♦ Central Problems of an Economy 

♦ For the selection of an opportunity, the sacrifice of next best alternative use is called opportunity cost.
♦ Production possibility frontier (PPF) shows different combinations of a set of two goods which can be produced with given resources and production technology.
♦ Production possibility curve PPC
(a) Slopes downward from left to right because if production of one good is to increase then production of other good has to be sacrificed.
(b) Concave to the origin because of increasing marginal opportunity cost or (MRT)
♦ Rightward shift of PPC indicates increase in resources and improvement in technology.
♦ Leftward shift of PPC indicats decrease in resources and degradation in technology.
♦ Marginal Rate of Transformation (MRT) is the ratio of number of units of a good sacrificed to increase one more unit of the other good.
♦ MRT can also called Marginal opportunity cost. It is defined as the additional cost in terms of number of units of a good sacrificed to increase an additional unit of the other good.

VERY SHORT ANSWER TYPE QUESTIONS

Question. With the help of an example, define micro economics.
Answer: Micro Economics is that branch of economics in which economic problems are studied at individual level e.g. the behaviour of consumer, firms, etc.

Question. Define macro economics with the help of an example.
Answer: Macro economics is that branch of economics which studies the economy as a whole and its aggregates e.g. National income, the level of employment.

Question. Define opportunity cost.
Answer: For the selection of an opportunity, the sacrifice of next best alternative use is called opportunity cost.

Question. Why does an economic problem arise?
Answer: An economic problem arises due to scarcity of resources having alternative uses in relation to unlimited wants.

Question. Write two characteristics of resources.
Answer: Resources are scarce (limited) and they have alternative uses.

Question. What do you mean by scarcity?
Answer: Scarcity refers to a situation in which demand is more than supply.

Question. What do you mean by marginal opportunity cost?
Answer: Marginal rate of transformation (MRT) is the ratio of one good sacrificed to increase one more unit of the other good.

Question. What do you mean by an economy?
Answer: An economy is an economic organisation which provides sources to earn livelihood.

Question. What is meant by economising the use of resources?
Answer: Economising the resources means that resources are to be used in a manner such that maximum output is realised per unit of output. It also means optimum utilisation of resources.

Question. What do you mean by alternative uses of resources?
Answer: Alternate use of resources mean, more than one uses to which a resource can be put.

Question. What will be the shape of PPF when MRT is constant?
Answer: Shape of PPF will be a straight line sloping down ward.

Question. Unemployment in India is a subject matter of Microeconomics or Marcoeconomics, give reason.
Answer: Unemployment in India is a subject matter of macroeconomics because it relates to economy as whole.

Key Points for Class 12 Economics Chapter 1 Introduction 

Economics: A science which studies the human behaviour as a relationship between ends and scare means which have alternative uses.

Two Branches of Economics 

Sr. No.	Points of difference	Micro Economics	Macro Economics
1.	Meaning	It studies the economic behaviour of individual units of the economy	It studies economic behaviour of aggregates of the economy as a whole.
2.	Focus of Study	Price determination, consumer/Producer Equilibrium	Determination of level of national income and employment
3.	Instruments/tools	Demand and supply	Aggregate demand and aggregate supply
4.	Method of study	Partial equilibrium analysis	General equilibrium analysis
5.	Example	Individual demand, Individual supply, Price of a commodity an equilibrium of industry, equilibrium of a firm etc.	Aggregate demand aggregate supply, national Income, general price level total investment etc.

Three Types of economy:

1. Market/capitalist economy: - In this type of Economy the factors of production are owned and operated by individuals or group of individuals.
2. Main objective of production is self interest or profit maximization.
3. Central problems are solved by price mechanism or market forces of demand & supply.

2. Planned/centrally planned/ socialistic economy
1. Factors of production are owned and operated by Govt.
2. Main objective of production is social welfare.
3. Central problems are solved by central planning authority.

3 Mixed Economy: -
1. The Economy in which factors of production are owned and operated by both Govt. and private sector
2. Main objective is profit maximization(private sector) and social welfare(Gov. sector)
3. Central problems are solved by central planning authority(in public sector) and price mechanism (in private sector)

Scarcity of Resources:-
It implies that availability/supply of resources is less than their requirement/demand.
( D > S )

Economic Problem:
Main economic problem is how to allocate the scare resources so as to satisfy maximum of our unlimited wants. Economic problem arise mainly because human wants are unlimited and resources are limited and have alternative uses.
This creates the problem of choice.

Central Problems of an Economy 

Efficient utilization of Resource

1. What to produce: - An economy have unlimited wants and limited means having alternative use. Economy can‟t produce all type of goods like consumer goods, producer goods etc. So, Economy has to make a choice what type of goods and services are to be produced and in what quantities.

