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

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

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

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

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

Q.1. Discuss the nature of economics as positive and normative science

Ans. 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

  1. 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.
  2. 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 and each part is entrusted to a separate worker. As a result each worker becomes efficient in his work. So, it is suggested that the economics concentrates on the positive aspect of economic activities and leave normative aspect.
  3. More Neutral : The economist will not 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.

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

  1. More Practical : Economics studies the economic activities of man. Economic activities are based not only 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.
  2. More Useful : Economics is a social science. It should suggest way 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 great service to mankind as normative science.
  3. More Economical : If the economist synchronizes the analysis of economic problem with concrete economic policies he would save time.
  4. In short Prof. Wagner has rightly said, “Economics is both a positive and normative science.”

Q2. Discuss the relationship of economics with other subjects.

Ans. Growth and development of Economics has been possible over a long period of time and with the co-operation of many other branches of knowledge. Macroeconomics, Statistics, Mathematics, Accounts etc. have contributed a lot in the growth of Economics. A well trained economist uses and integrates the concepts, methods and techniques of all of these disciplines to solve managerial problems. D.C. Hague has stated in this regard, “Economics uses the logic of

Economics, Mathematics and statistics to provide effective ways of thinking about business decision problem.” Relationship of Economics with other branches of learning can be explained as under:

  1. Economics and Statistics : Economics is closely related with Statistics in a number of ways. The relationship of Economics with Statistics can be summarized as follows: (i) Statistics provides the basis for empirical testing of theory. The results of a theory cannot be accepted in a firm unless and until they are verified, (ii) Statistics provides the measures of appropriate functional relationship involved in decision-making, (iii) An Economist has to deal with the uncertainty of future events. Theory of probability, upon which many of the statistical studies are made, is important in providing logic for dealing with such uncertainty, (iv) Technique of linear programming is also important for Economist because it helps him in finding the best solution of a problem or the best alternative.
  2. Economics and Mathematics : Mathematics is another very important subject closely related with Economics. A knowledge of Geometry, Trigonometry and Algebra is essential for estimating various economic relationship, predicting required economic quantities and decision-making. In addition to this, certain mathematical tools and concepts are also useful in Economics.
  3. Economics and Operation Research : Operation research is also very useful in Economics. Operation research is concerned with model building, minimization, maximization and optimization. Construction of theoretical models is helpful in decision-making and maximization of profits or minimization of costs. Operation research is helpful in business firm in studying the inter relationship and relative efficiencies of the various aspects of business such as sales, production and financing. Operation research may encompass the complete cycle of the flow of good and services from suppliers to company and from company to consumers. Primary purpose of operation research as applied to a business firm is to find the optimum combination of various factors to achieve the objects of maximization of profit, minimization of cost, saving of time or any other subject. Haynes and William Warren have stated in this regard, “It is not important to determine where economics begins and operations research ends. But it is important to recognize the closer relation of the two subjects and the contribution that each makes to the other. The student who intends to do more advanced work in economics should obtain a thorough training in mathematics and statistics for the models which are likely to be important for future.” BBA 1st Year Principles Of Economics Short Question Answer Study Notes
  4. Economics and Accounting : Economics is related with Accounting also. Accounting is concerned with recording and analyzing the financial activities of a business firm. Accounting is the data required by an economist for the purpose of decision-making. For example, funds flow statement provides the information how these funds have been generated by a firm during a certain period and how these funds have been applied in the firm.

Q.3. Discuss the criticism of Robbins’s definition.

