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Introduction – Class 12 Economics notes, important questions and MCQs

NCERT Class 12 Economics, chapter 1. Notes, key terms, important questions with answers and MCQs.

Chapter overview

Every economy faces scarcity and must decide what, how and for whom to produce. The production possibility frontier shows the choices available with given resources. Microeconomics studies individual units such as consumers and firms, while macroeconomics studies the economy as a whole, such as national income, employment and the general price level. Macroeconomics grew after the Great Depression and J.M. Keynes's General Theory (1936).

Central problems and PPF

Central problems: what to produce and in what quantities, how to produce (technique) and for whom to produce (distribution).
The production possibility frontier (PPF) shows the combinations of two goods that can be produced with given resources and technology when resources are fully used.
The PPF is concave to the origin because the opportunity cost (marginal rate of transformation) of producing more of one good rises.
A point inside the PPF shows unemployment or inefficiency; the PPF shifts outward with growth of resources or technology.

Types of economies and economic analysis

In a centrally planned economy the government solves the central problems; in a market economy prices and markets solve them; a mixed economy combines both.
Positive economics describes what is; normative economics states what ought to be.
Microeconomics studies individual consumers, firms and markets; macroeconomics studies aggregates such as national income, total employment and the general price level.

Emergence of macroeconomics

The Great Depression of 1929 caused huge unemployment and fall in output in many countries.
J.M. Keynes's General Theory of Employment, Interest and Money (1936) explained how aggregate demand determines output and employment.
A modern economy has four sectors: households, firms, government and the external sector.

Key terms

Production possibility frontier: a curve showing the combinations of two goods that can be produced with given resources and technology
Opportunity cost: the value of the next best alternative given up
Microeconomics: the study of individual economic units such as a consumer, a firm or a market
Macroeconomics: the study of the economy as a whole, including national income, employment and the price level
Normative economics: economic analysis about what ought to be, involving value judgements

Important questions with answers

What is a production possibility frontier?2 marks

A production possibility frontier is a curve showing the different combinations of two goods that an economy can produce with its given resources and technology when the resources are fully and efficiently employed.

Distinguish between microeconomics and macroeconomics.3 marks

Microeconomics studies individual economic units such as a consumer, a firm or a particular market, and deals with issues such as price determination and the consumer's equilibrium. Macroeconomics studies the economy as a whole and deals with aggregates such as national income, total employment, the general price level, the government budget and the balance of payments.

Explain the central problems of an economy with the help of a production possibility frontier, and state how macroeconomics emerged.5 marks

Because resources are scarce and have alternative uses, every economy must decide what to produce and in what quantities, how to produce, that is which technique to use, and for whom to produce, that is how output is distributed. The production possibility frontier shows the combinations of two goods, say wheat and cloth, that can be produced with given resources and technology when resources are fully used. Choosing a point on the PPF answers the problem of what to produce. The PPF slopes downward because producing more of one good requires giving up some of the other; it is concave to the origin because the marginal opportunity cost, or marginal rate of transformation, rises as resources are shifted. A point inside the PPF shows unemployment or inefficient use of resources, while a point outside is unattainable with present resources; growth of resources or better technology shifts the PPF outward. Macroeconomics emerged as a separate branch after the Great Depression of 1929, when output fell and unemployment rose sharply. Classical economists believed markets would restore full employment automatically, but J.M. Keynes, in his General Theory of 1936, argued that output and employment are determined by aggregate demand and that the government may need to intervene.

Quick revision

What, how, for whom.
PPF concave due to rising opportunity cost; shifts with growth.
Planned, market and mixed economies; positive vs normative.
Macro after the Great Depression; Keynes 1936; four sectors.

Exam tips

Draw the PPF and mark points inside, on and outside it with their meaning.
For micro vs macro, give examples: price of rice (micro) vs inflation rate (macro).

Practice MCQs

Deciding the technique of production is the problem of
1. what to produce
2. for whom to produce
3. how to produce
4. when to produce
Show answer
Answer: (c) how to produce. Labour- or capital-intensive.
The study of an individual firm's output decision is part of
1. macroeconomics
2. public finance only
3. microeconomics
4. international economics
Show answer
Answer: (c) microeconomics. It deals with an individual unit.
J.M. Keynes's General Theory was published in
1. 1776
2. 1929
3. 1936
4. 1991
Show answer
Answer: (c) 1936. It founded modern macroeconomics.
A point inside the PPF shows
1. full employment
2. an unattainable combination
3. growth
4. unemployment or inefficient use of resources
Show answer
Answer: (d) unemployment or inefficient use of resources. More of both goods could be produced.
The PPF is concave to the origin because
1. opportunity cost is constant
2. resources are unlimited
3. marginal opportunity cost increases
4. technology is fixed only
Show answer
Answer: (c) marginal opportunity cost increases. Resources are not equally efficient for both goods.
'The government should reduce income inequality' is a
1. positive statement
2. normative statement
3. fact
4. law
Show answer
Answer: (b) normative statement. It involves a value judgement.
An outward shift of the PPF can be caused by
1. better technology or more resources
2. unemployment
3. a natural disaster
4. inefficient use of resources
Show answer
Answer: (a) better technology or more resources. Production capacity rises.
In a market economy, the central problems are solved mainly by
1. the price mechanism
2. the government planning board
3. religious leaders
4. random choice
Show answer
Answer: (a) the price mechanism. Prices guide decisions.

All chapters of Class 12 Economics

Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.