INTRODUCTION

Prepared by Pankaj Kumar Thakur 9540000775

The word ECONOMICS is derived from two Greek worlds, ‘Oikos’ (Household) and ‘Nemein’
(management) i.e. How a household wife manage her house with a limited sources of income.

“Economics is the study of how man and society choose to employ scarce productive resources
having alternate uses to produce various commodity and distribute them for present and future
consumption”

Therefore Economics today is regarded as a more comprehensive subject than before with broader
and wider scope.

MICROECONOMICS AND MACROECONOMICS

Micro Economics Macro Economics

Derived from greek word “Mikros” means small Derived from greek word “Macros” means
It is that part of social science of economics that large
deals with the behaviour of individual unit such It refers to the study of economy as a whole
as individual household/firm/market etc. and deals with the aggregates such as GNP,
Problem of Employment, aggregate demand
etc.

It is difficult to differentiate between Micro & Macro Economics as they are independent on each
other for example: Aggregate demand is the summation of all the individual demand, however they
can be distinguished on the basis of meaning, scope, type of analysis.

Difference b/w Micro & Macro Economics

Micro Economics Macro Economics

• It studies individual units within an • It studies the economy as a whole and
economy like individual demand, aggregates like aggregate demand,
individual firm’s supply, income of aggregate supply, National Income, GDP,
household etc. etc.
• It deals with the problem of allocation of • It deals with the problem of full and
resources efficient utilisation of recourses.
• It is called price theory as it determines the • It is called theory of income and
price of individual commodities and employment as it determines the
factors. equilibrium level of income and
• It deals with partial equilibrium analysis. employment.
• The scope are Theory of Demand & Supply, • It deals with general equilibrium analysis.
Theory of Factor Pricing • The scope are Theory of National Income,
Employment, Financial system of and
economy, Foreign Trade and payment
system, Fluctuation in level of economic
activities.

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Economy:

It refers to the framework within which all the economic activities have been carried out.

Economic activities

Production Consumption Capital formation

It refers to the creation of It refers to the using the goods Refers to the addition made to
goods & service or increasing & services for the satisfaction the capital or stock during an
the value of already existing of human wants. accounting year
goods & services for the
satisfaction of people wants.

Economic theory:- is a collection of laws and principles which try to explain the working of economic
phenomenon and indicate the cause and effect relationship among economic variables.

Assumption of economic analysis are:

1. Rationality of human behaviour (acts in a sensible manner)

2. Other things remaining constant (cetris paribus)

Economic problem

The problem which arises out of unlimited wants, limited recourses and these resources have
alternative uses.

The root cause of an economic problem is the problem of scarcity and this problem gives the birth to
the problem of choice as the recourses are scarce & they have alternative uses economy has to
make a choice about the use of recourses as per their priorities because resources can be used only
for one purpose at a time.

Scarcity : excess of demand of resources over the availability of resources.

Resources: anything which can satisfy human wants, features of Resources are they are scares, they
have alternative uses & they are economic as well as non economic

Type of Resources:

1. Land: it consists of all free gifts of nature (natural resources)

2. Labour: it consists of all human resources, mental and physical, both inherited and acquired.
3. Capital: it consists of all those man-made aids to further production.
4. Entrepreneurship: it organises other factors of production and directs them along new lines.

Central problem of an economy: the problem which is common to all economy or which exists in
every economy.

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Types of central problem of an economy

1. What and how much to produce:

This problem is concerned in deciding what good should be produced and in how much
quantity. Eg: war goods or civilian goods. This problem arises because of scarcity of
resources as they are limited and have alternative uses. Economy has to make a choice
about the use resources as per their priorities.
Guiding principle- allocate the resources in such a manner which gives the maximum
aggregate satisfaction.

2. How to produce:
This problem is related to the techniques used in production.
There are two types of techniques of production-
(a) Labour intensive: more labourers instead of capital
(b) Capital intensive: more capital instead of labourers
Eg: European countries prefer to use capital intensive technique because labourers are
not easily available and they are costlier, whereas a country like India which is labour
surplus economy prefers to use labour intensive because labourers are easily available
and even they are economical.
Guiding principle- allocate the factors of production in such a manner which gives the
maximum aggregate output.

