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NIOS Class 12 Economics Chapter 13 Central Problems of an Economy
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Central Problems of an Economy
Chapter: 13
Module – V: Introduction To Economics
TEXT BOOK QUESTIONS WITH ANSWERS
INTEXT QUESTIONS 13.1.
Q.1. State whether the following statements are true or false:
(i) Resources are scarce.
Ans. True.
(ii) Wants are limited.
Ans. False.
(iii) Scarcity does not lead to choice.
Ans. False.
(iv) Resources have alternative uses.
Ans. True.
(v) Every country does not face the basic economic problem.
Ans. False.
(vi) Economizing of resources means being miserly about using resources.
Ans. False.
(vii) Land is a factor of production.
Ans. True.
(viii) Human wants are unlimited.
Ans. True.
(ix) Resources are scarce if demand is less than its availability.
Ans. False.
(x) Only producers face economic problems.
Ans. False.
INTEXT QUESTIONS 13.2.
Q.1. Choose the correct answer:
1. The problem of how to produce relates to:
(a) Distribution of income.
(b) Technique of production.
(c) Choosing the goods to produce.
(d) Choosing the quantities to produce.
Ans. (b) Technique of production.
2. The problem of what to produce is solved by:
(a) Preferences of people.
(b) Market prices.
(c) Government allocation of resources.
(d) All of the above.
Ans. (d) All of the above.
3. The income earned by labour in the production process will be part of the problem of:
(a) What to produce and what quantities.
(b) How to produce.
(c) For whom to produce.
(d) None of the above.
Ans. (c) for whom to produce.
4. Labour intensive technique of production means:
(a) The use of only labour in production.
(b) Production unit is owned by labour.
(c) The technique used for producing necessities.
(d) The use of more labour than capital in producing goods.
Ans. (d) The use of more labour than capital in producing goods.
5. The central problems facing an economy relate to:
(a) The allocation of resources.
(b) What to produce.
(c) How to produce.
(f) For whom to produce osi.
Ans. (a) The allocation of resources.
INTEXT QUESTIONS 13.3.
Q.1. Choose the correct answer:
1. Under utilization of resources means that resources are being used _________ (efficiently/ inefficiently).
Ans. Inefficiently.
2. Technological ________ (backwardness/ improvements) lead to growth of resources.
Ans. Improvements.
3. Resources should remain _________ (idle/ fully utilised).
Ans. Fully utilised.
4. Ifa person is _________ (employed/ unemployed), it means that the resource is being wasted.
Ans. Unemployed.
5. Quantitative change in resources means that ________ (there is more labour available/ labour gets more skill and training).
Ans. There is more labour available.
INTEXT QUESTIONS 13.4.
Q.1 State whether the following statements are true or false:
1. A point on the PPC implies that resources are fully utilised.
Ans. True.
2. A point inside the PPC implies existence of under employment.
Ans. True.
3. A PPC is drawn on the assumption that resources of the economy are increasing.
Ans. False.
INTEXT QUESTIONS 13.5.
Q. Choose the correct answer:
1. (a) A point on the production possibility curve shows-
(i) Growth of resources.
(ii) Inefficient utilization of resources
(iii) Unemployment of resources.
(iv) Full and efficient utilization of resources.
Ans. (iv) Full and efficient utilization of resources.
(b) An outward shift of the production possibility curve shows:
(i) Growth of resources.
(ii) Inefficient utilization of resources.
(iii) Unemployment of resources.
(iv) Full and efficient utilization of resources.
Ans. (i) Growth of resources.
2. State whether true or false:
(a) A point inside the production possibility curve shows underutilization of resources.
Ans. True.
(b) Unemployment of labour means that resources are not being fully employed.
Ans. True.
(c) Better technology will lead to an inward shift of the production possibility curve.
Ans. False.
(d) A production possibility curve can depict more than two goods in an economy.
Ans. False.
(e) An economy needs to choose the point at which it wishes to operate on the production possibility curve, as all points are equally efficient.
Ans. True.
TERMINAL EXERCISE
Q.1. How do economic problems arise? Would there be any economic problem if resources were unlimited?
