University of Delhi

The three central problems of an economy are scarcity, choice, and resource allocation.

The price mechanism plays a crucial role in an economy by allocating resources through the interaction of supply and demand, thus determining the prices of goods and services.

Opportunity cost is the cost of forgoing the next best alternative when making a decision. It is related to the PPC as the PPC illustrates the trade-off between two goods, showing the opportunity cost of producing one good in terms of the quantity of the other good that must be given up.

The government plays a role in the economy through various means such as regulation, fiscal and monetary policies, and provision of public goods and services, aiming to address market failures and promote economic stability and growth.

The concept of demand is significant in economics as it reflects consumer preferences and behavior, influencing production decisions and resource allocation in the market.

Scarcity refers to the limited availability of resources in comparison to unlimited wants and needs. It forces individuals, businesses, and governments to make choices about how to allocate resources efficiently. This impacts the economy by influencing production, consumption, and distribution decisions, leading to the need for economic systems and principles such as opportunity cost, supply and demand, and resource allocation.

The price mechanism, also known as the market mechanism, plays a crucial role in an economy by coordinating the activities of buyers and sellers through the interaction of supply and demand. Prices act as signals that convey information about the scarcity of goods and services, leading to efficient allocation of resources. It also influences consumer behavior and production decisions, ensuring that resources are utilized effectively.

Opportunity cost refers to the value of the next best alternative foregone when a choice is made. It is closely related to the production possibilities curve (PPC) as the PPC illustrates the trade-offs between the production of different goods given limited resources. The opportunity cost is represented by the slope of the PPC, showing the quantity of one good that must be given up to produce more of the other.

The government intervenes in an economy through various policies and regulations aimed at addressing market failures, promoting economic stability, and achieving social welfare goals. It plays a role in providing public goods, regulating externalities, redistributing income, and managing macroeconomic variables such as inflation and unemployment. Additionally, the government implements fiscal and monetary policies to influence aggregate demand and supply, aiming to achieve sustainable economic growth.

Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period. It is a fundamental concept in economics, influencing the pricing, production, and distribution of goods and services. Understanding demand is crucial for businesses to make pricing and production decisions, and it also impacts the allocation of resources within an economy.