NCERT Solutions Class 12 Micro Economics Chapter 1

NCERT Solutions Class 12 Microeconomics Chapter 1 – Introduction

In any society, people require many goods and services for their day-to-day activities. A rough list of these goods and services can range from goods such as food, clothing and shelter to services such as transportation facilities, accessible channels of communication and services from healthcare professionals. Thus, in terms of an economy, it can be stated that a particular society has unlimited demands. But these unlimited demands are limited by the resources that society possesses. Every individual is engaged in some production of goods or services and wants a combination of goods and services that they will not produce. Any allocation of societal resources would result in the production of a specific combination of distinct goods and services. The goods and services created will need to be redistributed among the members of society. Two fundamental economic issues that society faces are the distribution of the final mix of commodities and services and the allocation of scarce resources. Chapter 1 of Class 12 Microeconomics introduces the students to the above-mentioned economic issues.

The NCERT Solutions Class 12 Microeconomics Chapter 1 provides students with the base of Microeconomics concept of central problems of the economy while also discussing in depth the market economy and production possibility and laying down the concept of Microeconomics and Macroeconomics. Going through these solutions will help students have a strong base of knowledge that will help them understand more complex economic concepts in the future.

Students are commonly advised to use the NCERT Solutions for each chapter to help them grasp and apply the chapter’s contents. Many students struggle to find solutions to all of the NCERT activities for a variety of reasons. The NCERT Solutions Class 12 Microeconomics Chapter 1 was prepared by Extramarks to help students grasp the material, formulate their answers, and receive solutions that have been properly reviewed. As they are created by subject matter experts and adhere to the most recent CBSE rules, these NCERT Solutions Class 12 Microeconomics Chapter 1 assist students in properly learning the topic, allowing them to perform well on tests.

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Key Topics Covered in NCERT Solutions Class 12 Microeconomics Chapter 1

The introductory chapter holds a lot of importance for students of Class 12. A strong hold on the concepts mentioned in the NCERT Solutions Class 12 Microeconomics Chapter 1 will give students the required knowledge to dig deeper into economic problems and understand how economies in the real world function.

Some key topics covered in NCERT Solutions Class 12 Microeconomics Chapter 1 are as follows:

• Introduction to a Simple Economy
• Central Problems of the Economy
• Production Possibility Frontier
• Assumption of the Production Possibility Frontier
• Shifts in the Production Possibility Curve
• Opportunity Cost
• Different Types of Economy
• Positive and Normative Economics
• Microeconomics and Macroeconomics

Let us now look at the detailed information on each of the above-listed subtopics in the NCERT Solutions Class 12 Microeconomics Chapter 1:

Introduction to a Simple Economy

• The simple economy faces the problem of choice. There are unlimited demands but limited resources that are available for which a choice has to be made.
• It is also referred to as the resource economisation problem or the challenge of using some resources effectively to meet the demands of the population.
• Natural resources, such as land and air, human resources, such as labour, capital resources, such as equipment and structures, and entrepreneurial resources such as a person prepared to take chances are all examples of components of production.
• The root causes of key difficulties include the unending human demand, the scarcity of economic resources and alternate uses of resources.

Central Problems of the Economy

There are three central problems to an economy. A detailed description of these problems as given in the NCERT Solutions Class 12 Microeconomics Chapter 1 is as follows:

1. What to Produce?

• The first challenge of every economy is deciding what things to produce and in what quantities or amounts. There are decisions to be made, including whether to create consumer or luxury goods, agricultural goods or investment goods, educational and healthcare needs of the nation or bolster the military.
• The Latin American country of Costa Rica provided a good example by dismantling its military in 1949 and allocating the funds previously used to maintain it to healthcare and education.
• After deciding what to produce, the following step is to estimate the amount or quantity of production. The economy thus faces ongoing challenges in deciding what to produce and what amounts.

