BBA 1st Principle Of Economics Long Question Answer Study Notes

BBA 1st Principle Of Economics Long Question Answer Study Notes

BBA 1st Principle Of Economics Long Question Answer Study Notes

BBA 1st Principle Of Economics Long Question Answer Study Notes

Q.1. Define the term Economics. Discuss its nature and scope.


Ans. Economics: The term Economics is derived from Greek words ‘Oikos’ Roman ‘Nomos’ which means household management.

“It is a science which deals with human being, how they earn money and how they spend it.”

Economics has been defended by many authors in different ways as follows:

Definition According to Wealth

In the word of Adam Smith, “Economics is an enquiry into the nature and causes of wealth of nation.”

In the word of J.B. Says, “Economics is the science which treat of wealth.”

According to Walker “Economics is the body of knowledge which is related to wealth.”

Definition According to Welfare

In the word of Penson, “Economics is the science of material welfare.”

In the word of Prof. Robbins, “Economics is a science that studies human behaviour as a relationship between ends. Scare means which have alternative uses.”

Nature and Scope of Economics

The nature and scope of Economics too has not being free from controversy. Scope means field of study. To discus the nature and scope of Economics we have to indicate whether economics is a science or an art or it is positive science or normative science or both.

  1. Economics is a Science: The term science is defined as a body of knowledge which describes the relationship between set of giving causes and their effect in that science.

(a) Economics is a science because it is body of generalized principles and theories which trace out a casual relationship between causes and effect.

(b) Economics is a science because it gives a systematic knowledge about economic activities of human beings.

(C) Economics is a science because like science, economic phenomena are also measured by economist using measuring rod money.

  1. Economics is an Art: A discipline of study is termed as an art if it tells us how to do a thing i.e. to achieve objectives in the best possible manner. Prof. Keyner says, “An Art is a system of rules for achievement of a given objective.”

Economics is used for achieving a variety of goals. Everyone has some specific goals. It decides its course of action by keeping in mind the end to be achieved and the situation faced by it. Economic laws are widely used and delight upon at all level of all economic activities so that it makes Economics an Art.

  1. Economics as Pure and Applied Science : Dr. Marshall suggests that Economics is pure and applied science. Pure Economics and Applied Economics is better, more scientific, more dignified and conductive to better understanding.
  2. Is Economics a Positive Science or a Normative Science? With regard to the nature of Economics, another question that arises, is Economics a Positive Science or a Normative Science?

According to Robbins; “Economics is only a positive science.” On the other hand Marshall and Pigou give the opinion, it is both positive and normative science.

  1. Economics is a Positive Science : Positive science is that science which studies an accurate and true description of events as they happen. Positive science confines itself to the study of what, how and why?

Argument in Favour of Economics being a Positive Science

(a) More Logical : Basis of positive science is logic while that of a normative science is emotion. It is by logic that the relationship between causes and effect of one can be established.

(b) More Efficient: The positive and normative aspect of every problem is studied separately to take advantage of the division of labour. In case of division of work divided into many parts and each part is entrusted to a separate worker. As a result each worker becomes efficient in his work. So, it is suggested that if the economics concentrate on the positive aspect of economic activities and leave normative aspect.

(C) More Neutral: The economist will not be neutral if he seeks to know both what is and what ought to be simultaneously.

It is therefore, essential to study economics as a positive science only to know the true facts.

  1. Economics is a Normative Science : Many economists like Marshall, Pigou etc. regard economics as a normative science. A normative science is one that aims at determining norms or values or ideals. Normative science means “What ought to be ?”

Arguments in Favour of Economics being a Normative Science

(a) More Practical : Economics studies the economic activities of man. Economic activities are based not only on logic but also on emotion. If economics is to be made more useful and practical, then along with logic care must also be taken of man’s emotion.

(b) More Useful : Economics is a science. It should suggest ways and means to promote economic welfare of man. It can become more useful if it is not only light bearing but also fruit bearing. Economics can be a great service to mankind as normative science.

(c) More Economical : If the economist synchronizes the analysis of economic problem with concrete economic policies he would save time. In short Prof. Wagner has rightly said, “Economics is both a positive and normative science.”

