NCERT Solutions for Class 11 Economics Chapter 1 - Introduction

1. Discuss the central problems of an economy.

Ans. The three central problems of an economy are:

What to produce?
- What to produce is related with a problem of deciding which goods are to be produced and
  services to be taken.
- Since the resources are limited, every economy must decide what goods are to be produced and in what quantities.
- The main principle for an economy is to allocate resources in such way so that it gives maximum utility to the people of society.
How to produce?
- How to produce is related with a problem of deciding regarding which production technique to be used in manufacturing commodities.
- Goods and services can be manufactured in two ways, i.e., either by using labour-intensive techniques or by using capital-intensive techniques.
- The main principle for an economy is to decide about production techniques to be used based on production cost. Those production techniques should be used which lead to the least possible cost per unit of good or service.
For whom to produce?
- For whom to produce is related with a problem of deciding regarding which section of people will be served or consumed final good.
- Goods and services are created for those who can buy them and have the capacity to buy them.
- Capacity to buy based on how the income is distributed among different factors of production such land, labour, capital and enterpreneur. The lower the income, the lower is the capacity to buy and vice versa.
- The main principle for an economy is that to see whether the urgent needs of its citizens are being satisfied to the maximum possible extent or not.

2. What do you mean by the production possibilities of an economy?

Ans. Production possibilities of an economy refer to different combinations of commodities and services which an economy can produce from the available resources and technology.

3. What is a production possibility frontier?

Ans. The production possibility frontier is a curve which portrays all the possible combinations of two commodities which can be produced in an economy with the given resources and technology.

4. Discuss the subject matter of economics.

Ans. The subject matter of economics includes two branches of economics, i.e., microeconomics and macroeconomics.

Microeconomics studies the behaviour of an individual units of an economy, such as firms, individual producers, households, individual consumers etc. It do not study the economy as a whole.
Macroeconomics studies the economy as a whole, such as aggregrate employment, national income, general price level, aggregate investment, aggregate consumption, etc.

5. Distinguish between a centrally planned economy and a market economy.

Ans.

No.	Points of Difference	Centrally Planned Economy	Market Economy
1.	Ownership of factors of production	Publicly owned	Privately owned
2.	Production Aim	The aim of production is to provide social welfare to the people.	The main aim is to earn and maximize profits.
3.	Governing Factor	The production is regulated by a planning mechanism. It is controlled by the government.	The production is regulated by a price mechanism. It is controlled by the market forces of demand and supply.
4.	Income Distribution	The degree of income disparity is modest.	There is a disparity in income distribution.
5.	Government’s Role	From production to distribution, government plays an important role.	Private players play the main role. They choose what to produce, while the government is limited to maintaining law and order in the country.

6. What do you understand by positive economic analysis?

Ans. Positive economic analysis is the study of what or how an economic problem is solved via examining numerous positive statements and methods. In another way, it is also known as a cause-and-effect relationship. It expresses “what is.”
These are true statements that explain what was, is, and will be in the future. These assertions may be examined, proven, or disproven and are free of personal value judgments. For example, if someone states it's raining outside, the truth of that assertion can be checked. It is concerned with real-life or realistic issues. Economic theory is regarded as pure science by economists such as Lionel Robbins. Other instances include India is an overpopulated country with a diversified economy, and so on.

7. What do you understand by normative economic analysis?

Ans. Normative economic analysis is the process of determining whether or not a specific method is good. This analysis focuses on what should be the desired state or how the economic problems should be addressed. It offers economic goals and objectives, as well as what should be done to accomplish them. We come across normative propositions in normative economic analysis that cannot be evaluated because they require human value judgments. It is founded on ethics and deals with idealistic issues.
For instance, the government should support private enterprises to increase the pace of industrialisation, as an illustration of this analysis. Economists such as Marshall, Pigou, and others consider economics to be a normative science.

8. Distinguish between microeconomics and macroeconomics.

Ans.

Point of Difference	Microeconomics	Macroeconomics
Definition	It is a branch of economics that deals with the economic variables at an individual level such as firms, households, consumer etc.	It is a branch of economics that deals with the economic variables of an economy as a whole.
Deals with	It deals with how consumers or the producers make decisions depending on their given budget and other variables.	It deals with how different economic sectors like households, industries and other government and foreign sectors make their decisions.
Method	The method of partial equilibrium is used, i.e., equilibrium in one market.	The method of general equilibrium is used, i.e., equilibrium in all the markets simultaneously.
Variables	The major variables involved are prices, consumers demand, wages, rent, profit, firms, revenue, cost, etc.	The major variables involved are aggregate demand, aggregate supply, inflation, unemployment, poverty, etc.
Theories	Various theories studied are: Theory of consumers' behavior and demand Theory of producers' behavior and supply Theory of price determination under different market conditions	Various theories studied are: Theory of national income Theory of income and employment Theory of general price level Theory of money Theory of international trade
Popularized by	Prof. Alfred Marshal	Prof. Keynes