Basic Problems of An Economy - Questions & Answers

MULTIPLE CHOICE QUESTIONS

1. Resources are (c) Both (a) and (b)
(a) Scarce     (b) Alternative uses     (c) Both (a) and (b)     (d) None of these

2. Environment supplies (c) Both (a) and (b).
(a) Renewable resources only     (b) Non-renewable resources only     (c) Both (a) and (b)     (d) Biotic resources only

3. Following is a biotic element of environment.
(a) Land     (b) Plants     (c) Water     (d) Mountains
Ans: (b) Plants

4. Which of following is an abiotic element of environment?
(a) Plants     (b) Animals     (c) Water     (d) Birds
Ans: (c) Water

5. Which of the following is a renewable resource?
(a) Coal     (b) Fish     (c) Petroleum     (d) All of these
Ans: (b) Fish

6. Which of the following are biotic elements : (i) Birds; (ii) Water; (iii) Land; and (iv) Forests?
(a) (i), (ii)     (b) (i), (iii)     (c) (i), (iv)     (d) (ii), (iii)
Ans: (c) (i), (iv)

7. Which of the following statements is/are true?
I. Air and water are biotic resources
II. Fossil fuels and minerals are non-renewable resources
III. Cloth is a man-made resource
Select the best option.
(a) Only I     (b) Only III     (c) Only II and III     (d) Only I and II
Ans: (c) Only II and III

8. Resources need to be efficiently used because
(a) they are scarce
(b) their continuous and excessive use will cause environmental crisis
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Ans: (c) Both (a) and (b)

9. Sustainable development implies (d) All the above.
(a) Increase in national income and per capita income     (b) rational utilisation of natural resources     (c) Environmental protection     (d) All the above

10. The concept of sustainable development is related to :
(a) Rural development     (b) Growth rate of GDP     (c) Human development     (d) Environment
Ans: (d) Environment

11. Benefit of sustainable economic development is obtained by :
(a) Present Generation     (b) Future Generation     (c) Both (a) and (b)     (d) Neither (a) nor (b)
Ans: (c) Both (a) and (b)

12. Economic problem arises due to
(a) limited wants     (b) scarce means     (c) alternative uses     (d) Both (b) and (c)
Ans: (d) Both (b) and (c)

13. Which of the following is related to the problem of how to produce?
(a) distribution of income     (b) choice of technique     (c) choice of product     (d) None of these
Ans: (b) choice of technique

14. Which is not a central problem of an economy
(a) What to produce?     (b) How to produce?     (c) When to produce?     (d) For whom to produce?
Ans: (c) When to produce?

15. Which one of these economic problems deals with technique of production?
(a) What to produce     (b) How to produce     (c) For whom to produce     (d) None of these
Ans: (b) How to produce

16. What is the underlying concept of economic development?
(a) It is just another synonymous term with economic growth
(b) It focuses on productive capacity of an economy
(c) Economic development is sustainable improvement in standard of living
(d) All of the above
Ans: (c) Economic development is sustainable improvement in standard of living

17. Which statement best defines economic growth?
(a) Reduction in poverty     (b) Increase in real output/income     (c) Widespread equality     (d) Improvement in health
Ans: (b) Increase in real output/income

18. Which is a key indicator of economic development, not just growth?
(a) GDP per capita     (b) Human Development Index (HDI)     (c) National Income     (d) Output per worker
Ans: (b) Human Development Index (HDI)

ASSERTION - REASONING & MATCHING BASED QUESTIONS

1. Read the following statements: Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): The supply of resources is limited in relation to demand.
Reason (R): Human wants are unlimited.
Alternatives :
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Ans: (b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).