0.2. “Economics is the science of scarcity and choice.” Discuss this statement. Or “Economics is a science of choice making”, explain this statement.


 Ans. The definition of Marshall and Pigou was undoubtedly accepted by all the economists. But with the publication of Prof. Robbins’ book ‘An Essay on the Nature and Significance of Economic Science’ in 1932 created doubts in the mind of economist. Robbins neither emphasized ‘wealth’ nor ‘welfare’ but tried to establish a relationship between ‘limited sources’ and ‘unlimited wants’. Robbins defined economics in the following way:

“Economics is the science which studies human behaviour as a scarce means which have alternative uses.”

Fundamental Prepositions in Robbins’s Definition

Robbins’s definition includes four fundamental prepositions which can be studied unde following heads :

  1. Unlimited Wants. Ends and wants are numerous in number. It is not possible to satisfy all of them. When a particular want is satisfied, other creeps up to take its place. Multiplicity of wants make It imperative for a human being to work ceaselessly for their satisfaction, but that was Hence we have to choose between more urgent and less urgent wants and then to satisfy more urgent wants first.
  2. Limited Resources : The means to satisfy human unlimited wants are scarce and limited in quantities. Scarce means both ‘money’ and ‘time’. According to Robbins a person does not face only the problem of scarce money but, also face the problem of scarce time.
  3. Alternative uses of Resources : The limited resources can be put to various uses, so it gives birth to economic problem. But as our resources are scarce and can be put to various uses, so we have to choose between their uses. For example, land is capable of growing wheat, rice, maize pulses etc Hence, we have to choose which commodity to produce first. This we will do on the basis of Scale of preferences.
  4. Wants vary in Intensity : The various wants which a person has to fulfil do not carry equal intensity because all wants differ in their importance. Hence the problem of choice is solved by this intensity, variation and priority is given to that want which possesses higher intensity.

Features of Robbins’s Definition

Under the sphere of fundamental composition, Robbins’s definition has following features:

  1. Robbins’s Definition is Analytical : Robbins’s definition is analytical, not classificatory. It does not contain vague expression as ‘material welfare’ or ‘material requisites’ of well being. His definition is analytical because it does not study a particular kind of behaviour, but it focuses our attention on a particular aspect of behaviour, i.e. the influence of scarcity.
  2. Economics is Treated as Science : Another implication of Robbins’ definition is that economics is science. Like pure science, economics is neutral between ends. The ends may be noble or ignoble, material or immaterial economic or non-economic. Economics has nothing to do with ethics. According to Robbins, “Economics deals with ascertainable facts, ethics with valuation and obligations. The two fields of enquiry are not on the same plane of discourse.”
  3. Universality : Robbins’s definition of economics is considered to be very universal. It can be applied to any person or any economy at any time. According to Prof. Wickstead, “Its laws are the laws of life and are applicable to all the fields, that have no connection whatsoever with business or production of wealth.”
  4. Study of Human Behaviour: According to Robbins, “Economics is a human science.” It studies all the human activities of all the persons, whether they live in society or not. Problem of choice making among different wants is equally important for all the persons.

Criticism of Robbins’s Definition

Robbins’s definition has been criticised by R.W. Souter, Fraser, Durbin, Boulding and Barbara Wotten on following grounds :