2 How to produce: - It is the problem of choice of technique of production. There are two techniques of production.
(a) Labour Intensive Technique: - It is the technique of production when labour is used more than capital.
(b) Capital Intensive Technique: - In this technique capital is used more than Labour.

3 For whom to produce: - It is the problem related to distribution of produced goods among the different group of the society.
It has two aspects:-
1. Personal distribution
2. Functional distribution

Personal distribution:- When the National Income is distributed according to the ownership of the factors of production.
Functional distribution: - When the national Income/Production is distributed among different factors of production like Land, Labour, capital and Entrepreneurship for providing their service in term of rent, wages, interest and profit respectively.
4 Problem related to the efficient use and fuller utilization of resources Efficiency of production means the maximum possible amounts of goods and services are being produced with available resources. The resources are already scare in relation to the need for them and therefore an economy has to ensure that its resources do not remain underutilized their under employment is nothing but wastage of resources. 

5. Problem related to Growth of Resources
It is related to increase in the production capacity of the economy so that the quantity of production will rise.

Production Possibility Curve/ Transformation Curve/Production Frontier Curve

Meaning: - The curve which shows the various alternative production combinations of two goods that can be produced with given resources and technology when resources are fully and efficiently utilized. 

Features of PPC:-
1. It is concave to origin because of increasing marginal opportunity cost.
2. If the marginal opportunity cost is constant than PPC will be a straight line and 3. If MOC is decreasing than PPC will be convex to origin. 

Opportunity cost
It is the cost of next best alternative foregone.

Marginal Opportunity Cost/Marginal Rate of Transformation
It is the amount of a good (good Y) sacrificed for the production of an additional unit of other good (good X)

Questions for revision

Question. Define scarcity.
Answer: Scarcity means shortage of resources in relation to their demand is called scarcity.

Question. What is an economy?
Answer: An economy is a system by which people get their living.

Question. Define central problem.
Answer: Central problem is concerned with the problems of choice (or) the problem of resource allocation.

Question. Give one reason which gives rise to economic problems?
Answer: Scarcity of resources which have alternative uses.

Question. Name the three central problems of an economy.
Answer: i) What to produce?
ii) How to produce?
iii) For whom to produce?

Question. What is opportunity cost?
Answer: It is the cost of next best alternative foregone.

Question. Why is there a need for economizing of resources?
Answer: Resources are scarce in comparison to their demand, therefore it is necessary to use resources in the best possible manner without wasting it.

Question. What is production possibility frontier?
Answer: It is a boundary line which shows the various combinations of two goods which can be produced with the help of given resources and technology.

Question. Why PPC is concave to the origin?
Answer: PPC is concave to the origin because of increased marginal opportunity cost.

Question. Define marginal rate of transformation.
Answer: MRT is the ratio of units of one good sacrificed to produce one more unit of other goods. MRT = Δy / Δx

Question. What does a point inside the PPC indicate?
Answer: Any point inside the production possibility curve indicate underutilization of resources.

HOTS

Question. Does massive unemployment shift the PPC to the left?
Answer: Massive unemployment will shift the PPC to the left because labour force remains underutilized. The economy will produce inside the PPC indicating underutilization of resources.

Question. What does the slope of PPC show?
Answer: The slope of PPC indicates the increasing marginal opportunity cost.

Question. From the following PP schedule calculate MRT of good x.
Answer:
Production possibilities        A    B  C  D  E
Production of good x units   0    1  2   3  4
Production of good y units   14 13 11 8   4 

Question. If a Consume has monotonic preference, can lie is indifference between the bundle (10, 8) and (8, 6)?
Answer: No, he prefer (10, 8) to (8, 6)

UTILITY ANALYSIS

UTILITY
Meaning: - It may be defined as the process of commodity or service to satisfy human wants.

Utility may be „Cardinal‟ or „Ordinal‟
Cardinal Utility:- It means that utility can be measured with the utils. but it converted to the price.
Ordinal Utility:- It means that utility can be ranked according to the preferences of the individuals.
Two concepts of utility (i) Total u

Total Utility: - Total amount of satisfaction obtained from consuming various units of commodity
TU= ΣMU
Marginal Utility: - Change in total utility from the consumption of one additional unit of goods.
MU= TU_n – TU_n-1
ORtility (ii) Marginal Utility
MU = ΔTU/ΔQ
TU_n = Total Utility of n units
TU_n-1= Total Utility of n-1 units
ΔQ = Change in Quantity
ΔTU = Change in Total Utility

Table 

1. When T.U. Increases with diminishing rate, M.U. declines.
2. When T.U. is maximum, M.U. is zero
3. When T.U. declines, M.U. is negative.

The Law of Diminishing Marginal Utility.
Definition: - When a consumer consumes more and more units of commodity marginal utility from it goes on diminishing. 