Ahs. Every economy has limited quantity of resources. With this limited quantity of resources an economy can neither produce all what it wants nor can it produce whatever it wants in abundance. To produce a particular goods and service it has to forego all other options of the good and services that it can produce. This, however, leads to a prɔblem in the use of resources. Now making such a choice is the economic problem. The problem of choice is laced both by consumers as well as producers. Consumer faces the problem in a way that with limited income which goods or services should he buy and which he shouldn’t. On the other hand, the producer has to face the problem of where to allocate the limited resources for the production of goods and services, for example, if on a farm both wheat and sugarcane or both and in what proportion should he cultivate them both. However, the problem of choice also arises in case of technique of production. This is due to the selection of technique of production. When one should opt for labour-intensive technique for the production of a particular good and services and in what proportion should labour and capital be used. Had there been unlimited resources there would have no economic problem in any economy.
Q.2. Explain how scarcity leads to choice.
Ans. Scarcity of resources also leads to choice. For example, Neha has only Rs. 20 to spend but she wants to buy many things with it,.so she must choose which things she should buy in order to satisfy her wants. In this way a consumer faces the economic problem of unlimited wants and limited resources. Similarly producers also face the economic problem.as they need to decide to which alternative use they should put their scarce resources. This shows that the basic economic problem is also faced by both consumers and producers.
Suppose resources were not limited. Would it still lead to the economic problem? The answer to this question is that if resources were not scarce they could be used to satisfy all wants Hence, the basic problem of scarcity and choice would not arise. Scarcity of resources results in people making decisions about how best they would like to use these limited resources. Making the best use of resources is termed as economizing of resources. Economizing of resources does not mean being miserly about using resources, but using resources judiciously so that maximum benefit can be obtained from the scarce resources.
Q.3. Using examples explain the problem of what to produce and in what quantity.
Ans. What to produce and in what quantity?: Resources are scarce so they lead to the problem of what to produce and in what quantities of produce. An individual producer needs to decide on how to employ the resources that are available to her for production. For example, if Jaya, a farmer has a piece of land she needs to think about what crop she would like to produce on her land. Let us assume she can grow either sugarcane or wheat. Given that her land is limited, she needs to choose whether she wants to use the land to produce sugarcane or wheat or both. Once Jaya has taken this decision she needs to think what quantity of the crop that she would like to produce. For example, 10 quintals, 20 quintals or 50 quintals.
This problem of what to produce and in what quantities to produce is faced by all economies. An economy needs to choose whether it wants.to use its resources to produce consumer goods or producer goods. Alternatively, to what extent should luxury goods be produced in comparison to necessities or goods of mass consumption? An economy may also be faced with the question of how much of civilian goods to be produced and how much of defence goods to be produced. In other words, scarce resources require economies to decide the combination of goods and services they should produce.
The problem of what to produce and in what quantities to be produced can be solved by a.government that decides the allocation of resources in different areas of production. Alternatively, it can be solved based on the preferences of people in an economy and on the price of goods and services in market.
Q.4. Discuss the problem of ‘how to produce’.
Ans. How to produce?: All goods can be produced through different methods of production. Various methods of production require different combinations of factors of production. A technique of production could be either labour-intensive or capital-intensive.
Let us take some examples. On Jaya’s farm, she has the choice of using different combinations of labour and capital to produce her crop. If she chooses to do the ploughing, sowing, harvesting and threshing with her bullocks and employing people, then she is using a labour-intensive technique. On the other hand, if she uses machines such as plough, sower, harvester and thresher to do the same work, then she is using a capital-intensive technique of production. Similarly, in cloth production the use of handlooms is a labour-intensive technique of cloth to produce cloth whereas the use of powerlooms is a capital-intensive technique of production of cloth.
The solution of the problem of how to produce is based on the extent of output that is produced for a given level of resources. Any producer would like to maximize the level of output from the available resources.
Q.5. Explain the problem of fuller utilization of resources.
Ans. The problem of fuller utilization of resources:
Since resources are scarce they must not be wasted. Also they must be used judiciously to give maximum output. Thus, fuller utilization of resources has further two associated problems with it
(i) All resources must be utilized. and
(ii) Efficient utilization of resources.
These two issues are discussed below:
(i) All resources must be utilized: If resources are not utilized or are lying idle, it means that they are being wasted. Wastage of resources results in low output. For example, people may be unemployed. This means that human resources are being wasted. Similarly, when workers in a factory go on strike, capital resources lie idle and are wasted. If these resources are utilized, the output that can be produced in the economy shall rise. Thus, every economy must ensure that scarce resources are utilized and not left idle or unemployed.
