EEC-11
Book
1
Q: Define economics. Explain the usefulness
of study of economics. (Dec.’01) 20
Ans: According to earlier definitions economics
was linked with Wealth. Earlier economists like Adam Smith, J.E. Cairnes, J.B.
Say assigned wealth a key position in the study of economics. Later on A.
Marshall defined it as the science of material welfare. According to him, economics
is a study of mankind in the ordinary business of life; it examines that part
of individual and social action which is most closely connected with the
attainment and with the use of the material requisites of well being.
However, according to Robbins definition, it is the science which studies
human behaviour as relationship between ends and scarce means which have
alternative uses. Robbins claimed that his definition was analytical rather
than classificatory. Instead of discussing a certain type of human behaviour,
it focused its attention on human behaviour concerned with the utilization of
scarce resources to achieve unlimited ends. His definition lays three
fundamental propositions- “ends”, “scarce” means and “their alternative uses”
which constitute the basis of the structure of economic science. According to
modern definition i.e., in Keynesian terms, Economics is defined as the
study of the administration of scarce resources and of the determinants of
income and employment, In other words, it studies the cause of economic
fluctuations to see how economic stability could be promoted.
Economics has become one of the important
branches of social sciences. It is of great practical value in our daily life.
Economists study the subject not only to know the truth for its own sake, but
to find out a way for many economic and social problems of the society. In
economics, we study about things like prices, rent, wages, interest, profits
and taxation. All these affect every person one way or the other. The
study of Economics is divided by the modern economist into two parts – Micro
economics and macro economics:
Micro-economics occupies a very important place in the study of
economic theory. It has both theoretical and practical importance. From the
theoretical point of view, it explains the functioning of a free enterprise
economy. It tells us how millions of consumers and producers in an economy take
decisions about the allocation of productive resources among millions of goods
and services. It explains how through market mechanism goods and services
produced in the community are distributed. It also explains the determination
of the relative prices of the various products and productive services. It
explains the conditions of efficiency both in consumption and production and
departure from the optimum. As for practical importance, microeconomics helps
in the formulation of economic policies calculated to promote efficiency in
production and the welfare of the masses. Thus, the role of micro-economics is
both positive and normative. It not only tells us how the economy operates but
also how it should be operated to promote general welfare. Micro-economic
analysis is also applicable to the various branches of economics such as public
finance, international trade.
The macro approach of economics is useful in several ways: It is
helpful in understanding the functioning of a complicated economic system. It
gives a bird’s eyeview of a complicated economic system. For the formulation of
useful economic policies for the nation, macro-analysis is of the utmost
significance. Economic policies cannot be obviously based on the basis of the
fortunes of a single firm or even a single industry or the price of an
individual commodity. It is far more fruitful to regulate aggregate employment
and national income and to work out a national wage policy. Macro-analysis also
occupies an important place in economic theory in its pursuit of the solution
of urgent economic problems. These problems relate to aggregate output,
employment and national income. Economic theory seeks to explain fluctuations
in the level of national income, output and employment. Thus, we are able to
study the economy in its dynamic aspect. (635 Words)
Q: “Economics is a
science of choice making”. Explain this with the help of production possibility
curve. (Dec.’06),
(June’07) 20
Ans: Like the
individuals, a society as whole has limited resources. It has to decide what to
produce with the limited resource. It has to make choice about the quantity of
different commodities. Choice emanates from scarcity. Thus our choice is always
constrained or limited by scarcity of our resources. Suppose we have enough
resources we can produce all that we want.
All
such choices can be made with help of production possibility curve. The
production-possibility curve separates outcomes that are possible for the
society to produce from those which cannot be produced subject to the available
resources.
Let
us consider an economy with only so many people, so many industries, so much of
electricity and natural resources in deciding what shall be produced and how
these resources are to be allocated among thousands of different possible
commodities. How many industries are to produce steel? How much electricity to
be provided for agriculture; how much for industries?. Whether to provide free
electricity to farmer or not? Theses problems are complicated. Therefore, to
simplify let us assume there are only two goods to be produced - apples and
oranges.
Production Possibility Schedule
In
the schedule A and E are possibilities where the economy either produces 100
percent of apples or 100 percent of oranges alone. But the production
possibility curve assumes the production of two goods in different
combinations. Possibilities A, B, C ,D and E are such that the economy produces
4 units of apples and 0 units of oranges in possibility A, 3 units of apples
and 2 units of orange in possibility B, 2
units of apples
and 4 units of oranges in possibility C, 1 unit of apple and 6 units of oranges
in possibility D, 0 unit of apples and 8 units of oranges in possibility E.
Thus we see that
if we are willing to have more of oranges, we should be willing to sacrifice
more of apples. For instance, to reach possibility C from B, the economy
produces 2 units more of oranges by sacrificing 1 unit of apples. A full
employment economy must always in producing one good be giving up something of another.
