CH-01: FUNDAMENTALS OF ECONOMICS

CHAPTER-01

FUNDAMENTALS OF ECONOMICS

PART-01: DEFINITIONS, NATURE & BRANCHES OF ECONOMICS

1.1 DEFINITION OF ECONOMICS 2
1.2 CHOICE AND SCARCITY 3
1.3 NATURE OF ECONOMICS 4
1.4 BRANCHES OF ECONOMICS 5

PART-02: PRODUCTION, CONSUMPTION & FACTORS OF PRODUCTION:

2.1 FACTORS OF PRODUCTION 7
2.2 PRODUCTION WITH SPECIALINZATION AND DIVISION OF LABOUR 9
2.3 CAPITAL FORMATION 10
2.4 AGENTS/PARTICIPANTS OF AN ECONOMY 11

PART-03: GOODS, ITS TYPE & OPPORTUNITY COST

3.1 TYPES OF GOODS 12
3.2 OPPORTUNIOTY COST 13

PART-04: PRODUCTION POSSIBILITY FRONTIER/CURVE:

4.1PROPERTIES/CHARACTERISTIC OF PPC 16
4.2 ECONOMIC GROWTH/ SHIFT IN PPC 16

PART-05: ECONOMIC SYSTEM

5.1 MARKET ECONOMY/ CAPITALISM 17
5.2 PLANNED/ COMMAND ECONOMY/ SOCIALISM 18
5.3 MIXED ECONOMY 19
5.4 ISLAMIC ECONOMIC SYSTEM 21

PART-06: MULTIPLE CHOICE QUESTIONS & TEST-01

MCQ 25
TEST-01 36

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PART-01: DEFINITIONS, NATURE & BRANCHES OF ECONOMICS

SUBJECT MATTER OF ECONOMICS

Economics is known as mother of social sciences. History of the world is witnessing that man is
continuously striving to solve its major economic issues at individual and state level such as; health
care, illiteracy, poverty, inflation and unemployment.

1.1: DEFINITION OF ECONOMICS

Adam Smith (Classical Definition) – Science of Wealth

He is also known as the father of Economics, has explained it in his book “An Inquiry into nature
and causes of Wealth of Nations” in 1776. According to Smith (1776), economics deals with the
wealth of nations rather than human welfare.
He elaborated how wealth is produced, exchanged, distributed and used.
(i) Production of wealth means that the production of goods and services by combining four
factors of production such as; Land, Labor, Capital and Entrepreneur.

(ii) Exchange of wealth means every individual cannot produce all the goods and services he
needs, for this purpose he must depend upon the goods and services produced by others,
which is only possible with exchange of wealth.

(iii) Distribution of wealth elaborates distribution of generated wealth through combined efforts
of factors of production among those households who have provided them. The wealth which
firms or producers distribute, among factors of production, is termed as rewards of factors of
production.

(iv) Consumption of wealth is the ultimate objective behind its generation. People spend money
or wealth on different goods and services to satisfy wants.

Alfred Marshal (Neo-Classical Definition) – Science of Human welfare

He wrote in his book entitled “principles of Economics” in 1890 that
• Economics is a social science as it studies the people in their ordinary business (day to
day affairs) of life.
• Wealth is the central area of interest.
• Economics anxiously discuss about the welfare (wellbeing) of society

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Lionel Robbins (Modern Definition) – Science of Scarcity and Choice

In his book “nature and significance of economic science” (1932), said “Economics is the science
which studies human behaviour as a relationship between (multiple) ends and scarce (limited)
means (resources) which have alternative uses”.
• Multiple Ends states the ample wants of human beings (means wants are unlimited), the
human wants never came to an end which provide basis of basic economic problem.
• Scarcity of resources. resources to satisfy human needs/wants are insufficient.

Scarce resources can be used alternatively.

For instance, a piece of land can be used for cultivation or to build a factory or house. It’s up-to the
need and priority of humans that what way they want to utilize it.

1.2: SCARCITY & CHOICE

Basic Economic issue arises due to multiplicity of Ends and Scarcity of Means. Every economy
faces a constraint of human, capital and natural resources.

Unlimited Wants > limited Resources

Resources

Economics Resources Free Resources

Limited in Supply e.g. Unlimited in Nature

(Factors of Production) e.g. (Air, Sunlight)

Basic economic problems mean choosing (choice) how to allocate these scarce (limited)
resources to satisfy our needs and wants.

Three fundamental Basic Economic Questions:

(i) What to produce? It depends upon the needs of the society and the use of the available
resources in the most efficient manner
(e.g. either capital goods or consumer goods) (how much land should be allocated for crops
and how much for industry?)

(ii) How to produce? Involves the combination of scarce resources and technique to produce
goods and services
(e.g capital intensive or labour intensive), and

(iii) For whom to produce? Goods are being produced with intensions to sell them who have
ability to buy them. Who will be the potential buyers?

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1.3: NATURE OF ECONOMICS

What Is the nature of Economics? Economics

Science Art

Positive Science Normative Science

A Science or an Art?
Science:
Economics is a science because Science is a systematic study of knowledge and fact which develops
the correlation-ship between cause and effect. In science all the facts must be systematically
collected, classified, analysed, perform experiment and then make a general principle

(i) Positive science deals with factual questions, tested and accepted facts and to develop
some more required laws and principles. (Tells Real situation). It is one which is agreed by
everyone.
Example:
• earth is round and moving around the sun
• our brain passes orders to our body parts to act and react under some existing conditions.
(Tested fact)
• unemployment increases poverty and hurts living standard of the people
• inequitable distribution of income hurts and economic growth of a country in long run
etc.
(ii) Normative science discusses ‘what ought to be/ should be’. Normative science inquires,
offers suggestions to the problems (tells ideal situation). It also involves ethical precepts and
norms of fairness
For example
• pollution is increasing the global temperature, so it must be tackled
• Government should provide basic health care to all citizens; it is normative science.
• social unrest creates political and administrative challenges for state, that’s why it should
be manage in anticipation
• fast growth in population along income inequalities, creates many other social and
economic challenges, so high rate of population growth must be discouraged
• unemployment increases poverty and hurts living standards of the public, so government
should create job opportunities to prevent it

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An Art:
“Knowledge is science, action is art.” Art is the practical application of knowledge for achieving
particular goals. Science gives us principles of any discipline however; art turns all these principles
into reality
Example
For example, since someone gathering knowledge and facts through lectures and training about
driving a car is called science, while as he or she takes a drive on road is considered as art.

