1 What are the main Themes of economics

Scarcity and Efficiency are the Twin Themes of Economics.

Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among various people.
As per the above definition, The goods are Scarce, The society should use them
efficiently. Hence, Scarcity and Efficiency forms the basic Twin Themes of
Economics.
2 Bring out the meaning of negative externality
A negative externality is a cost that is suffered by a third party as a result of an
economic transaction.
In an economic transaction,
Producer - First party
Consumer Second Party
All others Third Party.

With a negative externality the Social Cost > Private Cost

Solution:
To achieve a more socially efficient outcome, the government could levy more tax on the
good with negative externalities. This means that consumers pay the full social cost.
3. Define Demand.

An economic principle that describes a consumer's desire and willingness to pay

a price for a specific good or service.
"the want or desire to possess a good or service with the necessary goods, services, or financial
instruments necessary to make a legal transaction for those goods or services.
In Simple Terms,
A Want to Desire to buy,
A capacity to Pay

Holding all other factors constant, the price of a good or service increases as its
demand increases and vice versa.
4 What do you understand by consumer equilibrium?

The point at which a consumer reaches optimum utility, or satisfaction, from the
goods and services purchased given the constraints of income and prices.
This is based on the assumption that consumers attempt to get maximum utility
from their purchases and that competition exists for the item in question.
Equilibrium is reached when the consumer purchases the assortment of goods
which best meets his satisfaction requirements given his financial constraints.
5. What is the meaning of market efficiency?
Measure of the availability (to all participants in a market) of the information that
provides maximum opportunities to buyers and sellers to effect transactions with
minimum transaction costs.
6. State the meaning of product market.
The marketplace in which a final good or service is bought and sold. A product
market does not include trading in raw or other intermediate materials, and instead
focuses on finished goods purchased by consumers, businesses, the public sector
and foreign buyers.
7. Give an account of aggregate supply.
Aggregate supply (AS) is defined as the total amount of goods and services (real
output) produced and supplied by an economys firms over a period of time. It
includes the supply of a number of types of goods and services including private
consumer goods, capital goods, public and merit goods and goods for overseas
markets.

The total supply of goods and services produced within an economy at a given
overall price level in a given time period. It is represented by the aggregatesupply curve, which describes the relationship between price levels and the
quantity of output that firms are willing to provide. Normally, there is a positive
relationship between aggregate supply and the price level. Rising prices are
usually signals for businesses to expand production to meet a higher level of
aggregate demand.
8. What is macro economic equilibrium?
Macroeconomic equilibrium for an economy in the short run is established when aggregate
demandintersects with short-run aggregate supply.
A state of national economic activity wherein aggregate demand is met by aggregate supply. Significant
movement on either side will affect prices, employment and resources.
9. State any two reasons for inflation.
Causes of Inflation:

Inflation means there is a sustained increase in the price level.

Demand pull inflation:
If the economy is at or close to full employment then an increase in AD leads to an increase
in the price level.
As firms reach full capacity, they respond by putting up prices, leading to inflation.
Also, near full employment, workers can get higher wages which increases their spending
power.
Cost Push Inflation
If there is an increase in the costs of firms, then firms will pass this on to consumers. There
will be a shift to the left in the AS.
Factors Causing Cost Push Inflation:
1.
2.
3.
4.

Raising Wages
Import Prices
Raw material prices
Higher Taxes

10. What does Philips curve deal with?

Phillips curve is a historical inverse relationship between rates of unemployment and
corresponding rates of inflation that result in an economy. Stated simply, decreased
unemployment, (i.e., increased levels of employment) in an economy will correlate with
higher rates of inflation.

1. Discuss the causes of the fundamental economic problems and offer suitable
measures for these problems.

The Fundamental Economic Problem

The fundamental economic problem is related to the issue of scarcity. Because of limited resources and
infinite demands, society needs to determine how to produce and distribute these relatively scarce
resources. Of course, it is possible humans could limit their demands and be satisfied with the basic
necessity's of life. In some tribal society's / spiritual communities you could argue there is no economic
problem because the limited resources are more than adequate to meet all their wishes. However, society
is mostly dominated by people wishing to consume more goods and services than are available. Because
their is a shortage of resources, economics considers:

What to Produce

How to Produce

For Whom to Produce

From these 3 key questions there are numerous alternatives and theories about the best way to proceed.
One of the fundamental questions has been the extent to which governments should intervene in the
production and distribution of resources.
2. Enumerate the factors that determine a countrys economic growth.
Factors Affecting Economic Growth

Economic growth is an increase in real GDP. It means an increase in the value of goods and
services produced in an economy. The rate of economic growth measures the annual
percentage increase in real GDP. There are several factors affecting economic growth, but it
is helpful to split them up into:

Demand side factors

Supply side factors
Demand Side Factors Influence Growth of Aggregate Demand (AD)
What Could Affect AD?