This assumes of course, that at least some resources can be transferred from
one good to another. Such choice of one particular alternative involves
opportunity cost of foregoing the other. Hence, the decisions of the society
will be based on the comparison of costs and benefits of each alternative. In
doing so, both the monetary and social cost and benefit should be the basis of
any choice. Thus
the one that gives the maximum benefit at minimum cost to the whole society
should be the best choice.
Production
possibility schedule is shown graphically in the fig. Units of oranges are
measured horizontally and that of apples on the vertical axis. The curve A and
E depict the various possible combinations of the two goods - A, B, C, D, and
E. Thus a list of all the possible combinations of apples and oranges makes up
production possibilities. The production possibility curve is also known as transformation
curve or production possibility frontier. This curve shows the rate of
transformation of one product into the other when the economy moves from one
possibility point to the other.
All
possible combinations lying on the production possibility curve show the
combinations of the two goods that can be produced by the existing resources.
Any combination lying inside the production curve such as U in the figure
indicates that resources are not being fully employed in the best-known way.
Any point outside the production possibility frontier, such as L implies that
the economy does not have adequate resources to produce this combination. But a
shift outside the production possibility frontier certainly indicates economic
development. This is possible by technological advancement and increase in
supply of factors of production. (641 Words)
Production Possibility Curve (Dec.’07) 3
A production possibilities curve (PPC) shows the various combinations
of two goods (X, X2) which the firm can produce using
technically most efficient methods of production and allocating resources in an
economically efficient manner, with its resources being
always fully utilised. It shows, given scarcity of resources and given technology, the maximum output produced of one good, given the
output of the other good. It shows how one good can be transformed into another
good not physically
but via the transfer or shifting of resources from one line of use to another. It shows how food is transformed into
clothing or from clothing to food by diverting resources from one use to
another. Hence PPC is also called the transformation curve. (121 Words)
Positive versus Normative Economics (June’07) 5
Positive economics can be defined as a body of systematized
knowledge concerning what is, while normative economics tries to develop
criteria for what ought to be. Positive economics is mainly concerned with the
description of economic events and it tries to formulate theories to explain
them. But in normative economics, we give more importance to ethical judgments.
Normative economics is concerned with the ideal rather than the actual
situations. Statements on economics may be classified into positive statements
and normative statements. If there is disagreement over a statement, we can
find out whether it is true or false by verifying facts. But when there is
disagreement over a normative statement, we cannot settle the issue simply by
appealing to facts. The questions, “what policies Government should follow to
reduce unemployment? What should it do to reduce inflation? are all questions
in positive economics. On the other hand, question like, “should the government
be more concerned about unemployment than inflation?”, then it is a normative
one. Economists like Lionel Robbins believe that we must leave normative
questions, such as what ought to be done to political and moral philosophy and
that we must study and analyse only positive questions. (198
Words)
Explain Scarcity
is the root cause of all economic problems (Dec.’00) 5
According to Robbins, an economic problem will arise only when
there is scarcity, but it may arise during times of abundance as well. For
example, the great depression of 1930s was caused not so much by scarcity but
by plenty. That is why the world depression was described as poverty in the
midst of plenty. In spite of the above criticisms, we have to note that most of
the economists have accepted the definition of Robbins because it emphasizes
scarcity and choice which are two important facts of life under all economic,
political and legal systems. It is true that there have been improvements in
the methods of production because of technological advancements. But scarcities
are always with us. That is why we say economics is
the science of scarcity and it is the root cause of all economic problems.
(140 Words)
Stock Variable and Flow Variable (June’07) 5
Anything, which
varies, is a variable, (For e.g. price, quantity demanded and supplied, income,
investment, exports, imports, employment, cost of production, profits etc.).
However, time period is important to observe the variation. I may be a week, a
month, or a year or a longer period of time. Now in-each of these periods the
relevant variable may be a stock variable or a flow variable. Both stocks and
flows are expressed at a precise moment in time. A flow variable has both a
time dimension and a time reference, while a stock variable has only a time
reference. Though both are measured at fixed points in time, flow variables are
measured in "temporally determined units". In other words, flows are
always expressed per unit of time. While stocks are always expressed at a point
in time. For instance, capital is a stock variable, since it has no time
dimension but has only time reference, like stock of capital on 1st January
2000. Investment, however, is a flow variable since it is expressed per unit of
time, like 10 per cent per annum. (182 Words)
Partial
equilibrium (Dec.’99) 2
A partial equilibrium is a type of economic equilibrium, where the clearance
on the market of some specific goods is obtained independently from prices and
quantities demanded and supplied in other markets. In other words, the prices
of all substitutes and complements, as well as income levels of consumers are
constant. Here the dynamic process is that prices adjust until supply equals
demand. It is a powerfully simple technique that allows one to study equilibrium, efficiency
and comparative statics.
