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Questions and Answers

What is the focus of micro-economics?

The study of economic policies only.

The study of the economy as a whole.

The study of international trade only.

The study of thousands of units of the economy. (correct)

What do we study in micro-economics?

Only consumption and distribution.

The economy in its entirety.

Equilibria of thousands of units of the economy. (correct)

Only production and distribution.

Who defined micro-economics as looking at the economy through a microscope?

Prof. Smith.

Prof. Davis.

Prof. Johnson.

Prof. Lerner. (correct)

What is the scope of micro-economics?

Production, consumption, distribution, and economic welfare. Signup and view all the answers

What is the limitation of micro-economics?

It does not throw any light on collective activity. Signup and view all the answers

What is macro-economics concerned with?

Aggregates and averages. Signup and view all the answers

What is the study of macro-economics?

The study of economic system as a whole. Signup and view all the answers

What does macro-economics study?

Total demand, supply, output, income, and so on. Signup and view all the answers

What is the assumption made about consumers in economic theories?

They try to maximize their satisfaction with minimum possible expenditure. Signup and view all the answers

What gives rise to the economic problem?

Limited resources in relation to their demand. Signup and view all the answers

What is essential for economic prosperity?

Political stability. Signup and view all the answers

What do applied economists study?

Statistical and other evidence to discover if it appears to support particular economic theory. Signup and view all the answers

What is the scope of economics centered around?

Wants - efforts - satisfaction. Signup and view all the answers

What is the starting point of the economic problem?

Human wants. Signup and view all the answers

What is the goal of businessmen according to economic theories?

To maximize their profits. Signup and view all the answers

What is economics concerned with?

One aspect of human beings, relating to their daily activities. Signup and view all the answers

What does an indifference curve represent?

The different combinations of two goods yielding the same level of satisfaction Signup and view all the answers

What is the assumption of ICs approach based on?

Rationality Signup and view all the answers

What is the characteristic of points on an indifference curve?

They yield the same level of satisfaction Signup and view all the answers

What is the difference between points A, B, and C on an indifference curve?

The quantity of 'x' and 'y' goods differ at each combination Signup and view all the answers

What does the production-possibility frontier (PPF) show?

The maximum amounts of production that can be obtained by an economy Signup and view all the answers

What determines the combination of goods a consumer prefers?

The consumer's tastes and preferences Signup and view all the answers

What is the significance of points outside the production-possibility frontier?

They are infeasible or unattainable Signup and view all the answers

What happens when a consumer moves from point A to point C on an indifference curve?

They consume more of 'x' and less of 'y' Signup and view all the answers

What is the significance of points inside the production-possibility frontier?

They indicate that the economy has not attained productive efficiency Signup and view all the answers

What is the shape of an indifference curve?

It is a curve Signup and view all the answers

What is the significance of an indifference curve?

It shows the different combinations of goods yielding the same level of satisfaction Signup and view all the answers

How does the production-possibility frontier relate to different goods?

It applies to any choice of goods Signup and view all the answers

What is the relationship between resources and goods production?

The more resources used for one good, the less will be available for another Signup and view all the answers

What is the purpose of the production-possibility frontier?

To show the maximum amount of goods that can be produced Signup and view all the answers

What does the production-possibility frontier represent?

The menu of goods and services available to society Signup and view all the answers

What is the assumption of the production-possibility frontier?

That the quantity of inputs and state of technology are given Signup and view all the answers

What is the condition for a consumer to be in equilibrium?

When the consumer buys a combination of goods that gives him maximum satisfaction. Signup and view all the answers

What is the assumption that the consumer has limited money income spent on?

'x' and 'y' goods and services. Signup and view all the answers

What is the implication of the consumer being rational?

The consumer knows the market conditions and tries to maximize his satisfaction. Signup and view all the answers

What is the shape of the IC curve at the point of equilibrium?

Convex Signup and view all the answers

What is the representation of the slope of the price line?

$Px/Py$ or $Py/Px$ Signup and view all the answers

What is the condition for equilibrium in terms of MRSxy?

MRSxy = Px/Py or Py/Px Signup and view all the answers

What is the first condition for equilibrium?

The price line is tangent to the highest possible IC. Signup and view all the answers

What is the purpose of the consumer's IC map?

To show the consumer's scale of preference. Signup and view all the answers

Study Notes

Micro-Economics

Micro-economics is the study of individual economic units, such as firms and individuals, and their interactions in the economy.
It involves the analysis of equilibria of thousands of units in the economy.
According to Prof. Lerner, micro-economics involves studying the economy through a microscope to understand how individual units contribute to the overall economic organization.

Scope of Micro-Economics

Micro-economics includes the study of production, consumption, and distribution of goods and services.
It aims to maximize social welfare by achieving the highest efficiency in economic activities.
It also studies the circular flow of income and its constituents.

Limitations of Micro-Economics

Micro-economics does not provide insight into collective economic activity.
The analysis is based on unrealistic assumptions, which may lead to doubtful conclusions.

Macro-Economics

Macro-economics deals with aggregates, such as total demand, supply, output, and income.
It studies the economy as a whole and is concerned with aggregates and averages.
It assumes that consumers and businesses behave rationally, trying to maximize their satisfaction and profits respectively.

Assumptions of Economics

The first group of assumptions relates to economic rationality, where consumers and businesses make rational decisions.
The second group of assumptions relates to the physical structure of the world, including natural conditions and limited resources.
The third group of assumptions relates to social and economic institutions, including political stability.

Economic Problem

The economic problem begins with human wants and ends with satisfaction of those wants.
It is concerned with the study of human behavior in relation to unlimited wants and limited means.

Production-Possibility Frontier (PPF)

The PPF represents the maximum amounts of production that can be obtained by an economy, given its technological knowledge and quantity of inputs available.
It shows the menu of goods and services available to society.
The PPF can be used to analyze trade-offs between different goods and services.

Indifference Curve (IC)

An IC is a curve that represents all combinations of two goods that yield the same level of satisfaction to a consumer.
It is a conceptual curve that shows the consumer's scale of preference.
The IC is used to analyze consumer behavior and choices.

Assumptions of ICs Analysis

The ICs approach assumes rationality, limited money income, divisibility of goods, and constant prices.
The consumer is assumed to have a IC map exhibiting their scale of preference.

Consumer's Equilibrium

A consumer is said to be in equilibrium when they are buying a combination of two goods that leaves them with no tendency to rearrange their purchases.
The consumer attains equilibrium at a point where the price line is tangent to the highest possible IC.
The slope of the price line and IC curve must be the same at the point of equilibrium.

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