The document contains multiple statements about economic concepts. Most of the statements are incorrect. The document aims to test the reader's understanding of key economic ideas like scarcity, market structures, costs, revenues and equilibrium. It provides incorrect definitions or relationships between economic variables to see if the reader can identify the mistakes.

1. Certain Products are Not Subject to
Scarcity!
Incorrect:
Except for free goods that we obtain from nature
all the economic goods, whether of industrial
origin or agricultural origin, are subject to the
law of scarcity, i.e., their availability falls
short of requirements.

2. In a market economy, the government
has no role to play.
• Incorrect:: In a market economy most
decisions are made in the market place. But
the government plays an important role in
modifying the functioning of the market;
government sets laws and rules that regu­late
economic life, produces educational and police
services, and regulates pollution and business.

3. In Command Economy Major Decisions
are made by Individuals & Firms
• Incorrect:
A command economy is one in which the
government makes all decisions about
production and distribution; the government
owns a considerable fraction of the means of
production, it also owns and directs the
operations of enterprises in most industries.

4. In a market economy the government
answers the major economic questions
Incorrect: A market economy is one in which
individuals and private firms make the major
decisions about production and distribution. A
system of prices, of markets, of profits and
losses, of incentives and rewards determines
what, how, and for whom.

5. The curve that shows different combinations of two
commodities that can be produced in an economy with
the given inputs is indifference curve.
Incorrect: Such a curve is known as a production
possibility curve. It shows the maximum
amounts of production that can be obtained by
an economy, given the tech­nological
knowledge and quantity of inputs.

6. The alternative foregone is called fixed
cost.
Incorrect: Making a choice in a world of scarcity
requires us to give up something else, in effect
costing us the opportunity to do something
else. The alternative foregone is called the
opportunity cost.

7. The law of diminishing returns concerns the
relationship between inputs and output.
Correct. This law concerns the relationship
between inputs and output in the produc­tive
process. More specifically, the law holds that
we will get less and less extra output when we
add successive doses of an input while holding
other inputs fixed.

8. Capital is a primary factor of
production.
Incorrect. Land and labour are often called
primary factors of production. A primary
factor of production is one whose quantity is
determined outside the economy (by so­cial
forces in the case of labour and geological
history in the case of land).

9. Financial capital is an important input
in the productive process.
Incorrect. We must carefully distinguish
physical capital form financial capital.
Physical capital takes the form of factories,
equipment, houses, and inventories, physi­cal
capital is an input or factor of produc­tion.
Financial capital is paper assets or claims, like
bonds, common stocks, savings accounts, or
home mortgages; financial capital is often the
claim to physical capital, but it is never an
input into the productive process.

10. Market is a mechanism by which buyers and
sellers meet to exchange
Correct: The market may be centralised or
decentralised, or may even be an electronic
market. The crucial characteristic of a market
is that it brings buyers and sellers together to
set prices and quantities.

11. Prices play an important role in the
market system.
Correct. Prices coordinate the decisions of
produces and consumers in a market. Higher
prices tend to reduce consumer purchases and
encourage production. Lower prices encourage
consumption and discourage production.
Prices are the balance­wheel in the market
system

12. A market equilibrium represents a balance
among all the different buyers and sellers.
Correct. It represents a balance among all the
different buyers and sellers. Households and
firms all want to buy or sell certain quantities
depending upon the price. The market finds
the equilibrium price that just balances the
desires of buyers and sellers.

13. By 'invisible /hand' Adam Smith meant the intervention of the
government in the market system.
Incorrect. The principle of invisible hand, as
seen by Adam Smith, holds that, in selfishly
pursuing only his or her personal good.. every
individual is led, as if by an invisible hand, to
achieve the best good for all. Smith saw
harmony between private interest and public
interest. In his view of the economic world,
any government interference with free
competition is almost certain to be injurious.

14. A market in which no firm or consumer is large
enough to affect the market price is called
monopoly.
Incorrect. This type of market structure is
known as perfect competition. The number of
buyers and sellers is so large that no one, by
his individual action, can affect the course of
demand and supply of a commodity.

15. An economic transaction without an
economic payment is called economic gain.
Incorrect. Such an economic transaction is
known as externality. Externalities occur
when firms or people impose costs or
benefits on others outside the market place.

16. A state transport undertaking bus is a
good example of a public good.
Incorrect. We can distinguish public goods from
private goods on the basis of two fea­tures : (i)
excludability, and (ii) divisibility. Ownership
is not important. Private goods possess both
these characteristics, whereas private goods
lack them. But since the production of public
goods cannot be left to private enterprise, these
are produced by the state.

17. Demand for a good is what a consumer
needs to satisfy a want.
• Incorrect. Demand is an effective desire
backed by adequate ability and willingness.

18. Law of demand establishes a direct positive
relation between the price and demand for a
commodity.
Incorrect: The law of demand establishes a
negative relationship between the two
variables; as the price of a commodity goes
up, its demand contracts and vice -versa.

19. A typical demand curve slopes
upwards, going from northwest to
South East.
Incorrect: A demand curve is a graphical
illustration of the law of demand, the law
explains that more of a commodity is
demanded at a lower price than at a higher
price. Hence, the demand curve slopes
downwards from northwest to southeast.

