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Class 12-science NCERT Solutions Economics Chapter 1 - Introduction

Introduction Exercise 8

Solution 1




Microeconomics studies the behaviour of individuals.

Macroeconomics studies the behaviour of an economy as a whole.

Scope of microeconomics is narrow.

Scope of macroeconomics is comparatively wider as it deals with national income.

Determination of prices and quantities of goods and services in the individual market is a subject matter of microeconomics.

Determination of aggregate price level and quantities of goods and services in an economy is a subject matter of macroeconomics.

The main focus of microeconomics is equilibrium of prices and quantities of goods and services in the individual market.

The main focus of macroeconomics is a general equilibrium of all markets in an economy.

Price determination and allocation of resources are central economic problems.

Income and employment level determination are central economic problems.

Individual demand, individual supply, rent, wages, profit and price are main microeconomic variables.

Inflation, aggregate demand, aggregate supply and employment level are main macroeconomic variables.


Solution 2

Important features of a capitalist economy:

Ownership of private property: Individuals can own private property and the same can be used for private interests.

Economic freedom to producers and consumers: Producers have full rights to decide what to produce, how to produce and for whom to produce. Consumers are given full freedom to decide about their consumption baskets.

Price determination by market forces: Price is determined by market forces, i.e. market demand and market supply. The government or external forces have no role in the process of price determination in a capitalist economy.

Fair competition in market: There is fair competition in a capitalist economy as the number of buyers and sellers is large.

No role of government: The government does not intervene in day-to-day economic activities. It only provides the framework for smooth functioning of economic activities.

Profit maximisation: Profit maximisation is the main motive of a capitalist economy. All economic decisions are mainly taken for maximising economic profit.  

Solution 3

Four major sectors in an economy according to the macroeconomic point of view:

  1. Household sector: The household sector is an important sector from the consumption point of view. It spends income on buying goods and services. Spending by the household sector becomes revenue for the producer sector.
  2. Government sector: The government sector plays a vital role in the process of formulating laws and regulations for the smooth functioning of economic activities. The government spends money on social welfare.
  3. Producer sector: The producer sector focuses on producing goods and services. Maximising profit is the main focus of this sector.
  4. External sector: This is engagement of the country with the rest of the world through trade. Trade can be through imports or exports of goods and services and inflow or outflow of capital.

Solution 4

The Great Depression was a financial crisis which occurred in 1929. It lasted for the next several years. The main cause of the Great Depression of 1929 was higher investment and lower consumption. Decline in the aggregate demand caused by reduction in consumption expenditure led to a recessionary situation all over the world.

The demand for goods and services during the Great Depression of 1929 declined drastically. Decline in the demand for goods and services forced the producers to reduce production. The unemployment level in the United States increased from 3% to 25% due to reduction in production.

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