UNIT – 1

INTRODUCTION TO ECONOMICS

• Meaning (done)
• Definition (done)
• Early Definitions (done)
• Fundamental Problems of Economy (done)
• Difference between growth and development
• Micro and Macro (done)
• Science or an Art (done)
• Positive or Normative (done)
• Social Science (done)
• Economic Laws (done)
• Basic Assumptions (done)
• Production Possibility Curve

MEANING OF ECONOMICS
- Derived from the Greek word Oikonomia which means household management.
- Managing scarcity of resources.
- Maximum production at minimum cost

DEFINITION
Economics should not be defined:

Dr. J.M. Keynes – “Political Economy is said to have strangled itself with definitions.”
Pareto – It is “a waste of time to investigate what it (economic phenomenon) may be.”
Myrdal – “Economics is the only term regarding the precise definition of which the economist
need not be concerned.”
Hutchinson – “The actual assignment of a definition to the word ‘economics’ does not appear
to solve, or even help in the solution of any useful scientific problem whatsoever.”

Therefore, it is said that it is needless to waste words in defining economics. It will be an

exercise in futility.

Economics should be defined:

Lionel Robbins has stoutly denied that it is a waste of time to attempt a precise delimitation
of the field of economics.
Macfie – Lack of clear definition can prove harmful.
EARLY DEFINITIONS:
1. Economics as a Science of Wealth – Adam Smith (father of economics) (1776)
- According to him, economics was concerned with “An enquiry into the nature and
causes of wealth of nations.”
- Other economists who called economics, the Science of Wealth: J.E. Cairnes, J.B. Says,
F.A. Walker. In their definitions, a key position was assigned to wealth in the study of
economics.

FEATURES:

- VALUE IN USE: Utility of the commodity in day to day life. The satisfaction which one
obtains from the use of a commodity is known as the value-in-use. For example:
Sunlight, air, water. Water has immense use value, because it quenches thirst and
without it, daily life is just impossible. The quality of water is the value-in-use of water.
[These goods have no value in exchange. Why? Because they are in abundance.]
- VALUE IN EXCHANGE: Worth of commodity expressed in terms of price. For instance,
if one kg of rice can be obtained in exchange of one dozen of banana, then we may
say that value of one kg of rice is equal to one dozen of banana.

Those goods having both features are wealth. Example: Property, Gold, Automobiles.
Only material goods (tangible) were considered wealth by Adam Smith. He didn’t
consider services as wealth.

CRITICISMS:

- DISMAL SCIENCE: These definitions came at a time when religious sentiment was
strong and spiritual values held sway over men’s minds, therefore, exclusive emphasis
on wealth ended up causing repulsion in the enlightened mind.
Consequently, the early economists came to be looked down upon. Economics was
supposed to teach selfishness and came to be called a dismal science.
- IGNORING CONTRIBUTION OF SERVICES: It makes the person materialistic.

2. Science of Material Welfare – Alfred Marshall

- According to Marshall, “Political Economy or Economics is a study of mankind in the

ordinary business of life; it examines that part of individual income which is most
closely connected with the attainment & with the use of material requisites of well-
being. Thus, it is on one side a study of wealth; and on the other, and most important
side, a part of the study of man.”
- Other economists according to whom the aim of economics is to study human
activities which are conducive to human welfare in its material aspect: Beveridge
(speaks of meeting “material needs”), Cannan (speaks of causes of material
weldfare”), Pigou.
- Wealth furnishes man with material means of satisfying his wants and promoting his
welfare.
FEATURES:

- Wealth is attained for promoting welfare

Economics does not regard wealth as the be-all and end-all of economic activities.
Wealth is sought for promoting human welfare. Hence, wealth is relegated to a
secondary position.

- Economics deals with ordinary men & women

Economics is not concerned with “economic man” (a man whose only motive is to
acquire wealth for its own sake and who is not influenced by human considerations in
the pursuit of wealth). Rather, economics deals with ordinary men and women who
are swayed by love, affection and fellow-feelings and not merely motivated by the
desire to get maximum monetary advantage.

- It does not study isolated individuals

Economics is a social science and not one which studies isolated individuals. It is the
study of persons living in society influencing other people and getting influenced by
them.

