Chapter Two |Basic Concepts and Issues of Economics|

Very Short Question Answer

1. What is meant by goods and services?
All those things which can satisfy human wants are called goods and services. Goods have physical existence where as services have no physical existence.

2. Define goods.
Goods are defined as the tangible things or commodities which can satisfy human wants. In other words, tangible commodities having utility are called goods. For examples food, clothes, care, building, etc. are goods.

3. What is meant by service?
Services are defined as the intangible things or human works, which can satisfy human wants. For example, doctor’s work, teacher’s work, banker’s work, etc. are the services.

4. Define inferior good.
Inferior goods are defined as the goods are those goods, whose demand increases with fall in income and decreases with rise in income of the consumers. These goods are low quantity goods such as street food, clothes kept in street for sale, etc.

5. Define normal goods.
Normal goods are defined as the goods whose demand increases as income of the consumer rises and vice-versa. These goods are quality goods such as branded clothes, restaurant foods, car, LCD television, etc.

6. Define giffen goods.
Giffen goods are special types of inferior goods, whose demand increases with rise in price and decreases with fall in price. Giffen goods are the exceptions to the law of demand.

7. Define complementary goods.
Complementary goods are those goods which are jointly used to satisfy a want. For example, ink and ink pen are complementary goods.

8. What is substitute good?
Those goods are substitute goods, which can be used in place of each other to satisfy a want. For example, Coca-cola and Pepsi are substitute goods.

Short Question Answer

1. Define land. What are its features? [5] [NEB, 2074, Set A]

Definition of Land

Land refers to all natural resources which are free gifts of nature. Land, therefore, includes all gifts of nature available to mankind-both on the surface and under the surface. For example, soil, rivers, waters, forests, mountains, mines, deserts, seas, climate, rains, air, sunlight, etc.

Features of Land

The features/characteristics of land are as follows:

• Land is fixed in supply: Since land is gift of nature, its supply is fixed. Man cannot add even an inch to the existing supply of land.
• Land is a free gift of nature: Land is a natural resource. Since nature has provided land, it is a free gift of nature.
• Land is permanent and indestructible: Land as a whole enjoys permanent existence and it cannot be destroyed. But a particular piece of land may be made useless or infertile.
• Land differs in fertility and situation: All land are not of the same quality. It is fertile somewhere and barren or sandy or marshy at other places. Thus, land differs in fertility and situation.
• Land has no geographical mobility: Land cannot be physically moved from one place to another but it has occupational mobility, i.e., it can be put to alternative uses.

2. Define Labour. What are its features? [5] [NEB, 2074, Set A]

Definition of Labour

Human efforts done mentally or physically with the aim of earning income is known as labour. Thus, labour is a physical or mental effoit of human being in the process of production. The compensation given to labourers in return for their productive work is called wages (or compensation of employees).

Features of Labour

The features/characteristics of labour are as follows:

• Labour cannot be separated from the labourer: This feature is found in labour alone. Other factors of production like land and capital can be separated from its owner. But labourer cannot be separated from labour.
• Labour is perishable: Goods can be stored and sold in the future at a high price. But this is not applicable for labour. If a worker does not work on a particular day, his labour for that day is wasted. Labour is thus perishable.
• Labour is an active factor of production: Land and capital are passive factors of production. Both land and capital cannot yield anything without the cooperation of the labour.
• Labour is mobile: Labour alone is a factor which is mobile. It can move from one place to another or from one occupation to another.
• A Labourer sells his labour, not himself: Only the service of labour i bought and sold not the worker himself. For example, a doctor is rendering certain service. We pay for the service of the doctor, not for the for doctor himself. paid

3. Define Capital. What are its features?

Definition of Capital

Capital refers to all man-made goods which are used for further production of wealth. Thus, it is man-made material source of production. Machines, tools, buildings, roads, bridges, raw material, trucks, factories, etc. are examples of capital.