1. How to Produce?

• The second issue is which method should be applied to produce diverse goods and services. The nation’s resource endowment plays a significant role in determining the best approach.
• The economy must determine whether capital- or labour-intensive processes can produce goods efficiently. The decision is based on the current economic climate and the requirement that the technique chosen not only lower manufacturing costs but also increase social and economic welfare.
• For instance, it is beneficial to choose a labour-intensive technique if a country is experiencing widespread unemployment due to its large population. The economy has two major ways in which it can produce goods and services:

1. Labour Intensive Approach- In this technique, more labour resources are utilised to produce goods and services in the economy than capital goods.
2. Capital Intensive Approach- In this approach, more capital is used in producing goods and services than labour resources.

3. For Whom to Produce?

• Finally, there must be a deliberate allocation of the final commodities and services generated (national income); i.e., who receives what and how much?
• The economy must choose the most appropriate distribution method for the finished goods among the various social classes.
• The purpose of choosing such a mechanism is to improve social welfare and people’s living standards while reducing income inequality and poverty. It has two aspects to it;

1. Personal Distribution: It is when national income is allocated according to who owns the production factors.
2. Functional Distribution: Is is when the national revenue or output is shared among several production components, such as land, labour, capital, and entrepreneurship, to pay them in the form of rent, wages, interest, and profit for their services.

Production Possibility Frontier

• The production possibility frontier (PPF) is a mathematical curve that depicts the balance between the production levels of two different products within limited resources.
• The Production Possibility Frontier can represent the production potential of two different foods on a graph; for instance, if a food producer can produce either 50 mangoes or 25 oranges with the same amount of resources. And this provides us with the frontier of manufacturing possibility.
• PPF is calculated under the presumption that due to limited and scarce resources, it is only possible to increase the production of one good by decreasing the production of another. Hence, the PPC curve is concave.
• Businesses frequently utilise PPF data to compare the production costs of various products. After that, the data is analysed to help people allocate limited resources wisely and generate more money.

Assumption of the Production Possibility Frontier

The following is some of the assumptions taken into consideration for the Production Possibility Frontier or PPF:

• The resource base of the economy is fixed.
• The technology is already installed and is not altered.
• The available resources are efficient and used effectively.
• Resources are not equally efficient in the production of all goods.

Shifts in the Production Possibility Curve

The reasons for the shift in the PPC or Production Possibility Curve as given by the NCERT Solutions Class 12 Microeconomics Chapter 1 are as follows:

1. Change in resources
2. Change in the technology for production of both goods.

Rightward Shift: Production Potential Curve sees a shift to the right when there is an expansion of resources or technological development. For instance, skilled labour, technological breakthroughs and higher land productivity influence production.

Leftward Shift: The production Potential Curve shifts to the left, suggesting a resource reduction or a decline in technology in the economy. Unskilled labour, outdated technology, and lower land productivity, for instance, are all issues that are causing productivity to decline.

Opportunity Cost

• The idea of opportunity cost in economics refers to the values or benefits that companies, business owners, or organisations forego when they select one option over another when making business decisions.
• In simple language, the value is lost when a company chooses between two or more alternatives.
• For example, fewer resources are available for cotton production if more limited resources are used to produce wheat and vice versa. The economy will have less of the other good if we want more of the desired good. Therefore, having more of one good comes at a cost for the other good that producers must sacrifice.

Different Types of Economy

The different types of the economy as given in the text of the NCERT Solutions Class 12 Microeconomics Chapter 1 are as follows:

1. Centrally Planned Economy-

• A centrally planned economy has its primary activities by the government or another central authority. The government makes all important choices involving product, exchange and consumption of products and services.
• The goal of a planned economy is to distribute the ultimate mix of products and services that are regarded as desirable for society at large while also allocating resources in a particular way.
• The main objective of the centrally planned economy is social welfare.

2. Market Economy-

• In a market economy, the market regulates all economic activities. A market is characterised by the free interaction of individuals who pursue their separate economic activities.
• A market is thus a group of agreements between market players where they come together to freely exchange goods and services. There is private sector involvement, but there is no government interference. The economy is run by the forces of supply and demand and how people behave in the market.
• Profit maximisation is the primary goal of a market economy.

3. Mixed Economy-

• A mixed economy is a system of economics where production components are owned and managed by both the public and private sectors.
• The main objectives are to maximise profits in the private sector and to promote social welfare in the public sector.
• Central problems are solved by the central planning authority and the price mechanism.