Ans. Criticism of Robbins’ Definition : Robbins’s definition has been criticized by R.W. Souter, Fraser, Durbin, Bounding and Barbara Wooten on the 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 Behavior: Robbins’s definition of economics is related with individual behavior. It ignores that social behavior also influences the activities of a man living in society an economic problems are more related with social behavior than individual behavior.
  4. Economics cannot be ‘Neutral’ between Ends : Robbins’ definition of economics criticized on the ground that it has no relationship with human welfare. It assumes thatch neutral between ends. Prof. Tomas has said, “The function of economist is not only to expels to advocate and condemn.” Similarly, in the words of Barbara Wooten, “It is ve economists to divert their discussion completely of normative significance.”
  5. Distinction between ‘Ends’ and ‘Means’ is Confusing : Robbins has not words ends and means. In fact, there may be many things, which are ends at one tin other times.
  6. Concept of Welfare is Inherent in Definition : Critics say that the inherent in the problem of choice making, because basic motive of choice maximum satisfaction of welfare.
  7. Failes to Tackle the Problem of Underdeveloped Countries : Robbins no solution to the problem of underdeveloped countries. Resources are in n which are unutilized or under-utilised. This problem finds no solution in this definition

Q.4. Discuss the responsibilities of an economist.

Ans. Responsibilities of An Economist : An economist has a great responsibility in a big business and industrial enterprise. He can serve the management of his firm in the best possible manner only if he keeps in mind the main objects of his firm and his responsibilities to achieve those objects. Responsibilities of Economist can be explained under following heads:

  1. To Search the Measures for the Increase in the Earning Capacity of Firm: Every business firm has an object of earning maximum profit. An Economist has a great responsibility in this regard. He has to play an important role in the achievement of this object. If he does not undertake his responsibility properly, capacity of the firm cannot be utilised fully and the firm cannot achieve its objects. Therefore, the Economist should continue his efforts in increasing the earning capacity of his firm.
  2. To Make Successful Forecasting: Success of every business firm is largely determined by the degree of accuracy and correctness of the forecasts made by it. An Economist is responsible of making successful forecasts by analysing all the internal and external factors and by predicting their impact on profitability and working of the firm. He must make his best efforts to minimise the uncertainties of future. If he finds an error in his forecasts, he should alert the management at the earliest so that necessary changes may be made in plans, policies and programmes.
  3. To Establish Contact with the Sources of Economic Information and Experts : An Economist is responsible for providing all the relevant economic information to the management so that the plans and programmers of the firm may be chalked out after taking into consideration these factors. Therefore, the Economist should establish and maintain contacts with all the possible sources from where he can collect the information relevant for his firm. He should take the help of experts also in analyzing such information so that the information may be more accurate and useful. He can join all the academic and professional associations from where he can get the information that are useful for his firm.
  4. To Keep the Management Informed of all the possible Economic Trends: A Economist should keep himself in touch with the latest developments of national economy and business environment so that he can get the management familiar with these developments and expected trends of the economy.
  5. To Make his Status Respectable in the Firm: Economist should earn respectful status in the firm. He can get it only when he performs his duties and responsibilities sincerely and seriously. He should be helpful to the management in successful decision-making. He should be ready and offer himself to take up special assignment allocated to him by the management. He should work in the manner that top management may realize his need in the firm and respect his ideas. He should explain his findings to the management in a simple and easy language.
  6. To Perform Specific Functions: Most important responsibility of an Economist is to perform his functions most sincerely.

Q.5. What is inductive method of analysis in economics? Also, give its advantages and disadvantages.

Ans. 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 or analytical method.

Steps of Inductive Method

Inductive method has following three steps:

  1. Observation of Facts : In this approach, first of all facts pertaining to an economic behavior, are collected. Facts are collected in two ways:

(a) Experiment, and

(b) Statics.

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

  1. Formulation of Hypothesis : After collecting the facts, hypotheses are formulated on the Hypothesis is the probable explanation of a problem.
  2. Verification : Finally, the validity of the conclusion is verified by applying the same to real

Advantages of Inductive Method

It has following advantages :

  1. 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.
  2. Posibility of Verification : It is also called experimental method because it is possible to verify the inferences through experiment.
  3. Complement to Deductive Method : It has verified the conclusion of deductive method and expressed their merits.
  4. Dynamic Approach: This approach keeps in mind the ever changing character of economic 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:

  1. Difficult Method : It is a complex method. An ordinary person cannot make use of this
  2. 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. It is used in very much restricted.
  3. Limited Scope of Verification : If the conclusion 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.6. What do you understand by Microeconomics? How does it differ from Macroeconomics?

