Basic Concepts of Microeconomics-Part II

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  • Q1

    Explain the Paradox of Value.


    To understand the Paradox of Value we have to understand Value-in-Use and Value-in-Exchange.

    Value in Use: This value of a commodity relates to the value an individual places on the consumption of the commodity. For example, necessities like food and water have a very high value-in-use.

    Value-in-Exchange: This value of a commodity relates to its worth in terms of exchange. It relates to how much of the commodity can be exchange for other goods.

    The value-in-exchange is not necessarily correlated with value-in-use. For example, water has a very high value-in-use as it is a necessity but its value-in-exchange is low. Whereas, a diamond has low value-in-use but high value-in-exchange. This lack of relation between value-in-use and value-in-exchange is termed as the paradox of value.

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  • Q2

    What is a market? What are the types of market.


    A market is a mechanism in which the buyers and sellers meet and strike a bargain.

    The types of markets are:

    1. Goods Market: In this market goods and services are bought and sold. For example car market, cloth market, etc.
    2. Factor Market: In this market, factor services are bought and sold. For example labour market, capital market, etc.

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  • Q3

    Classify the following as stock and flow:

    1. Wealth
    2. Investment
    3. Debt
    4. Income


    a)Wealth – Stock

    b)Investment – Flow

    c)Debt – Stock

    d)Income - Flow

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  • Q4

    What is the equilibrium price.


    The equilibrium price is the price at which quantity demanded and quantity supplied are equal and there is no pressure on the price to change.

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  • Q5

    Name the basic entities in an economy?


    The basic economic entities in an economy are households, firms and the government.

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