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NIOS Class 12 Economics Chapter 12 Introduction to The Study of Economics
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Introduction to The Study of Economics
Chapter: 12
Module – V: Introduction To Economics
TEXT BOOK QUESTIONS WITH ANSWERS
INTEXT QUESTIONS 12.1.
1. Identify the following statements as positive on normative:
(i) Government should provide unemployment benefit to the unemployed youths.
Ans. Normative.
(ii) 27 per cent of India’s population belongs to poor sections of the society.
Ans. Positive.
(iii) India should take loan from world bank to create more infrastructure.
Ans. Normative.
(iv) RBI should increase the bank rate to curb inflation.
Ans. Normative.
(v) RBI has increased me batik rate to 6 per cent.
Ans. Positive.
INTEXT QUESTIONS 12.2.
1. Which one of the following statements is correct?
(a) Determination of price of a good.
(b) What goods to be produced.
(c) Both (a) and (b).
(d) Only (a).
Ans. (c) Both (a) and (b).
INTEXT QUESTIONS 12.3.
1. Give the name of the book authored by Keynes?
Ans. General Theory of Employment Interest and Money.
2. Which one of the following statements is correct?
(a) Determination of price of a good.
(b) What goods to be produced.
(c) Both (a) and (b).
(d) Only (a).
Ans. (c) Both (a) and (b).
INTEXT QUESTIONS 12.4.
1. State whether the following statements are true or false:
1. Micro economics studies the aggregates of the economy.
Ans. False.
2. Macro economics deals with partial equilibrium analysis.
Ans. False.
3. Macro economics addresses the issue of unemployment in the economy.
Ans. Ture.
4. Economic policies are studied under micro economics.
Ans. False.
TERMINAL EXERCISE
Q.1. Define microeconomics.
Ans. Microeconomics is the study of economic activity of an economic unit or a part of the economy or a small group of more than one unit. Derived from the Greek word micros meaning small, it relates to the individual economic agent’s behaviour and the result of such interactions in determining the price of goods and services. It is thus, also called Price Theory.
It is the microscopic study of me economy which deals with decision making by any individual, firm, household with respect to matters of production, consumption, determination of prices in the market, determination of wage rate and so on. The aim is to provide a framework within which the behaviour patterns and inter-relationships between individual economic units can be studied and their behaviour with regards to production, exchange and distribution of goods and services can be predicted. Thus, attainment of a state of equilibrium from the point of view of individual economic units is the main aim in micro-economic analysis.
Further, micro-economics also puts emphasis on behaviour patterns and role of firms and individuals in income distribution and study of conditions of efficiency in production and attainment of overall efficiency. Efficiency implies optimum allocation of resources among the consumers and producers so that there is neither excess demand nor excess supply of goods and services. The analysis of the three central problems of an economy-what goods and services to be produced, how to produce them and how they can be distributed in the economy are all subject matter of micro economics.
Q.2. Define macroeconomics.
Ans. Macroeconomics is the branch of economics that deals with the economic aggregates of a country as a whole. The word macro is derived from the Greek word macros meaning large. It has emerged after the British economist John Maynard Keynes published his famous book The General Theory of Employment, Interest and Money in 1936. The Great Depression of 1929 made economists think about the subject in a newer way which was holistic and macroeconomic study developed. It is also called the Theory of Income and Employment.
The content of macroeconomic analysis involves a combination of units to get a complete picture of the economic system so as to deal with economic affairs at a large scale. The focus areas are aggregate economic variables of an economy. The components of output, price level and employment operate in an economy simultaneously which indicates that they bear a close relationship with each other. This forms the basis of macroeconomic study which attempts to analyse these attributes together. It sees the economy as a combination of four components-households, firms, government and external sector.
The study area involves the analysis of effects in the market of taxation, budgetary policies, policies on money supply, role of state, rate of interest, wages, employment and output. It is, therefore, also called income theory as it is concerned with the economy as a whole and seeks to study the causes and solutions for economic issues such as unemployment, inflation, balance of payment deficits and so on.