  1. Wrong Connection of Limited Resources : According to Robbins, the problem of scare resources gives birth to all economic problems. But it is not always true. Some economic problems arise due to abundance of resources. For example, unemployment problem is caused not by scarce resources but by the abundance of population resources.
  2. Scope of Economics has Unnecessarily been Widened: According to Robbins, Economics is a human science. He has unnecessarily widened the scope of economics by including study of activities of those persons who are living outside the society, even if their activities have no relationship with wealth.
  3. Ignorance of Social Behaviour: Robbins’s definition of economics is related with individual behaviour. It ignores that social behaviour also influences the activities of a man living in society. All economic problems are more related with social behaviour than individual behaviour.
  4. Economics cannot be ‘Neutral’ between Ends: Robbins’s definition of economics is bitterly criticised on the ground that it has no relationship with human welfare. It assumes that economics is neutral between ends. Prof. Thomas has said, “‘The function of an economist is not only to explain but also to advocate and condemn.” Similarly, in the words of Barbara Wootten, “It is very difficult for economists to divert their discussion completely of normative significance.”
  5. Distinction between ‘Ends’ and ‘Means’ is Confusing : Robbins has not well explained the words ends and means. In fact, there may be many things, which are ends at one time and means at other times.
  6. Concept of Welfare is Inherent in Definition : Critics say that the concept of welfare is inherent in the problem of choice making, because basic motive of choice making is based on maximum satisfaction of welfare.
  7. Fails to Tackle the Problem of Underdeveloped Countries : Robbins’s definition provides no solution to the problem of underdeveloped countries. Resources are in plenty in these countries which are unutilized or underutilized. This problem finds no solution in this definition.
  8. Economics is not only a Positive Science but also an Art: According to Robbins, economics is a positive science, whose function is to formulate laws and principles only and has no concerns with its uses, but in actual practice, economics provides prior information about economic problems and suggests the ways to solve them. Therefore, economics is an art as well as positive science.
  9. Robbins’s Definition is Static and Inadequate : Robbins’s definition is static and inadequate, because there is no provision for development of means (resources) and some very important economic events are out of the purview of this definition, i.e., unemployment, depression, economic stability, distribution of income etc.

Q.3. Discuss the importance of economics with special reference to decision-making.


What is the significance of economic analysis in business decisions?

Ans. Main aim of all the business and industrial enterprises is to earn maximum profit. To achieve this object, executives have to take many decisions. Decision-making is the process of selecting a particular course of action from among the number of alternatives. A sound decision can be taken only when the decision maker has fairly good knowledge of the aspects of economic theory and the tools of economic analysis which are directly involved in the process of decision-making. Economics is concerned with such aspects and tools. Thus, Economics plays in important role in the decision-making process of a firm. BBA 1st Principle Of Economics Long Question Answer Study Notes

In its decision-making process, the management of a firm is to identify the factors which influence the firm. These factors can broadly be divided into two categories-external factors and internal factors. External factors are the factors over which a firm cannot have any control. These factors relate to the social, economic and political environment in which the firm is to operate. Internal factors are the factors that are within the control of a firm. These factors relate to business operation. Through knowledge of these factors help the management in making sound business decisions.

Q.4. What do you mean by Microeconomics? Give its importance and limitations.

Ans.Microeconomics Micro and Macro have come to be known as two important approaches to the economic analysis, They have assumed such a great significance that economists have safely bifurcated economic theroy into microeconomics and macroeconomics. These two terms were coined by Prof. Ranger Friseh during the twenties and since then they are frequently being used by economists for economic analysis.

Meaning and Definition of Microeconomics

The term ‘micro’ has been derived from the Greek word ‘mikros’ which means ‘small”. Thus, microeconomics is the study of individual units of economy such as individual consumer, individual firm and small group of individual unit such as various industries and markets. The term ‘microeconomics’ has been defined as under:

According to Prof. K.E. Boulding, “Microeconomics is the study of a particular firm, particular household, individual price, wages, income industry and particular commodity.”

According to Prof. Leftwitch, “Microeconomics is concerned with the economic activities of economic units such as consumers, resource owners and business firms.”

Thus Microeconomics studies the economic activities and behaviour of individual unit and small groups of individual units. In other words, it is a microscopic study of an economy.

Features or Characteristics of Microeconomics

  1. A Study of Individual Unit: Microeconomics is a study of individual unit of an economy such as a particular consumer, a particular household, a particular firm, a particular industry, a particular commodity, a particular price, a particular factor of production etc.
  2. A Study of Small Variables : Microeconomics is a study of small variables. These variables have a negligible (almost nil) effect on whole economy.
  3. Price Determination of a Commodity : Price theory is an important tool of microeconomics. It studies the determination of price for an individual commodity and an individual factor of production

Importance of Microeconomics

Microeconomics occupies a very important place in the study of economic theory. It has both theoretical and practical importance.

From the theoretical point of view it explains the functioning of a free enterprise economy. It tells us how millions of consumers and producers in an economy take decision about the allocation of productive resources among millions of goods and services. It explains how through market mechanism goods and services produces in the community are distributed. It also explains the determination of the relative prices of the various products and productive services. It explains the conditions of efficiency both in consumption and in production and departure from the optimum. As for practical importance, microeconomics helps in the formulation of economic policies calculated to promote efficiency in production and the welfare of the masses.

