MEFA Assignment 1 - Answers
Q1. Write a short note on Scarcity and Choice
Scarcity is the fundamental economic problem arising because human wants are unlimited,
but resources such as land, labor, capital, and entrepreneurship are limited. Since resources
are not sufficient to satisfy all wants, individuals, businesses, and governments must make
choices on how to allocate them efficiently.
Choice arises because of scarcity. When resources are limited, selecting one alternative
means giving up another, leading to an opportunity cost—the value of the next best
alternative foregone.
For example, if a country has limited resources and must choose between investing in
healthcare or education, it must evaluate the benefits and trade-offs of each option.
Q2. Distinguish between inductive and deductive method in economics?
Economics relies on different methods to develop theories and understand economic
behavior. The two major approaches are:
1. Inductive Method (Empirical Method)
- This method involves collecting real-world data, analyzing patterns, and then deriving
economic principles or theories from observations.
- It follows a bottom-up approach, meaning it starts from specific cases and generalizes
conclusions.
- It is used in applied economics and statistical studies.
Example: Engel’s Law states that as income increases, the proportion of income spent on
food decreases.
2. Deductive Method (Theoretical Method)
- This method starts with established principles or assumptions and applies logical
reasoning to derive conclusions.
- It follows a top-down approach, meaning it begins with general theories and applies them
to specific cases.
- It is used in theoretical economics and mathematical modeling.
Example: The Law of Demand states that 'other things being equal, as the price of a good
increases, the quantity demanded decreases.'
Q3. Define and describe the term static and dynamic economics?
1. Static Economics
- Studies economic activities at a particular point in time, assuming that factors like
technology, population, and capital remain unchanged.
- Concerned with equilibrium conditions in an economy.
- Example: Determining the market equilibrium price when supply and demand remain
constant.
2. Dynamic Economics
- Studies economic variables that change over time, including factors like population growth
and technological advancements.
- Focuses on long-term economic trends.
- Example: Business cycles, inflation, and economic growth models like Harrod-Domar
Growth Model.
Q4. Describe circular flow in 2 and 3 sector economy?
1. Two-Sector Economy (Households & Firms)
- Consists of households and firms.
- Households provide factors of production to firms, and firms produce goods and services
consumed by households.
- Income flows from firms to households as wages, rent, and profits.
2. Three-Sector Economy (Households, Firms & Government)
- Includes the government, which collects taxes from households and firms.
- Government provides public goods and services, and influences the economy through
subsidies and spending.
Q5. Explain the meaning, nature, and scope of economics?
Economics is the study of how individuals, businesses, and governments allocate scarce
resources to satisfy human wants.
Nature of Economics:
- Economics as a Science: Systematic study with laws.
- Economics as an Art: Applies knowledge to solve real-world problems.
- Positive vs. Normative Economics: Positive describes facts; Normative gives policy
recommendations.
Scope of Economics:
- Microeconomics: Studies individual markets and consumer behavior.
- Macroeconomics: Examines national-level economic issues like GDP and inflation.
Q6. Explain the different methods for calculating national income?
1. Product Method (Value-Added Method): Measures the total value of goods and services
produced within a country.
2. Income Method: Calculates national income by summing up wages, rent, interest, and
profits.
3. Expenditure Method: Measures total spending using the formula GDP = C + I + G + (X - M).
Q7. Define the concept of national income?
National income is the total monetary value of all final goods and services produced within
a country over a specific period.
Key Measures of National Income:
- Gross Domestic Product (GDP): Total value of goods & services within a country.
- Gross National Product (GNP): GDP + income earned from abroad.
- Net National Income (NNI): GNP - Depreciation.
Importance of National Income:
- Measures economic growth.
- Helps in policy-making.
- Assesses living standards.
Comparison of Inductive and Deductive Methods
Feature Inductive Method Deductive Method
Approach Bottom-up Top-down
Basis Observation & Data Assumptions & Logic
Example Engel’s Law Law of Demand
