IGNOU| ECONOMIC THEORY (ECO - 06)| SOLVED PAPER – (JUNE - 2023)| (BDP)| ENGLISH MEDIUM
BACHELOR'S DEGREE PROGRAMME
(BDP)
Term-End Examination
June, 2023
(Elective Course: Commerce)
ECO-06
ECONOMIC THEORY
Time: 2 Hours
Maximum Marks: 50
Weightage: 70%
Note: The paper contains three Sections A, B and C.
Instructions are given in each Section along with marks.
हिंदी माध्यम: यहां क्लिक करें
Section-A
Note: Answer any two questions from this Section.
1. What do you mean by the term 'Economy'? Explain the
fundamental problems of an economy. 4+8
Ans:- Economy is a system of production, distribution
and consumption of goods and services in a country or region. It includes the
activities of individuals, businesses and governments.
The economy is a
large set of interrelated production and consumption activities that help
determine how scarce resources are allocated. It is also known as economic
system.
Economy is also
a social field that focuses on the practices, discourses, and material
manifestations associated with the production, use, and management of scarce
resources.
No two economies
are alike. Each is constituted according to its own resources, culture, law,
history and geography.
There are
different types of economies, including: command, traditional, market, mixed.
Each differs in
its ideals and control systems.
An economy is an
area of production, distribution and trade as well as consumption of goods and
services. In general, it is defined as a social domain that emphasizes the
practices, discourses, and material manifestations associated with the
production, use, and management of scarce resources.
Basic
problems of an economy:-
If there is
one central economic problem that exists in all countries without exception, it
is the problem of scarcity. This problem arises because all types of resources
are limited and have alternative uses. If resources were unlimited or a
resource had only one use, economic problems would probably not arise. However,
whether it is natural productive resources or man-made capital/consumer goods
or money or time, scarcity of resources is the central problem. This central
problem gives rise to four basic problems of an economy.
Four basic
problems of economy are:-
As discussed in
the above paragraphs, the central economic problem of scarcity of resources is
divided into four basic problems of the economy. Let's look at each of them
separately.
(i) What is
to be produced?
What does
society do when resources are limited? It decides what good/service it wants to
produce. Furthermore, it also determines the quantity required. For example,
should we produce more guns or more butter? Do we choose capital goods like
machines, equipment etc. or consumer goods like cell phones etc.? Although it
sounds elementary, society must decide the type and quantity of each
good/service to be produced.
(ii) How to
produce?
It is possible
to produce a product in different ways. For example, you can produce cotton
fabric using handlooms, power looms, or automatic looms. While handlooms
require more labour, automatic looms require higher power and capital
investment.
Therefore,
society has to choose between techniques for producing a good. Similarly,
similar decisions are required for all goods and/or services. Further, the choice
depends on the availability of various factors of production and their prices.
Typically, a society selects a technology that makes best use of its available
resources.
(iii) For
whom to produce?
Think about it –
can any society satisfy the desires of every human being? certainly not.
Therefore, he has to decide who will get what share in the total output of
goods and services produced. In other words, society decides the distribution
of goods and services among the members of the society.
(iv) What
provision should be made for economic growth?
Can a society
use all its resources for current consumption? Yes it can. However, this is
unlikely to happen. The reason is simple. If a society uses all its resources
for current consumption, its production capacity will never increase.
Therefore, the
standard of living and income of the member of the society will remain stable.
After this, the standard of living will decline in future. Therefore, society
has to decide how much resources it wants to save for future progress.
2. Explain the Law of Diminishing Marginal Utility' with
the help of a diagram. What are its limitations? 6+6
Ans:- It states that as we consume more and more
units of a good, the utility derived from each successive unit decreases. It
has universal applicability. It applies to all goods and services except the
sector of education. This is also known as Gosen's first law of consumption.
Assumptions of
the Law of Diminishing Marginal Utility (Law of DMU)
(i) Cardinal
measure of utility.
(ii) Consumption
of appropriate quantity.
(iii) Continuous
consumption.
(iv) No change
in quality.
In the given
diagram, units of ice cream are shown along the x-axis and MUs are shown along
the y-axis. The MU from each successive ice cream is represented by points A,
B, C, D and E. The downward slope of the MU curve indicates that the MU of
successive units is falling.
The Law of
Diminishing Marginal Utility (DMU) has several limitations:-
(i) Small
units: The law does not apply to very small units of goods.
(ii) Unequal
units: The units should be similar in size and quality.
(iii)
Irrational consumers: The law does not apply to consumers who are
irrational or suffer from mental illness or addiction.
(iv)
Non-standard units: The law does not work for non-standard units, such as
different types of soft drinks or shoes.
(v) Change in
tastes: The law does not take into account changes in tastes or
preferences, which may change over time.
(vi) Time
limit: The law works only when the time limit for consumption is relatively
short.
(vii) Hobby
or collectible items: The law does not apply to hobby or collectible items,
such as coins, stamps or baseball cards.
(viii) Money:
The law does not apply to money.
(ix) Rare
collections: The law does not apply to rare collections such as ancient
coins or stamps.
The DMU rule
assumes that tastes, habits, fashions and income remain constant, which is not
always true.
3. Explain the concept of price elasticity of demand. Also
state its determinants. 7+5
[COMING SOON]
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