Thus, the role of microeconomics is both positive and normative. It not only tells us how the economy operates but also how it should be operated to promote general welfare. In Prof. Lerner’s words, “Microeconomic theory facilitates the understanding of what would be a hopelessly complicated confusion of billions of facts by constructing simplified models of behaviour.” Microeconomics analysis is also applicable to the various branches of economics such as public finance, international trade etc. Limitations of Microeconomics Microeconomics analysis also suffers from certain limitations : 1. It cannot give an idea of the functioning of the economy as a whole. An individual industry

may be flourishing, whereas the economy as a whole may be languishing. 2. It assumes full employment which is a rare phenomenon in the present days. It is

therefore based on an unrealistic assumption. 3. Microeconomics does not give a correct picture of the working of the entire economy. It explains the working of individual units only.

 Q.5. Define Macroeconomics. Give its limitations and importance.

Ans. Macroeconomics

Macro analysis is a recent development in economics. Instead of giving concentration upon the individual units, macroeconomics treats the whole economy. It deals with the great aggregates and average of the system rather than with particular items in it and attempts to define these aggregates in a useful manner and examines their relationship. In other words in macroeconomics we study how these aggregates and averages of the economy as a whole are determined and what cause fluctuations in them. From theoritical reasoning and on the basis of empir know that the old assumptions of full employment is not valid and therefore, it is very vital that w should investigate how these aggregates of the economy are determi determinants how to ensure the maximum level of income and employment in a country. The term macroeconomics has been as under: BBA 1st Principle Of Economics Long Question Answer Study Notes

According to Prof. Gardner Ackley, “Macroeconomics concerns itself with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed with the size of the national income with general price level.”

According to Sehultz, “The main tool of macroeconomics is national income analysis.” Thus, it may be concluded that macroeconomics is the study of the behaviour of large aggregate such as total employment, national product, national income, general price level of the country etc. It deals with the problems of unemployment, inflation, deflation, international trade, economic growth and economic fluctuations.

Scope of Macroeconomics

Macroeconomics deals with the economy as a whole. It deals with national income, national output, national expenditure, level of savings and investments level of employment etc.

Thus, employment theory, income theory, theory of price level, theory of growth distribution theory are the subject matter of the study of macroeconomics.

Limitations of Macro-Analysis

Macro-analysis has limitations its own :

(a) Individual is ignored altogether. It is individual welfare which is the main aim of economics. Increasing national saving at the expense of individual welfare is not a wise policy.

(b) The macro-analysis overlooks individual differences. For instance, the general price level may be stable, but the prices of food grains may have gone up spelling ruin for the poor. A steep rise in manufactured articles may conceal a calamitous fall in agricultural prices, while the average prices were steady the agriculturists may be ruined. While speaking of the aggregates, it is also essential to remember the nature, composition and structure of the components.

Importance of Macroeconomics

The importance of macroeconomics can be illustrated with the help of following points :

(a) Helpful in understanding the working of whole economy.

(b) Helpful in the formulation of Economic policies.

(C) Helpful in the study of growth and developments.

(d) Helpful in the development of macroeconomics.

Prof. Boulding rightly said, “Macroeconomics is essential from the view of framing economic policies because government policies are necessarily concerned with large group and not with a few persons.” BBA 1st Principle Of Economics Long Question Answer Study Notes

Q.6. Who is Economist? Examine his role and responsibility in the management.

Ans. Meaning of Economist : One of the most important object of management in its decision-making process is to identify the key factors which influence the business firm over a period of time. The person responsible for assisting top management in this task is called Economist. Economist helps the management in arriving at sound business decisions. He is known as an Economist, a Business Economist and an Economic Advisor also. He helps the top management in analyzing all the internal and external factors related with business firm so that sound business decisions may be taken. Importance of Economists is increasing day by day in business and industrial firms due to their ability and efficiency in arriving at sound business decision and in solving the complicated managerial problems.

