NIOS Economics (318) Notes/Answer| Chapter-2|Basic Problems of an Economy

NIOS Economics (318) Notes/Answer| Chapter-2|Basic Problems of an Economy. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-2|Basic Problems of an Economy

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-2|Basic Problems of an Economy

Intext Question

1. State whether the following statement are true or false: 

a) Resources are scarce.

Ans. True

b) Wants are limited.


c) Scarcity does not lead to choice.

Ans. False

d) Resources have alternative uses.

Ans. True 

e) Every economy does not face the basic economic problem.

Ans. False

f) Economising of resources 

Ans. False

g) Land is a factor of production. 

Ans. True

h) Human wants are unlimited.

Ans. True

i) Resources are scarce if demand is less than its availability.

Ans. False

j) Only producers face economic problem.

Ans. False

2. Choose the correct answer:

a) The problem of how to produce relates to: 

  1. distribution of income
  2. technique of production
  3. choosing the good to produce 
  4. choosing the quantities to produce

Ans. (b) technique of production

b) The problem of what to produce is solved by:

  1. preferences of people
  2. market prices
  3. government allocation of resources
  4. all of the above 

Ans. (D) all of the above

c) The income earned by labour in the production process will be part of the problem of:

  1. what to produce and what quantities
  2. how to produce
  3. for whom to produce
  4. none of the above

Ans. (C) for whom to produce

d) Labour intensive technique of production means:

  1.  the use of only labour in production
  2. production unit is owned by labour 
  3. the technique used for producing necessities.
  4. the use of more labour than capital in producing goods 

Ans. (D) the use of more labour than capital in producing goods

e) The central problems facing an economy relate to:

  1. the allocation of resources
  2. what to produce 
  3. how to produce 
  4. for whom to produce

Ans. (A) the allocation of resources

3. Choose the correct answer:

a) Under utilisation of resources means that resources are being used _________ (efficiently/ inefficiently).

Ans. inefficiently

b) Technological________ (backwardness/ improvement) leads to growth of resources.

Ans. improvement

c) Resources should remain _________ (idle/ fully utilised).

Ans. fully utilised

d) If a person is __________ (employed/ unemployed), it means that the resource is being wasted.

Ans. unemployed

e) Quantitative change in resources means that __________(there is more labour available/ labour gets more skill and training).

Ans, there is more labour available

4. Choose the correct answer:

a) A point on the production possibility curve shows:

  1. Growth of resources 
  2. Inefficient utilisation of resources
  3. Unemployment of resources
  4. Full and efficient utilisation of resources

Ans. (D) Full and efficient utilisation of resources 

b) An outward shift of the production possibility curve shows:

  1. Growth of resources 
  2. Inefficient utilisation of resources 
  3. Unemployment of resources
  4. Full and efficient utilisation of resources 

Ans. (A) Growth of resources

2. State whether true or false:

a) A point inside the production possibility curve shows underutilization of resources.

Ans. True

b) Unemployment of labour means that resources are not being fully employed.

Ans. True

c) Better technology will lead to an inward shift of the production possibility curve.

Ans. False

d) A production possibility curve can depict more than two goods in an economy.

Ans. False

e) An economy needs to choose the point at which it wishes to operate on the production possibility curve, as all points are equally efficient.

Ans. True

Terminal Exercise

1. How do economic problems arise? Would there be any economic problem if resources were unlimited?

Ans. The economic problem arises in every economy due to

  1. Unlimited wants 
  2. Limited resources
  3. Alternative uses of resources. 

If the resources were unlimited then the economic problem would probably not arise. 

2. Explain how scarcity leads to choice.

Ans. Scarcity of resources having alternative uses compels every individual and society to make choices in the use of resources in order to obtain maximum satisfaction. Clearly choice arises because of scarcity. Thus scarcity and choice go together. For example: Neha has only Rs 20 to spend. She wants to buy many things with it, so she must choose which things she should buy in order to satisfy her wants. In this way a consumer faces the economic problem of unlimited wants and limited resources. Similarly producers also face the economic problem as they need to decide to which alternative use they should put their scarce resources.

3. Using examples explain the problem of what to produce and in what quantity. 

Ans. The fact that resources are scarce leads to the problem of ‘what to produce’ and in what quantities to produce. An individual producer needs to decide on how to employ the sources that are available to her for production. For example, if Lata, a farmer has a piece of land, she needs to think about what crop she would like to produce on her land. Let us assume that she can grow either sugarcane or wheat. Given that her land is limited, she needs to choose whether she wants to use the land to produce sugarcane or wheat or both. Once Lata has taken this decision she needs to think about the quantity of the crop that she would like to produce. For example, 10 quintals, 20 quintals or 50 quintals.

This problem of ‘what to produce’ and in what quantities to produce is faced by all economies. An economy needs to choose whether it wants to use its resources to produce consumer goods or producer goods. Alternatively, to what extent should luxury goods be produced in comparison to necessities or goods of mass consumption? An economy may also be faced with the question of how much of civilian goods to be produced and how much of defence goods to be produced. In other words, scarce resources require economies to decide the combination of goods and services they should produce.

The problem of what to produce and in what quantities to be produced can be solved by a government that decides the allocation of resources in different areas of production. Alternatively, it can be solved based on the preferences of people in an economy and on the price of goods and services in the market.

4. Discuss the problem of ‘how to produce’?

Ans. Choosing the technique of production relates to the problem of ‘how to produce’. By technique of production we mean the different combination of factors of production that can be used to produce a good.