Conclusion:
In nutshell we can say that “economics is a science and an art as well,”

1.4: BRANCHES OF ECONOMICS

There are two branches of economics i.e., Microeconomics and Macroeconomics

Microeconomics:

Definition Microeconomics is derived from a Greek word “micro” meaning “small” or the
millionth part. This is the branch of economics that investigate the individual
behavior of households and firms and markets in their ordinary business of life
(decision making and allocation of scarce resources).
Factors • It helps in determining market equilibrium
• Market Demand and Supply
• Consumer theory
• Theory of Production
• Costs of Production etc.
Scope • Commodity Pricing: In microeconomics the prices of different goods and
services are determined by demand and supply forces.
• Factor Pricing: Factors of production such as, Land, labour, capital and
entrepreneur, are the core of any production process. Micro economics also
helps in determination of reward of FOP (rent, wages, interest and profit/loss)
which is termed as 'Price Theory’.
• Welfare Theory: Maximization of social welfare is bonded with the optimum
allocation of available economic resources
• Key economic questions; 'What to produce? How to produce? and for whom
to produce? are also discussed in microeconomics
Importance • Study of individual economic agents (Household, Firm etc)
• Allocation of scarce resource:
• Price determination: (With the help pf Price mechanism)
• Helps in formulating economic policies:

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(Microeconomics helps economists to instigate macroeconomic policies such as

sustainable growth, price stability, full employment, balance of payment and exchange
rate stability.)
• Assistance of Finance Minister:
(Taxes are the most important component of Public Finance of any country)
limitations • Narrow perspective. (Ignore the implications on whole economy)

• Inappropriate in major areas:

it is observed that while dealing with some crucial economic issues such as;
trade imbalances, for debts and inflation etc., microeconomics doesn’t provide
sufficient aid to solve them
Example:
Rising prices in chicken market does not mean inflation, because fall in prices of other
food and non-food items may overcome this effect and inflation will not occur.

• Weak assumption:
Economic laws often based on variety of assumptions or presumed pre-
conditions. these conditions are found unrealistic in real life individual’s
behavior does not represent the behavior of large segment of the society in
every case
Example:
• A decision may be useful for single unit not may not be useful for whole economy (e.g.,
saving decision).
• If households are facing employment issue in some particular area or in a particular
time period, it may be not reflected in overall unemployment in a macro scenario.

Macroeconomics:

Definition Macroeconomics is the branch of economics concerned with the overall

performance of the economy.
Factors • National Income
• Inflation and unemployment
• Rate of interest
• Public debts etc.
Scope • Economic Growth and Development: (evaluated in term of per capita real income)
• National Income Determination:
• Inflation and Employment:
• Balance of Payments and Trade: (Import and Export in a country)
• Macroeconomic Policies:
(Economic policies such as; Monetary policy, Fiscal policy, Commercial policy,
Exchange rate policy etc., are the preconditions of economic growth and development
of a country.)
Importance • Understanding of complex economic systems: (unemployment, BOP etc.)
• Helpful to achieve predetermine economic targets (sustainable economic
growth.)
• Price stability: (neither inflation nor deflation).

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• Balance of Payments:
• Helpful to address the macroeconomic issues:
(Poverty, unemployment, inflation, wage fluctuations, instability of financial markets
etc. Furthermore, it provides corrective measures for severe economic problems.)
Limitation • Excessive Generalization:
Macroeconomics focuses on aggregate rather than individuals. Sometime a
decision which is better for whole not be suitable for individuals

• Heterogeneity is ignored:
Macroeconomics takes the aggregate as homogenous (e.g aggregate demand),
ignoring the internal composition and the structure (individual demand)

• Analysis can be misleading

Aggregate sometime ignores the changes occurred in different sectors, which
can be misleading for economic policy derivation.
Example: In macroeconomic analysis shows a growth in agriculture sector if a good
harvest in rice crop has compensated a bad harvest of cotton.

PART-02: PRODUCTION, CONSUMPTION & FACTORS OF PRODUCTION:

Meaning of Production:
production can be defined as “the process that creates or adds value.”
Production means where the inputs (resources) are processed and transformed into outputs (good
and services).

Meaning of Consumption
the process by which consumers satisfy their want by consuming Goods and Services.

Factors of Production:
Also termed as “Input” or “Economic resource” It’s Include: Land, Labor, Capital and Enterprise.

2.1: FACTORS OF PRODUCTION

Factors of production are the resources (input factors) which are used to produce goods and services
These input factors include: Land, Labor, Capital and Enterprise.

• Human factors: Labor and Entrepreneur

• Non-human factors: Land and Capital

1) Land (N) (Natural Resources)

• All natural and GOD-gifted resources which are used to produce other goods and services are
known as Land, it includes;
• On, inside and outside earth such as; agriculture, minerals, water resources, sunlight and
wind power, mountains, deserts, climate, rain, etc.
• Land is a passive factor of production as it depends upon some other active factor i.e. labour
• Supply of Land is fixed (vertical) and immovable.

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2) Labour (L) (Human resources)

• Labor means physical and mental effort of human being which are used to produced goods
and services e.g. road breaking, mining, teaching, or counseling workers in a factory.
• Human Capital (Productivity of labor) can be enhanced by proper education, training,
division and specialization of labor.
• Labour is an active factor of production, perishable and cannot be stored.

3) Capital: (K) (Man-made resources)

Capital means man-made resources which are used to produce other goods and services. It
includes: machinery, equipment, factories, commercial buildings, hospitals, schools, roads,
railways, docks. Transportation network (roads, railways, airports etc.). Money is not a capital.

4) Enterprise/Entrepreneur (Human resources):

An individual or a group of people who combines all three factors of production, undertakes the
risk to earn profit.
Entrepreneurs create businesses and provide a return (reward) to the other factors of
production.

Rewards (or Income) of Factors of Production:

• Rent: is the reward against use of Land that are fixed in supply.
• Wages: is the reward against Labour for service rendered
• Interest: is the reward against use of Capital.
• Profit: is the reward for the entrepreneur for taking risk.”

Derived Demand:
Demand for factors of production is called derived demand. Producer demand for labour to
produce goods and services. The demand for labour is derived demand

Summary:

FOP Definition Reward Examples

Land GOD-gifted natural Rent agriculture, minerals, water resources,
resources,fixed sunlight and wind power, mountains,
deserts, climate, rain
Labour physical and mental effort of Wages road breaking, mining, teaching, or
human being counseling workers in a factory
Capital man-made resources Interest machinery, equipment, factories,
commercial buildings, hospitals, schools,
roads, railways, docks and MS Word
Entrepreneur Combining all three (FOP), take Profit Sole-Trader services, Shareholder’s
risk to earn profit services

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2.2: PRODUCTION WITH SPECIALINZATION AND DIVISION OF LABOUR:

Division of Labor:
Division of labour, refers to producing goods or services by dividing into a number of tasks that are
carried out by different workers, rather being done by an individual.

Stages involve in Garment Factory: (Cutting section, stitching section, ironing and wrapping, marketing etc.)
Stages involve in small scale Pen maker: (melting of plastic, molding, refilling, and packaging)
Stages involve in large scale Automobile: (assembling, painting, electric work and air-condition system)

Specialization of Labour:
Specialization occurs when workers use specialised skills and knowledge for completing specific
assigned tasks.

Benefits of Specialization:

• Specialization and division of labor:

Division of labour leads to specialization. This refers to dividing the production into a number of
specialised tasks and assigning each task to a particular set of labour. Establishing division of
labour allows people to do specified tasks they are good at rather than doing everything in a
mediocre way as famous saying “A jack of all trades is master of none”.