Diagram and table shown that as we consume additional units at a good, M.U. from them goes on diminishing.
Consumer Equilibrium: A consumer is in equilibrium when he gets maximum satisfaction out of his limited Income and he has not tendency to shift from this situation till circumstances unchanged.

Consumer Equilibrium with Single Commodity

When a consumer purchases a single commodity, his behavior is guided by the Law of Diminishing Marginal Utility. He will try to consume the Commodity up to the point where marginal utility is just equal to its price.
MUx = Px 

Above diagram and table shows equilibrium at point E. where MU= Price. Here Consumer consumes four units of goods.

Indifference Curve Analysis
Meaning: - Indifference Curve shows the different combinations between two commodities in which consumer‟s get equal satisfaction

In the table and diagram shows that consumer is indifferent between five combinationn of goods x and y.

MRS- Marginal Rate of substation:-
The rate of substitution of one commodity for another is known as M.R.S.
MRSy = ΔY/ΔX

Assumptions of IC:-
1. The consumer is rational.
2. Consumer has monotonic preferences.
3. Price of goods and Income of the Consumer are given.
4. There is no change in the taste and preference of consumer.

Properties of Indifference Curve:-
1. An indifference curve always slopes downward from left to right. If a consumer increases one unit of a particular commodity other one has to be decreased.

2. Indifference Curve are Convex to the origin:-
Because diminishing Marginal rate of Substitution.

3. Indifference Curves never intersect each other:-
Each IC has its own level of satisfaction.
4. Higher Indifference Curves represent higher level of satisfaction.
Budget Set: - “A budget set is collection of all bundles available to a consumer at prevailing market price, with his Income.”
Budget Line: - A budget line represents all bundles which a consumer can actually buy with his Income at prevailing market price.
If there are two goods- good1 and good 2 than
P₁X₁+P₂X₂ = M P1 = Price of good-I
X1 = Unit of good-I
P₂ = Price of good 2
X₂ = Unit of good 2
PX = Rs. 20 Income= Rs. 100
Py = Rs. 25
Budget Equation
P1X1 + P2X2 = Income
(20X5) + (25X0) = 100
(20X0) + (25X4) = 100

Budget line is also known as Price line, or Market offer line/curve
Budget line changes (Rotates) due to following reasons:-
When change in Price of a Single good.
a) When change in price of Y good (Good 2)

♦ Budget line rotates to the left (P-A) when Price of Good Y Increase.
♦ Budget line rotates to the right (P-B), when Price of Good Y Decreases.
b) When change in Income of Consumer than Budget line shift right or left.
(1) Ex. If income of Consumer Increases, Budget line Shift rightward. 

Consumer’s Equilibrium
A consumer will be in equilibrium where he can maximize his satisfaction, subject to his budget constraint.
There are two conditions for consumer equilibrium.
1. Budget line should be tangent to indifference Curve.
MRS xy = Px/Py
Or
Slope of IC and budget line are equal to each other.
2. Indifference Curve should be Convex to the Point of origin at equilibrium Point.

Business Cycle Class 12 Economics 

Question. Unemployment is a
(a) a leading indicator
(b) a coincident indicator
(c) a lagging indicator
(d) a cyclical indicator
Answer: C

Question. The beginning of recession is
(a) Peak
(b) Trough
(c) Contraction
(d) Expansion
Answer: C

Question. According to Keynes, Fluctuations activity are due to fluctuations in
(a) aggregate effective demand
(b) Price
(c) Supply of resources
(d) None of the above
Answer: D

Question. Which of the following does not occur during an expansion?
(a) Consumer purchases of all types of goods tend to increase.
(b) Employment increases as demand for labour rises.
(c) Business profits and business confidence tend to increase
(d) None of the above.
Answer: D

Question. A significant decline in general economic activity extending over a period of time is
(a) business cycle
(b) contraction phase
(c) recession
(d) recovery
Answer: C

Question. Which of the following is not a characteristic of business cycles
(a) Business cycles have serious consequences on the well-being of the society.
(b) Business cycles occur periodically, although they do not exhibit the same regularity.
(c) Business cycles have uniform characteristics and causes.
(d) Business cycles arecontagious and unpredictable.
Answer: C

Question. Even with lower rate of interest, demand for credit declines in
(a) Expansion Phase
(b) Peak
(c) Contraction Phase
(d) Depression
Answer: D

Question. The four phases of the business cycle are
(a) peak, recession, trough, and boom
(b) peak, depression, trough, and boom
(c) peak, recession, trough, and recovery
(d) peak, depression, bust, and boom
Answer: C

Question. Which of the following is not an example of coincident indicator?
(a) Industrial production
(b) inflation
(c) Retail sales
(d) New orders for plant and equipment
Answer: D

Question. Which of the following best describes a typical business cycle?
(a) Economic expansions are followed by economic contractions.
(b) Inflation is followed by rising income and unemployment.
(c) Economic expansions are followed by economic growth and development.
(d) Stagflation is followed by inflationary economic growth.
Answer: A

