Economic Qs

Q3. Define and explain Micro & Macroeconomics?
Microeconomics
 is the part of economics concerned with decision making by individual
customers, workers, households, and business firms
 At this level of analysis, we observe the details of their behavior under a
figurative microscope
Microeconomics
We measure
 The price of a specific product
 The number of workers employed by a single firm
 The revenue or income of a particular firm or household
 The expenditures of a specific firm, government entity, or family
 In microeconomics, we examine the sand, rocks, and shells, not the
beach
Macroeconomics
 Examines the performance and behavior of the economy as a whole
 It focuses its attention on
 Economic growth
 The business cycle
 Interest rates
 Inflation
 The behavior of major economic aggregates such as the government,
household, and business sectors
 An aggregate is a collection of specific economic units treated as if they
were one unit.
Macroeconomics
 Macroeconomics speaks of such economic measures as
 Total output
 Total employment
 Total income
 Aggregate expenditures, and
 The general level of prices in analyzing various economic problems
Q4. Briefly explain the critical and closely interrelated features of economic
perspective?
► Scarcity and Choice
► Purposeful Behaviour
► Marginal Analysis: Comparing Benefits and Costs
A. Scarcity and Choice

 Resources are limited, leading to choices about what to produce or
consume since we can't have everything. This scarcity restricts
options and demands choices
 Because we “can’t have it all,”
 we must decide what we will have and what we must forgo.
 Economic Perspective: Emphasizes the idea that "there is no free
lunch," meaning every action has a cost, whether individual or
societal.
 Opportunity Costs: Represent the benefits missed when choosing
one option over another, as resources used for one purpose could
have been used for something else.
 Society's Cost: All resources are owned by individuals or society, so
ultimately, society bears the cost of using resources for specific
purposes.
B. Purposeful Behaviour:
Behaviour that has a particular and recognized goal in mind, aimed
at achieving that goal. The goal may be static, represented as endpoints,
or dynamic, focused on the process and time involved. Economics
operates on the assumption of "rational self-interest," where individuals
seek opportunities to enhance their utility in terms of pleasure,
happiness, or satisfaction derived from consuming goods or services.
C. Marginal Analysis:
o Economic focus on comparing marginal benefits and costs.
o "Marginal" means extra, additional, or a change in.
o Decisions involve changes from the existing state (status quo).
o Utilized primarily for decision-making in economics
Q-5 Explain “The Law of Diminishing Marginal Utility”
 The Law of Diminishing Marginal Utility
 Marginal utility: The increase in satisfaction from
consuming one additional unit of the good
 The Law of Diminishing Marginal Utility states that as each
additional unit of a good is consumed, the amount of
marginal (incremental) utility will decrease
 The consumer will compare
 The additional (marginal) utility to be achieved by
consuming one more unit of the good,
 To the additional (marginal) utility that must be given up
(buying power) in order to obtain the good
Q-6 Briefly explain Ceteris paribus assumption?

Ceteris paribus- Other things equal assumption
► In constructing their theories, economists use the ceteris paribus or other-
things-equal assumption
► The assumption that factors other than those being considered do not
change
► They assume that all variables except those under immediate consideration
are held constant for a particular analysis
► Example, consider the relationship between the price of Pepsi and the
amount of Pepsi that is purchased
► Ceteris paribus- Other things equal assumption
► Assume that of all the factors that might influence the amount of Pepsi
purchased
► Example, the price of Pepsi, the price of Coca-Cola, and consumer incomes
and preferences), only the price of Pepsi varies
► This is helpful because the economist can then focus on the relationship
between
► The price of Pepsi
► Purchases of Pepsi in isolation without being confused by changes in other
variable
Q-7 Briefly explain “Generalizations” when applying economic principles?
Generalizations:
► Economic principles are generalizations relating to economic behavior or to
the economy itself
► Economic principles are expressed as the tendencies of typical or average
consumers, workers, or business firms
► Example, economists say that consumers buy more of a particular product
when its price falls
► Economists recognize that some consumers may increase their purchases
by a large amount, others by a small amount, and a few not at all
► This “price-quantity” principle, however, holds for the typical consumer and
for consumers as a group
Q-8 Briefly discuss factors of production?
Resource categories (Factors of production):
Land
Labor
Capital
Entrepreneurial Ability
 Scarce Resources
Land: Includes all land and natural resources used in the production process
Labor: Physical actions and mental activities that people contribute to the
production of goods and services
Capital: All manufactured aids used in producing consumer goods and
services
Entrepreneur functions
The entrepreneur takes the initiative in combining the
resources of land, labor, and capital to produce a good or a service
Acts both as a sparkplug and a catalyst
The entrepreneur is the driving force behind production
The agent who combines the other resources in what is hoped will be a
successful business venture
The entrepreneur makes the strategic business decisions that set the course
of an enterprise
The entrepreneur innovates
He or she commercializes
New products
New production techniques
Even new forms of business organization
The entrepreneur bears risk
Innovation is risky, as nearly all new products and ideas are subject to the
possibility of failure or success
Progress would cease without entrepreneurs
They are willing to take on risk by devoting their time, effort, and ability
They are prepared to invest their own money and the money of others to
commercializing new products and ideas that may enhance society’s standard
of living
 Because land, labor, capital, and entrepreneurial ability are combined to
produce goods and services, they are called the factors of production, or
simply “inputs”
Q-9 Briefly explain 4 different structures of economy?