(ii) Efficient utilization of resources: Since resources are scarce, they should not be under-utilized. Under-utilization of resources means that resources are not being used to their fullest capacity. For example, if a person finds a job in which he works only for 4 hours a day, but his capacity to work is 8 hours a day, then she is underutilized. In other words, the person is not being employed efficiently. Ifhe had a job for 8 hours a day, the output would increase. Underutilization of resources also results in wastage of resources. Hence, every economy must try and adopt techniques of production that ensure efficient utilization of resources.
6. How can resources groW in an economy?
Ans. Growth of resources: Human wants are unlimited. People continuously want more and more things. However, these ever increasing wants cannot be satisfied unless the resources that produce goods and services are increased. Thus, resources must grow to satisfy the continuo usly increasing wants in an economy. Resources can grow in an economy if:
(i) There are quantitative changes in the resources: Quantitative increase in resources occurs when the actual quantity of resources that is available in the economy increases. For example, when the population increases, then the quantity of human capital increases. Similarly, when more natural resources are found, it increases the availability of resources in an economy.
(ii) There are qualitative changes in resources: Qualitative changes in human capital occur due to better training and skill development. Qualitative changes in man-made capital occur when there is an improvement in technology. Under qualitative changes, the amount of resources available does not change but their productivity increases. Productivity is defined as the output per unit of input. For example, if labour gets trained, then the output from the same person can increase from, say, 10 units per hour to 15 units per hour. Here the quantity of resources remains the same at 1 unit of labour, but the output produced increases from 10 units to 15 units. Hence, we say that the productivity has improved due to better skill and training.
To conclude we can say that , growth of resources occurs when the physical availability of resources increases and/or there is technological upgradation or an improvement in the quality of resources.
Q.7. What is production possibility curve? Using a production possibility curve show the problem of inefficient utilization of resources.
Ans. Production possibility curve: A production possibility curve is a curve which depicts all possible combinations of two goods that an economy can produce with full and efficient utilization of given resources and a given state of technology. A production possibility curve assumes the following:
(i) Only two goods are produced.
(ii) Technology is given.
(iii) Resources are constant.
(iv) Resources are fully and efficiently utilized.
Inefficient utilization of resources: Any point on the production possibility curve represents full and efficient utilization of resources. If however, the economy functions at a point inside the production possibility curve, then it shows that there exists either under utilization or inefficient utilization of resources.
In Fig. 1., at point G, the economy is producing 2 lakh quintals of pulses and 6 million metres of cloth. Through a re-allocation of resources, the economy can do one of the following:
(a) increase the production of pulses to 3 lakh quintals and keep the production of cloth at 6 million metres (point D).
(b) increase the production of cloth to 10 million metres of cloth and keep the production of pulses at 2 lakh quintals (point C).
In both (a) and (b) above, the economy has been able to increase the overall production of two goods by either using some unemployed resources or using existing resources more efficiently. Therefore, we can conclude that at point G the economy was not using its available resources in the best possible manner.
Q.8. Draw a production possibility curve that shows growth of resources. How does growth of resources affect the output of an economy?
Ans. Production possibility curve showing growth of resources: Resources in any economy need to grow to satisfy the ever increasing wants of people. Growth of resources occurs when the physical quantum of resources increases or when there is a rise in the productivity level of resources. This implies that with resources growing, the output produced in an economy will increase.
As resources grow, the economy can produce more of both pulses and cloth. This is depicted by the curve UZ. At point U, the economy produces no output of pulses but the production of cloth has increased to 20 million metres. This is more than the output of cloth at point A. Similarly, at point Z, when the production of cloth is zero, the output of pulses is 5 lakh quintals. This is greater than the output of 4 lakh quintals when resources had not grown. All other output combinations show that the output of both pulses and cloth are higher in the production possibility curve UZ than in curve AE. This shows that growth of resources results in an outward shift of the production possibility curve, which results in higher levels of output.
Q.9. Discuss the problems of what and how to produce?
Ans. The problems of what and how to produce are determined by the free price mechanism.
(i) What to produce?: Let us consider the first question ‘what to produce’ and in what quantities to produce is faced by all economies. An economy needs to choose whether it wants to use its resources to produce consumer goods or producer goods. The commodities which do not command positive prices in the market would not be produced. Therefore, only those commodity with positive prices are to be produced and in such a way that would clear the markets.