- Studies only ‘material requisites’

Economics studies only ‘material requisites of wellbeing’ or causes of material welfare.
It has a materialistic aspect and ignores non-material aspects.

CRITICISMS:

• Economics cannot just be confined to only material welfare:

Lionel Robbins thinks it isn’t right to confine the study of economics to material
welfare, because in the actual study of economic principles both the “material” and
“immaterial” are taken into account.
Robbins has given examples of goods which are highly conducive to human welfare
but don’t have anything material in them, eg., services of doctors, lawyers, etc. These
services have economic significance. They are scare. They have value.
Economics is this concerned with both material as well as non-material things
provided they have value.

• Only welfare aspects?

Robbins also objects to the term “welfare.”
Example: intoxicants are regarded as wealth, but by no stretch of imagination can they
be regarded as conducive to human welfare. Being scarce, they are subject to the
“pricing process.” They have economic significance, though human welfare is not
promoted by them.
Moreover, welfare is too vague and indefinite an ideal to provide a sound foundation
for building up a respectable science.

• No moral judgements
 It is not supposed to be the function of economics to pass moral judgments and say
what is good and what is bad. What is conducive to human welfare and what is not so
conducive. Why? Because according to Robbins, Economics is neutral as regards ends.

Therefore, according to Robbins, Economics is not to be regarded as a study of the

causes of material welfare. He said, “Whatever Economics is concerned with, it is not
concerned with the causes of material welfare as such.”

Criticism in brief: Robbins called the hitherto accepted definition of economics

classificatory and unscientific. The word “material” imposed unnecessary limitation.
The welfare conception of Economics lacked universality and scientific precision.

3. Science of scarcity/choice – Lionel Robbins

- According to Robbins, “Economics is a science which studies human behavior as a
relationship between ends & scarce means which have alternative uses”
- Robbins claimed that his definition was analytical rather than classificatory.
- His definition focused on human behavior concerned with the utilization of scarce
means to achieve unlimited ends.

Features:
- Ends (wants) are unlimited
“Ends” refer to wants. Human beings have wants which are unlimited in number. If
one want is satisfied, another crops up. Multiplicity of wants calls forth ceaseless effort
for their satisfaction, and the unending cycle of economic activity moves on.
Had wants been limited, they would’ve been adequately satisfied and there would
have been no economic problem.

- Means (resources) are scarce

Although wants/ends are unlimited, yet the means to satisfy them are strictly limited.
Had the means of satisfaction been unlimited, no economic problem would have
arisen.
Economic resources/means are the various types of land, labor, capital and
entrepreneurship used in producing goods and services. Since these resources are
limited, the ability of the community to produce goods and services is also limited.

The term “scarcity” here is used in a relative sense. It is scarcity in relation to

requirements. It is not to be taken in an absolute sense. A commodity may exist in a
small quantity but if nobody has any use for it, it shall not be called scarce in the
economic sense.
Example: There may be huge stocks of wheat or coal, yet they’re called scarce because
the demand is even larger than the supply.
It is the demand, in relation to supply, for a commodity, and not its quantity alone,
which determines whether a commodity is scarce or not.
Therefore, scarcity is a relative term.

- Alternative uses
 The scarce means are capable of alternative uses. These alternative uses are of varying
importance; some are urgent and others less urgent. We can select the use to which
a commodity may be put. Choice comes in again.
Thus, according to Robbins, economic activity lies in man’s utilization of scarce means
having alternative uses, for the satisfaction of multiple ends.

- Matter of ‘choice’
Since, human wants are unlimited, one is compelled to choose between the more
urgent and the less urgent wants. Means refer to time, money or any other form of
property. They are all limited. But since the ends are unlimited, choice-making is
essential.
Therefore, Economics is also called a science of choice.

Superiority of Robbins’ Definition:

- Robbins demolished the old structure of economics based on material welfare and
raised a new one with two foundation stones – multiplicity of wants and scarcity of
means.
- Robbins’ definition takes into account all types of human wants, material or non-
material.
- Robbins raised economics to the level of science whereas the earlier economists
regard is as both, a science and an art.
- Robbins made Economics a positive science whereas earlier economists regarded it as
a normative science. Economics was thus freed from the responsibility of making value
judgments. It was no longer its function to examine the right or wrong form of an
economic activity.
- It was no longer a “dismal science” because it takes no responsibility for selecting the
ends. The ends may be good or bad. Economics is not concerned. Wherever the ends
are many and the means are scarce, Economics is directly concerned.