Ans. Economics is divided into two branches :

  1. Microeconomics,
  2. Macroeconomics

Microeconomics: The prefix micro in microeconomics is taken from Greek word “mikros” which means small.

Microeconomics is the study of the behavior of individuals unit of Economics. Microeconomics refers to the study of scarcity and choice problem faced by individual Economics.

In the words of Shapiro, “Microeconomics deals with small parts of the economy.”

According to Boulding, “Microeconomics is the study of particular firm, particular household, individual price, wage income industry and particular commodity.”

Difference between Microeconomics and Macroeconomics

  1. Microeconomics is a study of individual unit of economy on the other hand, Macroeconomics is a study of economy as a whole.
  2. Microeconomics studies individual economic units on the other hand, macroeconomic is a study of national aggregates,
  3. Microeconomics deal with determination of price of a commodity, a factor of production, satisfaction of a consumer etc. On the other hand, Macroeconomics deals with the problem of unemployment, trade cycles, international trade, economic growth.
  4. Microeconomic is suitable to study the problem of individual economic unit. Macroeconomic is suitable for the problem of economy as a whole.

Q.7. What are the assumption of PP curve? Give its two basic characteristics.

Ans. Assumptions of PP Curve
  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 particular 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. 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). BBA 1st Year Principles Of Economics Short Question Answer Study Notes

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. why PP curve is termed as transformation curve.

Shape of PP Curve

There are two 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, that is why PP curve is downward sloping curve.

  1. The shape of PP curve concave to origin. The shape of PP curve is concave because o increased marginal opportunity cost.

Q.8. Explain the law of diminished marginal utility.

Ans. The law of diminishing marginal utility can be traced back to the writings of Gossen and Bentham. According to this law, as a person purchase more and more units of a commodity its marginal utility goes on declining. In the words of Prof. Boulding, “As a consumer increases the consumption of any one commodity, keeping constant the consumption of all other commodities, the marginal utility of the variable commodity must eventually decline.” The law points out that the marginal utility of a commodity depends upon its quantity, but is not proportional to its quantity. The marginal utility of the commodity to the consumer depends upon the volume of the stock purchased by him. The larger the stock purchased by him, the smaller is the utility derived from an additional unit of commodity. The law can be formally stated thus : “As the quantity of a commodity possessed by a person at any time increases, its marginal utility to him diminishes.” It should, however, be remembered that the law of diminishing marginal utility says nothing about the rate of decline or marginal utility. It does not specify whether the marginal utility diminished at a slow or a fast rate or whether it declines at a uniform or a variable rate.

The law of diminishing marginal utility can also be expressed in another way. When the consumer has only a little of a particular commodity, he puts it to the most urgent use. As he gets more and more of it, he begins putting it to less and less urgent uses. In the words of Baumol, this is so, “because we give priority to more highly valued uses: if we have only one piece of cake, we give it to our child ; if we have two, we give the second to our wife; a third we keep for ourselves and fourth we give to our mother-in-law.” BBA 1st Year Principles Of Economics Short Question Answer Study Notes

It should be clearly noted that when a person buys more and more units of a commodity or puts it to less and less urgent uses, the marginal utility derived therefrom has to diminish. It cannot increases. If the marginal utility were to increase with purchases of additional units of the commodity, then the consumer would spend his entire income on that commodity alone. As he purchases the first unit, it implies that the utility of the first unit is higher than its price. Now suppose that the marginal utility increases as he purchases more and more units of the commodity. In other words, the utility of an additional unit is higher than the utility of the preceding units. As the utility of the first unit is higher than the price, the utility of the second unit will be still higher. So he will purchase the second unit. The utility of the third unit would be higher than that of the second unit. Therefore, he will purchase the third unit as well. In this way, once he starts purchasing the commodity he would continue purchasing additional units of it till his entire income is spent on that commodity. The fact that a person does not spend his entire income on one commodity, proves that the marginal utility does not increase as the quantity of a commodity purchased by him increases. The conclusion then is that the marginal utility diminishes with every increase in the stock of the commodity.

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