Q.3. What is the significance of the study of microeconomics?
Ans. Both the branches of economic analysis are complementary and supplementary to each other. The applied aspects of these relate to the fields of economics and commerce.
The significance areas of microeconomics analysis lie in agriculture economics, labour economics, international economics, consumer economics, comparative economics, welfare economics, regional economics, aspects of public finance and other fields. Microeconomics also analyse market failure, where market fail to produce efficient results and describes the theoretical conditions needed for project competition. Significant fields of study in microeconomics include general equilibrium, markets under symmetric information, choice under uncertainty and economic applications of game theory. Microeconomics theory typically begins in the study of a single rational and utility maximizing individual. Its theory progress by defining a competitive budget set which is a subset of the consumption set.
Q.4. Explain the deference between the microeconomics of macroeconomics.
Ans.
| Microeconomics | Macroeconomics |
| 1. It is that part of economic theory which studies the individual unit, an individual firm, an individual household or consumer. | 1. It is that part of economic theory which studies economy as a whole or study of aggregates like national income, general price level, real GDP, etc. |
| 2. It is concerned with determination of output and price for an individual firm or industry. Therefore, it is also known as “price theory”. Price determination is the subject-matter of this branch. | 2. It is concerned with determination of output and employment in an economy as a whole. Therefore, it is also known as “income theory”. Income determination is the subject-matter of macro-economics. |
| 3. Microeconomics is primarily concerned with allocation of resources by a single firm or household. | 3. Macroeconomics is concerned with the interrelationship between economic aggregates such as later output, employees and spending in order to achieve a stabilisation in the economy. |
| 4. It may be a good policy decision by a single farmer to produce more wheat in order to ac earn maximum profit. | 4. If all the farmers produce more, there will be excess supply with market leading to fall in price of wheat. So what is good for individual is not always so at the aggre- gate level. |
Q.5. What are the fields of study in microeconomics and macroeconomics.
Ans. Macroeconomics and microeconomics, and their wide, array of underlying concepts, have been the subject, of a great deal of writings. The field of study is vast; here is a brief summary of what each covers:
Microeconomics: The study of economic behaviour of these economic units is the subject matter of microeconomics. How do the individuals or households as consumers allocate their incomes between alternate uses? How do the firms as producers allocate their resources in the production of different goods and services? How is the prices of a good determined? How is the price of a factor of production determined? These are some problems which are studied in microeconomics. For example, a consumer has only limited income but his wants are unlimited. Wants are satisfied by goods and services. He has to allocate his income on the purchase of the goods and services. His objective is to get maximum satisfaction. How should he spend his income to achieve this objective and how should he react to change in prices to goods and other changes that may take place from time to time? The study of the actions and reactions of a consumer is a subject-matter of micro economics. Likewise, in micro economic analysis, we also study the behaviour of the individual firms in the fixation of price, output, employment and their reactions to the changes in the demand and supply conditions.
Macroeconomics: Macroeconomics, on the other hand, is the field of economics that studies the behaviour of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/ decrease in net exports would affect a nation’s capital account or how GDP would be affected by unemployment rate.
Q.6. What is the significance of study of macroeconomics?
Ans. Why is macroeconomics important? Here are a few crucial reasons:
(a) It helps us understand the functioning of a complicated modern economic system. It describes how the economy as a whole functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.
(b) It helps to achieve the goal of economic growth, a higher GDP level, and higher level of employment. It analyses the forces which determine economic growth of a country and explains how to reach the highest state of economic growth and sustain it.
(c) It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control inflation and deflation.
(d) It explains factors which determine balance of payments. At the same time, it identifies causes of deficit in balance of payments and suggests remedial measures.
(e) It helps to solve economic problems like poverty, unemployment, inflation, deflation etc., whose solution is possible at macro level only.
(f) With a detailed knowledge of the functioning of an economy at macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies.
(g) Last but not least, macroeconomic theory has saved us from the dangers of application of microeconomic theory to the problems that require us to look at the economy as a whole.
Q.7. Distinguish between positive and normative economics with examples.