CRITICISMS:
- They ethical neutrality of Economics emphasized by Robbins exposed it to 2 main
criticisms:
(a) Since search for particular ends have been abandoned, the scope of economics has
been widened to include phenomena which are not strictly economic.
(b) Lack of concern for the nature of ends has made economic theory a purely formal
affair.
- Robbins’ definition does not cover the theory of economic growth or economic
development. He takes resources as a “given” and discuses only their allocation.
- In Robbins’ definition, human touch is entirely missing.

4. Science of Growth and Development – J.M. Keynes [MODERN DEFINITION]

- In Keynesian terms, Economics is defined as the study of the administration of scarce

resources and of the determinants of income and employment.
- According to him, Economics studies how the levels of income and employment in a
community are determined.
 - It studies the causes of economic fluctuations to see how economic stability could be
promoted.
- It studies about macro problems of poverty, development and growth.

FUNDAMENTAL PROBLEMS OF ECONOMY:

Economic Problem: Problem of choice involving satisfaction of unlimited human wants out
of limited resources having alternative uses. Reasons for economic problem? 1. Scarcity of
resources. 2. Unlimited wants. 3. Alternative Uses

Problems which an economy must answer before moving to the

development process:

1. What to produce?
Involves selection of goods & services to be produced & the quantity to be produced.
Quantity and range of goods to be produced. It also implies the allocation of resources
between the different types of goods, eg., consumer goods (end products) and
producer/capital goods (machinery/plants/equipment). (Some commodities may be
intermediaries – Example: Wheat. It can be used for consumption and for another
commodity as well.)
Every economy has to have a judicious mix of both types of commodities – consumer
and producer.
Guns (defence purposes) or Butter (consumption purposes) – Every economy has to
decide which one to produce and in what quantity.
Example: Raw Cotton (intermediary good) – Put in a machine (capital good) – Made
shirt (Consumer good)
Since resources are limited, we have to decide what is the optimum mix of the
consumer and producer goods. Composition of consumer and producer goods
depends on the particular economy’s demand, tech, development stage.

2. How to produce?
Involves selection of technique to be used for production.
Having decided the quantity and the type, next, the techniques of production must be
determined. Eg., labour-intensive (more quantity of labour, less amount of capital is
used) or capital-intensive (more amount of labour, less amount of labour). Both,
labour and capital are required for production.
Example: Car, Phone (manufactured or industrial goods) – capital intensive techniques
are required.
Agricultural Commodities – Wheat, Rice (wage goods) – labour intensive technique.
In populated economies, like India, there is more labour, and capital is scarce –
therefore, labour intensive techniques must be used – so as to ensure employment.
We are far behind the Western countries in terms of technology therefore we will
have to import machines, plants and equipment – cost of capital is higher.
Policy decision, must keep in mind both factors – labour is abundant and capital is
scarce.
 It is preferable to use labour intensive techniques where labour is more, reverse is
true for a capital surplus countries, eg., US.
To a certain extent, labour and capital are substitutes of each other, but not wholly.
There has to be a mix of both, the intensity might be different depending on the
factors of the particular economy.

3. For whom to produce?

Involves selection of category of people who will ultimately consume the goods.
How to distribute/share national product (national income). Who should get how
much. Who are the people who earn income? Owners of any factors of production –
land (rent), labour (wages) capital (interest), entrepreneur (profit). This comprises the
total national income. The workers are the salary earning people. Profit/interest
earning people. Higher income people demand luxurious goods. Lower class people
require necessary items – for survival – food, shelter. Upper – middle – lower class. If
income of upper class increases, income of lower class declines. Why? Because it has
to be from the same salary pool. When a producer increases its profits, from
somewhere he is compensating. From where? From the cost of production? What is
the cost of production? Wages is one of the component. Profit increases, wages
declines. Now, if wages increase – cost of production increases – profit declines.
Ultimately, when income is earned – in whose pocket that income is going? Higher
(profits) class, lower/middle (salary or wages). There has to be equitable distribution
of income amongst all classes of society.

