Chapter 1
INTRODUCTION
Practice Exercises
1. Discuss the main problems of an economy.
Answer: The production, exchange and consumption of goods and services are the basic economic activities of life. In performing these basic economic functions, every society faces a 'scarcity' of resources and this scarcity creates a problem of 'choice' The scarce resources of an economy have competitive uses. In other words, each society must decide how to use scarce resources. The problems of an economy are often summarized as follows.
(a) What is produced and in what quantities: How much of each of the many possible goods and services will each society produce or will it produce more luxuries. Will you need more agricultural inputs or more industrial goods and services? Should more resources be used in education and health or should more resources be used in building military services. Do you need more primary education or higher education? Do you need more consumer goods or investment goods that will increase production and consumption in the future?
(b) How these goods are produced: When producing each of the various goods and services, each society has to decide which resources to use and how much. more labor or more machinery will be used. Which of the obtainable production techniques will be used when producing each of the products.
(c) For whom are these goods produced: Who gets what share of the goods produced in the economy? How will the output of the economy be distributed among the people of the economy? Who gets more and who gets less? Whether or not a minimum amount of consumption must be ensured for each person in the economy. Whether primary education and basic health services should be made free for everyone in the economy.
Therefore, the central problem of any economy is the problem of allocating scarce resources to the production of various potential goods and services and the distribution of the goods and services produced among the individuals of the economy.
2. What is the production potential of an economy?
Answer: Just as an individual faces scarcity of resources, the resources of the economy as a whole are always limited compared to what all the individuals in the economy collectively want. Rare resources are substitutes and each society has to decide which resources to use and how much to produce different goods and services. In other words, each society must determine how to allocate scarce resources to various goods and services.
An allocation of scarce resources in the economy creates a certain combination of different goods and services. In terms of the total amount of resources, it is possible to allocate resources in different ways and thus obtain different mixtures of all possible goods and services. The production potential of an economy is the collection of all possible combinations of goods and services produced through a certain amount of resources and certain technological knowledge .
3. What is the production feasibility frontier?
Answer: Any point on or below the line represents a combination of rice and cotton that can be produced by the resources of the economy. The line shows the maximum amount of paddy that can be produced with a given quantity of cotton. This line is called the production feasibility frontier. The production potential frontier shows all the combinations of paddy and cotton that can be produced if the resources of the economy are fully utilized. It should be noted that a point below the production potential limit represents a combination of paddy and cotton in which all or some resources have either been incompletely employed or resources have been wasted during production.
4. Discuss the content of economics.
Answer: Traditionally, the subject of economics is studied in two broad disciplines - collectivist economics and collectivist economics. In consumerist economics, we study the behavior of individual economic agents in various markets for goods and services and try to describe how the prices and quantities of goods and services are determined by the interactions of individuals in these markets. In a collectivist economy, on the other hand, we try to understand the economy as a whole by focusing on aggregate calculations such as total output, total employment and aggregate price levels. Here we wish to bring out how the levels of these aggregates are determined and how these aggregates change over time. Some of the important economic questions studied in collectivist economics are as follows: What is the level of total output of the economy? How is total production determined? How does total output increase over time? Are the resources of the economy fully employed? What are the reasons behind the non-full deployment of resources? Why do prices go up? Therefore, instead of studying different markets as in a collectivist economy, in a collectivist economy we try to study the behavior of aggregate or broad accounts for economic efficiency.
5. Distinguish between a centrally planned economy and a market economy.
Answer: The difference between a centrally planned economy and a market economy is -
(a) In contrast to a centrally planned economy, in a market economy, all economic activities are organized through markets. In a centrally planned economy, the government or central authority plans all the important activities of the economy.
(b) In a centrally planned economy, the government or central authority manages all the important functions of the economy. In a market economy, on the other hand, all economic activities are conducted by the market.
6. What is meant by sound economic analysis?
Answer: There is more than one process in principle to solve the central problems of the economy. In general, these different processes are likely to provide different solutions to the problems, resulting in different allocations of resources and different distributions of the final mix of goods and services produced in the economy. In real economic analysis, we study how different processes work. Therefore, it is important to understand which of these alternative processes is desirable for the economy as a whole. Exact economic analysis is often called precise economic analysis based on whether we are trying to find out how a particular process works or whether we want to evaluate it.
7. What is meant by ideal economic analysis?
Answer: There is more than one process in principle to solve the central problems of the economy. In general, these different processes are likely to provide different solutions to the problems, resulting in different allocations of resources and different distributions of the final mix of goods and services produced in the economy. In idealized economics, we try to understand whether these processes are desirable or not. Therefore, it is important to understand which of these alternative processes is desirable for the economy as a whole. It is often called ideal economic analysis based on whether we are trying to figure out how a particular process works or whether we want to evaluate it.
4. Write the difference between individualist economy and collectivist economy.
