NCERT Solutions for Class 12 Economics Part A Chapter 1 Introduction

1. What is the difference between microeconomics and macroeconomics?

Ans.

	Points of Difference	Microeconomics	Macroeconomics
(i)	Definition	It is a branch of economics that deals with the economic variables at an individual level like the households, the firms, the consumers, etc.	It is a branch of economics that deals with with the economic variables of an economy as a whole.
(ii)	Deals with	It deals with how the consumers or the producers make decisions depending upon their given budget and other variables.	It deals with the mechanism of how different economic sectors like households, industries and other government and foreign sectors make their decisions.
(iii)	Method	The method of partial equilibrium (i.e. equilibrium in one market) is dealt here.	The method of general equilibrium (i.e., equilibrium in all the markets, simultaneously) is applied here.
(iv)	Variables	Some of the major variables which are involved here are price, consumer’s demand, wages, rent, profit, firm’s revenue, cost, etc.	The major variables involved here are aggregate demand, aggregate supply, inflation, unemployment, poverty, etc.
(v)	Theories	Various theories studied under this branch are: Theory of Consumer's Behaviour and Demand Theory of Producer's Behaviour and Supply Theory of price determination under different market conditions	Various theories studied under this branch are: Theory of National Income Theory of Money Theory of General Price level Theory of Employment Theory of International trade
(vi)	Popularisation	Popularised by Alfred Marshal	Popularised by Keynes

2. What are the important features of a capitalist economy?

Ans. Capitalist economy is a type of economic system where all the means of production are privately owned. These means of production are mainly driven by the motive of profit making. This economic structure is also popularly known as free market economy or laissez faire.

Following are the features of a capitalist economy:

(i) Role of the government: The government only provides the basic framework for the smooth functioning of an economy. It is required to provide the basic framework and is then responsible for the maintenance of law and order, justice, growth and
stability, defence, etc.

(ii) Profit motive: The economic agents are driven by the sole motive of profit maximization.

(iii) Central problems: All the central problems of an economy are to be solved by the market forces of demand and supply, i.e., the law of demand and supply operates here in full capacity. The producers will supply only those goods and services which are demanded by the economy

(iv) Role of private sector: The role of private individuals is more dominant here. The main role of undertaking production and organising factors of production and other such roles are played by the private individuals and capitalists.

(v) Laissez-faire: This economy is popularly known as ‘laissez faire’. It usually has minimum interference or restriction from the government.

3. Describe the four major sectors in an economy according to the macroeconomic point of view.

Ans. The four major sectors of an economy as per the macroeconomic point of view are:

(i) Households

(ii) Firms

(iii) Government

(iv) External sector

These can be represented in the following flow chart:

(i) Households: Households are the ones which buy goods and services for consumption and also supply the factors of production like land, labour, capital, and entrepreneur. Households also provide the market for the output of the firms.

(ii) Firms: Firms are an individual economic units that carry out the production process. They are the ones who employ and organise the factors of production and then undertake the production process for the motive of profit making.

(iii) Government: A state/government provides the basic law and order, maintains growth and stability and also provides administrative services. The main motive of a government is to undertake various developmental projects such as dams, roads, heavy industries that usually have long gestation periods. The government also invests in education, health sector and provides these services at nominal price.
The basic motive of a government is to serve and not to make profits.

(iv) External sector: This sector is engaged in the process of exports and imports (external trade) of goods and services. If goods and services, which are produced domestically are sold to the rest of the world, then it is called export. If the goods and services are to be purchased from the rest of the world, then it is called import.

4. Describe the Great Depression of 1929.

Ans. The Great Depression of 1929 was a severe economic crisis that was witnessed back in 1929. It was originated in the United States of America with the crash of the stock market and was gradually spread to other countries of the world. The main cause of this crisis was the fall in aggregate demand due to under consumption and over investment. Due to the under consumption and over investment the stock of finished goods started piling up, which resulted in low price levels and consequently low profit levels. The money in the economy was then converted into unsold stock of finished goods that directly lead to an acute fall in the employment and hence income level fell drastically. The demand for goods in the economy was extremely low and eventually led to the considerably lower levels of employment too. In USA, the rate of unemployment significantly increased from 3% to 25%.

The Great depression had its own implications and importance in economics, as it led to the failure of the classical approach of economics. The believers of market forces of demand and supply, paved the way for emergence of the Keynesian approach. It was this incident only that provided the economists with sufficient evidence to recognise macroeconomics as a separate branch of economics.

The cause and effect relationship of the Great Depression can be summarised in this flow chart
Low demand → overinvestment → low level of employment → low level of output → low income → low demand.