Features of Capital

The features/characteristics of capital are as follows:

• It is man made factor: Capital is the result of man’s effort. Thus, every type of capital such as machines, buildings, road, factories etc. are produced by man. It is a man made factor.
• A passive factor: It is passive factor of production because capital is unable to produce anything without land and labour.
• A mobile factor: Capital is one of the most mobile factors of production. It can be taken from one place to another as it holds the quality of divisibility, durability and portability. It can be easily taken where it requires for production.
• A temporary factor: It is a temporary factor of production because it cannot live forever. When capital is used for production it depreciates depending upon the durability of capital assets. Thus, provision must be made for replacing it. Thus it is temporary factor.
• Elastic supply: Since capital is man-made factor of production, its supply is elastic (i.e., its supply can be increased or decreased).

4. What is organization? Mention its features.

Definition of Organization

Organization is that factor of production, which organizes land, labour and capital to produce goods and services according to a set plan. Organization is also known as the enterprise. Its main function is to manage and control production.

Features of Organization The main features/characteristics of organization are as follows:

• Organization of production: The organization takes steps to raise the necessary capital. It purchases machineries and materials, it hires labour, and it also arranges the production, distribution and exchanges of goods and services.
• Risk taking and uncertainty bearing: Risk taking and uncertainty bearing are very important features of the organization. There is risk of loss due to uncertain future, such as natural calamities, change in government policy, change in fashion, etc. All such risks and uncertainties are borne by the organization.
• Profit motive: The objective of the organization is to earn profit and accumulate wealth. Profit is essential for the survival as well as expansion of business. The performance of the organization is evaluated in terms of profit earning capability.
• Direction, supervision and control: Besides organizing the production, an organization exercises close and constant supervision. It also keeps direction and controlling in order to achieve the goal.
• Innovations: Another important feature of the organization is introducing innovations. Innovation implies a variety of things. It means introduction of new method of production, discovery of new raw materials, introduction of new commodity, etc.

5. What is scarcity? [5] [HSEB 2073, Set D]

Resources are said to be scarce when they are insufficient to satisfy human wants. Human wants are unlimited but resources which can satisfy human wants are limited or scarce. This is known as the problem of scarcity. This raises the problem of how to use scare resources to achieve the maximum possible satisfaction of people. This is the economic problem. This is also known as the problem of economizing resources. The goods and services are scarce because the productive resources such as land, labour, capital, raw materials, natural resources, etc., which are used in the production of goods and services are scarce or limited.

The scarcity in economics is always refers to the relative scarcity. Anything is said to be scarce if it is insufficient to satisfy human wants. Everything is limited except air and sun light. Thus, it is not possible to produce all things that we want to have. This is the basis of all economic problems. If there was no scarcity, there would not be a economic system and no economics. Thus, scarcity is the central problem of all economies of the world whether developed economies or developing economies.

6. What is Choice? OR “Economics is the science of choice and scarcity.” Discuss

OR, Discuss the concept of scarcity and choice in economics. [5] [NEB, 2074 Set B]

Choice refers to process of selection from available limited alternatives. It emerges because of unlimited human wants, limited resources and alternatives uses of these limited resources. As human being can not satisfy all his wants are more urgent than the others. Therefore, it is necessary to divert resources from less urgent wants to more urgent wants.

If there had been limited wants and unlimited resources, we would not face the problem of choice. Hence, due to imbalance between human wants and resources available, the problem of choice arises. In other words, as most people can not get all the goods and services they want, they have to make choice. With no rise in income, if someone wants to buy motorbike, he will have to spend less on food and clothes. Similarly, with limited resource, if a country wishes to devote more expenditure on road construction, it will have to reduce expenditure on education. Thus, choice is the result of limited resources and unlimited human wants.

7. What is opportunity Cost? OR, Explain the concept of opportunity cost.

Since all the resources are limited, we cannot produce everything we want. Therefore, we are compelled to make choice. If we choose to produce more quantities of a commodity, the resources available for the production of other commodities will be less and consequently there will be less production of other commodities. For example, let us suppose, a farmer has ten ropanies of land. He can grow paddy and maize in his farm land. If he decides to grow only paddy, he will have to sacrifice production of maize. Here, opportunity cost of producing paddy is the production of maize scarified. Hence, opportunity cost is the best next best alternative foregone.