20. It has not been possible to explain the
basis of the law of demand
Incorrect: The law of demand operates on the
basis of two forces, viz., income effect and
substitution effect. Income effect comes into
play when as price goes up, I find myself
somewhat poorer than before. Similarly, when
the price of a good rises, I will substitute other
similar goods for it.

21. As the price of oranges falls and I begin to buy
more of them, my demand for oranges would be
said to have increased.
Incorrect: The correct expression in this situation
is that my demand for oranges has expanded.
An increase in demand is associated with a
total shift in the demand schedule; it arises due
to a change in any of the determinants of
demand other than the price of the commodity.

22. Supply of a commodity is the total
stock of a commodity available with
the producers.
• Incorrect.: Supply is that part of the stock of a
commodity available with the producers that
they want to sell at obtaining prices.

23. A typical supply curve slopes upwards
Correct. Producers would be willing to offer
higher quantity for sale at a higher price, and
conversely lower quantity at a lower price. The
supply curve, consequently, depicts this direct
positive relationship and slopes upwards.

24. Supply of a commodity is basically
determined
by the cost of production.
Correct. When production costs for a good are
low relative to the market price, it is profitable
for producers to supply a great deal. When
production costs are high rela­tive to price,
firms produce little or may simply go out of
business.

25. When automobile prices change, this
would be represented with the help of a
new supply curve
Incorrect. When automobile prices change,
producers change their production and
quantity supplied, but the supply and the
supply curves do not change. By contrast,
when other influences affecting supply change,
supply changes and the supply curve shifts.

26. If the market price is less than the equilibrium
price there with be an excess of quantity
supplied in the market.
Incorrect. Equilibrium price is the price at which
the demand and the supply of a commodity are
equal. At a price other than the equilibrium
price, there may be a shortage or surplus of a
commodity in the market. If the market price is
less than the equi­librium 'price, all the buyers
will not be in a position to find the commodity,
and hence there will arise a shortage of the
com­modity that will push the market price
towards the equilibrium price.

27. Equilibrium price of a commodity may rise if the
demand for this commodity decreases, ceteris
paribus.
Incorrect: A decrease in demand will shift the
demand curve to the left of the original curve,
i.e., consumers would be willing to buy lesser
quantity of a commodity at a given price.
Consequently, the sellers will be forced to
reduce the prices. The equilibrium price will
fall.

28. Equilibrium price of a commodity may rise
if the supply of this commodity increases,
ceteris paribus.
Incorrect. An increase in the supply of a
commodity implies that the sellers are will­ing
to sell larger quantity of the commodity at the
given price. In order to attract more buyers to
this commodity, its price will have to fall.

29. The equilibrium price of a commodity
will rise if increase in demand equals the
increase in supply of the commodity.
Incorrect. An increase in demand will pull the
equilibrium price upwards, but the equilibrium
price will be pushed downwards by an increase in
supply. It the pulls and pushes neutralise each
other, equilibrium price may not change at all.

30. The equilibrium price of a commodity will
rise if the increase in demand meets with a
decrease in supply.
Correct. In this situation, both demand and
supply forces are working together to push
the equilibrium price upwards.

31. If the decrease in demand matches the
decrease in supply, both equilibrium
price and equi­librium quantity will
remain unchanged.
Incorrect. A decrease in demand will push the price
downwards, but this push will be neutralised by an
upward pull of equilibrium price due to a decrease in
supply. The equilibrium price will remain un­
changed. But at this equilibrium price, quantity
demanded and supplied will be lesser than in the
original equilibrium.

32. At a non­equilibrium price, quantity
bought in the market is not equal to
the quantity sold.
• Incorrect. Quantity bought must always be equal to
the quantity sold. Apparently, that which has not been
sold cannot be bought. But at a high price there is a
surplus of goods, with producers eagerly trying to sell
more goods than consumers will buy. This excess of
desired supply over desired demand will put
downward pressure on price until price finally
reaches that equi­librium level where the two curves
inter­sect.

33. For inelastic demand curve, any increase in
supply will lead to an upward shift in
equilibrium price and quantity.
Incorrect. Given an inelastic demand curve, an
increase in supply will lead to a surplus of
stocks with the producers. They will be
compelled to offer their surpluses at lower
prices in the market. The equilibrium price
may fall without a corresponding increase in
the quantity demanded and sold.

34. Cross elasticity of demand is the responsiveness
of demand to a change in the supply of a
commodity.
• Incorrect. Cross elasticity of demand for a
commodity is the responsiveness of demand for
a commodity to a change in the price of either
of its substitutes or comple­ments.

35. When a 1 percent change in price evokes
only 1 percent change in quantity
demanded, this is price­inelastic demand.
• Incorrect. Price elasticity coefficient is the
percentage change in quantity demanded
divided by the percentage change in price. If
both the variables change in the same
proportion, the value of co­efficient will equal
one, which is described as unit elasticity.

