Economics — Part 1 MCQs with Explanations

The capital that is consumed by an economy or a firm in the production process is known as Depreciation. In economics, depreciation is the gradual decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question.

Haberler propounded the opportunity cost theory of international trade. Gottfried Haberler has attempted to restate the comparative costs in terms of opportunity cost. He demonstrates that the doctrine of comparative costs can hold valid even if the labour theory of value is discarded. The theory determines the cost of producing a commodity in terms of the alternative production that has to be foregone for producing the commodity in question.

Option B is incorrect. When two linear demand curves intersect each other, they have the same price and quantity at the point of intersection . However, their slopes may be different. Since price elasticity of demand depends on both the slope of the demand curve and the price-quantity relationship , the coefficient of elasticity need not be the same on both demand curves. Option A is correct: A linear demand curve can depict different degrees of price elasticity, ranging from elastic to unitary elastic to inelastic at different points. The limiting cases of perfectly elastic and perfectly inelastic demand are also represented conceptually by horizontal and vertical demand curves. Option C is correct: Two parallel linear demand curves have the same slope , but at a particular price they can have different quantities demanded. Since elasticity depends on the price-to-quantity relationship as well as the slope, the coefficient of elasticity can be different for the two curves. Option D is correct: Price elasticity of demand measures the relative (percentage) change in quantity demanded in response to the relative (percentage) change in price , rather than absolute changes. Therefore, the incorrect statement is Option B .

If the demand for a good is inelastic, an increase in its price will cause the total expenditure of the consumers of the good to increase. Raising prices will always cause total revenue to increase.

The horizontal demand curve parallel to x-axis implies that the elasticity of demand is infinite.It is zero when the demand curve is parallel to the y-axis.

An individual demand curve slopes downward to the right because of the Working of the law of diminishing marginal utility, Substitution effect of decrease in price and Income effect of fall in price.

Income Elasticity of Demand (YED) is defined as the responsiveness of demand when a consumer's income changes. It is defined as the ratio of the change in quantity demand over the change in income. The higher the income elasticity, the more sensitive demand for a good is to changes in income.

The supply of a good refers to quantity of the good offered for sale at a particular price per unit of time. The term supply refers to the entire relationship between the quantity supplied and the price of a good.

The cost of one thing in terms of the alternative given up is called Opportunity cost. Opportunity cost is an economics term that refers to the value of what you have to give up in order to choose something else.

We can conclude with certaintty that the equilibrium quantity will decrease.

The economist's objections to monopoly rest on the following grounds that there is a transfer of income from consumers to the monopolist and there is welfare loss as resources tend to be misallocated under monopoly.

In Monopoly market structure the degree of control over the price of its product by a firm very large. In a monopoly type of market structure, there is only one seller, so a single firm will control the entire market. It can set any price it wishes since it has all the market power. Consumers do not have any alternative and must pay the price set by the seller.

The offer curves introduced by Alfred Marshall, helps us to understand how the terms of trade is established in international trade. An offer curve shows how the volumes traded change when the terms of change.

Demand for factors of production is derived demand. The demand for any factor of production, such as labor, physical capital or land is a derived demand because it arises not from the intrinsic utility provided by the factor but because of the value placed on the production it produces by consumers.

The producer's demand for a factor of production is governed by the marginal productivity of the factor.

Under conditions of perfect competition in the product market MRP = VMP. Under the assumption of perfect competition a firm employs a factor up to that number at which the price of the factor is just equal to the value of the marginal product (=MRP of the factor).

Index numbers statistical measure helps in measuring the purchasing power of money. Index numbers possess much practical importance in measuring changes in the cost of living, production trends, trade, income variations, etc.

Fisher's Ideal volume index is the geometric mean of the Laspeyres and Paasche volume indices. A measure of change in volume from period to period. It is calculated as the geometric mean of a chain Paasche volume index and a chain Laspeyres volume index.

Reserve bank of India is the 'lender of the last resort' in the banking structure of India. A lender of last resort is an institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.

Bank rate is the official minimum rate at which the Central Bank of a country is prepared to rediscount approved bills held by the commercial banks.

In order to control credit, Reserve Bank of India should Increase CRR and increase Bank rate. During high inflation in the economy, RBI raises the CRR to lower the bank's loanable funds.

Collecting and compilation of statistical information relating to banking & other financial sector is a function of the Reserve Bank of India.

Credit creation power of the commercial banks gets limited by Banking habits of the people, Cash Reserve Ratio and Credit policy of the central bank.

Number of times a unit of money changes hands in the course of a year is called Velocity of money. The velocity of money is the number of times a unit of money changes hands during exchanges in a year.

Autarky in international trade means the idea of self sufficiency and no international trade by a country. A country is said to be in a complete state of autarky if it has a closed economy, which means that it does not engage in international trade with any other country.

Normally a demand curve will have downward sloping shape. The demand curve is downward sloping, indicating the negative relationship between the price of a product and the quantity demanded.

L. Robbins defined economics: "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."

Law of demand shows relation between Price and quantity of commodity. Quantity demanded of a commodity is inversely related to the price of the commodity.

A mixed economy is characterized by the co-existence of Public and private sectors. Mixed economies, with state-supervised markets, are most related to fascism (in the economic sense) and have several common features.

Iso-product curves does not intersect each other.

The law of demand is based on the following assumption or conditions: No change in consumer's income: Consumer's income must remain unchanged because if income increases consumer may buy more even at a higher price invalidating the law of demand. No change in the size and composition of population: The size of population, gender ratio and age composition are assumed to remain constant. As such changes are sure to affect demand. No change in consumer's taste, preference, habits and fashions: If the taste changes then the consumer's preference also will change which will affect demand. When commodities go out of fashion then demand will be low even at a low price. No expectation of future price change: The consumers do not expect any significant rise or fall in the future prices. No change in prices of related goods: The law assumes that prices of substitutes and complementary goods remain constant. No change in tax policy of the Government: The level of direct and indirect tax imposed by the government on the income and goods should remain constant.

Microeconomics deals with the Allocation of resources of the economy as between production of different goods and services, Determination of prices of goods and services and Behavior of industrial decision makers.

Some economists refer to iso-product curves as Production indifference curve. A given quantity of output may be produced with different combinations of factors. Iso-quant curves are also known as Equal-product or Iso-product or Production Indifference curves.

According to Joseph Schumpeter, profit is the reward for Innovation. He believed that an entrepreneur can earn economic profits by introducing successful innovations.

If quantity demanded is completely unresponsive to changes in price, demand is Perfectly inelastic. Perfectly inelastic demand means that quantity demanded remains the same when price increases or decreases. Consumers are completely unresponsive to changes in price.

Microeconomics is primarily concerned with the factors that affect individual economic choices, the effect of changes in these factors on the individual decision makers, how their choices are coordinated by markets, and how prices and demand are determined in individual markets.

Short-run average cost (SAC) curves is also known as plant curves. These SACs are also called plant curves. In the short run, a firm can operate on any SAC, given the size of the plant.

Other things equal, if a good has more substitutes, its price elasticity of demand is larger.

An economic theory is a tested hypothesis. Hypothesis testing is an act in statistics whereby an analyst tests an assumption regarding a population parameter. The methodology employed by the analyst depends on the nature of the data used and the reason for the analysis. Hypothesis testing is used to infer the result of a hypothesis performed on sample data from a larger population.

Rectangular hyperbola is the shape of the average fixed cost (AFC) curve. The AFC curve is a rectangular hyperbola in the sense that all rectangles formed by AFC are of equal sizes.