Economics and Economy Class 12 Economics Notes and Questions

Please refer to Economics and Economy Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams

Economics and Economy Class 12 Economics Notes and Questions

The below Class 12 Economics and Economy notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.

Question. What do you mean by economic problem? Why does it arise?
Ans. Economic Problems:
It is the problem of making choice among the use of scarce resources. It arises due to the following reasons:

1. Human wants are unlimited:
Human beings have wants which are endless in nature. A particular want can be satisfied by consuming goods and services but new wants keep on arising. Thus, unlimited human wants create economic problems.

2. Resources are limited:
The main reason for economic problem is the scarcity of resources. It means supply of resources is less in comparison to their demand. Thus, an economy can’t produce all the products it needs. Therefore, scarcity and choice always go together.

3. Resources have alternative uses:
Economic resources are not only limited in supply rather they have alternative uses also. For example, a piece of land can be used either for farming or for construction of schools, malls etc. so it makes resources more scarce because any resource used for one purpose can’t be used for another purpose at the same time.

Central Problems of an Economy

Question. Explain Central Problems of an Economy.
Ans. The central problems of an economy related to allocation of resources includes:

1. What to produce?
The central problem of what to produce is related to the selection of category of goods to be produced and selection of quantity of goods to be produced. In other words, it is the problem of deciding which type of goods an economy should produce and in how much quantity. As there is scarcity of resources, therefore and economy can’t produce more quantity of all the products it needs, therefore society has to make choice between:
• Necessary goods and luxury goods
• Consumer goods and producer goods
• War goods and civil goods
The guiding principle is that those goods should be produced which gives maximum satisfaction to the society.

2. How to produce?
It is the problem of selection of method of production to be used for producing. In other words, it is the problem of choice of technique of production. There are mainly two techniques of production:
a) Labour Intensive Technique (use more labour and less capital)
b) Capital Intensive Technique (use more capital and less labour)
A producer selects that technique of production which minimizes the production cost and maximizes the output. For example, India is a labour surplus economy where labour is relatively cheaper than capital. So, India should prefer labour intensive technique.

3. For whom to produce?
The central problem of ‘For whom to produce’ is related to the problem of selection of category of people for whom goods should be produced. In other words, it is the problem of distribution of national income.
In an economy, goods are produced for those people who have purchasing power which depends on their income level, but individual income level further depends upon distribution of national income. So this problem has 2 aspects:
A. Functional Distribution: It is the problem of distribution of factor income among factors of production in the form of rent, interest, wages and profit.
B. Personal Distribution: It is the problem of distribution of national output between rich and poor sections of the society.

Production Possibility Curve (PPC)

Question. Explain the concept of Production Possibility Curve with the help of hypothetical schedule and diagram.
Ans. Production Possibility Curve is the graphical representation of various possible combinations of 2 products which an economy can produce from full and efficient use of given resources.
As there is scarcity of resources, so an economy can’t produce more quantity of all the products. The central problem of what to produce can be graphically explained with the help of PPC.
Thus, it shows various possible combinations of 2 products which can be produced at full employment of resources. It is also known as Production Possibility Frontier, Production Possibility Boundary and Production Transformation Curve.

The concept of PPC is based on following assumptions:
1. In an economy amount of given resources remain constant.
2. An economy can produce only 2 goods from given resources so resources can be shifted from the production of one good to another.
3. There is full and efficient use of given resources.
4. All resources are not equally efficient in the production of all the products, so when resources are shifted from one product to another, then their productivity falls.
5. There is no change in technology.

It is explained with the help of following hypothetical schedule and diagram assuming that an economy can produce 2 products i.e. Wheat and Machine from given resources:

In the above diagram, PPC shows various possible combinations of wheat and machine which an economy can produce at the full employment of resources.
1. Any combination on PPC (A, B, C, D, E, F) are attainable and indicates full efficient use of given resources.
2. Any combination inside PPC is also attainable but indicates underutilization of resources.
3. Any combination outside the PPC is unattainable from given resources.