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• Learning by doing:
Specialisation increase productivity, efficiency levels, reduces average costs and firms benefit
from the economies of scale.
• Saving of time:
It reduces the time required for production. Specialization makes labor highly skilled and
increased efficiency rate. Also, specialisation promotes invention
• Specialization in regional and international contexts:
Some countries have comparative advantages in production.
For example, Pakistan has advantages over other countries in the region in production of
cotton due to fertile soil, climate conditions and rainfall required for this crop. Pakistan should
get specialized in production of cotton rather utilizing its economic resources in multiple crops

2.3: CAPITAL FORMATION:

• Capital formation is the net capital accumulation and refers to the increase in the stocks of
capital in the country over a long period of time.
• current consumption is sacrificed for accumulation of capital goods.
• Capital goods include machines, plants, tools, factories, transport equipment, materials,
electricity, etc.

Stages involved in the process of capital formation:

(i) Creation of savings:

Savings are done by the Individuals or households. People save money by not spending all their
income. The level of savings in a country depends:
• Low present consumption
• More Power and will to save
• High Average level of income
• High Distribution of National income

(ii) Mobilization of savings:

• Transfer of savings from the households to businesses for investment.
• Savings are mobilized through Capital Market.
• Development of capital market is necessary for the increase in rate of capital formation.
• In the Capital market funds are supplied by the individual investors, banks and financial
organizations, insurance companies and government etc.

(iii) Investment of savings:

• Investment of savings in real capital is integral for the capital formation.
• This can only happen if there are enough entrepreneurial ventures and businesses that are
willing to take risks and embrace uncertainty

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2.4: AGENTS/PARTICIPANTS OF AN ECONOMY:

Definition of Agent:
An actor or decision-maker within an economic model.

Types of Agents:
There are four types of agents:

(i) Households: (Consumer, consumption units)

The collective group of individuals who are not only consuming goods and services, but also
providing labour for firms.

Economic Problem:
They allocate scarce income between different goods and services to satisfy their needs.
.
(ii) Firm: (producer, production unit)
The collective group of organizations producing goods and services in an economy.

Economic Problem:
Allocating scarce factors of production (labor, equipment, raw materials) between different
potential products to increase its profits.

(iii) Government: (State)

Also known as “the state”, the organisation that governs over society through a combination
of customs, exercises and laws. Allocating its resources (tax revenue, staff etc.) between
different social needs.

Economic Problem:
Allocating its resources (tax revenue, staff etc.) between different social needs.

(iv) Foreign Traders: (Importers and Exporters)

The collective group who exchanges goods and services between different economies.

PART-03: GOODS, ITS TYPE & OPPORTUNITY COST

Goods are tangible items that satisfy human needs or wants and provide utility. It is directly
consumed by the consumers e.g (All final goods) i.e car, mobile phone, Apple etc.
• Durable goods (that can be used for a longer period of time) e.g. automobiles, furniture and
other household equipment;
• Non-durable goods/Perishable goods (that cannot be used for a longer period of time) e.g.
food, clothing; and
• Services are intangible. E.g. Building work, teaching, transport, medical care, entertainment
etc.

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3.1: TYPES OF GOODS:

On the basis of Income

1) Normal goods:
• Normal goods are those whose demand increases as the income increases such as
milk.
• For normal goods the “income elasticity demand (YED)” is positive. Most of the
goods come under this category

2) Inferior goods:
• Inferior goods are those whose demand decreases as the income increases.
• With the increase in income people tend to move from inferior goods to normal goods.
• The “income elasticity demand (YED)” in case of inferior goods is negative.
• e.g. Inexpensive food, frozen food, long route bus tickets, reconditioned cars, public
transport, second-hand products etc.

3) Superior/Luxury goods:
• Superior goods are those goods whose demand increase more than as the income of
consumer increases
• Income elasticity of demand is positive and greater than 1.
• e.g. a luxury car and Gold ornaments.

Summary:
Goods Income Elasticity of Demand Example
Normal Good Positive Milk, Fresh vegetables
Inferior Good Negative Frozen vegetable, 2nd hand good
Superior Good Greater than 1 luxury car, Gold

On the basis of Consumption

1. Merit Goods: Goods which are socially desirable, create positive externalities in society
(beneficial for society). Examples include Education, Health, Parks.

2. Demerit Goods: Goods which are socially undesirable, create negative externalities
(harmful for society). Examples include Cigarette, Alcohol, drugs etc.

3. Private goods: These are the goods that can be provided separately to different persons with
no costs to be borne by others. It has:
• Rivalry (consumption by one consumer prevents simultaneous consumption by other
consumers), and
• Excludability (Exclude consumers who do not have purchasing power.).
Example: personal mobile, house, bike, Bread etc.

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4. Public goods: are readily available to all the people in a society. It has:
• Non-rivalry (consumption of a good by one person does not reduce the amount
available for others), and
• Non-excludability (cannot exclude a certain person from using such goods).

Examples include National Defense System, High-ways, Street-lights, emergency services etc.

5. Club Goods: are non-rival but excludable till a point where congestion occur. Examples
include Golf clubs, Cinema, social media etc.

Summary:
Goods Characteristic Example
Merit Good Socially desirable, welfare, positive Education, Health,
externalities Parks
Demerit Good Socially undesirable, harmful, negative Cigarette, Alcohol,
externalities drugs

Goods Characteristic Example

Private Good Rivalry Excludability mobile, house, bike, Bread
Public Good Non-Rivalry Non-Excludability National Defense System, High-
ways, Street-lights, emergency
services
Club Good Non-Rivalry Excludability Cinema, social media

3.2: OPPORTUNITY COST

Definition:
The opportunity cost is the value (benefit) of the next best alternative (good or service) foregone.

Examples:
• For students:
sleeping an extra hour or outing with friends is the opportunity cost of attending the lecture.
• For Firm:
The option between different techniques of production is also determined on the basis of
opportunity cost. The revenue foregone by using productive resources to supply good A
rather than using them to supply good B.
• For a government:
The social needs forgone by using resources to provide service A (e.g., education) rather than
service B (e.g., health).

In nutshell, we can say that all economic decisions have their opportunity costs. Production possibility
Frontier is the most appropriate way to explain opportunity cost.

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PART-04: PRODUCTION POSSIBILITY FRONTIER/CURVE:

Definition:

A Production Possibility Frontier/Curve (PPF or PPC) shows different combinations of two goods
that an economy can produce efficiently by using scarce resources with the given technology.

To elucidate the production possibility curve or frontier, we must understand some key concepts;
• Trade-off: To get something we must forgo something else as resources are limited.
• Choices: To grow more of wheat a farmer must sacrifice some of rice as piece of land is
limited.
• Efficient and inefficient use:
Efficiency states that the maximum attainable combinations a society is achieving.
In-efficiency termed as the underutilization of resources due to different macro-economic
affairs such as; any pandemic like COVID-19 when people stop spending on consumer goods
and capital goods, builders stop building more houses etc.
• Growth: Increasing ability to produce more goods and services in an economy over time,
through inventions, innovations, discoveries etc.
• Increasing opportunity cost: Law of diminishing returns increases the opportunity cost by
continuous switching of resources to some other uses.
⯈ Formula
The opportunity cost of X commodity in terms of units of Y given up can be written
as Opportunity Cost: 𝒀𝟐−𝒀𝟏
𝑿𝟐−𝑿𝟏

Assumptions:
To illustrate production possibility frontier in a complex economy is not possible without
simplifying the model through some core assumptions.
• Efficient use of resources: It is assumed that economic resources are used efficiently
• Full employment: It is assumed that all available economic resources are fully employed.
• Input resources are fixed: It is further assumed that economic resources are given and
fixed. The change in quantity and quality of input resources is not possible.
• Two goods model: It is assumed that society’s resources are deployed to produce only TWO
goods like, Capital goods and Consumer goods
• Constant state of technology: It is further assumed that techniques of production remain
unchanged during production process.

