Chapter 1
Micro Economics- Introduction
Introduction
What is an Economy ?
An economy is a system which provides
people, the means of work and earn a living.
Eg: People working in factories, mines,
shops, offices etc.
P=organization provides living to the people
and produces various goods and services that
people want.
Vital processes of an Economy
3 important economic activities undertaken
by an economy.
1. production
2. consumption
3. investment or capital formation
Why study Economics ?
Problem of scarcity
Human wants are unlimited and resources
are limited .
Need for allocation of resources for
satisfaction of never ending human wants.
Economics is concerned with the
selection of resources under conditions
of scarcity
Scarcity
Refers to limitation of supply in relation to the
demand of a commodity.
Scarcity is universal- faced by all
organizations, individuals and economy
Economizing of resources refers to making
optimum use of additional resources.
RESO- LIMITED
WANTS – UNLIMITED
EFFECTIVE USE OF RESOURCE
Scarcity is not the only problem
Along with limited resources , one resources
have alternate( different) uses. ( a resource
can be put to more than one use .
Example :petrol is scarce , not only used in
vehicles but also machines, engines, airplanes
etc.
It give rise to the problem of choice.
Economic Problem
Problem of choice
AC / Rice
EP is the problem of choice involving
satisfaction of unlimited wants out of
limited resources having alternate uses.
Reasons for Economic Problems
1. Scarcity of resources
2. unlimited human wants
3. alternate uses.
Meaning of Economics
Economics is a social science which studies
the way a society chooses to use its limited
resources, which have alternate uses to
produce goods and services and to distribute
them among different groups of people.
Positive Economics and Normative
Economics
Positive Economics
Deals with facts of life- things as they are
Positive Economics deals with what are the
economic problems and how are they actually
solved.
Eg: India is an over populated economy.
Prices are constantly rising
Positive statement describe what was,
what is and what will be
Positive Economics and Normative
Economics
Normative Economics
Deals with what ought to be or how the
economic problems need to be solved.
Eg: India should not be an over populated
economy.
Normative Economics will tell you what are
desirable things and what are undesirable
things.
Positive •What is?
•What was?
science •What will be?
Normativ •What ought to be?
•What should happen?
e science •What should have happened?
Micro Economics and Macro Economics
Economics
Micro Macro Economics
Economics ( Income Theory)
( price Theory)
Micro Economics
Adam Smith – Founder of Micro Economics
Micro means small.
Micro Economics deals with small and individual
units of an economy
Micro is that part of economic theory which deals
with individual units of an economy
For Eg: individual income, price of a commodity
etc.
Demand and supply are the main tools
Macro Economics
Macro – Large
Macro deals with overall performance of an economy
Concerned with problems of whole economy like
unemployment, inflation etc.
Macro economics is that part of economic theory
which studies the behavior of aggregates of the
economy as a whole.
Aggregate demand and aggregate supply
Average income= total income / pop
MICRO – Individual units – studies
economic behaviour of individuals in
economy
MACRO – Aggregate units- studies the
economy as a whole.
Interdependence of micro and macro
economics
Micro depends upon Macro
Macro depends upon Micro
Interdependence of micro and macro
economics
Micro depends upon Macro
price of single commodity is influenced by
general price level.
Macro depends upon Micro
Aggregate demand is the sum of all
individuals demand in the economy
Which is more important
Micro Economics
Macro Economics
Central problems of an Economy
3 central problems of an economy
What to produce?-
AC / Rice
How to produce ?-
LB/ CAP intensive
For whom to produce ?
Higher / middle/ low
Opportunity cost
OC is the cost of next best alternative
forgone
Eg: you are working in a bank for 40,000 pm
salary
Suppose you get 2 more offers
1. to work as an executive in a company for
30,000 pm
2. to become a journalist for 35,000 pm
What is the cost of working in an office ?
Opportunity cost of working in a bank is cost
of next best alternative
OC for working in a bank is 35,000 pm
salary forgone .
The amount of other goods and services ,
that must be sacrified to obtain more of
any good I opportunity cost of a good
Opportunity cost
Q1: Deepak is working as a sales manager at a
salary of 2,00,000 pm. He received 2 more
job offers. He got an offer of 80,000 pm from
reliance industries and 90,000 from tata
industry. Calculate the OC of working as a
sales manager.
Q2: a farmer produces 200 kg of wheat on a
piece of land with given resources. If this
farmer can also produce 80 kg of rice with
same given resources, Calculate OC
Production Possibility Frontier/Curve( PPF)/
PPC
PPF refers to the graphical representation of
possible combinations of two goods that can
be produced with given resources and
technology.
A and B – total resources are 15
10A: 5 B
9 A: 6 B
Assumptions
Only 2 goods are taken – guns and butter
The amount of resources are fixed
With these resources, only 2 goods are
produced
The resources are fully & efficiently utilized
Technology is constant
Production possibility schedule
Possibilitie Guns Butter MOC MRT =
s ∆Guns/∆Bu
tter
A 21 0 - -
B 20 1 1 1G:1B
C 18 2 2 2G:1B
D 15 3 3 3G:1B
E 11 4 4 4G:1B
F 6 5 5 5G:1B
G 0 6 6 6G:1B
PPF Curve
Max- 21 guns with 0
butter ( point A)
Max- 6 butter with 0
guns( point G )
AG curve will show
max limit of
production of guns
and butter.
Marginal Opportunity cost ( MOC)
Number of units scarified to gain one
additional unit of another commodity .
Always increasing
Marginal Rate of transformation ( MRT)
Ratio of units scarified to gain one additional
unit of another commodity
MRT = ∆units scarified / ∆units gained
Production possibility schedule
Possibilitie Guns Butter MOC MRT =
s ∆Guns/∆Bu
tter
A 21 0 - -
B 20 1 1 1G:1B
C 18 2 2 2G:1B
D 15 3 3 3G:1B
E 11 4 4 4G:1B
F 6 5 5 5G:1B
G 0 6 6 6G:1B
Properties of PPF
PPF will slope downwards
Concave shaped.
( increasing MRT, more and more units
scarified
to gain another units of a commodity
Attainable and unattainable combinations
in PPF
Change in PPF curve
If resources change – PPF will also change
change in PPF can either increase or
decrease the production capacity of an
economy
change
Shift in Rotation in PPF
PPF
Shift in PPF
Rightward shift Leftward shift
Advancement or up Technological
gradation of degradation or
technology or decrease in
growth of resources resources
Rotation of PPF
Rotation on X axis Rotation on Y axis
When there is a technological When there is a technological
advancement or increase in advancement or increase in
resources for commodity on X resources for commodity on Y
axis.(Guns)
axis.(Butter)
Numerical
Good x Good Y MOC
0 200
10 180
20 140
30 80
40 0
Comment on the shape of PPC
Good X Good Y
0 16
1 12
2 8
3 4
4 0
Calculate MRT
Comment on the shape of PPC
Good X Good Y
0 10
1 9
2 7
3 4
4 0
Calculate MRT
Comment on the shape of PPC
Good X Good Y
20 0
14 1
9 2
5 3
2 4
0 5
Calculate MRT