Top Broad Economics Questions &
Answers
1. Why is the concept of scarcity fundamental to the study of
economics? Explain with examples.
Scarcity refers to the limited availability of resources compared to unlimited human
wants. It is fundamental because economics is essentially the study of how people
allocate these limited resources to satisfy their needs and wants. For example, a country
may have to choose between building hospitals or highways due to limited government
funds. This leads to choices, and every choice involves an opportunity cost—the next
best alternative forgone.
2. Compare and contrast Classical, Neoclassical, and Keynesian
schools of thought in economics.
Classical Economics (Adam Smith): Focuses on long-term growth, wealth of nations,
and believes in free markets (laissez-faire). Markets are self-correcting.
Neoclassical Economics (Alfred Marshall): Emphasizes individual decision-making
(microeconomics), utility, and marginal analysis. Still favors minimal government.
Keynesian Economics (John Maynard Keynes): Focuses on short-term fluctuations.
Believes markets can fail, and government intervention is necessary to stabilize output,
employment, and inflation.
3. Explain the roles of the main economic agents in the circular flow
of income. How do they interact in different markets?
The main economic agents are:
- Households: Supply labor and consume goods.
- Firms: Hire labor and produce goods.
- Government: Collects taxes, provides public goods.
- Rest of the World: Imports and exports.
They interact in three key markets:
- Product Market: Firms sell goods, households buy them.
- Factor Market: Households sell labor, firms buy it.
- Financial Market: Firms and government borrow, households lend.
These interactions create a circular flow where income flows from firms to households as
wages, and back to firms as consumption spending.
4. What is opportunity cost? How does it relate to the problem of
choice in resource allocation?
Opportunity cost is the value of the next best alternative forgone when a choice is made.
Since resources are scarce, every decision involves giving up something else. For
example, if a student chooses to study economics instead of working a part-time job, the
opportunity cost is the wage they could have earned. Thus, opportunity cost helps in
rational decision-making and efficient allocation of resources.
5. Discuss the three fundamental economic questions every society
must answer. How are these addressed in capitalist and socialist
economies?
The three questions are:
1. What to produce?
2. How to produce?
3. For whom to produce?
In capitalist economies, these are answered by market forces (demand and supply).
In socialist economies, the government decides through planning.
For example, a capitalist society may produce luxury cars for the wealthy, while a
socialist one may focus on public transport for all.
6. Draw and explain a Production Possibility Frontier (PPF). What
does it show about opportunity cost and efficiency?
A PPF shows the maximum possible combinations of two goods that can be produced
using all resources efficiently.
- Points on the curve: Efficient.
- Inside the curve: Inefficient use of resources.
- Outside the curve: Unattainable with current resources.
The opportunity cost is shown by the slope—producing more of one good means
sacrificing more of the other.
7. What are the determinants of demand? How do they influence
shifts in the demand curve?
Determinants of demand include:
- Price of the good
- Income (normal vs inferior goods)
- Price of related goods (substitutes, complements)
- Tastes and preferences
- Expectations about future prices
When these factors (other than price) change, the demand curve shifts:
- Rightward shift: Increase in demand.
- Leftward shift: Decrease in demand.
8. Differentiate between movement along the demand curve and a
shift of the demand curve. Illustrate both with examples.
Movement along the curve: Caused by a change in the price of the good itself. Example:
Price drops from $10 to $8 → quantity demanded increases.
Shift of the curve: Caused by changes in other factors (income, taste, etc.). Example: A
rise in income → demand curve for smartphones shifts right.
9. Differentiate between microeconomics and macroeconomics. How
do they complement each other in understanding the economy?
Microeconomics: Studies individual units—consumers, firms, markets. E.g., demand for
rice, pricing of mobile phones.
Macroeconomics: Deals with the whole economy—GDP, inflation, unemployment. E.g.,
national income, government spending.
They are complementary: micro-level decisions affect the macro economy and vice
versa.
10. Discuss the philosophical bases of economic analysis. How do
positive and normative economics guide policy decisions?
Positive Economics: Describes what is. Based on facts and data. Example:
'Unemployment is 6%'.
Normative Economics: Describes what ought to be. Involves values and opinions.
Example: 'The government should reduce unemployment'.
Policy makers use positive economics to understand the current state, and normative
economics to decide what actions should be taken.