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Schedule/Table/Numerical Example:

Possibilities Capital Good Consumer Good

A 0 100
B 1 90
C 2 70
D 3 40
E 4 0

100 A
B
Diagram and Explanation: 90

80
Consumer Good

C
70 H
60

50
D
40
G
30

20

10
E

0 1 2 3 4 PPF0
Capital Good

Point on the PPC: (Efficiency):

PPF shows concept of Economic Efficiency. Each point on PPF shows production which is obtained
by using all resources efficiently.
The curve indicates that the economy can (choose) a number of combinations such as (Point C) 2
units of capital goods and 70 units of consumer goods and so on.
Every choice on PPC has an Opportunity Cost e.g., if option D is selected instead of option C,
opportunity cost of producing 1 more unit of capital goods will be 30 lost units of consumer goods.

Point (G) below the PPC: (Inefficiency):

Any point below the curve indicates that the economy has not produced efficiently. At this point
economy can produced one good without sacrificing the other.

Point (H) above the PPC: (Scarcity/unattainable):

Points outside the frontier are unattainable because of scarcity of resources, but it can be achieved
in long run with some Assumptions.

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4.1: PROPERTIES/CHARACTERISTIC OF PPC:

1. Downward sloping left to right: This implies the trade-off between two goods due to
constraint of input resources.

2. Concave to the origin:

It implies an increase in slope of PPF, as the opportunity cost of producing more of one
product increases due to two reasons:
(i) Law of diminishing returns and,
(ii) Some resources are not compatible for some goods, by switching resources from
compatible goods to non-compatibles, more of one product has to forgo to get a little
of other good.

Example: Land A is more fertile for rice crops and land B is for cotton. By switching land,
A from rice crop to cotton, we will get little of cotton by sacrificing much of rice crop.

4.2: Economic Growth/ Shift in PPC:

During the phase of economic growth of a country, it experiences expansion in its productive
potentials. For example, human resources (doctors, engineers, charted accountants and skilled
entrepreneurial etc.). Such investments enable the agents of an economy to produce more goods and
services than before.

PPC can shift outwards under following conditions:

• when there is an increase in resources available to the economy
• when there is an increase in quality and quantity of labor
• when there is technological progress

100
A
B
90

80
Consumer Good

C H
70

60

50
D
40
G
30

20

10
E

0 1 2 3 4 PPF0
Capital Good

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PART-05: ECONOMIC SYSTEM

An economic system is a system which resolves the basic economic problem by making three
resource allocation decisions i.e. what to produce, how to produce, and for whom to produce.

There are three economic systems:

Type of Economic System Depiction Countries

Free market/ Market All economic decisions are Canada, Chile, Germany, Japan,
Economy/Capitalism (or taken by the free-market forces South Korea
laissez-faire) economy
Command/Planned (or All economic decisions are North Korea, Cuba, Finland,
Socialism) economy taken by a central planning
body (Government)
Mixed economy Combination of market forces Sweden, France, United Kingdom,
and central planning United States, China, Netherland

5.1: MARKET ECONOMY/ CAPITALISM

According to Prof. Loucks “Capitalism is a system of economic organization featured by the private
ownership and the use for private profit of man-made and nature-made capital”.

What is a market economy?

In a market economy, the decisions and choices about allocation of resources are usually taken by
individuals and firms through market forces (Demand and Supply) without intervention of
government (called price mechanism or market mechanism)
Government’s role is restricted to legislation, foreign affairs, peace and security, and currency
issuance

Features
• Laissez Faire/ (hand-off) Approach means (leave alone)
• Price Mechanism: Prices are determined through price mechanism
• Environment of Competitions: In urge of monetary returns every firm tries to exercise all
those steps which others cannot.
• Freedom of Enterprise: Everyone is free to choose profession of his own choice.
• Right of Private Property: Private ownership of factors of production.
• Self Interest: Economic decisions are based on self-interest and profit motives.
(Entrepreneur for maximum profit, landlords for maximum rent/price, Labour for maximum
wages, Consumer for maximum utility)

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Benefits/Merits:
(i) Consumer’s sovereignty: (Freedom of choice for consumers)
(ii) Unhindered price mechanism: (Auto-adjusted price/market mechanism)
(iii) Incentives for agents of economy: (Freedom of entrepreneur and an incentive to innovate)
(iv) Capital accumulation: (By making new investments in the economy the overall capital stock
of the country increases)

Drawbacks/Disadvantages:
(i) Imprudent competition: (Unproductive expenditures on packaging, advertisement and other
marketing tactics to eradicate competitors from the market)
(ii) Threat of economic instability: (Danger of emphasis on luxuries rather than necessitates to
maximize their profits)
(iii) Economic inequalities: (firms maximize their profits at the cost of consumer surplus
(artificial shortage) which enlarge the gap between richer and poorer.)
(iv) Human welfare is a myth: (High prices by creating artificial shortage, exploitation of weak
economic agents, negative externalities etc., compromise the human welfare.)
(v) Cartels and monopolies: (Influential producers restrict entry of the weak and small producer
and enjoy as monopolists. concentration of economic power remains in few hands.
(vi) No provision of public good or social security.

5.2: PLANNED/ COMMAND ECONOMY/ SOCIALISM

Definition:
In a planned economy/ Socialism, the decisions and choices about allocation of resources are made
by the government rather than market.

Features:
• Resources are state-owned.
• A central planning body decides what to produce, how to produce and for whom to produce.
• government determines the prices of factors of production (FOP) and all goods and services.
• Government produces for the entire economy through an administrative process.

Benefits/Merits:
(i) Efficient use of resources: (Less duplication and waste of resources.). Comparative to
capitalism, socialism shows greater efficiency regarding the use of resources.
(ii) Prevention from price discrimination: (prevents from monopolistic practices.)
(iii) Social security: State makes sure the protection of the social rights of the public such as; job
security, life threats and medical care etc.
(iv) Discouragement of monopolistic practice:
(v) Economic stability: (Permits long term industrial and social planning fostering economic
stability.)
(vi) Full employment of the workforce is possible.
(vii) Promotes equal distribution of wealth.

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Drawbacks/Disadvantages:
(i) No care of transparency: (Assignment of most important economic activities may be based
on nepotism rather than on merit and skills)
(ii) Bureaucratic issues: (they do not have an urge to work efficiently which keep the pace of
economic development slow.)
(iii) Incentive less: (pre-defined tenure system of promotion makes them sluggish as do not have
incentive to work hard)
(iv) Loss of consumer sovereignty: (i.e., power to determine what goods and services should be
produced hold by the government)
(v) Less economic freedom: (Through rules and regulations e.g. people remain unable to choose
occupation of their interest.)
(vi) Lack of profit motive and competition makes the economy inefficient
(vii) Likelihood of corruption.