36. Water is more useful than diamond & so its
price should be higher.
Incorrect. The price of a commodity is
determined by its marginal utility; the utility of
water as a whole does not deter­mine its price
or demand. Rather, water's price is determined
by its marginal utility, by the usefulness of the
last glass of water. Because there is so much
water, the last glass sells for very little.

37. Indifference curve gives different
commodities that a consumer prefers
to buy with the same money.
Incorrect An indifference curve represents those
different combinations of two com­modities
that yield a consumer equal satis­faction.

38. A supply function illustrates the
relationship between inputs & output.
Incorrect The relationship between input and
output is known as the production function.
Production functions describe how a firm can
produce its bundle of out­puts, and production
function is behind a firm's cost curves.

39. Total production is maximum when
marginal product is zero.
Incorrect. Total product designates the total amount of
output produced in physi­cal units. Marginal product
is the extra out­put added by one extra unit of that
input while other inputs are held constant. Mar­ginal
products of all the units add up to total product. As
long as marginal product is more than zero, total
product goes on increasing, the moment marginal
product becomes zero, total product becomes
maximum and does not increase further.

40. Returns to scale refer to the response
of output to an increase in the units of
a single input.
Incorrect- When all other factors are held
constant, the response of output to an increase
in one input is known as returns to a factor.
Returns to scale, on the other hand, reflect the
responsiveness of total product when all the
inputs are increased proportionately.

41. Average Fixed costs remain unchanged
at varying levels of output.
Incorrect. Fixed cost is the amount that must be
paid irrespective of the level of output. Hence,
total fixed costs remain un­changed at varying
levels of output. Average fixed costs are
obtained by dividing total fixed costs by the
units of output. As the level of output rises,
given that the numerator remains unchanged,
average fixed costs go on falling.

42. Average fixed costs determine the
behaviour of the marginal cost.
• Incorrect Marginal cost is the addition to the
total cost resulting from a unit increase in
output. As output increases, total fixed costs
remain unchanged. These are only the variable
costs that change. Thus, the marginal cost
represents the addition to total variable costs
resulting from a unit increase in output.

43. For a perfectly competitive Firm, price will
always be less than its marginal revenue.
• Incorrect. A, perfectly competitive firm is a
price­taker firm. It accepts the price as given,
the price which is determined by industry
demand and industry supply. Thus, each of the
units that the firm sells is sold at this given
price. The MR of the firm equals the price.

44. When a perfectly competitive firm
breaks even it produces at the lowest
average cost.
Correct. Break­even level of out put for a firm is
one where the firm's total revenue equals its
total COST or where its average revenue
equals its average costs. Average cost curve
for a firm is a U­shaped curve, whereas the
average revenue­curve is a horizontal straight
line. Break­even point occurs where the
average cost curve is tangent to the average
revenue curve. Invariably it is the lowest
average cost level of output.

45. Imperfect competition implies that firm
has absolute control over the price of
its product.
Incorrect. Imperfect competition prevails in an industry
whenever individual sellers have some measure of
control over the price of output in that industry.
Imperfect competition does not imply that a firm has
absolute control over the price of its product. To call
Pepsi an imperfect competitor means that it may be
able to set the price of a cool drink bottle at Rs.5 or
Rs.6 and still remain a viable firm. The firm could
hardly set the price at Rs.100 or Re.1; it would go out
of business. It has only some discretion in its price
decisions, not absolute control.

46. For a monopolist, marginal revenue
always equals average revenue.
Incorrect. A monopolist always is faced with a
downward sloping demand curve. Its demand
curve is its average revenue curve that reveals
that every additional unit of output can be sold
only when the monopolist lowers the price of
his product. Consequently, the marginal
revenue curve also slopes downwards and lies
below the AR curve.

47. Perfect competition breaks down in a
situation of decreasing costs.
True:Under continuously decreasing costs, one
or few firms will expand their out puts to the
point where they become a significant part of
the industry's total out put. The industry then
becomes imperfectly competitive. Perhaps a
single monopolist will dominate the industry, a
more likely out come will be a few large
sellers will control most of the industry’s
output; or there might be a large number of
firms, each with slightly different products.

48. Any factor in perfectly elastic supply
can earn economic rent.
Incorrect. Economic rent is the difference
between the actual earnings of a factor and its
opportunity cost. The actual earnings of a
factor that is perfectly elastic in supply tend to
be determined in the market at the level at
which they are equal to its opportunity cost.
Hence, such a factor­input does not earn any
economic rent.

49. All the firms break even in the long-run
Incorrect These are only the competitive firms
that break­even in the long run, i.e., when their
AR = AC. A monopolist firm can and does
manage to keep its AR above the AC at the
equilibrium level of output and hence earns
monopoly gains.

50. All the competitive firms operate at
their optimum level of output in the
long run.
Incorrect. Optimum level of output for a firm is the one
where its average cost is the minimum, and is
obtained when the U shaped average cost curve is
tangent to the average revenue curve. This tangency
obtains in the case of a perfectly competitive firm at
the lowest point of the AC curve, because the AR is a
horizontal straight line. For an imperfectly
competitive firm AR curve slopes downwards, hence
tangency cannot be at the lowest point of the AC
curve.