4. Are the resources efficiently utilized?

Resources are scarce, so they have to optimally utilized. So, the economy has to decide
the allocation of the resources for catering to various wants of people, so that these
resources are not wasted. There has to be a judicious use of resources.
This is the problem of economic efficiency or welfare maximisation.
There is to be no waste or misuse of resources since they are limited.
Example: Buyers – 5. We produce – 10 units. Leads to wastage of 5 units. Economy
must ensure efficient utilization.

5. What are the provisions for growth?

Types of economies - underdeveloped, developing, developed. A
development/growth model (prescribed by the economists) must be adopted
according to the economy.
An economy must make sure that it keeps on expanding or developing so that it
maintains conditions of stability. It is not to be static.
Example: In India we had 5 year plans.

6. Other problems? (Problem of employment)

An economy must endeavour to achieve full employment of both labour and
resources.

SUBJECT MATTER – MICRO & MACRO:

Study of trees – micro. Study of forest – macro.

1. Micro-Economics (PRICE THEORY)

• Study of individual economic units

• Individual consumer/producer
• Pricing of single commodity
• Employment in a firm
• Determination of income of a factor of production
• Explains market mechanisms and distribution of goods and services
• Explains conditions of efficiency in production & consumption

Micro-economic theory studies the behaviour of

- Individual consumers
- Resource owners
- Business firms
- Particular industries
In micro economics, we study the
- Price of a particular product or of a particular factor of production and not the general
price level in the country.
- Demand of an individual or that of an industry, and not the aggregate demand of an
entire community.
- Income of an individual or of an industry, and not the national income of a country.
- Employment in a firm or in an industry, and not the aggregate employment in the
whole country.

Theoretical Importance of Micro-Economics:

- It explains the function of a free enterprise economy.
- It tells us how millions of consumers and producers in an economy take decisions
about the allocation of productive resources among millions of goods and services.
- It explains how through market mechanism (demand and supply), goods and services
are distributed.
- It explains the determination of the relative prices of the various products and
productive services.
- It explains the conditions of efficiency both in consumption and production and
departure from the optimum.
Practical Importance of Micro-Economics:
- It helps in the formulation of economic policies calculated to promote efficiency in
production and the welfare of the masses.
Therefore, the role of micro-economics is both positive and normative. It not only tells
us how the economy operates but also how it should be operated to promote general
welfare.

Limitations:
- It cannot given an idea of the functioning of the economy as a whole. An individual
industry may be flourishing, whereas the economy as a whole may be languishing.
 - It assumes full employment which is a rare phenomenon at any rate in the capitalist
world. It is an unrealistic assumption.

Market mechanism - goods and services are distributed.

- Market Determined Economy:
When pricing of any commodity is done by the free flow of the market forces (demand
and supply). There is no interference from the commodity. Jitni demand – Utni
production. Usi demand – Price determine. Commodity surplus – demand less – price
decline. Commodity scarce – demand more – price more. Such determination – MDE.
When an economy functions on demand on supply – MDE.
- State Determined Economy:
Government interfere. Price won’t increase beyond this, fall beyond this. SDE. Ex:
MSP, BPL – essential commodities at a lower price.
When we talk about micro-economics - we study how the forces of demand and
supply determine the price of the commodity, interest rate, savings, employment, etc.

2. Macro-Economics (INCOME THEORY)

• Study of economic units at aggregate level
• Studies determination of NI, general price level, interest rates, saving and
investment, total employment, etc.
• Analyses chief determinants of economic development & various stages and
processes of growth

Macro-Economics is concerned with aggregates and averages of the entire economy, such as
national income, aggregate output, total employment, total consumption, savings and
investment, aggregate demand, aggregate supply, etc.
In Macro we study how these aggregates and averages of the economy as a whole are
determined and what causes fluctuations in them.
It deals with how an economy grows.
It analyses the chief determinants of economic development and the various stages and
processes of economic growth.
The theory of growth is long run macro-economics.