Role or Functions of Economist in a Business Firm

Decision-making in one of the most important functions of management of a business and industrial firm. A Economist can play key role in the process of the firm by assisting management in using the specialised and complicated techniques and methods which are required to make the process of decision-making and planning easy. That is why, in developed countries, all the large business and industrial enterprises employ one or more Economists. In our country also, the importance of Economist is being growingly recognised and all the big business and industrial houses are employing Economists. Economist studies and analyses all the internal and external factors that may influence the activities of a firm so that the uncertainties may be predicted and business risks may be minimised. These factors may be divided into two parts as follows:

  1. Internal Factors : Internal factors affecting decisions are the factors over which the management has control. These factors lie within the scope and operation of a firm, such as determination of price policy, decision of contraction or expansion of business activities, determination of the level of efficiency and operation, determination of wage policy etc. Economist can assist management in decision making by playing an important role with regards to all these factors. He can advise management on following questions related with internal factors: BBA 1st Principle Of Economics Long Question Answer Study Notes

(a) What should be the sales budget for the next year?

(b) What should be the policy regarding inventory for next year? (

  1. c) What should be the production schedule for next year?

(d) What changes should be introduced in pricing policy of the enterprise during the next year?

(e) What should be the the wage policy for next year?

(f) What types of changes are required in the credit policy of the enterprise?

(g) What should be the policy regarding cash for next year?

(h) What should be the profit budget for next year?

Though all the decisions discussed above are taken independently by the managers of every enterprise but the atmosphere of business uncertainties creates complications in the process of decision-making. Various economic principles help in minimising these uncertainties. Economist can help by analysing these economic principles.

  1. External Factors: External factors are the factors over which the management has no control. These factors relate to business environment, in which a firm has to operate, such as:

Business policy of the government, situation of money inflation or money deflation, labour laws, government controls, competition, economic policy of the government, cyclical fluctuations in the industries etc. These factors are of great importance for a firm. Economist has to keep himself in constant touch with these factors so that he may assist top management in the process of Decision making He can advise top management on the following problems related with extern factors:

(a) What changes have taken place in economic policies of government and what more change are expected in near future in this field?

(b) What types of cyclical fluctuations are expected in national economy in future?

(c) What are the expectations of demand of goods being produced by the enterprise?

(d) what policies are expected to be adopted by competitors during coming period?

(e) What changes are expected to take place in the prices of raw materials in the comming period?

(f) What changes are excepted in the wage policy of government in comming ye (g) What changes are expected to take place in the cost of production.

(h) What is the outlook of national economy for comming year? What are the important economic trends of national economy that may affect the activities of the firm?

(i) What is the outlook of credit policy of financial institutions in future?

(j) What is the outlook of taxation policy, foreign trade policy, industrial policy of the government

(k) What is the outlook of market and customer outlooks during comming period (l) What are the main components of the five year plan?

Though the management of an enterprise cannot have any control over any of the factors discussed above, vet an assessment and analysis of these factors will help the management defining the scope, direction and limitations of business activities. An Economist can guide the management about general outlook of the economy and its impact on the activities on the firm. BBA 1st Principle Of Economics Long Question Answer Study Notes

Q.7. What are the methods of analysis in Economics? Discuss their advantages and disadvantages.


Induction and deduction are both needed for scientific through as the right and left foot are needed for walking commitment.

Ans. The techniques used to formulate economic laws are called method of Economics. According to Peterson, “The term method refer to those techniques which are used by the economists to formulate and confirm economic theories.”

Methods of Economic Study: There are two methods which are commonly used in scientific enquiries :

  1. Deductive Method,
  2. Inductive Method.

Deductive Method

Deductive method is an important method relating to the formulation of economic theory. This method is also known as hypothetical method, abstract method.

In this method, inferences are drawn from general cases to establish particular cases.

Steps of the Deductive Method

There are three steps of deductive method:

(a) Assumption : To begin with certain assumptions are made concerning some important aspects of economic behaviour.

(b) Logic: On the basis of these assumption of economic behaviour, certain logical conclusions are drawn with the help of mathematics. With the help of mathematical equation models are framed and conclusion drawn.

(c) Verification: The validity of the logical conclusion so drawn is verified by applying the same to the facts of real life.