Opportunity cost is a very important concept in economics. It makes clear the true resources cost of any economic decision. The concept of cost-benefit analysis is based on the theory of opportunity cost. The cost-benefit analysis is very useful tool to decide public projects such as construction of road, bridge, irrigation canal, etc.

8. What is allocation of resources?

Allocation of resources is the basic economic problem related to the utilization of resources for the production of different goods and services. In other words, it refers the use of scarce resources in the production of goods and services that satisfy human wants. In fact, it is scientific and optimúm use of scarce resources to meet unlimited human wants. It is also regarded as the fundamental problem of the econorny. There are three fundamental problems regarding the allocation of resources, which one as follows:

• What and how much to produce?: The problem of the economy can be divided into two questions: first, which goods and services to produce and second, in what quantities these goods are to be produced. For example, we have to choose whether to produce more goods and services for consumption or more capital goods such as machineries, factories, etc.
• How to produce?: This questions or problem is related with the choice of method of production. There are two methods or techniques of production: labour intensive and capital intensive. The choice of method of production depends upon the supply situation of resources and their prices.
• For whom to produce?: This question or problem means how goods and services produced are distributed among the people. In other words, it means who gets how much of the goods and services produced in the country.

 

Long Question Answer

1. What do you mean by factors of production? Explain about the types of factors of production.

Factors of production are those resources which are used by the producer to produce goods and services. In other words, factors of production refer to all those goods and services which are required to produce other goods services. Production is not possible without factors of production. Factors of production are also known as the inputs. For example, it a farmer wants to produce paddy, he needs seeds, land, labour, tools and implements, etc., which are called factors of production.

Types of Factors of Production

There are four factors of production: land, labour, capital and organization. These factors production are briefly explained as follows:

1. Land: in the ordinary language, land refers to earth surface. But in economics, land refers to the all those resources which are free gift of nature. It covers the land surface, whether level or mountainous. It includes oceans, lakes and rivers, mineral depositors, rain fall, forest and numerous other things which nature provides and man uses. Thus, land embraces all that nature has created on the earth, above the earth and below the earth surface.

   Land is a very important factor of production. It is original source of all material wealth. The economic development of a country depends upon the quality and quantity of land available in the country. Land is limited in area; it lacks mobility; it is permanent and it has infinite varieties.

2. Labour: In the ordinary sense, labour refers to the work done by manual unskilled labour. But in economics labour has wider meaning. It doesn’t merely mean labour. It includes mental work too. Thus, in economics labour is defined as the human effort done mentally or physically with aim of earning income. Capital is passive factor of production but labour is active factor of production. It is impossible to produce goods and services without use of labour. Labour is mobile but its supply is inelastic.
3. Capital: In the ordinary language, capital is used in the sense of money: But in economics capital has wider meaning. In economics capital refers to all those man-made goods which are used for further production of wealth. Thus, it is man-made material source of production. For example, machines, tools, buildings, road, bridges, factories, etc. are capital.

   Capital is man-made factor of production but it is passive. It means that without labour, we cannot operate capital. It is highly mobile factor of production but temporary. Since, it is man-made factor of production, its supply is highly elastic.

4. Organization: Organization is defined as the factor production, which organizes other factors of production to produce goods and services according to a set plan. Organization is also known as the enterprise. Its main functions are organizing and risk-taking.

   Organization or enterprise organizes production, takes risk and bears uncertainty. The main objective of organization is to maximize profit. Organizations also introduce innovations, i.e., introduction of new method of production, discovery of new raw materials, introduction of new goods, etc.