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Positive and Normative Economics

Positive Economics

• Positive economic analysis is the study of how an economic problem is solved through the assessment of multiple positive statements and approaches. It’s also referred to as a cause-and-effect relationship. It conveys the “what is.”
• These are actual assertions that describe the past, present and future. These statements lack personal value judgments and are open to examination, verification and refutation. For instance, verifying whether someone is telling the truth when they say it is raining outdoors is possible.
• It is focused on issues that are relevant to or realistic. Economists like Lionel Robbins view economic theory as pure science. Other examples include the fact that India has a diverse economy and is overpopulated.

Normative Economics

• Normative economics is the process of deciding whether or not a particular method is good. This analysis focuses on the ideal situation or the best way to solve economic issues. It provides economic goals and objectives and recommendations for achieving them.
• In normative economic analysis, we come across normative arguments that cannot be examined because they rely on human value judgments. It is based on moral principles and addresses idealistic issues.
• As an illustration of this analysis, let’s take the recommendation that the government should assist private businesses in accelerating industrialisation. The view that economics is a normative science is shared by economists like Marshall, Pigou and others.

Microeconomics and Macroeconomics

Microeconomics

• Micro is derived from the Greek word ‘micros’, which means small. It is also known as Price Theory.
• The branch of economics studies the behaviour of individual economic units, such as individuals or households.
• Its primary concerns are pricing and resource allocation. The primary objective is to investigate the principles, issues and policies that can be used to attain the goal of optimal resource allocation.
• It concerns how consumers and producers make decisions depending on their financial situation and other considerations.
• Microeconomics uses a partial equilibrium technique, which entails attaining equilibrium in just one market.

• Among the crucial microeconomic factors are pricing, individual consumer demand, wages, rent, profit and revenues.
• The popular theories of Microeconomics include; Consumer Behaviour and Demand Theory, Producer Behaviour and Supply Theory, Factor pricing/distribution theory, and Economic Welfare Theory.
• Alfred Marshall popularised microeconomics.

Macroeconomics

• In Macroeconomics, the word Macro is derived from the Greek word ‘makros,’ which means ‘big.’ A different name for it is the Income and Employment Theory.
• Macroeconomics looks into the economy as a whole.
• Identifying the income and employment levels in the economy is the key concern in Macroeconomics. It examines the guiding concepts, problems, and strategies for attaining full employment and raising the level of output.
• It looks at the decision-making processes of many economic sectors, including households, businesses, the government and the global community.
• Macroeconomics uses the general equilibrium method, ensuring that all markets in an economy are in equilibrium.
• The aggregate price, demand, supply, inflation, unemployment and other macroeconomic factors are considered significant.
• The popular theories of Macroeconomics are Money Theory.
•  National Income Theory, General Price Level and Inflation Theory, Price Determination Theory under various Market Situations, Employment Theory, International Trade Theory, Macro-distribution Theory and Economic Growth Theory.
• John Maynard Keynes made the concept popular.

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NCERT Solutions Class 12 Microeconomics Chapter 1: Exercise and Solutions

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Class 12 Microeconomics 1: Very Short Answer Type Questions

Class 12 Microeconomics 1: Short Answer Type Questions

Class 12 Microeconomics 1: Long Answer Type Questions

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By referring to the Class 12 Microeconomics Chapter 1 NCERT Solutions, students will clearly understand the basic concepts of the subject area, which will help them understand the forthcoming chapters better.

Key Features of NCERT Solutions Class 12 Microeconomics Chapter 1

Students can utilise the NCERT Solutions Class 12 Microeconomics Subject 1 for a fast overview of the entire chapter in simple language. It will aid students in fully comprehending the chapter on the introduction to Microeconomics and clarifying all concepts before taking any tests or examinations. Furthermore, these study resources are advantageous to learners who aim to do well in their exams.

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• Students can handle end-text problems using the Extramarks solutions, which provide comprehensive answers to the chapter questions and sample test questions to help them become well-versed in their subject matters.
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• By offering a framework and summarising the chapter’s key concepts, NCERT Solutions Class 12 Microeconomics Chapter 1 helps students overcome their doubts and problems.