2. Read the following statements: Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Economic development comes after economic growth.
Reason (R): Economic development = Economic growth + improvement in standard of living.
Alternatives :
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Ans: (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

3. Identify the correct sequence of alternatives given in Column II by matching them with respective terms in Column I:
Column I
(A) Economic Problem
(B) Human wants
(C) Resources
(D) Central Problem
Column II
(i) What to produce
(ii) Problem of Scarcity
(iii) Limited
(iv) Unlimited
Choose the correct alternative:
(A) (A) (iii) (B) (ii), (C) (iv), (D) (i)
(B) (A) (iii), (B) (i), (C) (iv), (D) (i)
(C) (A) (i) (B) (iv), (C) (ii), (D) (iii)
(D) (A) (ii), (B) (iv), (C) (iii), (D) (i)
Ans: (D) (A) (ii), (B) (iv), (C) (iii), (D) (i)

4. From the set of information given in Column A and Column B, choose the correct pair of options:
Column I
(A) Economic growth
(B) Economic development
(C) What to produce?
(D) How to Produce
Column II
(i) Allocation of resources
(ii) An increase in real national income
(iii) Choice of Techniques of Production
(iv) Quantitative as well as qualitative changes in the economy.
Choose the correct alternative:
(A) (A) (ii) (B) (iv), (C) (iii), (D) (i)
(B) (A) (iii), (B) (ii), (C) (iv), (D) (i)
(C) (A) (ii) (B) (iv), (C) (i), (D) (iii)
(D) (A) (iii), (B) (i), (C) (iv), (D) (ii)
Ans: (C) (A) (ii) (B) (iv), (C) (i), (D) (iii)

SHORT ANSWER TYPE QUESTIONS

1. Explain the concept of economic problem.
Ans: The problem of selection of commodities to be produced and consumed by the society is called choice problem or economic problem. It exists because human wants are unlimited but the resources to satisfy them are scarce and have alternative uses.

2. Mention the causes of economic problem.
Ans: The three main causes of economic problem are: (i) Human wants are unlimited. (ii) Resources are limited (scarce). (iii) Resources have alternative uses.

3. What are the three basic problems of an economy? Name them.
Ans: Every society faces basic central problems. They are: (i) What to produce? (ii) How to produce? and (iii) For whom to produce?

4. Explain the central problem of what to produce.
Ans: Resources available to an economy are scarce. An economy cannot produce all that the society needs. This compels the economy to choose which commodities should be produced and in what quantities, allocating resources to maximize aggregate satisfaction. For example, deciding whether to produce consumer goods like wheat or capital goods like machinery with a given piece of land.

5. Explain the central problem of how to produce.
Ans: Goods can be produced in more than one way, either by labour-intensive techniques (using more labour and less capital) or capital-intensive techniques (using more machines and less labour). An economy will opt for the technique which uses the least amount of scarce resources to produce a given quantity of output efficiently.

6. Explain the problem of distribution.
Ans: The problem of distribution, or "for whom to produce", determines how the national product (national income) is to be distributed among the factors of production (landlords, labourers, capitalists, and entrepreneurs) that helped produce it. It involves both functional and personal distribution of wealth in society.

7. Explain the problem of efficient use of resources.
Ans: After deciding what, how, and for whom to produce, an economy must ensure that resources are utilised efficiently and without wastage. Production is efficient if it is impossible to produce more of one good without reducing the output of another. Similarly, distribution is efficient if nobody can be made better off without making someone else worse off.

8. Why is there a need for economising of resources?
Ans: There is a need for economising of resources because society has to satisfy maximum human wants using limited and scarce resources which have alternative uses. Proper allocation avoids misuse and idle resources.

9. Define the term economic growth.
Ans: Economic growth implies an increase in real national income and per capita income in a certain time period. It is a single-dimensional quantitative concept.

10. What do you mean by the term economic development?
Ans: Economic development implies an increase in national income and per capita income along with improvement in the living standard of the people. It is a multidimensional process that involves quantitative as well as qualitative changes.

LONG ANSWER TYPE QUESTIONS

1. Define an economic problem. Why does it arise?
Ans: An economic problem means the problem of making choices that occurs because of the scarcity of resources to satisfy all human wants. It arises mainly due to three reasons: (i) Unlimited Wants: Human wants are unending and recurring. (ii) Limited Resources: The factors of production to satisfy wants are strictly scarce. (iii) Alternative Uses: Scarce resources can be put to multiple alternative uses, forcing society to make choices.