3. For whom to produce:

This problem is concerned in deciding for which section of the society the economy is
producing the good for rural section or for urban section because income is distributed in
the economy unevenly in the form of rent, interest, wages etc. At the same time economy
has to decide how to distribute these goods so that prospective consumer can access them,
through physical distribution or functional distribution.
Guiding principle – ensure that all the urgent needs of all the factors of production are
fulfilled to the maximum extent.

PRODUCTION POSSIBILTY CURVE / PRODUCTION POSSIBILITY BOUNDARY / PRODUCTION

POSSIBLITY FRONTIER / TRANSFORMATION CURVE / OPPORTUNITY COST CURVE

It is a graphical representation of different combination of two goods which an economy can

produce with the assumption that resources are fully utilised and technology remain constant in a
two good economy.

Assumption:

• Resources are fixed

• Resources are fully and efficiently utilised
• All the resources are not equally efficient in production of both the goods
• Technology remain constant

Characteristics / features / Properties

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 • Its slopes downwards from left to right because economy has to sacrifices some units of one
commodities to produce an additional unit of another commodity as resources are fixed.
• It is concave to the origin because of increasing marginal opportunity cost / marginal rate of
transformation which suggest that to produce more and more units of one commodity, each
time economy has to sacrifice some units of another commodity at an increasing rate
because no resource are equally efficient in production of both the goods.
Combination X Y MOC MRT
A 1 20 - -
B 2 18 2 2:1
C 3 15 3 3:1
D 4 11 4 4:1
E 5 6 5 5:1

Good Y

Good X

Opportunity cost:

The value of factor to its next best alternative use.

Eg: farmer produces rice in his farmland and it gets him Rs 10,000 if he will produce maize it will get
him Rs 9,500 and wheat Rs 8,000 therefore the opportunity cost of producing rice is the cost of
sacrificing maize i.e Rs 9,500.

MARGINAL RATE OF TRANSFORMATION (MRT)

It refers to the ratio of number of units of one good sacrificed to produce an additional unit of
another good.

Marginal Opportunity Cost (MOC)

It refers to the addition to the cost in terms of number of units of one good sacrificed to produce an
additional unit of another good.

The difference b/w MRT & MOC is that one is in terms of rate whereas another in terms of value.

• MRT is the slope of production possibility curve

∆" $%&& '( )%%* "
MOC/MRT =
∆+ ),'( '( )%%* +
MRT determine the shape of PP Curve if it is increasing the shape will be concave, if it is
constant shape will be straight line.

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Points in / on / outside the ppc indicate

b
d
Good y

a
c

x
o good x

• Point a indicate under and in efficient utilisation of resources

• Point b & c indicate optimum utilisation of resources
• Point d indicate over utilisation of resources (unattainable combination with the given
resources & technology)
• From point a to c / b indicate moving of resources from under utilisation to optimum
utilisation
• From point b/c to point a indicate moving of resources from optimum utilisation to under
utilisation
• From point b to c indicate more of good x and less of good y
• From point c to b indicate more of good y and less of good x

Shift in the PPC

Rightward shift : PPC shift towards the right when there is increase in resources or technology
becomes advanced for both the goods.

Eg: make in India, Digital India, Beti Bachao Beti Padhao, Discovery of new oil reservoirs, etc.

Y
Good Y

X
Good x 5|Page
 O

Leftward shift : PPC shift towards the left when there is decrease in resources or technology
becomes obselete for both the goods.

Eg: natural calamities causes lots of death, use of obsolete technology, etc.