(79 Words)
Partial versus General Equilibrium (June’07) (Dec.’02) 5
A partial
equilibrium is a type of economic equilibrium, where the clearance
on the market of some specific goods is obtained independently from prices and
quantities demanded and supplied in other markets. In other words, the prices
of all substitutes and complements, as well as income levels of consumers are constant.
Here the dynamic process is that prices adjust until supply equals demand. It
is a powerfully simple technique that allows one to study equilibrium, efficiency
and comparative statics.
General equilibrium theory is a branch of theoretical economics.
It seeks to explain the behavior of supply, demand and prices in a whole
economy with several or many markets. It is often assumed that agents are price
takers and in that setting two common notions of equilibrium exist: Walrasian
(or competitive) equilibrium, and its
generalization; a price equilibrium with transfers. General equilibrium tries
to give an understanding of the whole economy using a "bottom-up"
approach, starting with individual markets and agents. Macroeconomics,
as developed by the Keynesian economists, focused on a
"top-down" approach, where the analysis starts with larger
aggregates, the "big picture". Therefore general equilibrium theory
has traditionally been classed as part of microeconomics. (194 Words)
Macro-economics (Dec.’06) 2
Macro-economics is defined as that branch of economic analysis which
studies the behaviour of not one particular unit, but of all the units combined
together. It is study of the economics as a whole. The overall conditions of an
economy say, total production, total consumption, total savings and total
investment are studied under it. The fields covered by Macro-economics are-
Theory of Income, Output and Employment, Theory of Prices, Theory of economic
growth and Macro theory of distribution. (78 Words)
(Extra Questions)
Micro-economics
Micro-economics
occupies a very important place in the study of
economic theory. It has both theoretical and practical importance. From
the theoretical point of view, it explains the functioning of a free enterprise
economy. It tells us how millions of consumers and producers in an economy take
decisions about the allocation of productive resources among millions of goods
and services. It explains how through market mechanism goods and services
produced in the community are distributed. It also explains the determination
of the relative prices of the various products and productive services. It
explains the conditions of efficiency both in consumption and production and
departure from the optimum. As for practical importance, microeconomics helps
in the formulation of economic polices calculated to promote efficiency in
production and the welfare of the masses. Thus, the role of micro-economics is
both positive and normative. It not only tells us how the economy operates but
also how it should be operated to promote general welfare. Micro -economic
analysis is also applicable to the various branches of economics such as public
finance, international trade. (179 Words)
Q: Show the difference between static and dynamic equilibrium.
Ans: Static equilibrium, relates to the
equilibrium of a static or stationary economy. A stationary economy is a sort
of closed economy where there is absolutely no incentive for change on
the part of any organism whether it is production or population or any other
organism. Population is constant in number as well as in composition.
Production is also constant in the sense that the total stock does not change
at all, the rates of production and consumption being constant and equal to
each other. Prof. Boulding offers a mechanical analogy of static equilibrium in
the form of a ball rolling at a constant speed or better still, in a forest in
equilibrium where trees sprout, grow, and die, but where the composition of the
forest as a whole remains unchanged. It is also pointed out that the concept of
static equilibrium has hardly any validity in western capitalism. During its
long history of two hundred years, western capitalism, at no stage, exhibited
any tendency towards static equilibrium. Some backward economies, on the other
hand, like those of India and China in the past, showed definite symptoms of
stationariness and stagnation. The concept of static equilibrium, therefore, is
no mere form concept. It stands realized historically.
Dynamic
equilibrium
relates to a progressive economy which is the opposite of a stationary economy.
The incentive to change is to be found in all the organisms of the economy.
These organisms do undergo changes but the point to be noted is that the
various organisms change at the same rate (whether in the direction of an
increase or decrease). "An economic system might be said to be in dynamic
equilibrium if its total stock, including both things and people, changed at a
constant rate (per cent per annum), and if the rates of production and
consumption of all items of the stock increased at the same rate." The
point then to be noted is that the various organisms must change (whether in
the upward or in the downward direction), and secondly, they must change at a
uniform rate. If this meaning or dynamic equilibrium is accepted, then it
becomes clear how very artificial and unrealistic this concept becomes. The
organisms do change but they need not necessarily change at a uniform rate. As
such, this concept is of little importance in interpreting "economic
change because actual society never conforms to it. The concept of static
equilibrium, on the other hand, is realistic and a historical possibility. But
there is no reason to expect that any economy shall ever be in dynamic
equilibrium. (428 Words)
Equilibrium
In economics
equilibrium is said to exist in a market where the forces operating from the
side of potential buyers exactly offsets the forces operating from the side of
potential sellers. This means that when quantity supplied balances (matches)
the quantity demanded, the market for that commodity reaches equilibrium. (49
Words)
Sir plz provide me the note sof other blocks of eec11 as well it is so very useful amd easy to study. My exam is on 21st dec.. sir plz plz provide me with ur notes
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