Structure of the economy
Traditional Economic System
The traditional economic system is the most basic
There is no involvement by the government, so people are largely left to
conduct economic activities without influence
It is a very basic system that relies on basic customs and traditions
Two current examples of a traditional or custom based economy are Bhutan
and Haiti
 Socialism – Command economic system
A command economic system or a socialist or communist system
Under this structure, power is centralized either to the government or a sole
ruler
They decide the rules of the game and command how economic interactions
take place
Examples of command economies include Belarus, Iran, North Korea
 Capitalism – Market economic system
A capitalist economic system is where the means of production is owned and
controlled by private enterprise rather than the government
Instead of government dictating what goods and services should be
produced, these are driven by supply and demand mechanisms
Pure Capitalist economic system does not exist
Mixed Economy
A mixed economy is one of the most common forms of economic systems in
the world today
We see it in many developed nations such as the US, Japan, and throughout
most of Europe
It is simply a mixture of capitalist and command economic systems
Example of economic system UK, US, and European Countries etc.
Q10.Like the physical and life sciences, economics relies on the scientific
method. Describe the critical elements of this procedures?
Sure, here are the important points from the text:
Scientific Procedure:
Observe real-world behavior and outcomes.
Formulate a cause-and-effect explanation (hypothesis).
Test the hypothesis by comparing predicted and actual outcomes.
Accept, reject, or modify the hypothesis based on results.
Continue testing the hypothesis against facts.
A hypothesis evolves into a theory with favorable results.
Well-tested theories become economic laws or principles.
Economic laws predict the effects of actions.
Laws and principles are combined into models, simplified representations of
economic systems or markets.
Q11. Discuss the two economics systems under which nations allocate their
resources. Briefly explain each.?
 Socialism – Command economic system
A command economic system or a socialist or communist system
Under this structure, power is centralized either to the government or a sole
ruler
They decide the rules of the game and command how economic interactions
take place
Examples of command economies include Belarus, Iran, North Korea
Capitalism – Market economic system
A capitalist economic system is where the means of production is owned and
controlled by private enterprise rather than the government
Instead of government dictating what goods and services should be
produced, these are driven by supply and demand mechanisms
Pure Capitalist economic system does not exist
Q-12 Illustrate a budget line with combination of movie tickets and
paperback books attainable with an income of $120 (price of movie ticket
$20 & Book $10). Also list down ideas budget line illustrates.
 A Budget Line- Example
To understand the idea of a budget line, suppose that you received an
Amazon gift card as a birthday present
The $120 card is soon to expire
You go online to Amazon.com and confine your purchase decisions to two
alternatives:
Movies
Paperback books
Movies are $20 each and paperback books are $10 each
Q-13 Briefly discuss “Individual’s Economizing Problem”?
Individual’s Economizing Problem
 Limited Income
We all have a finite amount of income, even the wealthiest among us
Even Bill Gates must decide how to spend his money- majority of us have
much more limited means
Our income comes to us in the form of
Wages
Interest
Rent, and Profit
Although we may also receive money from government
programs or family members
 Unlimited Wants
 For better or worse, most people have virtually unlimited wants
 We desire various goods and services that provide utility
 Our wants extend over a wide range of products, from
Necessities (for example, food, shelter, and clothing)
Luxuries (for example, perfumes, yachts, and sports cars)
 Some wants such as basic food, clothing, and shelter have biological roots
 Other wants, for example, specific kinds of food, clothing, and shelter, arise
from the conventions and customs of society
Services, as well as goods, satisfy our wants
(A custom is about habit, something that happens a lot
A convention is about agreement, that it is accepted, formally or informally)
A Budget Line
We can clarify the economizing problem facing consumers by visualizing a
budget line (or, more technically, a budget constraint)
It is a schedule or curve that shows various combinations of two products a
consumer can purchase with a specific money income
To understand we assume two products, the analysis to the full range of
products available to consumers
Economizing
Problem
The budget line illustrates
several ideas
Attainable and Unattainable
Combinations
Trade-Offs and Opportunity
Costs
Choice
Income Changes
Q-14 Briefly explain “Society’s Economizing Problem”?
Scarce Resources
Society has limited or scarce economic resources
This includes all natural, human and manufactured resources that go into the
Land
Labor
Capital
Land: Includes all land and natural resources used in the production process
Labor: Physical actions and mental activities that people contribute to the
Capital: All manufactured aids used in producing consumer goods and
services
Investment
Refers to spending that pays for the production and accumulation of capital
goods
Capital
We have two types of goods
Consumer goods
Satisfy wants directly
Capital goods
Satisfy wants indirectly by aiding the production of consumer goods
Economists do not count money as an economic resource because money
produces nothing
Money is just a means for purchasing goods and services, including capital
goods
The entrepreneur takes the initiative in combining the
resources of land, labor, and capital to produce a good or a service
of an enterprise
New products