UTILITY OF MACRO-ANALYSIS
- It is helpful in understanding the functioning of a complicated economic system. It
gives a bird’s eye-view of the economic world. The economy is more important than
the individual.
- It is of utmost significance for the formulation of useful economic policies for the
nation. Economic policies cannot be based on the fortunes of a single firm or a single
industry. It would be far more fruitful to regulate aggregate employment and national
income.
- Macro-analysis enables us to study the economy in its dynamic aspect. It seeks to solve
urgent economic problems related to aggregate output, employment and national
income.
LIMITATIONS OF MACRO-ANALYIS
 - Individual is ignored altogether. The main aim of Economics is individual welfare, and
increasing national saving at the expense of the individual is not a wise policy.
- It overlooks individual differences. Example: The general price level may be stable, but
the prices of food grains may have gone spelling ruin to the poor. While considering
the aggregates, it is also essential to remember the nature, composition and structure
of the components.
CONCLUSION
In economics, what is true of the parts is not necessarily true of the whole, and what is true
of the whole may not apply to the parts. The subject matter of Economics includes price
theory (micro), income and employment theory (macro), and growth theory.

SCIENCE/ART
Economics is both science and an art. It is a science in its methodology and an art in its
application. It has a theoretical aspect and is also an applied science in its practical aspects.

POSITIVE/NORMATIVE
POSITIVE

• What is?
• Descriptive
• Establishes theory and gives predictions

NORMATIVE

• What ought to be?

• Prescriptive
• Establishes norms and tries to achieve it

Positive Science only explains what is.

Normative science tells us what ought to be, i.e., right or wrong.
PS – describes the things as they are
NS – evaluates how the things should ideally be
PS – Explains the “why” of things
NS – Passes moral judgments
PS – Example: Distribution of income in India is unequal
NS – Example: Distribution of income in India should be equal.
Economics is both a positive and normative science.

Therefore, economics is not merely concerned with allocation of scarce resources among
competing wants but in maximising total satisfaction according to one’s own judgment.
There are development models.

SOCIAL SCIENCE
Laws that we see in social science vary from pure science. They can be applied to a majority
of people, but there are exceptions. They aren’t universal like pure science.
Economics is primarily a study of man and not of wealth. But it doesn’t study man as an
isolated individual who has renounced the world. It is not concerned with the economic man
but with a man who lives in society affecting others by his actions and himself exposed to
social influences. He is swayed by ordinary human motives, noble or ignoble, and having his
ordinary share or human virtues and vices.
The process of satisfying wants is a social process, not an individual process.

ECONOMIC LAWS
• Statement of tendency
Economic laws lack predictability. We cannot say what will happen next because it depends on the
fulfilment of so many conditions. We can only say what is likely to happen. They only show the
likelihood of the behavior.
Therefore, economic laws are mere statement of tendencies of statistical probabilities.
If demand increases, price tends to rise. But it isn't universally true. It may or may not rise, since it also
depends on the supply conditions. Exceptions do exist.
Example: Price of a commodity and the quantity demanded – have an inverse relationship in general.
Exception: Price increases and the demand increases alongside. Only a tendency is there.

• Cause and effect behavior

There is a reason/cause for this statement of tendency, and there is some particular determinant that
has this effect on an entity. There is some particular determinant (cause) which has an influence on
(effect) the consumers/producer/any economic entity leading them to behave in a particular manner.
In demand law also, there is a reason for why the consumer is purchasing more/less.

• Ceteris paribus
Economic laws are governed by the phrase “other things remaining unchanged.”
Human behavior is determined by many factors. It is not possible to control all those factors. But if we
want to see the relationship between the quantity and price, so we have to keep other things
unchanged and constant. There may be other reasons that determine the demand of the commodity
(like income, climatic factors, fashion, taste, preferences). We presume all these factors remain
constant, other than the price. And then we see the effect of price on the quantity. Always mention
this while talking about economic laws.

• Conditional
There will be certain conditions under which we want to see the relationship between 2 variables.

• Less universal
Since economic laws are statement of tendencies, it just shows inclination/likelihood of a behavior.
There will be certain cases where they might not be applicable. Therefore, they are less universal.

• Less predictable
Since they are less universal, they are less predictable as well. Predictions may be there, but lesser.
Like when the news came that there might be a lockdown, the prices soar higher, and it was
anticipated that since quantity would be less, the prices may increase as the demand might increase
further. People predict on the basis of market conditions. So, economic laws are predictable BUT only
to a certain extent. Why? They are less universal.
BASIC ASSUMPTIONS
- Rationality
We assume that the consumers act in a rational manner and seek maximum
satisfaction. We assume that there is a mobility of labor in search of higher wages and
the entrepreneurs seek maximum profit. This is known as maximization principle. The
assumption that the consumers seek maximum satisfaction out of the money they
spend is fairly realistic.