Advantages of Deductive Method

It has the following advantages :

(a) Simple Method : It is a very simple method because it does not give rise to such problem as collection of facts and their analysis. Under this method, we do not face any difficulty in drawing inference from general theories.

(b) Certain and Clear Conclusion: The conclusion drawn by the use of deductive method are certain, clear, pure and reliable.

(c) Universality : The conclusion drawn under this method are applicable to all persons, at all times and at all places.

(d) Complement to Inductive Method : The veracity of inferences drawn through inductive metphod can be verified by deductive method.

(e) Help the Understand Economic Facts : In case of several economic facts it becomes difficult to separate causes from effect. Deductive method helps in studying such facts.

(f) Forecast : On the basis of this method, other things being equal forecast can be made in respect of specific economic behaviour.

Disadvantages of Deductive Method

Deductive method has certain disadvantages as under:

(a) Lack of Actual Facts : Correct inferences cannot be drawn due to lack of actual facts under this method. The assumption are not always true in real life.

(b) Difficulty in Verifying the Conclusion: It is not easy to verify the conclusion drawn.

(c) Unrealistic Assumption: The assumptions of this method are not always true. They change continuously with change in time and place.

(d) Less Possibility of the Development of Economics : All economic problems cannot be studied with the help of deductive method. If this method alone is taken into account then all round development of Economics would not be possible.

Inductive Method

Under this method conclusions are drawn on the basis of collection and analysis of facts relevant to the enquiry.

The logic in this case proceeds from the particular to general. The generalization based on observation of individual instances. This method is also known as historical method of analytical method

Steps of Inductive Method

Inductive method has following three steps:

(a) Observation of Facts : In this approach, first of all facts pertaining to an economic behaviour are collected. Facts are collected in two ways:

(i) Experiment, and (ii) Statics.

There is less possiability of experiment in economics as such, increasing use in made of statistics in collecting facts. Economics in the subject which analyses the quantitative relations of economic events with the help of statistics.

(b) Formulation of Hypothesis : After collecting the facts, hypothesis are formulated on their basis. Hypothesis is the probable explanation of a problem.

(c) Verification : Finally, the validity of the conclusion is verified by applying the same to real life.

Advantages of Inductive Method

It has following advantages :

(a) More Realistic: The inferences drawn through this method are more realistic and near to human life, as this approach studies intensively the effects of changing circumstances on human life.

(b) Possibility of Verification : It is also called experimental method because it is possible to verify the inferences through experiment.

(c) Complement to Deductive Method: It has verified the conclusion of deductive method and expressed their merits.

(d) Dynamic Approach: This approach keeps in mind the ever-changing character of economic facts. It does not assume the facts to be constant. Consequently its approach is dynamic.

Disadvantages of Inductive Method

The main disadvantages of this method are as follows:

(a) Difficult Method : It is a complex method. An ordinary person cannot make use of this method

(b) Limited use in the field of Economics : It is more useful in natural science where experiments are conducted on lifeless matter. In the field of Economics where complex problems of human being are faced. Its use is very much restricted.

(c) Limited Scope of Verification : If the conclusions are drawn on the basis of experiment on few people, then universal validity can be doubted. The theories formulated through this method can be valid only if the scope of their verification is wide.

Q.8. Write a detailed note on PP Curve (Production Possibility Curve).

Ans. Production Possibility Curve (PPC)

Production possibility curve shows all the possible combination of two goods, that an economy can produce faithful utilisation of giving resources and state of technology. BBA 1st Principle Of Economics Long Question Answer Study Notes

In other words, PP Curve shows that options of goods that are optionable with giving resources and technology.

According to Prof. P.A. Samuelson has bought the economizing problem into clear a focus by use of PP Curve.

Assumptions of PP Curve.

The assumptions of PP Curve are given below:

  1. Resources are fixed.
  2. There is no change in technology.
  3. The resources are fully and efficiently resources.
  4. The resources are not equally efficient in production of all products. It means a resource is more efficient in the production of one product than in another product.

Suppose only two goods are produced in an economy and they are product X and product Y are schedule and diagram show the various quantity of product X and product Y. They can be produced with the given resources and technology. If the economy devotes all its resources to the production of product Y. It can produce thousand of product Y. But then the production of product X will be zero PP curve. As now if we want to produce million of product X. We have reduced thousand the production of product Y. There can be a number of production possibility (ABCDEF).