Generally all goods can be produced through different methods of production. Various methods of production require different combinations of factors of production. A technique of production could be either labour intensive or capital intensive. In a production process when more units of labour are used in proportion to capital, it is termed as a labour intensive technique. Alternatively, when the proportion of capital used is more than labour, the production process is called a capital intensive technique.

Let us understand this with the help of some examples. On Lata’s farm, she has the choice of using different combinations of labour and capital to produce her crop. If she chooses to do the ploughing, sowing, harvesting and threshing with her bullocks and employing people, then she is using a labour intensive technique. On the other hand, if she uses machines such as tractor, harvester and thresher to do the same work, then she is using a capital intensive technique of production. Similarly, in cloth production the use of handlooms is a labour intensive technique to produce cloth whereas the use of power looms is a capital intensive technique of production of cloth.

The solution of the problem of how to produce is based on the extent of output that is produced for a given level of resources. Any producer would like to maximise the level of output from the available resources. At the same time, the cost of using a technique is equally very important. A producer will use that particular technology which is available at least cost.

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

5. Explain the problem of fuller utilisation of resources. 

Ans. Resources are scarce; they must not be wasted. They must also be used judiciously to give the maximum output. Thus, fuller utilisation of resources has the following implications:

  1.  All resources must be utilised and
  2. Resources must be used efficiently

These two issues are discussed below:

(i) All resources must be utilised 

If resources are not utilised/employed or are lying idle, it means that they are being wasted. Wastage of resources results in low output. For example, people may be unemployed. This means that human resources are being wasted. Similarly, when workers in a factory go on strike, capital resources lie idle and are wasted. If these resources are utilised, the output that can be produced in the economy shall rise. Thus, every economy must ensure that scarce resources are utilised and not left idle or unemployed.

(ii) Efficient Utilisation of resources

Since resources are scarce, they should not be underutilised. Under utilisation of resources means that resources are not being used to their fullest capacity. For example, if a person finds a job in which he works only for 4 hours a day, but his capacity to work is 8 hours a day, then his labour is underutilised. In other words, the person is not being employed efficiently. If he had a job for 8 hours a day, the output would increase. Under utilisation of resources also results in wastage of resources. Hence, every economy must try and adopt techniques of production that ensure efficient utilisation of resources.

6. How can resources grow in an economy? 

Ans. As we know that wants are unlimited. This means that people continuously want more and more goods. However, these ever increasing wants cannot be satisfied unless the resources that produce goods and services are increased. Thus, resources must grow to satisfy the constantly increasing wants in an economy. So, how can resources grow in an economy? Resources can increase if:

  1. There are quantitative changes in the resources Quantitative increase in resources occurs when the actual quantity of resources that is available in the economy increases. For example, when the population increases, then the quantity of human resources increases. Similarly, when more natural resources are found, it increases the availability of resources in an economy.
  2. There are qualitative changes in resources Qualitative changes in human capital occur due to better training and skill development. Qualitative changes in manmade capital occur when there is an improvement in technology. Under qualitative changes, the amount of resources available does not change but their productivity increases. Productivity is defined as the output per unit of input. For example, if labour gets trained, then the output from the same person can increase. Productivity improves due to better skill and training.

To conclude our discussion, growth of resources occurs when the physical availability of resources increases and/or there is technological upgradation or an improvement in the quality of resources.

7. What is a production possibility curve? Using a production possibility curve shows the problem of inefficient utilisation of resources.

Ans. The production possibilities curve is a graphical medium of highlighting the central problem of ‘what to produce’. To decide what to produce and in what quantities, it is first necessary to know what is obtainable. The curve shows the options that are obtainable, or simply the production possibilities. 

When the economy functions at a point inside the production possibility curve, then it shows that there exists either underutilization or inefficient utilisation of resources.

Fig: Inefficient utilisation of resources.

Let us understand this point with the help of a diagram given in Fig. In Fig. we see that at point G the economy is producing 2 units of butter and 5 units of guns. Through a re-allocation of resources, the economy can do one of the following:

  1.  increase the production of guns to 12 units and keep the production of butter at the same 2 units as at point C on PPC. 
  2. increase the production of butter to 4 units and keep the production of guns same at 5 units as shown at point E on PPC.

In both (a) and (b) above, we see that the economy has been able to increase the production of the one of the goods if it moves towards point C or E on PPC from the point G which is inside PPC.

  1. In fact the economy can produce more of both the goods on any point on PPC (e.g. at point D) as compared to point G Therefore, we can conclude that at point G the economy was not using its available resources in the best possible manner. So any point inside the PPC shows unemployment of resources.

8. Draw a production possibility curve that shows growth of resources. How does growth of resources affect the output of an economy?

Ans. Growth of resources occurs when the physical quantum of resources increases or when there is a rise in the productivity level of resources. This implies that with growth in resources, the output produced in an economy will increase.

Fig: Production Possibility Curve showing Growth of Resources As resources grow, the economy can now produce more of both guns and butter. This is depicted by the curve UZ. In the above fig. at point U, the economy produces only guns which have increased to 20 units. This is more than the output of gun at point A. Similarly, at point Z, when the production of gun is zero, the output of butter is 20 units. This is greater than the output of 5 units when resources had not grown. All other output combinations show that the output of both guns and butter are higher on the production possibility curve UZ than on the curve AF. This shows that growth of resources results in an outward shift of the production possibility curve, which results in higher levels of output.

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