of living
simply “inputs”
Q-15 Define an “Entrepreneur”? List its characteristic and skills.
Society’s Economizing Problem
The entrepreneur takes the initiative in combining the resources of land,
labor, and capital to produce a good or a service
of an enterprise
New products
of living
simply “inputs”
Q-16 Describe & compare Positive and Normative economics?
Positive economics
Example: "An increase in taxes leads to a decrease in consumer spending."
Normative Economics:
Example: "The government should implement tax cuts to stimulate economic
growth."
Q-17 List participants in a market system?
A Market System
 The participants in a market system include:
 Direct market players such as
 Producers
 Buyers/Customers
 Consumers who drive economic activity in the market
 Suppliers of supporting goods and services such as
 Finance
 Equipment
 Business consulting
Entities that influence the business environment
Q-18 List characteristics of the “Market System”?
1. Private property
2. Freedom of enterprise
3. Freedom of choice
4. Self-interest
5. Competition
6. Market and prices
7. Technology and Capital Goods
8. Specialization
9. Use of money
10.Active, but Limited, Government
Q-19 Discuss complex capital goods which market system encourages for
extensive use and rapid development?
The market system encourages extensive use and rapid development of
complex capital goods:
 Tools
 Machinery
 Large-scale factories
 Facilities for storage- warehousing
 Communication
 Transportation
 Marketing
Q-20 Describe how specialization is explained in term of division of labor,
support your answer with examples?
Specialization within the division of labor means that individuals focus on
specific tasks based on their abilities and skills. This allows them to efficiently
use their talents and fosters skill development through focused practice. For
example, Muhammad Rizwan specializes in cricket, while Aima Baig specializes
in singing. This optimized distribution of talents saves time by avoiding task
switching and ensures that individuals excel in their respective areas of
expertise within the market system. In a bakery, the bread baker specializes in
making bread, the cake decorator focuses on decorating cakes, and the pastry
chef specializes in making pastries. This specialization within the division of
labor ensures efficient production and high-quality products.
Q-21 List five fundamental questions of a market system?
The Five Fundamental economic Questions
 What goods and services will be produced?
 How will the goods and services be produced?
 Who will get the goods and services?
 How will the system accommodate change?
 How will the system promote progress?
Q-22 Briefly explain virtues of the market system?
 Efficiency: Efficient use of resources in producing goods and services most
wanted by society, promoting innovation and adopting efficient production
techniques.
 Incentives: Encourages skill acquisition, hard work, and innovation, leading
to higher production, incomes, and living standards. Rewards
entrepreneurship and successful innovations.
 Freedom: Emphasizes personal freedom, coordinating economic activity
without coercion, allowing freedom of enterprise and choice, and enabling
individuals to pursue self-interest within the system's rewards and
penalties.
Q-23 Identify and explain reasons of “The Demise of Command Systems”?
 Command system (Soviet Union, Eastern Europe, and China) was a
failure because the system encountered two insurmountable problems
The coordination problem
 Set output targets for all goods – setting a factory for cars
 The central planners had to coordinate the millions of individual
decisions by
 Consumers
 Resource
 Suppliers
 Businesses
 The coordination problem became more difficult as the economies
Expanded
The incentive problem
 Central planners determined the output mix
 They misjudge how many automobiles, shoes, shirts, and chickens were
wanted at the government-determined prices
 It created, persistent shortages and surpluses of those products
 No adjustments for surplus or shortage
 The command systems of the former Soviet Union and China before its
market reforms also lacked entrepreneurship
 Central planning did not trigger the profit motive, nor did it reward
innovation and enterprise (endeavor)
Q-24 Illustrate “The Circular Flow Model” briefly explain how simplified
economy in which there is no government works?
The Circular Flow Model
Households
 The rectangle on the right side of the circular flow diagram represents
households
 Defined as one or more persons occupying a housing unit
 There are currently about 32.21 million households in the Pakistan
economy
 Households buy the goods and services that businesses make available
in the product market
 Households obtain the income needed to buy those products by selling
resources in the resource market
Households
 All the resources in our no-government economy are ultimately owned
or provided by households
 For instance, the members of one household or another directly provide
all of the labor and entrepreneurial ability in the economy
 Households also own all of the land and all of the capital in the
economy
 They either own it
 Directly, as personal property,
 or Indirectly, as a consequence of owning all of the businesses in the
economy
Q25.Define a corporation? List what all it can do on its own behalf?
CORPORATION:
 Is an independent legal entity
 It means that its owners bear no personal or financial responsibility for
corporation’s debts and obligations
 If a corporation has failed to repay a loan to a bank, the bank can sue
the corporation but not its owners
 Professional managers run most corporations like Google, Ford etc.

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Economic Qs

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Q3. Define and explain Micro & Macroeconomics?

A. Scarcity and Choice

Q-6 Briefly explain Ceteris paribus assumption?

Q-9 Briefly explain 4 different structures of economy?

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