Chapter 1 - 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 the 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
Ans: 1) a, b and c
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
Ans: 1) d
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
Ans: 4) a, b, c and d
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 beings.
c) Wealth has no utility.
d) Wealth is scarce and exchangeable.
Options :
1) a, b and d
2) a, c and d
3) b, c and d
4) None of the above
Ans: 1) a, b and d
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
Ans: 3) a, b and d
Q. 2. Complete the correlation :
1) Natural sciences : Exact sciences : : Social sciences : ______
Ans: Abstract/Inexact Sciences
2) Physics : ______ : : Psychology : Social science
Ans: Natural Science
3) Arthshastra : Kautilya : : Wealth of Nations : ______
Ans: Adam Smith
4) Necessity : ______ : : Comforts : Washing machine
Ans: Food
5) Free goods : Value-in-use : : Economic goods : ______
Ans: Value-in-exchange
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.
Ans: Comforts:
A two-wheeler is not a basic necessity like food or shelter, but it makes travel more convenient and comfortable. It improves the quality of life by saving time and effort, so it is categorized under comforts.
2) A study of the annual income of the family of Ramesh
Ans: Microeconomics – Personal Income
Microeconomics deals with the study of individual units like specific firms, households, prices, wages, incomes, industries, or particular goods. In the given example, since it focuses on the income of individual families, it is a part of microeconomics and relates to Personal Income.
3) As per the data for financial year 2018-19, the country’s production of goods and services increased by 20%.
Ans: Economic Growth
Economic growth refers to the rise in a country’s real national income. In the given example, as there is an increase in the production of goods and services in the country, it is correctly described as economic growth.
4) Karuna’s mother saves ₹1000/- every month out of her given salary.
Ans: Savings
Savings refer to the portion of income that is set aside to meet future needs. In the given example, since Karuna’s mother is choosing not to spend a part of her income now, and is keeping it for the future, it is considered savings.
5) Ram’s father utilized his provident fund amount to set up a grocery store.
Ans: Investment
Investment means using savings to create capital assets. In this case, Mr. Ram’s father uses his provident fund savings to start a grocery store. This use of savings to start a business is known as investment.
Q. 4. Answer the following :
1) Explain the features of wealth.
Ans: Wealth is a basic concept of Micro Economics. Wealth refers to “anything which has market value and can be exchanged for money”. To be regarded as wealth, a commodity must possess the following characteristics:
1) Utility
A commodity must have the capacity to satisfy human wants for it to be considered as wealth.
E.g. furniture, refrigerator etc. can be considered as wealth.
2) Scarcity
A commodity must be scarce in supply in relation to its demand if it is to be considered as ‘wealth’.
E.g. all economic goods for which price is paid.
3) Transferability
A commodity should be transferable from person to person and place to place to be considered as ‘wealth’. It is possible to transfer a commodity from one place to another only when it is in material form or is tangible. E.g.: vehicle, jewellery etc.
Here, transfer can also mean the transfer of ownership. Therefore, even self-owned house property, land etc. can be considered as wealth.
4) Externality
A good can be transferred only if it is external to the human body.
E.g. bag, books, cars, etc.
2) Explain the characteristics of human wants.
Ans: Want is one of the basic concepts of Micro Economics. In simple words, want can be referred to as a need. In Economics, want denotes a feeling of ‘lack of satisfaction’. This feeling enables the individual to satisfy his want.
Human wants have grown in number for two basic reasons:
1) Desire for better living due to inventions and innovations.
2) Rise in population.
The following are characteristics of wants:
1) Wants are unlimited :
Wants not only arise again and again but they are also unending. If one want gets satisfied, another arises. Wants go on multiplying in number.
Example : Ravi buys a new mobile phone. After a few months, he feels the need for wireless earbuds. Later, he wishes to get a smartwatch to match his phone. Once that’s fulfilled, he starts wanting a better phone with more features.
2) Wants are recurring in nature :
Several human wants occur again and again, while some might be only occasional.
Example : Ravi needs tea every morning and evening — this is a want that happens daily. However, he buys a new pair of shoes only once every few months.