The quantity in which a commodity is to be produced is set that level where demand equals supply. lf quality produced is more or less, then there will be disequilibrium in the market and price will fluctuate. Hence, to maintain stable equilibrium price it becomes necessary to make demand and supply equal. This rule is applicable for each commodity. In this way, first central problem is solved.
(ii) How to produce?: Choosing the technique of production relates to the problem of how to produce. Generally all goods can be produced through different methods of production. Various methods of production require combinations of factors of production. A technique of production could be either labour intensive or capital intensive. In a production process when more units of labour are used in proportion to capital, it is termed as a labour intensive technique. Alternatively, when the proportion of capital used is more than labour, the production process is called a capital intensive technique.
The choice of technique depends on the prices of the factors of production. That is, if labour is cheap and capital is expensive, a labour- intensive technique would be considered and vice-versa. The prices of labour and capital are determined by the demand for the supply of labour and capital respectively. In this way, the second problem will be solved.
Q.10. Draw a concave PPC by drawing a schedule?
Ans.
| Possibilities | Guns (Units) | Butter (Units) | MRT |
| A | 15 | 0 | – |
| B | 14 | 1 | 4 |
| C | 12 | 2 | 2 |
| D | 9 | 3 | 3 |
| E | 5 | 4 | 4 |
| F | 0 | 5 | 5 |
Q.11. Using a PPC explain inefficient utilisation of resources?
Ans.
(a) Full employment of resources: It represented along the PP curve. The economy has to decide that which combination of good X and good Y should be produced. It means that the economy has to decide that how should resources of production be allotted for the production of these two goods. The desired allocation of two goods must lie somewhere on the PP curve say A.
(b) Under-employment of Resources:
(i) The problem of Unemployment: If the actual combination of the two goods produced lie below the PP curve, it shows that the resources are not fully employed. If the resources are fully employed the combination must lie somewhere On the PP curve. For example, the combination at point U below the PP curve represents unemployment of resources.
(ii) The problem of inefficiency: Assuming that the resources are fully employed and if the actual combination, say at point I, produced still lies below the PP curve, it means that resources are inefficiently employed so any combination that lies below the PP curve after full employment of resources also indicates the problem of inefficient utilisation of resources.
Q.12. Using a PPC explain growth of resources.
Ans. Growth of resources: A PP curve is drawn on the assumption that resources are fixed. If the resources grow the PP curve shift to the right. For example, the PP curve represents growth of resources. The economy now can produce more of both the goods.
Q.13. Using a PPC explain efficient utilisation of resources?
Ans. Any point that lies either on the production possibilities curve or to the left of it is said to be an attainable point, meaning that it can be produced with currently available resources. Points that lie to the right of the production possibilities curve are said to be unattainable because they cannot be produced using currently available resources. Points that.lie strictly to the left of the curve are said to be inefficient, because existing resources would allow for production of more of at least one good without, sacrificing the production of any other good. An efficient point is one that lies on the PPC. At any such point, more of one good can be produced only by producing less of the other.
Q.14. Give three examples each about microeconomics and macroeconomics.
Ans.
| Basis | Micro-economics | Macro – economics |
| 1. Meaning | Micro – economics is that branch of economic theory which studies the behaviour of individual economic units of an economy, like household, firms, individual consumers and producers etc. | Macroeconomics is that branch of economic theory which studies the economy as whole, such as national income, aggregate employment, general price level, aggregate investment, aggregate consumption etc. Its main instruments are aggregate demand and aggregate supply. |
| 2. Scope | (i) Theory of Demand.(ii) Theory of Production.(iii) Theory of Distribution.(iv) Economics of Welfare. | (i) Theory of National Income.(ii) Theory of Employment.(iii) Theory of Money.(iv) Theory of Price Level.(v) Theory of Growth. |
| 3. Central issue | Allocation of resources to different uses is the central issue in microeconomics. | Raising the level of output and growth is the central issue in macro – economics. |
| 4. Degree of aggregation | Here, the degree of aggregation is small. For e.g. Here we study output behaviour of an industry which is aggregate of all the firms producing a particular commodity. | Here, the degree of aggregation is large. For e.g. Here we study national output which is aggregate of output of all the producing units in the economy. |
| 5. Assumption | Study of micro-economics assumes that macro variables remain constant. | Study of macro – economics assumes that micro variables remain constant. |