5.3: MIXED ECONOMY:

Definition:
According to Prof. Samuelson, “Mixed economy is that economy in which both public and private
sectors cooperate.”

In simple words we can say: “Mixed economy is a system in which both government and private
individuals share the economic control.”

Types of Mixed Economy:

The mixed economy may be classified in two categories:
• Capitalistic Mixed Economy: It is also called as capitalistically dominating mixed economic
system. This is most popular and workable type of mixed economy where ownership of
private sector remains responsible for utilization of various factors of production, while
government does not interfere in any mode. Government is mainly responsible to ensure
sustainable economic growth without concentration of economic power in the few hands.

• Socialistic Mixed Economy: We can say that in such system the government dominates the
major economic decisions. Under this system government largely shares means of production
while primary economic decisions are taken through controlled market forces. In such
economic system numerous basic and strategic industries are owned by the state and their
operation and management is done through centrally planned bodies.

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Features of Mixed Economy:

1) Co-existence of Private and Public Sector:

2) Personal Freedom:
Freedom of choice regarding economic decision is most prominent feature of mixed economy.
Although government has some controls over economic resources

3) Pricing system
Government control prices through Price monitoring and price fixation (Regulated price)
To avoid monopolies that may exploit consumers by charging high prices.

4) Social Welfare:
(Government protect weak agents of the economy through laws like, minimum wage rate,
support price and labor law etc.

5) Discouragement of economic Inequalities:

(Through taxation and subsidies) e.g. old age allowances, life time medical facilities and need
based scholarships etc

Advantages of Mixed Economic System

• Fair distribution of goods and services especially of public interest.
• It ensures the distribution of rewards on fair basis as government has sound regulations
about it. That means customers will get the best value for what they have spent money.
• Private property rights ensure the automatic allocation of capital resources to the most
innovative and efficient producers which stimulates the capital formation in the country.
• The dominating role of government also makes sure the care of weak agent of the economy
which get exploited under free market mechanism.

Disadvantages of A Mixed Economy

• lack of cooperation between public and private sector.
• Dominating role of government in economic affairs may create inefficiencies due to
bureaucratic controls
• As government has foremost role in business affairs of the country, therefore, sometimes
state regulations and requirements may cause a burden by increasing cost of doing business
for firms

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5.4: ISLAMIC ECONOMIC SYSTEM:

Islamic economic system is constructed on the basis of fundamental principles of Islam which take
guidance from Quran and Sun’nah.

Features of Islamic Economic System:

A number of features in the Islamic economic system will be shared with those of a mixed economy

1) ALLAH is the sustainer:

ALLAH created all the resources and He is responsible for feeding and nourishing all the
creatures and human beings. Islamic economics encourages people to do their best to earn a
livelihood using all lawful (Halal) and fair means.
AL-QURAAN:
Say, “He is Allah, [who is] One, Allah, the Eternal Refuge. He neither begets nor is born, nor is
there to Him any equivalent.” (112: 1-4)

2) ALLAH is the true owner of everything:

Man is merely a trustee of resources and has authority for using them in fair support of his
existence.

AL-QURAAN:
“And to Allah belongs whatever is in the heavens and whatever is on the earth” (3: 180)

3) State ownership:
There is no ban on the state owning an enterprise. However, a free market still exists
where entrepreneurs can profit so long as they abide by the other rules of the Islamic economic
system

4) Practicing of moderation:
Islam focuses on a fair distribution of resources thus population is instructed to share wealth in
middle way.
AL-QURAAN:
“Whatever you lend out in usury to gain value through other people’s wealth will not increase
in God’s eyes, but whatever you give in charity, in your desire for God’s approval, will earn
multiple rewards.” [30:39]

5) Prohibition of charging interest (Riba):

It is forbidden for a lending party to earn interest from a transaction without taking any risk.
Both parties must do business on risk and reward basis.
AL-QURAAN:

“… Allah has allowed trade and has forbidden riba…” [2:275]

“You who believe, beware of God: give up any outstanding dues from riba, if you are true
believers. If you do not, then be warned of war from God and His Messenger.” [2:278-279

“You who believe, do not consume riba, doubled and redoubled. Be mindful of God so that you
may prosper.” [3:130].

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6) Earnings: Earnings must only be made from goods which are allowed in Islamic teachings.

AL-QURAAN:
“O you mankind! Eat of what is on earth, lawful and good; and do not follow the footsteps of the
devil, for he is to you an avowed enemy.” (Qur’ān 2:168)

7) Hoarding of wealth is discouraged:

Islam encourages distribution and discourages hoarding of wealth. Resources should be utilized
for a good cause rather than remaining in private possession.
AL-QURAAN:
“And let those who hoard gold and silver and do not spend them in the way of Allah know that
a severe and painful punishment is awaiting them.” [At-Tauba: 34]

8) Zakat:
Zakat is a financial tax on wealthy people to help poor. It ensures equal distribution of wealth
AL-QURAAN:
“And establish prayer and give zakat, and whatever good you put forward for yourselves – you
will find it with Allah.” (2:110, Qur’an)
“Of their goods, take zakat, so that you might purify and sanctify them.” (9:103, Qur’an)

Note:
The Reference of AL-QURAAN is given only for your Islamic Economic knowledge, it’s not
Examinable.

Comparison of Islamic Economic System and Capitalist Economic System:

Capitalism Islamic system

Distribution of wealth
Full economic liberty and private ownership Fair and equal distribution aimed at balancing
resulting in significant disparities and the distribution of economic resources. Uses
concentrated wealth accumulation. mechanisms such as zakat, sadaqat and bequest
to help re-distribute wealth.
Exploitation
Exploitation of the weak agents through It helps to minimise human exploitation
relatively unlimited authority for economic through prohibition of activities such as usury,
freedom and unhindered private ownership is gambling, speculation and taking interest from
a common practice in capitalism. perceived weaker classes.

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Institutions of interest
Large banking institutions facilitate access to Concept of interest is effectively eradicated by
capital through intermediation and justify introducing legitimate mode of financing such
interest as service charges. as murbaha and musharikah etc.
Monopoly
In capitalism this an accepted reality that firms Public-interest businesses are generally
through cartelisation and other deterrents maintained under joint ownership of the
enjoy high profit on the cost of weak agents of community with direct government
an economy. intervention to prevent such monopolistic
exercises.
Right to ownership
Unrestricted right for private ownership of To prevent concentration of wealth in few
property. This leads to wealth accumulation hands and economic equalities Islamic system
and imbalanced distribution of wealth in supports nationalization of privately owned
society. organization.

Economic freedom
In capitalism firms enjoy unconstrained Economic freedom and profit motive are
economic freedom regarding production and acceptable to a certain extent subject to the
distribution of goods and services to maximize concepts of halal (legitimate) and haram
their profits in any way. (forbidden being unlawful).