Question. Explain properties/ features of PPC.
Ans. 1. PPC is always downward sloping from left to right/ negatively sloped.
It is due to scarcity of resources PPC is always downward sloping. As resources are limited, so production of one good can only be increased along PPC by shifting the resources from production of another good.
Therefore, production of another good is sacrificed to produce additional unit of given good. Thus, PPC will be downward sloping from left to right.

2. PPC is always concave to the origin
It is because of increasing marginal rate of transformation, PPC is concave. MRT is the rate at which units of another good is sacrificed to produce additional unit of another good.
Slope of PPC is MRT which keeps on increasing because all resources are not equally efficient in the production of all the products. Therefore, when resources are shifted from production of another good to produce additional unit of given good, then it reduces their productivity.

Question. Draw PPC with the help of hypothetical schedule and diagram assuming that all resources are equally efficient.
Ans. If it is assumed that all resources are equally efficient in the production of all the products then Marginal Rate of Transformation were to be constant.
It means the rate at which units of another good is sacrificed to produce additional unit of given good remains constant throughout. As a result, PPC will be linear straight line. It is shown with the help of following hypothetical schedule and diagram.

Question. Explain the concept of shift in PPC.
Ans. There may be rightward or leftward shift in PPC which explained as below:
1. Rightward Shift
When there is growth of resources like increase in skilled workers, increase in capital formation, inflow of foreign capital, development of new source of energy, improvement in technology, etc., then it will increase the production capacity of the goods. As a result, PPC shift rightward.

2. Leftward Shift
When there is fall of resources like decrease in skilled workers, decrease in capital formation, outflow of foreign capital, loss due to flood, earthquake, war, etc., then it will decrease the production capacity of the goods. As a result, PPC shift leftward.

PPC Special Cases

1. Make in India
This policy encouraged MNCs to invest in India.
• There will be inflow of foreign capital.
• Increase in resources increases the production capacity. So, PPC shifts rightward.

2. Skill India Mission
Training programmes initiated by government
• It will increase skill and ability of youth of India.
• Increase in human capital formation increases production capacity so PPC will shifts rightward.

3. Jan Dhan Yojna
• This yojna encouraged each household to open bank account.
• It will increase banking habits of people. So, bank deposits will increase.
• There will be increase in the resources for investment and PPC shift rightward.

4. Clean India Mission
• Government focused to clean environment.
• It will decrease possibility of diseases and improve health.
• As a result, increase in efficiency will increase production capacity thus PPC shift rightward.

5. Employment generation schemes (like NREGA)
• Government provides opportunities for unemployed people.
• So, there will be better utilization of resources.
• Thus, economy move from inside PPC to on the PPC.

6. Economic slowdown in the world has adversely affected export of India
• Decrease in demand of exports will decrease domestic production.
• It will create unemployment and underutilization of resources.
• Thus, economy move from on the PPC to inside PPC.

Question. Distinguish between microeconomics and macroeconomics.
Ans.

Question. What do you mean by positive and normative economics?
Ans.

Question. Differentiate between Centrally Planned Economy, Mixed Economy and Market Economy.
Ans.

Question. Although water is useful, yet it is cheap. On the contrary, diamond is not much of use, still it is very expensive. Give an economic reason for this paradox.
Ans. The economic reason for this paradox is scarcity. Although water is useful, yet it is cheap due to its abundance in the economy. Diamonds are very expensive because they are scarce and people are ready to pay a high price.

Question. Massive unemployment will shift the PPF to the left. Defend or refute.
Ans. The given statement is refuted. Massive unemployment does not decrease the capacity of economy to produce. So, there will be no shift of PPF. However, economy will operate at some point inside the PPF, due to under-utilisation of human resources.

Question. The government establishes a large number of Institutes of science and technology. How will it affect the production possibility frontier? Explain.
Ans. By these institutes, skill development will improve. This would result in increase in the production potential of the country. So, the PPC will shift rightward.

Question. Why does the problem of choice arise for producers and for consumers?
Ans. The problem of choice arises for producers because resources are limited and have alternative uses. The problem of choice arises for consumers because their wants are unlimited while resources to fulfil these wants are limited.

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