Y
Good Y

X
O
Good x
Note:

1. When ppc shift towards left or right it will be parallel to the older one only when, change in
resources or technological changes for both the goods are in same proportion & in same
direction.
2. Two ppc intersect each other when there is favourable change in resources or technology in
one good and at the same time there is unfavourable change in resources or technology in
another good.
3. Rotation of ppc will takes place only when there is change in resources or technology occurs
in only one good. Following figure depicts the rotation-

Ø Favourable change in resources or technology for good X

A
Good Y

O X

B B’
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 Good X
Ø Favourable change in resources or technology for good Y

A’

A
Good Y

O X
B
Good X

Prepared by Pankaj Kumar Thakur 9540000775

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EXCERCISES
( 1 MARK )

1. Give one point of difference between micro and macro economics .

2. Why does the problem of choice arises ?
3. What is meant by economizing of resources ?
4. What do you mean by production possibilities frontier ?
5. Why is PPF concave to the origin ?
6. Define marginal opportunity cost.
7. Why is PPF downward sloping from left to right?
8. What factors lead to rightward shift of PPF ?
9. Can PPF be a straight line ?
10. What does the point below the PPF indicate ?
11. What is meant by scarcity ?
12. What is the basic problem for economic problem in all economies ?
13. What is meant by an economy ?
14. What is meant by economic problem ?
15. How is economic problem is a choice making activity ?
16. State two features of resources that give rise to economic problem.
17. Name two important branches of Economics.
18. Define Micro economics.
19. Define macro economics.
20. Give two examples of micro economics studies.
21. Give two examples of macro economics studies.
22. What are the central problem of an economy ?
23. What is meant by the problem what to produce ?
24. What is meant by the problem whom to produce ?
25. What is meant by the problem how to produce ?
26. What is the guiding principal of what to produce ?
27. What is the guiding principal of how to produce ?
28. What is the guiding principal of whom to produce ?
29. Give an example of decrease in resources .
30. When is the fuller utilization of available resources said to have taken place ?
31. What does increasing MOC along a PPC mean ?
32. When MOC is constant ?
33. What does the point from inside the PPC to the point on the PPC indicate ?
34. What does the point from PPC to the point inside the PPC indicate ?

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 35. What does the point from one point of PPC to another point on the PPC indicate ?
36. Can production takes place outside the PPC ?
37. Can PPC convex to the origin.
38. Define opportunity cost.
39. Which branch of economics is also known as price theory ?
40. Which branch of economics is also known as income and employment theory ?
41. What does the movement along the PPC indicate ?
42. What is meant by resources ?
43. Mention two examples of resources .
44. Give two examples of underutilization of resources .
45. What is the measure of MRT ?
46. What is the tendency of MOC ?
47. Give an example showing dependence of macro-analysis on micro-analysis .
48. What determine the shape of PP curve ?
49. If PPC shift towards the right, should it be parallel to the old one ?

¾ MARKS

1. What is an economic problem? Why does it arise?

2. Distinguish between micro economics and macro economics. Give one example of
each.
3. Define PPF. Explain the reason for its downward and concave shape.
4. Draw a PPF and depict the following situation: 1. Underutilization of resource 2. Fully
employment of resources 3. Growth of Resources.
5. Draw a production possibility frontier when MRT is constant. Give reason .
6. Production always take place on the production possibility frontier. Do you agree?
Give reason.
7. State whether the following statements are true or false. Give reason.
1. Massive unemployment will shift the PPF towards left.
2. An economy cannot operate outside the PPF;
3. Study of cotton textile industry is a macroeconomics study.
8. The economy discovers a new oil reservoir. How will it affect the PPF of the
economy? Give reason.
9. A doctor has a private clinic in city X and his annual earnings are 10 lakhs. If he works
in a government hospital, his earnings are 8 lakhs. What is opportunity cost of having
clinic in city X.
10. Briefly discuss the various reasons for economic problem.
11. What are the three central problems of an economy? why do they arise?
12. Discuss the central problem of an economy.
13. State the problems relating to ‘allocation of resource ‘ in an economy.
14. Explain ‘ what to produce’ with help of an example .
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15. Explain the concept of opportunity cost with the help of an example .
16. Discuss the meaning of production possibility curve with the help of a table and
diagram.
17. Explain the shape of a production possibility frontier.
18. Draw a production possibility curve and show the following situation:(1) Fuller
utilisation of resources ; (2) Economic growth ; (3) Decrease in resources; (4) Under
utilization of resources.
19. What does a production possibility curve show? When will it shift to the right ?
20. What is meant by marginal opportunity cost ? why is marginal opportunity cost
increasing in case of PPC?
21. Give the various reasons for shift in production possibility curve.
22. An economy produces 2 goods X and Y. Calculate the marginal opportunity cost of X
at various combinations:
X 0 1 2 3 4 5
Y 90,000 80’000 68’000 52,000 34,000 10,000

23 . Economy Produces 2 goods X and Y . Draw the PPF and Verify its concave shape.
What pattern in the table gives rise to concave shape?