Question. The term business cycle refers to
(a) the ups and downs in production of commodities
(b) the fluctuating levels of economic activity over a period of time
(c) decline in economic activities over prolonged period of time
(d) increasing unemployment rate and diminishing rate of savings
Answer: B

Question. A decrease in government spending would cause
(a) the aggregate demand curve to shift to the right.
(b) the aggregate demand curve to shift to the left.
(c) a movement down and to the right along the aggregate demand curve.
(d) a movement up and to the left along the aggregate demand curve.
Answer: D

Question. According to _________ trade cycle occurs due to onset of innovations.
(a) Hawtrey
(b) Adam Smith
(c) J M Keynes
(d) Schum peter
Answer: D

Question. A variable that tends to move later than aggregate economic activity is called
(a) a leading variable.
(b) a coincident variable.
(c) a lagging variable.
(d) a cyclical variable.
Answer: C

Question. The trough of a business cycle occurs when ________hits its lowest point.
(a) inflation in the economy
(b) the money supply
(c) aggregate economic activity
(d) the unemployment rate
Answer: C

Question. When aggregate economic activity is declining, the economy is said to be in
(a) Contraction.
(b) an expansion.
(c) a trough.
(d) a turning point.
Answer: A

Question. Increasing Prosperity and High standards of living are the characteristics of
(a) Peak
(b) Contraction
(c) Expansion
(d) Trough
Answer: C

Question. GDP is a
(a) a leading indicator
(b) a coincident indicator
(c) a lagging indicator
(d) a cyclical indicator
Answer: B

Question. Industries that are extremely sensitive to the business cycle are the
(a) Durable goods and service sectors.
(b) Non-durable goods and service sectors.
(c) Capital goods and non-durable goods sectors.
(d) Capital goods and durable goods sectors.
Answer: B

Question. Leading economic indicators
(a) are used to forecast probable shifts in economic policies
(b) are generally used to forecast economic fluctuations
(c) are indicators of stock prices existing in an economy
(d) are indicators of probable recession and depression
Answer: B

Question. Economic recession shares all of these characteristics except.
(a) Fall in the levels of investment, employment
(b) Incomes of wage and interest earners gradually decline resulting in decreased demand for goods and services
(c) Investor confidence is adversely affected and new investments may not be forthcoming
(d) Increase in the price of inputs due to increased demand for inputs
Answer: D

Question. Severe form of recession is
(a) Contraction
(b) Depression
(c) Expansion
(d) Peak
Answer: B

Question. A leading indicator is
(a) a variable that tends to move along with the level of economic activity
(b) a variable that tends to move in advance of aggregate economic activity
(c) a variable that tends to move consequent on the level of aggregate economic activity
(d) None of the above
Answer: B

Question. The end of expansion is termed as —
(a) Peak
(b) Contraction
(c) Trough
(d) None of the above
Answer: A

Question. Which of the following statements is true?
(a) An Economy grows endlessly
(b) An Economy Contracts endlessly
(c) It is easy to predict turning points of Business Cycle
(d) None of the above
Answer: D

Question. Peaks and troughs of the business cycle are known collectively as
(a) Volatility.
(b) Turning points.
(c) Equilibrium points.
(d) Real business cycle events.
Answer: B

Question. The most probable outcome of an increase in the money supply is
(a) interest rates to rise, investment spending to rise, and aggregate demand to rise
(b) interest rates to rise, investment spending to fall, and aggregate demand to fall
(c) interest rates to fall, investment spending to rise, and aggregate demand to rise
(d) interest rates to fall, investment spending to fall, and aggregate demand to fall
Answer: C

Question. The lowest point in the business cycle is referred to as the
(a) Expansion.
(b) Boom.
(c) Peak.
(d) Trough.
Answer: D

Question. During recession, the unemployment rate __________ and output ________
(a) Rises; falls
(b) Rises; rises
(c) Falls; rises
(d) Falls; falls
Answer: A

Question. When does an economic expansion occur in the business cycle?
(a) At the peak of the business cycle
(b) At the trough of the business cycle
(c) Between the peak and trough
(d) Between the trough and peak
Answer: D

Question. Changes in housing interest rate is a
(a) a leading indicator
(b) a coincident indicator
(c) a lagging indicator
(d) a cyclical indicator
Answer: A

Question. The different phases of a business cycle
(a) Do not have the same length and severity
(b) expansion phase always last more than ten years
(c) last many years and are difficult to get over in short periods
(d) None of the above
Answer: A

Question. Which of the following statement is not correct?
(a) Business Cycles are periodical
(b) Business Cycles are regular
(c) Business Cycles vary in intensity
(d) Business Cycles vary in length
Answer: B