Basic concepts in economics
Exercise
Q. 1. Choose the correct option:
1. Statements related to Economics:
a) Economics is a social science.
b) Concept of economics is derived from Greek word ‘Oikonomia’.
c) Economics is related to the study of human economic behavior.
d) Economics is related to management of the household.
Options:
1. a, b and c
2. a and b
3. b and c
4. a, b, c and d
Answer: 4) a, b, c and d
Explanation: All statements are correct. Economics is a social science studying human economic behavior, derived from the Greek word ‘Oikonomia’ meaning household management.
2. Statements incorrect with reference to Adam Smith’s definition:
a) Adam Smith is a classical economist.
b) Wealth of Nations is authored by Adam Smith.
c) Economics is the science of wealth.
d) Economics studies common man.
Options:
1. d
2. a, b and c
3. a and d
4. c and d
Answer: 1) d
Explanation: Adam Smith’s definition focuses on wealth and does not emphasize the study of the common man, making statement d incorrect. Statements a, b, and c align with his definition.
3. Key points in Lionel Robbins’ definition:
a) Wants are unlimited
b) Means are limited
c) Wants are not gradable
d) Means have alternative uses.
Options:
1. a and b
2. b and c
3. a, b and d
4. a, b, c and d
Answer: 3) a, b and d
Explanation: Robbins’ definition highlights unlimited wants, limited means, and alternative uses of means. Wants are gradable based on priority, so c is incorrect.
4. Statements related to wealth:
a) Wealth means anything which has market value and can be exchanged for money.
b) It is external to human being.
c) Wealth has no utility.
d) Wealth is scarce and exchangeable.
Options:
a, b and d
a, c and d
b, c and d
None of the above
Answer: 1) a, b and d
Explanation: Wealth has market value, is external, scarce, and exchangeable. Statement c is incorrect as wealth must have utility to satisfy human wants.
5. Aspects considered in National Income:
a) Final goods and services are included in national income.
b) Produced goods and services in a financial year are included in national income.
c) Double counting is avoided.
d) Value is considered as per market price.
Options:
1. a and c
2. b and c
3. a, b and d
4. a, b, c and d
Answer: 4) a, b, c and d
Explanation: National income includes final goods and services produced in a financial year, valued at market prices, with double counting avoided.
Q. 2. Complete the correlation:
1. Natural sciences: Exact sciences :: Social sciences: ____
Answer: Behavioural sciences
Explanation: Social sciences study human behavior, hence termed behavioural sciences.
2. Physics: Natural science :: Psychology: ____
Answer: Social science
Explanation: Psychology studies human mental behavior, a part of social sciences.
3. Arthashastra: Kautilya :: Wealth of Nations: ____
Answer: Adam Smith
Explanation: Wealth of Nations was authored by Adam Smith, just as Arthashastra was by Kautilya.
4. Necessity: Food :: Comforts: ____
Answer: Washing machine
Explanation: Food is a necessity; washing machine is a comfort, enhancing convenience.
5. Free goods: Value-in-use :: Economic goods: ____
Answer: Value-in-exchange
Explanation: Free goods have value-in-use (usefulness), while economic goods have value-in-exchange (market value).
Q. 3. Identify and explain the concepts from the given illustrations:
1. My father purchased a two-wheeler vehicle. This helps to fulfil my travel needs.
Concept: Economic good
Explanation: The two-wheeler is an economic good as it satisfies a human want (travel) and involves a monetary transaction.
2. A study of the annual income of the family of Ramesh
Concept: Personal income
Explanation: This refers to the total earnings received by Ramesh’s family from all sources, a microeconomic concept.
3. As per the data for financial year 2018-19, the country’s production of goods and services increased by 20%.
Concept: Economic growth
Explanation: An increase in the production of goods and services indicates economic growth, measured by national income.
4. Karuna’s mother saves 1000/- every month out of her given salary.
Concept: Saving
Explanation: Saving is the portion of income not spent on consumption, set aside for future needs.
5. Ram’s father utilized his provident fund amount to set up grocery store.
Concept: Investment
Explanation: Using savings (provident fund) to create capital assets (grocery store) is an example of investment.
Q. 4. Answer the following:
1. Explain the features of wealth.
Answer: Wealth in economics refers to anything with market value that can be exchanged for money. Its features include:
- Utility: Wealth must have the capacity to satisfy human wants, e.g., a refrigerator provides utility by preserving food.
- Scarcity: It must be limited in supply relative to demand, making it valuable, e.g., gold is scarce and thus considered wealth.
- Transferability: Wealth must be transferable from one person or place to another, e.g., jewellery can be sold or moved.
- Externality: It must be external to the human body, e.g., a car is wealth, but personal skills are not.
2. Explain the characteristics of human wants.
Answer: Human wants are desires for goods or services to achieve satisfaction. Their characteristics are:
- Unlimited Wants: Wants are endless; satisfying one leads to another, e.g., after buying a phone, one may want a laptop.
- Recurring Nature: Many wants reoccur, like the need for food daily, while others may be occasional.
- Vary with Age: Wants differ by age, e.g., a child wants toys, while an adult may want a car.
- Vary with Gender: Men and women have different wants based on needs, e.g., clothing preferences differ.
- Vary with Preferences: Individual tastes and habits influence wants, e.g., some prefer books, others gadgets.
- Vary with Seasons: Wants change with seasons, e.g., warm clothes in winter, cool drinks in summer.
- Vary with Culture: Cultural differences affect wants, e.g., food and dressing styles vary across cultures.
Q. 5. State with reasons whether you agree or disagree with the following statements:
1. All wants can be satisfied at a time.
Disagree
Reason: Human wants are unlimited, while resources (means) are limited. Due to scarcity, it’s impossible to satisfy all wants simultaneously, as prioritized wants are fulfilled first.
2. Human wants change as per the seasons and preferences.
Agree
Reason: Wants vary with seasons (e.g., umbrellas in monsoon) and individual preferences (e.g., some prefer tea, others coffee), as they are influenced by external factors and personal tastes.
3. Value-in-use and Value-in-exchange are the same.
Disagree
Reason: Value-in-use refers to a good’s usefulness (e.g., water’s necessity for life), while value-in-exchange is its market value (e.g., diamonds have high exchange value due to scarcity). The water-diamond paradox illustrates their difference.
Q. 6. Answer in detail:
1. Explain the basic concepts of macroeconomics.
Answer: Macroeconomics studies the economy as a whole, focusing on aggregate variables. Its basic concepts include:
- National Income: This measures the total monetary value of final goods and services produced in a country over a year, reflecting economic performance. It avoids double counting and uses market prices.
- Saving: Saving is the portion of income not spent on consumption, set aside for future needs, e.g., money saved in a bank.
- Investment: It involves using savings to create capital assets like machinery or buildings, contributing to economic growth.
- Trade Cycles: These are fluctuations in economic activity, with ups (inflation, rising prices) and downs (depression, falling prices), causing cyclical unemployment.
- Economic Growth: A quantitative increase in real national income over time, measured by national and per capita income, e.g., rising GDP.
- Economic Development: A qualitative concept combining economic growth with improvements in well-being, like better education and health, making it multidimensional and irreversible.
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