Sharia Law:

Sharia law is the branch of statute that formalizes the previously discussed principles of Islamic
economics into law. It is derived from Quran and Sunnah. For example, under Sharia Islamic law:

➢ Making money from money – e.g., charging interest – is usury and therefore not permitted
➢ Wealth should only be generated through legitimate investment in assets and legitimate
trade
➢ Investment in companies involved with gambling, tobacco, and alcohol is prohibited
➢ Short selling and non-asset backed derivatives are not permitted

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Islamic Financing:

There are now a range of products freely available on the global financial markets that comply with
Sharia Islamic law. These include:
• bank current accounts
• mortgages
• personal loans.

Islamic financial model works on the basis of sharing risk

1. Mudaraba:
This is where a financial expert offers specialist investment in which the customer and bank share
profits (a kind of partnership)

2. Musharaka:
This is an investment partnership with profit sharing terms agreed in advance and losses limited
to the initial capital invested. (a kind of partnership)

3. Murabaḥa:
This is a form of credit that enables customers following Islamic principles to make a purchase
without the need to take out an interest-bearing loan. The substance of the transaction is that the
bank buys an item then sells it to the customer on a deferred basis

Murabaha is a sale transaction where the seller discloses the cost and profit to the buyer at the time of
execution of sale. Murabaha is a short-term Islamic facility for meeting asset based working capital
requirement of customers where instead of providing a loan, Meezan Bank sells the required asset to the
customer on spot or deferred basis (Source: Meezan Bank)

4. Ijara:
This is a leasing agreement whereby the bank buys an item for a customer then leases it back to
them over an agreed time period. The bank makes a fair profit by charging rent on the property.

5. Ijara–wa–iqtina
Similar to Ijara but the customer is able to buy the item at the end of the contract

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MULTIPLE CHOICE QUESTIONS

1.1) Economics is best defined as the study of

(a) financial decision-making.
(b) how consumers make purchasing decisions.
(c) choices made by people faced with scarcity.
(d) inflation, unemployment, and economic growth

1.2) Scarcity can best be defined as a situation in which

(a) there are no buyers willing to purchase what sellers have produced.
(b) there are not enough goods to satisfy all of the buyers' demand.
(c) the resources we use to produce goods and services are limited.
(d) there is more than enough money to satisfy consumers' wants

1.3) Because resources are limited

(a) only the very wealthy can get everything they want.
(b) firms will be forced out of business.
(c) the availability of goods will be limited but the availability of services will not.
(d) people must make choices

1.4) “Economics is a science which studies human behaviour as a relationship between

means which have alternative uses”.
(a) ends and wealth (b) ends and scarce
(c) resource and wealth (d) income and scarce

1.5) Which of the following is a basic economic problem?

(a) Lower incomes and higher taxes (b) Unemployment and inflation
(c) Unlimited wants and scarce resources (d) Balance of payment deficits and recession

1.6) Which of the following is a question answered with positive economic analysis?
(a) Should the college reduce tuition for out-of-state residents?
(b) Should the college charge higher tuition for part-time students?
(c) If the college increased its eligibility requirements for enrollment, will class sizes decline?
(d) Should the college eliminate its athletic program to cut its costs?

1.7) Name of Book of Lionel Robbins is:

(a) Wealth of National
(b) An Essay on Nature and significance of (1932) Economic Sciences
(c) Principles of Economics (1990)
(d) None of above

1.8) economics involves ethical precepts and norms of fairness

(a) Normative (b) Positive
(c) Applied (d) All of above

1.9) Which of the following statements is NOT true?

(a) Ceteris paribus means other things remaining same
(b) One of the economic goals is to maintain price stability
(c) Normative aspect of economics deals with factual questions
(d) Agent is a decision maker within an economic model
1.10) Which of the following statements relate to normative aspect of economics?

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(a) Government should provide basic health care to all citizens

(b) Government provided health care increases public expenditures
(c) Economists are paid more than the accountants
(d) Technology has the great impact on productivity

1.11) Normative economics not only study the economic facts but also put its judgements like, what ought
to be
a) Ture
b) False

1.12) What must be true of a positive statement:

(a) It is one that can be shown the correct or incorrect
(b) It is one that deals with positive changes in economic well being
(c) It is one that is true by definition
(d) It is one which agreed by everyone

1.13) In economics we know a fact that unemployment increases poverty and hurts living standard of the
people, it is said:
(a) Normative Economics (b) Positive Economics
(c) Economics Is an Art (d) Modern Economy

1.14) Economics not only highlights the economic problems but also suggest solutions.
(a) Normative Economics (b) Positive Economics
(c) Economics Is an Art (d) Modern Economy

1.15) A boat owner employs a crew to catch fish to sell on the market. Which factors of production are
involved in this activity?
(a) labour, capital and enterprise only
(b) labour and enterprise only
(c) land, labour and capital only
(d) land, labour, capital and enterprise

1.16) Which of the following is a measure of income earned by a factor of production?

(a) Indirect taxes (b) Depreciation
(c) Rent (d) corporate taxes

1.17) Which one of the following is NOT a basic question of economic?

(a) What will be produced? (b) Who will produce it?
(c) For whom will it be produced? (d) How will it be produced?

1.18) Economic growth in an industrial society results from:

(a) Technological change (b) Capital production
(c) Innovation (d) All of the above

1.19) Micro economics does NOT cover:

(a) consumer behaviour (b) factor pricing
(c) general price level (d) product pricing

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1.20) Which of the following is NOT associated with macroeconomics?

(a) Study of collective decisions by households or producers.
(b) The role of the State Bank in regulating the money supply.
(c) The economic behaviour of buyers and sellers in particular markets.
(d) Study of issues such as unemployment, inflation, economic growth, etc

1.21) Which of the following is not an issue in macroeconomics?

(a) issues relating to balance of payment
(b) determination of prices in the agricultural sector
(c) relationship between inflation and unemployment
(d) possible effect of a budget deficit on the level of investment

1.22) Which of the following topics are studied in Macro Economics?

(a) Theory of Demand (b) Aggregate Demand and Aggregate Supply
(c) Equilibrium of Industry (d) None of the above

1.23) deals with the behaviour of the individual agents of an economy such as;
households, firms, and employees.
a) Microeconomics
b) Macroeconomics

1.24) Microeconomic study doesn’t cover

(a) Consumer Theory (b) Theory Of Firm Behaviour
(c) Theory Of Unemployment (d) Theory Of Market Equilibrium

1.25) What macroeconomics doesn’t cover?

(a) Theory Of Firm Behaviour (b) Theory Of Unemployment
(c) Public Debt (d) Interest Determination

1.26) Normative science deals with the factual questions.

a) True
b) False

1.27) The cost of next best alternative foregone is called:

(a) Explicit cost (b) Economic cost

(c) Accounting cost (d) Opportunity cost

1.28) Which of the following in NOT a participant of an Economy?

(a) Household (b) Government
(c) Land (d) Foreign Traders

1.29) Which of the following is not a factor of production?

(a) Land (b) Labour
(c) Money (d) Entrepreneurship

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1.30) Which of the following is not an economic resource?