Possibility A B C D E F

X 0 1 2 3 4 5

Y 100 95 85 70 50 25

24.The Following table shows the production possibilities for 2 goods.

Combination A B C D E
X 0 1 2 3 4

Y 10 9 7 4 0
a) Show these production possibilities on a PPF. What do these combination
indicate ?
b) Label point F and G inside and outside the PPF respectively. What do these points
indicate?
c) Suppose the technological progress takes place in the production of 2 goods, how
does it affect the PPF?
d) Suppose destruction of resources take place due to earthquake , how does it
affect the PPF?

Multiple Choice Question

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Q.1. The nation has two alternatives of producing 100X + 200Y or 102X + 196Y from its
given resources. The nation chooses the second. What is the marginal opportunity cost of
producing X:

(a) 4Y (b) 3Y (c) 2Y (d) 1Y

Q.2. Opportunity cost refers to the value of the opportunity:

(a) to be available in future
(b) available in the past
(c) actually availed at present
(d) could be availed at present as a second alternative

Q.3. A typical PP frontier shows:

(a) The actual output the nation is producing.
(b) The minimum output the nation must produce.
(c) The Maximum output the nation can produce for all times to come.
(d) The potential output of the nation from the given resources at present.

Q.4. A typical PP curve is downward sloping concave curve because : to produce more
of one good, output of the other good must be reduce.
(a) at increasing rate
(b) at decreasing rate
(c) at constant rate
(d) Initially at decreasing rate and then at increasing rate.

Q.5. As one moves along a PP curve, Marginal Rate of Transformation:

(a) Decreases continuously
(b) Remains unchanged
(c) Increase continuously
(d) Decreases upto a point, remains constant and then increases.

Q.6. A typical PP curve is:

(a) upward sloping convex (b) upward sloping concave
(c) downward sloping convex (d) downward sloping concave

Q.7. Marginal Rate of Transformation increases as we move along a typical PP curve

due to:
(a) Resources being fully employed.
(b) Resources being efficiently employed.
(c) No resource is equally efficient in production of every good.
(d) All the above

Q.8. A PP curve:
(a) Cannot shift at all (b) Can shift upwards only

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(c) Can shift downward only (d) Can shift both upwards and downwards

Q.10. Which of the following is not a subject matter of micro-economics?

(a) Theory of demand (b) Theory of production

(c) Monetary Policy (d) Market Structure

Q.11. Which of the following is a subject matter of macro-economics?

(a) Theory of Demand (b) Theory of production

(c) Fiscal Policy (d) Market Structure

Q.12. Central Problems of an economy arise due to ______________________________________.

(a) Plenty of resources and limited wants (b) Plenty of resources and unlimited
wants
(c) Scarcity of resources and unlimited wants (d) scarcity of resources and limited
wants

Q.13. Which of the following countries will have central problems?

(a) USA (b) China
(c) Pakistan (d) All the above

Q.14. State which of the following is a false statement:

(a) Central problems arise on account of limited resources.
(b) Resources available have many alternative uses.
(c) Resources are fixed and cannot be increased.
(d) We should use our resources efficiently.

Q.15. Which central problem is highlighted by production possibility curve?

(a) What to produce (b) How to produce
(c) For whom to produce (d) None

Q.16. Identify the statement which is false:

(a) Central problems different economies are not same.
(b) Scarcity of resources is the cause of central problems.