3) Wants differ with age :
Wants and their satisfaction differ with the age of a person.
Example : As a child, Riya wanted toys and chocolates. As she grew older, her wants changed to things like a smartphone and a laptop for studies.
4) Wants differ with gender :
Men and women want different goods according to their needs. Men and women both have personal needs and preferences which satisfy their needs.
Example : Men may prefer wallets, while women might prefer handbags.
5) Wants differ due to preferences :
Individual habits, tastes and preferences greatly influence the wants of people.
Example : One person may want to watch an action movie, while another may prefer a romantic movie.
6) Wants differ with seasons :
It is obvious that certain goods would be more in demand during certain seasons.
Example : We want an air conditioner during summer season whereas light cotton clothing during summers.
7) Wants differ due to culture :
A person’s culture and the way they are brought up also affect what they want. This can be seen in the clothes they wear, the food they eat, and how they spend their money.
Example : A person brought up in a traditional family might prefer wearing ethnic clothes like kurta-pajama or saree, while someone from a modern urban background might choose jeans and t-shirts.
Q. 5. State with reasons whether you agree or disagree with the following statements :
1) All wants can be satisfied at a time.
Ans: I disagree with the statement.
Human wants are never-ending. Once one want is fulfilled, another one emerges, and this cycle continues to grow. Some wants repeat themselves regularly, even after being satisfied once.
2) Humans want change as per the seasons and preferences.
Ans: Yes, I agree with the statement.
In economics, a want refers to the feeling of dissatisfaction or something missing. This feeling motivates a person to fulfill their needs. Human wants also change with the seasons. For example, a person may need woollen clothes during winter and an umbrella during the rainy season. Additionally, wants vary based on individual preferences, habits, and tastes.
3) Value-in-use and Value-in-exchange are the same.
Ans: No, I do not agree with the statement.
Value-in-use refers to the practical usefulness of a commodity. For example, air, water, and sunshine are highly valuable in use, as they are essential for survival and are generally free goods. On the other hand, value in exchange refers to the worth of a commodity when expressed in terms of money, which is its price. For example, a car, TV, or computer have value in exchange because they are bought and sold for a price, making them economic goods. Therefore, value in use and value in exchange are not the same.
Q. 6. Answer in detail :
1) Explain the basic concepts of macro economics.
Ans: In 1933, Sir Ragnar Frisch coined the terms ‘Micro Economics’ and ‘Macro Economics’. These terms are derived from the Greek words ‘Mikros’ and ‘Makros’, respectively. Macro means large or aggregate or total. Macro-Economics is therefore the study of aggregates covering the entire economy such as total employment, national income, national output, total investment, total savings, total consumption, aggregate supply, aggregate demand, general price level etc.
According to Kenneth E. Boulding, “Macro Economics deals not with individual quantities as such, but with the aggregates of these quantities, not with the individual incomes but with the national income, not with individual prices but with the general price level, not with individual output but with the national output.”
1) National Income :
In simple words, national income means the total income of the country. It reveals the total economic performance of a nation. In the economic sense, national income is the aggregate monetary value of all final goods and services produced in an economy during a year.
2) Saving :
Saving is that part of the income which is not currently spent on consumption. This part (of income) is usually set aside to be able to satisfy needs that arise in the future.
Example : If you earn ₹30,000 in a month and spend ₹25,000 on daily expenses, you save ₹5,000 for future needs, like emergencies or big purchases.
3) Investment :
It refers to creation of capital assets through mobilisation (collection) of savings.
Example :
(a) Buying a house to rent it out.
(b) Purchasing a car for a taxi service.
(c) Opening a shop using saved money to sell products.
4) Trade cycles :
Trade cycles are fluctuations in business. They are ups and downs in the overall economic activities. Ups and downs refer to fluctuations caused by inflation and depression, respectively. Inflation refers to a continuous rise in the general price level. Conversely, depression is a continuous fall in overall prices and slowdown of economic activity in general.
5) Economic growth :
The term economic growth has a ‘quantitative’ dimension. In simple words, economic growth means an increase in the real national income of the country, over a long period of time.