(a) Air (b) Sulphuric acid
(c) Water (d) Books

1.31) Microeconomics may be defined as the study of:

(a) the ‘focused picture’ of the national economy
(b) acquisition of new technological skills by the factors of production
(c) a study of the level of aggregate production and reasons for its fluctuations
(d) none of the above

1.32) Which one the following best describes the opportunity cost to society of building a new school?
(a) Increase in Taxes
(b) The money that was spend on school
(c) The running cost of school
(d) The other goods that could have been produced with the resources used to build the school

1.33) Which of the following is NOT a measure of income earned by a factor of production?
(a) Rent (b) Interest
(c) Profits (d) Taxes

1.34) Which of the following, best define Capital?

(a) This refers to all of Earth’s natural resources
(b) This refers to the work done by those who contribute to the production processes.
(c) This refers to man-made resources
(d) This refers to the people who take the risk of production using the other three factors

1.35) Which one is not a participant of economy?

(a) Household (b) Students
(c) Firms (d) Government

1.36) Which one is not a factor of production?

(a) Land (b) Air
(c) Capital (d) Labour

1.37) Which one is non-human factor?

(a) Land (b) Labour
(c) Entrepreneur (d) None of the Above

1.38) Interest is the reward of:

(a) Labour (b) Capital
(c) Land (d) Entrepreneur

1.39) Demand for land is:

(a) Direct Demand (b) Passive Demand
(c) Complementary Demand (d) Derived Demand

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1.40) Which of the following is NOT a Reward of factors of production?

(a) Rent (b) Interest
(c) Capital (d) Wages

1.41) The demand for a Factor of Production is called

(a) quantity demand (b) derived demand
(c) individual demand (d) market demand

1.42) Which of the following is NOT a processing part of Capital formation?

(a) Creation of savings (b) consumption of savings
(c) Mobilization of savings (d) Investment of savings

1.43) Which of the following is NOT a characteristic of Specialization?

(a) when workers use specialized skills and knowledge
(b) Specialization contributes directly to increased productivity levels.
(c) specialization does not promote inventions and innovations
(d) It reduces the time required for production

1.44) refers to producing goods or services by dividing into a number of tasks that
are carry out by different workers, rather being done by an individual.
(a) Specialization of labour (b) Division of labour
(c) Capital (d) Entrepreneur

1.45) refers to increase in existing stock of man-made capital of a country.

(a) Capital accumulation (b) Capital formation
(c) Both (d) None of these

1.46) Which one is the best definition of opportunity cost?

(a) All sacrificing cost (b) To obtain one more unit

(c) Next best alternative forgone (d) None

1.47) Following concept is NOT illustrated by the Production Possibility Curve:

(a) Efficiency (b) Equity

(c) opportunity cost (d) trade-off

1.48) Which of the following will NOT cause a shift in the Production Possibility Curve?
(a) A fall in unemployment (b) Increase in age of retirement
(c) Technological improvement (d) Capital investment

1.49) If a Society is producing inside the production possibilities curve, it means:

(a) Resources are not being used efficiently. (b) There is full employment of resources.

(c) Per capita income is increasing. (d) Income is distributed equally amongst all.

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1.50) The production possibility curve would move inwards when:

(a) there is a change in consumer taste
(b) there is an increase in employment of skilled labour
(c) there is a depletion of natural resources
(d) all of the above

1.51) What is Opportunity Cost if we move from point A to C.

Point Good A Good B

A 10 0
B 8 18
C 5 29
D 0 30
(a) 10 (b) 8
(c) 5 (d) 0

1.52) The production possibility frontier is concave to the origin because:

(a) in order to produce one good, resources must be diverted from the other
(b) some resources are better at producing one good and some resources are good at producing
other good
(c) there is always some level of unemployment
(d) all resources contribute towards production equally

1.53) If the production possibility curve moves outward to the right, it means that:
(a) the economy is capable of producing more goods and services than it could produce
previously.
(b) the economy is not able to produce goods and services that it could produce previously.
(c) it is not possible to produce the optimum combination of goods and services.
(d) there is significant decline in population or exhaustion of natural resources

1.54) The slope of a production possibility frontier is called:

(a) marginal rate of substitution (b) marginal utility of product
(c) marginal rate of transformation (d) marginal product

1.55) In the production possibility curve below what combination of two goods cannot be produced given
current levels of resources.

(a) A (b) B
(c) C (d) D

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1.56) Which of the following will move on economy’s P.P.F. outwards? (Select TWO)
(a) Improvement in labour skills (b) A fall in prices
(c) A rise in priced (d) A reduction in unemployment

1.57) In economics a good is called source if:

(a) If Demand is more then it’s supply (b) Only exist in small quantities
(c) Provides welfare to economy (d) If supply is more then it’s demand

1.58) Which of the following is more likely to be found in a free-market economy than in a planned
economy?
(a) An even distribution of wealth
(b) An incentive to innovate
(c) Production of goods for benefit of society as a whole
(d) Full employment of labour

1.59) In deciding what products to produce, the central planners in a planned economy would give least
priority to:
(a) size of economy’s labour force
(b) production capabilities of the economy’s factories
(c) consumer preferences
(d) type of raw materials produced by the economy

1.60) Which one of the following statements is NOT true for a planned economic system?
(a) Productive resources are state owned (b) Auto-adjusted price mechanism
(c) Full employment is possible (d) Less duplication of resources

1.61) Which of the following features is NOT related to capitalist economy?

(a) Consumer sovereignty (b) Profit motive
(c) No conflict between labour and capital (d) Freedom of enterprise

1.62) In which of the following options consumer sovereignty is in the order of highest to lowest?
(a) Market economy, mixed economy, planned economy
(b) Mixed economy, market economy, planned economy
(c) Market economy, planned economy
(d) None of the above

1.63) Capitalism is a system of economic organization featured by the ownership

(a) Private (b) Public
(c) Government (d) None of these

1.64) is an economic system in which all economic decision such as; what, how and for
whom to produce are largely taken by the state.
(a) Capitalism (b) Socialism
(c) State (d) Government

1.65) Free price mechanism / competition, self-interest, refers to

(a) Socialism (b) Mixed economy
(c) Capitalism (d) Islamic economic system

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1.66) Select any TWO merits of capitalist market.

(a) Unhindered price mechanism (b) Social security
(c) Economic stability (d) An incentive to innovate

1.67) Which of the following concepts is not illustrated by the production possibility curve?
(a) Efficiency (b) Opportunity Cost
(c) Equity (d) Trade-Off

1.68) P.P.F. is concave to the origin because of:

(a) Increasing opportunity cost (b) Decreasing opportunity cost
(c) Efficient use of resources (d) Full Employment

1.69) Rational behind a curvature production possibility curve is;

(a) Scarcity Of Resources (b) Non-Compatibility of Resources
(c) Rising Opportunity Cost (d) Decreasing Opportunity Cost

1.70) About given PPF, which TWO statements are true:

B C
A

(a) A Is Inefficient Use of Resources (b) B Is Most Inefficient Use of Resources

(c) C Is Unattainable (d) All Of Above

1.71) The curvature of the production possibility curve is due to:

(a) Change In Opportunity Cost (b) Increase In Resources
(c) Decrease In Demand (d) Decrease In Supply

1.72) Goods create positive externalities and contribute significantly to the social welfare household are:
(a) Merit Goods (b) Public Goods
(c) Demerit Goods (d) Free Goods

1.73) National defense is the example of:

(a) Private Goods (b) Public Goods
(c) Demerit Goods (d) Club Good

1.74) Goods for which demand decreases as income of households’ increases are known as:
(a) Normal Goods (b) Inferior Goods

(c) Superior Goods (d) Capital Goods

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1.75) goods are characterised with rivalry and excludability.