Ans. Positive economics concerns with the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioural relationships and includes the development and testing of economics theories. Positive economics as science, concerns analysis of economic behaviour. Positive economies as such avoids economic value judgements. For example, a positive economic theory might describe how money supply growth affects inflation, but it does not provide any instruction on what policy ought to be followed.
Positive economics is commonly deemed necessary for the ranking of economic policies or outcomes as to acceptability, which is normative economics. Positive economics is sometimes defined as the economics of “What is”, whereas normative economics discusses “What ought to be”.
Normative economics is a part of economics that expresses value or normative judgements about economic fairness or what the outcome of the economy or goals of public policy ought to be.
Economists commonly prefer to distinguish normative economics (“What ought to be” in economic matters) from positive economics (“What is”). Many normative (value) judgements, however, are held conditionally, to be given up if facts or knowledge of facts changes, so that a change of values may be purely scientific. On the other hand, welfare economist Amartya Sen distinguishes basic (normative) judgements, which do not depend on such knowledge, from non-basic judgements, which do. He finds it interesting to note that “No judgements are demonstrably basic” while some value judgements may be shown to be non-basic. This leaves open the possibility of fruitful scientific discussion of value judgments.
Some Other Important Questions For Examinations
Very Short Answer Type Questions
Q.1. What do you mean by micro-economics?
Ans. Microeconomics is a branch of economics which studies individual economic variables like demand, supply, market, firms, price, etc.
Q.2. Define macroeconomics.
Ans. Macroeconomics concerns with variables such as the aggregate volume of the Output of an economy with the extent to which the resources are employed with the size of national income and with the general price level.
Q.3. Give two examples of micro-economics study.
Ans. (i) Demand of a commodity.
(ii) Price determination.
Q.4. Give two examples of macro economics variables.
Ans. (i) Aggregate demand.
(ii) Aggregate supply.
Q.5. Mention two advantages of study of macroeconomics.
Ans. (i) Helpful in international comparison.
(ii) Helpful for study of welfare.
Q.6. Mention two problems which are studied under macroeconomics.
Ans. (i) National income.
(ii) Full employment.
Q.7. In which sense microeconomics and macroeconomics are complementary?
Ans. Microeconomics and macroeconomics are complementary in the sense that they supplement each other for effective economic analysis.
Q.8. What is economic theory?
Ans. Economic theory means those methods or a certain methodology which is adopted for developing, analysing and studying of economic laws and principles.
Q.9. What are capital goods?
Ans. Capital goods are those goods which help in the production of different goods and services.
Q.10. What do you mean by consumer goods?
Ans. Those goods which satisfy human needs directly are known as consumer goods.
Q.11. State one characteristic of the economic resources.
Ans. The supply of economic resources is short in relation to their demand is one of the main characteristics of the economic resources.
Q.12. What are the basic activities of an economy?
Ans. The basic activities of an economy are production, consumption and investment.
Q.13. How can we know the fluctuations in the economy?
Ans. We can know the fluctuations in the economy by studying national aggregate like income, output, expenditure, saving and investment.
Q.14. Why is there need for economic resources?
Ans. The scarcity of goods and resources in relation to their demand creates the need for economising resources.
Q.15. What do you mean by hypothesis?
Ans. Hypothesis means to put forward certain assumptions regarding the behaviour of individuals or households or firms.
Q.16. What is empirical observation?
Ans. To study the real or actual behaviour of various individuals to prove whether it goes according to our assumption or not, is called empirical observation.
Q.17. What do you mean by scarcity?
Ans. It refers to a situation where resources to produce goods and services are less in relation to their demand.
Q.18. Which specific problem of an economy is studied in welfare economics?
Ans. Problem related to the efficiency in production and distribution for maximisation of social welfare.
Q.19. What is price theory?
Ans. Microeconomics is concerned with determination of output and price for an individual firm or industry. Therefore, it is also known as price theory.
Q.20. What is income theory?
Ans. Macroeconomics is concerned with determination of output and employment in an economy as a whole. Therefore, it is also known as income theory.