PP curve tells us that we can produce more of any one commodity by given a sum of the others. In other words, one commodity can transfer into another, i.e. when PP curve is termed as transformation curve.

Shape of PP Curve

There are two basic characteristics of PP curve :

  1. PP curve is a downward sloping in full employment economy. More of one goods can be obtained only by given a production of another goods. It is not possible to increase the production of both of them with the given resources, i.e. when PP curve is downward slopping curve.
  2. The shape of PP curve concave to origin. The shape of PP curve is concave because of increased marginal opportunity cost.

Q.9. “The fundamental problem is the ‘problem of choice’.”Explain this statement in detail.

Ans. It is often said that central purpose of economic activity is the production of goods and services to satisfy our changing needs and wants.

The basic economic problem is about scarcity and choice. Every society has to decide :

What goods and services to produce : Does the economy uses its resources to operate more hospitals or hotels?

Do we make more iPhones and iPads or double-espressos? Does the National Health Service provide free IVF treatment for childless couples?

How best to produce goods and services: What is the best use of our scarce resources? Should school playing fields be sold off to provide more land for affordable housing? Should coal be produced in the UK or is it best imported from other countries?

Who is to receive goods and services: Who will get expensive hospital treatment and who not? Should there be a minimum wage? If so, at what level should it be set?


We are continually uncovering of new wants and needs which producers attempt to supply by employing factors of production. For a perspective on the achievements of countries in meeting people’s basic needs, the Human Development Index produced by the United Nations is worth reading. The economist Amartya Sen (Winner of the 1998 Nobel Prize of Economics) has written extensively on this issue.

Scarcity Means we all have to Make Choices

Because of scarcity, Choices have to be made by consumers, business and governments. For “ple, over six million people travel into London each day and they make choices about when to vel, whether to use the bus, the tube, to walk or cycle or whether to work from home. Millions of ecisions are being taken, many of them are habitual but somehow on most days, people get to work on time and they get home too.

Trade-offs when Making Choices

Making a choice made normally involves a trade-off this means that choosing more of one thing can only be achieved by giving up something else in exchange.

Housing : Choices about whether to rent or buy a home, there are costs and benefits of renting a property or in choosing to buy a home with a mortgage. Both decisions involve risk. People have to weigh up the costs and benefits of the decision.

Working : Do you work full-time or part-time? Is it worth your while studying for a degree? How have these choices been affected by the introduction of university tuition fees?

Transport and Travel : The choice between using Euro-Tunnel, a low-cost ferry or an airline when travelling to Western Europe.

The Cost Benefit Principle

Every purchase is a trade-off, of course. If you decide to spend $20,000 on a new car, you’re saying that’s worth more to you than 20 bicycles or four vacations to Europe or the down payment on d house. Every choice involves opportunity costs; when you choose one thing, you are giving up others. Plus, what you are giving up is not always financial. Or obvious.”

In many of these decisions, people consider the costs and beneifts of their actions, economists make use of the ‘marginal ideal, for example what are the benefits of consuming a little exta ola product and what are the costs.

Econonomic theory states that rational decisions-makers weight the marginal benefit one receives from an option with its marginal costs, including the opportunity costs. BBA 1st Principle Of Economics Long Question Answer Study Notes

The cost of benefit principle well applied will get you a long way in economics. Consumer welfare and rationality

What makes people happy? Why despite several decades of rising living standards, surveys of happiness suggest that people are not noticeably happier than previous generations?

Typically we tend to assume that, while making decisions people aim to maximize their welfare. They have a limited income and they seek to allocate their money in a way that improves their standard of living.

Of course in reality consumers rarely behave in a well informed and rational way. Often decisions by people are based on imperfect or incomplete information which can lead to a loss of welfare not only for people themselves but which affect others and our society as a whole.

As consumers we have all made poor choices about which products to buy. Behavioural economics is an exciting strand of the subject that looks at whether we are rational in our everyday decisions. One of the best people to read on behavioural economics is Dan Ariely. BBA 1st Principle Of Economics Long Question Answer Study Notes

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BBA 1st Year Principles Of Economics Short Question Answer Study Notes

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