Interest Rates. Lower interest rates would make borrowing cheaper and should
encourage firms to invest and consumers to spend. People with mortgages will have lower
monthly mortgage payments so more disposable income to spend. However, recently we
had a period of zero interest rates, but due to low confidence and reluctant banks growth
was still sluggish.
Consumer Confidence. Consumer and business confidence is very important for
determining economic growth. If consumers are confident about the future they will be
encouraged to borrow and spend. If they are pessimistic they will save and reduce
spending.
Asset Prices. Rising house prices create a positive wealth effect. People can
remortgage against the rising value of their home and this encourages more consumer
spending. House prices are an important factor in the UK, because so many people are
homeowners.
Real Wages. Recently, the UK has experienced a situation of falling real wages.
Inflation has been higher than nominal wage, causing a decline in real incomes. In this
situation, consumers will have to cut back on spending reducing their purchase of luxury
items.
Value of Exchange Rate. If the Pound devalued, exports would become more
competitive and imports more expensive. This would help to increase demand for domestic

goods and services. A depreciation could cause inflation, but in the short term at least it can
provide a boost to growth.
Banking Sector. The 2008 Credit crunch showed how influential the banking sector
can be in determining investment and growth. If the banks lose money and no longer want
to lend, it can make it very difficult for firms and consumers leading to a decline in
investment.
Factors that determine Long Run Economic Growth
In the long run, economic growth is determined by factors which influence the growth of
Long Run Aggregate Supply (the PPF of the economy). If there is no increase in LRAS, then
a rise in AD will just be inflationary.

1.

Levels of infrastructure. Investment in roads, transport and communication can

help firms reduce costs and expand production. Without necessary infrastructure it can be
difficult for firms to be competitive in the international markets. This lack of infrastructure is
often a factor holding back some developing economies.
2.
Human Capital. Human capital is the productivity of workers. This will be
determined by levels of education, training and motivation. Increased labour productivity can
help firms take on more sophisticated production processes and become more efficient.
3.
Development of Technology. In the long run development of new technology is a
key factor in enabling improved productivity and higher economic growth.

Other Factors that Can Affect Growth in the Short Term.

Commodity Prices. A rise in commodity prices such as a rise in oil prices can cause
a shock to growth. It causes SRAS to shift to the left leading to higher inflation and lower
growth.
Political Instability. Political instability can provide a negative shock to growth.
Weather. The exceptionally cold December in UK 2010, led to a shock fall in GDP.
Annual Rate of Economic Growth in UK

3. Discuss about analysis of short-run and long-run production function.

Production Functions
The production function relates the quantity of factor inputs used by a
business to the amount of output that result. We use three measures of production
and productivity.

Total product (or total output). In manufacturing industries such as motor

vehicles and DVD players, it is straightforward to measure how much output is
being produced. But in service or knowledge industries, where output is less
tangible it is harder to measure productivity.

Average product measures output per-worker-employed or output-per-unit of

capital.

Marginal product is the change in output from increasing the number of

workers used by one person, or by adding one more machine to the production
process in the short run.

Short Run Production Function

The short run is a time period where at least one factor of production is in
fixed supply. A business has chosen its scale of production and must stick with
this in the short run

We assume that the quantity of plant and machinery is fixed and that production
can be altered by changing variable inputs such as labour, raw materials and
energy.

Diminishing Returns

In the short run, the law of diminishing returns states that as we add more
units of a variable inputto fixed amounts of land and capital, the change in
total output will at first rise and then fall.

Diminishing returns to labour occurs when marginal product of labour starts

to fall. This means that total output will be increasing at a decreasing rate.

Average product rises as long as marginal product is greater than the average.
Once marginal product is below the average then the average must decline.
Long Run Production - Returns to Scale
In the long run, all factors of production are variable. How the output of a business
responds to a change in factor inputs is called returns to scale.

Increasing returns to scale occur when the % change in output > % change in
inputs

Decreasing returns to scale occur when the % change in output < % change in
inputs

Constant returns to scale occur when the % change in output = % change in

inputs