Q.17. Price theory deals with:

(a) Product pricing (b) Factor Pricing
(c) Welfare economics (d) All of the above

Q.18 Macro economics deals with:

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(a) Theory of distribution (b) Theory of income and employment
(c) Theory of economic growth (d) all of the above

Q.19. Economic problem arises because:

(a) Wants are unlimited (b) Resources are scare
(c) Alternative uses of resources exist (d) All of the above

Q.20. Central problem of an economy can be:

(a) What goods to produce and how much to produce
(b) how to produce
(c) For whom to produce
(d) All of the above

Q.21. Opportunity cost is:

(a) The additional benefit of buying an additional unit of a product
(b) The cost incurred in the past before we make a decision about what to do in future
(c) A cost that is born In term of discomfort and pain while supplying factors of production
(d) That which we forgo, or give up, while making a choice or a decision

Q.22. The opportunity cost of watching a movie will be equal to:

(a) The time lost while watching the show
(b) The pleasure that could have been enjoyed watching TV instead
(c) The pleasure enjoyed by watching the show
(d) The amount paid to buy the tickets

Q.23. When there is an improvement in technology, holding everything else constant

(a) The production possibilities frontier shifts inward
(b) The production possibilities frontier shifts upward
(c) The production possibilities frontier remains the same
(d) The production possibilities frontier shifts downwards

Q.24. Many people have died and large number factories destroyed because of a severe
earthquake in a country. How will it affect the country’s PPC?
(a) its PPC will shift to the right (b) Its PPC will shift to the left
(c) Economy will operate inside PPC (d) PPC will not be affected with this change

Q.25. The reason behind a rightward or outward shift of PPC could be:
(a) Growth of resources (b) Technologies advancement
(c) Either (a) or (b) or both (d) Fall in resources or obsolete technology

Q.26. The reason behind the concave shape of PPC is:

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(a) Increasing marginal opportunity cost (b) Falling marginal rate of
transformation
(c) Falling marginal opportunity cost (d) Constant marginal rate of
transformation

Q.27. PPC will be a straight line when MOC will be:

(a) Falling (b) Rising
(c) Constant (d) Zero

Q.28. Price theory studies the problem of:

(a) What goods to produce and how much to produce
(b) How to produce
(c) For whom to produce
(d) All of the above

Q.29. Production possibility curve (PPC) is defined as different combination of goods

and services that can be produced by whom when the resources are fully employed?
(a) Firm (b) Industry
(c) Economy (d) All of the above

Q.30. Assumption of PPC is/are:

(a) There are only two goods (b) Resources are not specific
(c) Resources are fully employed (d) All of the above

Q.31. Shape of PPC is:

(a) Downward slopping concave to the origin
(b) Downward sloping convex to the origin
(c) Downward sloping straight line to the origin
(d) All of the above

Q.32. PPC is also called:

(a) Opportunity cost curve (b) Transformation curve
(c) Production possibility frontier (d) All of the above

Q.33. If production of good X rises by 1 unit and that of good Y falls from 15 to 12.5 units
the marginal opportunity cost of X is:
(a) 27.5 (b) 2.5
(c) 15 (d) 12.5

Q.34. PPC can effectively explain the central problem of:

(a) What to produce (b) How to produce
(b) Economic growth (d) All of the above

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Q.35. Economics is:
(a) The study of stock and bond market (b) Mainly the study of business firms
(c) The problem of choice under scarcity (d) The study of management decisions

Q.36. In economics, the central problem is:

(a) Scarcity (b) Consumption
(c) Money making (d) Exchange

Q.37. Microeconomics is not concerned with the behaviour of:

(a) National Income (b) A consumer
(c) A Firm (d) A producer

Q.38. Macroeconomics deals with:

(a) The behaviour of firms (b) The behaviour of electronics industry
(c) The activities of individual units (d) Economic aggregates

Q.39. Microeconomics deals with which of the following:

(a) The total output of an economy
(b) The measurement of a nations inflation rate
(c) How producers and consumers interact individual markets.
(d) How tax policies influence economic growth

Q.40. Total output of an economy is the sum of total outputs of individual producers.
This statement proves that:
(a) Macroeconomics depends on micro economics
(b) There is no correlation between micro and macro economics
(c) Study of micro and macro economics is independent of each other
(d) Microeconomics is dependent on macroeconomics

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