2. "Economic problem is essentially a problem of making choices in the presence of scarcity." Explain.
Ans: We live in a world of scarcity. All of us want better food, clothing, housing, and entertainment, but resources are not enough to meet all our wants. Even the richest economies cannot satisfy all the needs of people. Because resources have alternative uses, an economy has to make a choice on how to allocate its limited resources in the best possible manner. If resources were available in plenty, there would be no problem of choice. Hence, economics is concerned with the problem of choice under conditions of scarcity.

3. Explain the basic problems of an economy.
Ans: Every economy faces three central basic problems:
(i) What to produce and in what quantities? The economy must choose which goods (consumer vs. capital) to produce to give maximum aggregate satisfaction.
(ii) How to produce? The economy must decide on the technique of production—labour-intensive or capital-intensive—to maximize output at minimum cost.
(iii) For whom to produce? This refers to the problem of distribution of the produced goods and national income among the individuals or factors of production in society.

4. Distinguish between economic growth and economic development.
Ans: 1. Meaning: Economic growth is the increase in the production of goods/services, whereas economic development is the improvement in economic well-being and quality of life.
2. Concept: Growth is a narrow concept; Development is a broad concept.
3. Dimension: Growth is a single-dimensional quantitative concept (only focuses on income increase); Development is a multidimensional concept (focuses on income plus qualitative living standards).
4. Sequence: Economic growth is a prerequisite and may occur without development. Economic development comes after economic growth.

QUESTION BANK

1. What is meant by choice problem or economic problem?
Ans: The problem of selection of commodities to be produced and consumed by the society is called choice problem or economic problem.

2. What is meant by resources? State two main features of productive resources.
Ans: By resources (also called factors of production) we mean all those goods and services which are used to carry out production.
Two Features of Resources :
(i) Resources are scarce and
(ii) Resources have alternative uses.

3. Mention causes of economic problem.
Ans: (i) Human wants are unlimited.
(ii) Resources are limited.
(iii) Resources have alternative use.

4. What are the central problems of an economy?
Ans: Every society has to decide 'what to produce'? 'How to produce' and 'for whom to produce'? All these problems are collectively known as central problems of an economy.

5. Explain the problem "What to produce" with the help of an example.
Ans: Resources available to an economy are scarce. An economy cannot produce all that the society needs. This compels the economy to utilise its scarce means so that society gets maximum aggregate satisfaction.
Example : For example, from a given quantity of land, either wheat or cotton can be produced or a combination of them. If it is desired to produce more wheat and less cotton, land use will have to get diverted from cultivation of cotton to wheat.

6. Explain the problem of 'how to produce' with the help of an example.
Ans: Goods can be produced in more than one way. Production techniques may be either labour intensive or capital intensive. An economy will opt for the technique which uses the least amount of scarce resources for a given quantity of output.
Example : For example, a given amount of foodgrains can be produced either by using more capital and less labour or less capital and more labour. We have to make a choice.

7. Explain the problem of "for whom to produce" with the help of an example.
Ans: Problem of "for whom to produce" means how the national product i.e. national income is to be distributed among the factors of production that helped to produce it. It is the factor prices namely rent, wages, interest and profits which determine the distribution of goods among the various individuals in the society. For example, how should production be distributed among landlords, labourers, capitalists and entrepreneurs who are the suppliers of factor services.

8. Define economic growth.
Ans: Economic growth implies an increase in real national income and per capita income in a certain time period.

9. Define the term economic development.
Ans: Economic development implies an increase in national income and per capita income along with improvement of living standard of the people.

10. "Scarcity and choice go together." Comment.
Ans: We live in a world of scarcity. All of us want better food, clothing, housing, schooling, entertainment and many more. But resources are not enough to meet all our wants. Even the richest economy (like U.S.A.) cannot satisfy all the needs of people. It means, scarcity of resources is a common feature of even economy and it gives rise to the problem of choice, i.e. how to make the best use of limited resources. If resources were available in plenty, there would not have been any problem of choice. Hence, economics is concerned with the problem of choice under the conditions of scarcity.

11. Give meanings of (a) Need and (b) want.
Ans: A need is something necessary for survival. Food, clothing, shelter are classified as needs.
A want is something that we would like to have but is not necessary for survival.

12. What is meant by the Central Problems of What to Produces?
Ans: This problem refers to the decision regarding the selection of different goods and the quantities that need to be produced.