2. What do you understand by allocation of resources? Explain.

Allocation of resources refers to distribution of factors of production among the alternative uses. In other words, it is the use of scare resources in the production of goods and services that satisfy human wants. In fact, allocation of resources is the scientific and optimum utilization scarce resources to meet the unlimited human wants. It is also regarded as the fundamentals or basic problem of the economy. There are three fundamentals problems regarding the allocation of resources, which are as follows:

1. What and how much to produce?: The problem of ‘what to produce’ can be divided into two related questions. First, which goods and services are to be produced and which not; and second, in what quantities those goods are to be produced. Since resources are limited and human wants are unlimited, it is not possible to produce all goods and services people want. An economy must choose among different alternative collection of goods and services that it should produce. If the economy produces particular goods in a large quantity, it will have to withdraw resources from the production of some other goods. Further, an economy also has to decide in the production consumers goods and capital goods. The choice between consumer goods and capital goods involves the choice between present and future. If the economy decides to produce more capital goods at present, the current consumption was to be sacrificed for the space of more consumption in the future.
2. How to produce?: The second problem is how to produce goods and services? This problem is concerned with the choice of production technique which implies more production at the Jeast cost. There are two techniques production capital intensive technique and labour intensive technique. Under the capital intensive technique, more capital and less labour is used where as under the labour intensive technique, more labour and less capital is used. The choice between these two methods depends upon the supply situation of factors of production and their prices. Thus, the economy has to decide whether to choose labour intensive technique or capital intensive technique of production.
3. For whom to produce?: Once the problem of ‘what and how to produce’ are solved, the third basic economic decision ‘for whom to produce’ must be taken. For whom to produce means how national income is to be distributed among the members of society. It means that his problem is concerned with distribution of total quantity of goods and services produced in the economy. In other words, for whom to produce means who should get how much of the goods and services produced in the economy.

3. Explain the concept of production possibility curve. OR What is the production possibility curve? Explain it with the help of a table and a diagram.

Production possibility curve is defined as the locus of various combinations of any two goods that an economy can produce with the full use of its resources and state of technology. The concept of production possibility curve is very useful to explain the problem of scarcity, choice and opportunity cost.

Assumptions

The concept of production possibility curve is based on the following assumptions:

Available resources are fully utilized in the economy.

No change in technique of production.

Perfect mobility of factors of production from one use to the other.

Economy is producing only two goods.

The concept of production possibility curve can be explained by the help of foilowing production possibility schedule.

 

Production Possibilities	Quantity of Good-X	Quantity of Good-Y
A B C D E F	0 1 2 3 4 5	15 14 12 9 5 0

The above production possibility schedule shows the possible combinations good-X and good-Y, that can be produced by the full utilization of the existing resources of the economy. If all the resources are used in the production of good Y, its production will be 15 units but production of good X will be 0. On the other hand, if all the resources are used in the production of good-X, its production will be 5 units but production of good y will be zero. It means that while producing more quantities of one commodity, the production of other commodities will have to be scarified. On the basis of above schedule, we can derive production possibility curve as follows:

In the given diagram, X-axis represents quantities of good-X and Y-axis represents quantities of good-Y. The points A, B, C, D, E and F represents various production possibilities. The point A represents production possibility of 15 units of good-Y and no production good-X. Similarly, points B, C, D, E and F represents different combination of good-X and good-Y. The point F represents 5 units of goods-X but no goods-Y. When we joint all these points A, B, C, D, E and F, we get production possibility curve AF. Thus, the production possibility curve is the graphical representation of various combinations of any two goods which an economy can produce by the full utilization of its existing resources.

Shift in Production Possibility Curve

The production possibility curve can shift upward (outward) and downward (inward). The causes of shift in production possibility curve as follows:

1. Change in state of technology
2. Change in quality and quantity of factors of production.
3. Exploration of new raw material
   The production possibility curve expands outwards or shifts upward due to improvement in productive capacity of the economy. The productive capacity of the economy increases due increase in supply of resources and improvement in technology. On the other hand, production possibility curve shifts inward or downward when there is decrease in productive capacity of the economy. The productive of the economy decreases due to decrease in resources in the economy and degradation of technology. In the given diagram, the initial production possibility curve is AF. When the productive capacity of the economy improves, this curve-shifts outward or rightward to A₂F2. On the other hand, if productive capacity of the economy decreases, the initial production possibility curve shifts inward or downwards to A₁F₁.