(a) Public (b) Demerit
(c) Private (d) Merit

1.76) Goods which are non-excludable and non-rivalrous known as:

(a) Merit goods (b) Public goods
(c) Demerit goods (d) Inferior goods

1.77) A movie theatre may be regarded as an example of

(a) public goods (b) demerit goods
(c) private goods (d) club goods

1.78) A good may be classed as if it causes positive externalities.

(a) Merit good (b) De-merit good
(c) Public good (d) Private good

1.79) Goods which are deemed to be socially undesirable are known as:
(a) Public goods (b) Private goods
(c) Merit goods (d) Demerit goods

1.80) Free price mechanism, competition, self-interest; refers to:

(a) Socialism (b) Capitalism
(c) Mixed Economic System (d) Command Economy

1.81) Consumer sovereignty, capital accumulation, less waste of resources; refers to:
(a) Capitalism (b) Mixed Economic System
(c) Socialism (d) Socialism

1.82) Which one is not a demerit of socialism?

(a) Cartels (b) Transparency Issue
(c) Bureaucratic Issues (d) Incentive Less

1.83) The central problem of economy is:

(a) To achieve maximum growth in production (b) To allocate resources between alternative
uses
(c) To ensure all resources are fully exploited (d) To overcome inequalities in income
distribution
1.84) Resources allocation refers to the apportionment:
(a) Consumer’s income (b) Productive capacity
(c) Factors of production (d) Raw materials

1.85) The system in which the government keeps its hands off economic decisions is called.
(a) Free market economy (b) Capitalist economy
(c) Laissez – faire economy (d) All of above

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1.86) In command economy resources are allocated by:

(a) Market forces (b) Entrepreneurs
(c) Government decisions (d) None of above

1.87) A centrally planned economy which seeks to maintain full employment can achieve this because.
(a) Economies of scale
(b) Firms are not permitted to earn super normal profit
(c) Net investment can within limits, represents any desired proportion of National product
(d) The public sector is obliged to employ all workers left after private sector demands have been
met

1.88) Which one is not prohibited in Islamic economic system?

(a) Making Of Money
(b) Investment In Prohibited (Haram) Businesses
(c) Short Selling
(d) Investment In Non-Asset Backed Derivatives

1.89) Which of the following is NOT in Islamic Economic System (Select TWO;
(a) Hoarding (b) Nationalization of Property
(c) Riba (d) Equity

1.90) A kind of partnership where a financial expert offers specialist investment in which the customer
and bank share profits is called .
(a) Murabaha (b) Mudaraba
(c) Ijara Wa-Iqtina (d) Ijara

1.91) is the leasing agreement whereby the bank buys an item for a customer then
leases it back to them over an agreed time period
(a) Ijara (b) Mudaraba
(c) Musharaka (d) Murabaha

1.92) The mode of Islamic financing where a financial expert offers services for managing investment; and
the investor and the expert share profits, is called:
(a) Ijara (b) Mudaraba
(c) Musharaka (d) Murabaha

1.93) is a form of credit that enables customers following Islamic principles to make
a purchase without the need to take out an interest-bearing loan
(a) Ijara (b) Mudaraba
(c) Musharaka (d) Murabaha

1.94) Islamic mode of financing includes an arrangement in which a person participates with his money
and another with his efforts/expertise. This mode of financing is known as
(a) Ijara (b) Mudaraba
(c) Musharaka (d) Murabaha

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 CH-01: FUNDAMENTALS OF ECONOMICS

ANSWER KEY

1.1) C 1.2) C 1.3) D 1.4) B

1.5) C 1.6) C 1.7) B 1.8) A
1.9) C 1.10) A 1.11) A 1.12) D
1.13) B 1.14) A 1.15) D 1.16) C
1.17) B 1.18) D 1.19) C 1.20) C
1.21) B 1.22) B 1.23) A 1.24) C
1.25) A 1.26) B 1.27) D 1.28) C
1.29) C 1.30) A 1.31) B 1.32) D
1.33) D 1.34) C 1.35) B 1.36) B
1.37) A 1.38) B 1.39) D 1.40) C
1.41) B 1.42) B 1.43) C 1.44) B
1.45) C 1.46) C 1.47) B 1.48) B
1.49) A 1.50) C 1.51) C 1.52) B
1.53) A 1.54) C 1.55) D 1.56) A,D
1.57) C 1.58) B 1.59) C 1.60) B
1.61) C 1.62) A 1.63) A 1.64) B
1.65) C 1.66) A,D 1.67) C 1.68) A
1.69) C 1.70) A,C 1.71) A 1.72) A
1.73) B 1.74) B 1.75) C 1.76) B
1.77) D 1.78) A 1.79) D 1.80) B
1.81) B 1.82) A 1.83) B 1.84) C
1.85) D 1.86) C 1.87) D 1.88) A
1.89) A,C 1.90) B 1.91) A 1.92) B
1.93) D 1.94) B

PRINCIPLES OF ECONOMICS | 35
 CH-01: FUNDAMENTALS OF ECONOMICS

TEST-01
1) Which of the following is not a factor of production?
a) Land b) Money
c) Oil d) Labor
2) In planned economic system profits belongs to government.
a) True b) False

3) Club goods are (Select TWO)

a) Rival b) Non-Rival
c) Excludable d) Non-Excludable
4) If a bank purchases an asset from a third party and then sells it to the company on a deferred basis,
the transaction is known as:
a) Musharaka b) Mudaraba
c) Murabaḥa d) Ijara

5) Which of the following is not permitted in Islamic economic system?

a) Special deposit with the bank in current account
b) Asset backed investment
c) Investment in the traditional market fund
d) legitimate investment in assets

6) Goods which demand decrease as Income increase.

a) Normal goods b) Inferior goods
c) Giffen goods d) Public goods

7) When the fisherman catches a fish and sells in the market the earn return is called?
a) Rent b) Interest

c) Wage d) Profit

8) Which of the following is not a feature of market economy.

a) Freedom of enterprise b) Environment of competition
c) Prices are determined through price d) Social security
mechanism

9) Three fundamental basic economic Questions, what to produce, How to Produce, for whom to
produce is due to ?
a) Want b) Need
c) Scarcity d) Opportunity cost

10) Which of the following is NOT the Advantages of Mixed Economic System? (Select TWO)
a) fair distribution of goods and services especially of public interest
b) inefficiencies due to bureaucratic controls
c) government also makes sure the care of weak agent of the economy
d) Government regulations increasing the cost of doing business for firms

PRINCIPLES OF ECONOMICS | 36