6) Economic development :
Economic development refers to economic growth plus progressive changes in certain important variables which determine the well-being of people like education, health and sanitation etc. The term economic development has a ‘qualitative’ dimension. It is a wider concept than economic growth.
IN BETWEEN THE CHAPTER
Find out :
Other Nobel Prize winners in Economics.
Ans: The Nobel Memorial Prize in Economic Sciences, established in 1969, has been awarded to numerous economists for their significant contributions to the field. Here are some notable laureates:
1970: Paul Samuelson (USA) – Recognized for his development of both static and dynamic economic theory.
1971: Simon Kuznets (USA) – Honoured for his empirical analysis of economic growth and its impact on social and economic structures.
1972: John Hicks (UK) and Kenneth Arrow (USA) – Awarded for their pioneering work in general economic equilibrium theory and welfare economics.
1976: Milton Friedman (USA) – Celebrated for his achievements in consumption analysis, monetary history, and theory.
1998: Amartya Sen (India) – Recognized for his contributions to welfare economics.
2001: George Akerlof, Michael Spence, and Joseph Stiglitz (USA) – Awarded for their analyses of markets with asymmetric information.
2005: Thomas C. Schelling (USA) and Robert J. Aumann (USA) – Honored for their work in game theory.
2019: Abhijit Banerjee, Esther Duflo, and Michael Kremer (USA) – Recognized for their experimental approach to poverty alleviation.
2023: Claudia Goldin (USA) – Awarded for her extensive research on women’s labor market outcomes.
2024: Daron Acemoglu, Simon Johnson, and James A. Robinson (USA) – Recognized for their studies on how institutions are formed and their impact on prosperity.
Find out :
Which of the following is ‘free good’ or ‘economic good’?
- Water in river
- Oxygen cylinder
- Sunshine
- Water processed for drinking
- Air
Ans: Free goods are those that are available in abundance and don’t command a price, while economic goods are limited in supply and have a price.
- Water in river – Free good (it is naturally available in abundance and doesn’t have a price in most cases).
- Oxygen cylinder – Economic good (it is a manufactured product that has a price and is bought/sold).
- Sunshine – Free good (it is available in abundance and doesn’t have a direct price).
- Water processed for drinking – Economic good (it has undergone treatment and processing, making it a scarce, priced resource).
- Air – Free good (it is freely available and abundant, with no direct cost for most of us).
Try This:
Prepare a list of commodities which satisfy the condition of physical transferability and notional transferability.
Ans: Physical transferability refers to commodities that can be physically moved from one place to another, such as food, clothing, or vehicles.
Notional transferability refers to commodities that can be transferred or traded without physical movement, like money, stocks, or intellectual property, where ownership or rights can change without the actual physical transfer of the item.
Commodities with Physical Transferability:
These are goods that can be physically moved from one place to another.
- Food Items (e.g., rice, vegetables, fruits)
- Clothing (e.g., shirts, trousers, jackets)
- Electronics (e.g., mobile phones, televisions, laptops)
- Furniture (e.g., tables, chairs, sofas)
- Cars and Vehicles (e.g., cars, bicycles, motorcycles)
- Books and Stationery (e.g., notebooks, pens, textbooks)
- Household Appliances (e.g., refrigerators, washing machines)
Commodities with Notional Transferability:
These are goods or assets that are not physically moved but can be transferred or traded based on a notion of value.
- Money (e.g., cash, bank balance, digital currencies)
- Stocks and Shares (e.g., equity shares, bonds)
- Insurance Policies (e.g., health, life, or property insurance policies)
- Intellectual Property (e.g., patents, copyrights, trademarks)
- Digital Products (e.g., software, digital media like music or e-books)
- Bank Loans (e.g., credit, mortgages, and other financial credits)
- Futures Contracts (e.g., contracts to buy or sell commodities at a future date)
Find out :
Which of the following terms is a part of micro economics or macro economics?
- Global poverty
- Price of a commodity
- Balance of payments
- Profits of a firm
- National income
Ans:
Micro economics: Price of a commodity, Profits of a firm.
Macro economics: Global poverty, Balance of payments, National income.