- Ceteris paribus (Taste & preferences remain unchanged)

Ceteris paribus means that the law will hold good if there are no other changes taking
place. It is assumed that the consumers’ tastes remain unchanged for fairly long
periods of time. That is, they don’t suddenly change the components of their diet or
their mode of dress. For instance, a vegetarian remains a vegetarian.

- Short term or long-term analysis

Not an assumption, we analyse certain behaviour in short run and long run because
their behaviour might be different in both. Time period is also one of the principles in
economics. We study economic phenomena in either short run or long run.
Example: Suppose a person wants to set up a car manufacturing plant – in that
perspective, 5 – 10 years is a long term. Medium term: 6 months – 1 year. Short term:
1 week – 6 months. Very short term – within a week.
Suppose we’re talking about agricultural products, vegetables – short term: 1-2 days.
Long term: 6 months. If we want to increase land fertility – more than 1 year.
Depending on the phenomena, we study short/long term analysis. Each economic
entity behaves differently in short/long term, because many variables might change
in long term.

- Concept of equilibrium
Another assumption is the concept of equilibrium. Equilibrium refers to a situation
from which no departure is desired. It is a point of rest, i.e., where a consumer is
supposed to have attained maximum satisfaction and an entrepreneur maximum
profit. A firm is said to be in equilibrium when it is making maximum profit and an
industry is in equilibrium when it gives only normal profit. When these positions have
been attained, there is no incentive to make any change.

- Marginal principal
Whenever we do any economic analysis – we analyze in terms of marginal analysis.
MA: How a small change in one variable, will affect another variable and what impact
it will have on people’s decision making. Whenever we talk about any economic
phenomena – we do the MA. For example: Marginal Utility Analysis.

- Opportunity cost analysis

We also do OCA. Economic Cost = Price for a commodity. Opportunity Cost = Cost of
next best alternative that is sacrificed.
We had many alternatives, but we chose to do BALLB (hons.) Therefore, OC of BALLB
(hons.) course = The cost of the next best alternative that is sacrificed.
 Importance: Suppose I want to become entrepreneur and I want to get profits.
Revenue Generated – Cost of FOP = Profit. No. We must also subtract the salary.
Why? If I am a teacher earning Rs. 50,000 and I want to become an entrepreneur.
Then, I must earn minimum 50,000 to continue as an entrepreneur. OC of becoming
an entrepreneur = Teaching salary.

PRODUCTION POSSIBILITY CURVE

It is a graphical representation of all the possible combinations of two goods which can be
produced with given resources and technology.

Since resources are limited and wants are unlimited, we have to choose the most desirable
assortment of goods that we can produce with the resources that we command and with a
given state of technical knowledge. Had there been unlimited resources, there would have
been no problem as we would have produced more of everything to satisfy our wants.
But, in an economy characterised by full employment, goods can be produced only by
foregoing the production of some other good. (Opportunity cost principle)
The society has to decide how these resources can be utilised to produce the various
possible commodities. It has to discover its production possibility curve.
The PPC shows the maximum output of any one commodity that the economy can produce
together with the prescribed quantities of other commodities produced and the resources
utilised. The PPC, tells us what assortment of goods and services the economy can produce
with the resources and the techniques at its disposal.
The PPC depicts the society’s menu of choices.
The points on the curve – production possibility
The points outside the curve – unattainable combination
The points inside the curve – attainable combination (underutilization of
resources/underemployment)
Increase in the resources at the disposal of the firm will take it to a higher production
possibility curve.

If the economy decides to spend all of its resources into the production of cotton. Maximum
possible units of cotton – 100 (OA). If decides to spend on machines. Max – 60.
When we join A and B, we get a PPC which shows the possible combinations of cotton and
machines which the economy can produce with the given set of resources.
If the economy is P1 – it is producing 50 units of cotton and 40 units of machines.
Suppose it decides to produce more cotton and moves to P2. Now it produces 80 units of
cotton and 30 units of machine.
To produce 30 more units of cotton, it had to sacrifice 10 units of machines.
OC of producing 30 units of cotton = 10 machines.

Beyond AB – unattainable.
To go beyond, increase the resources.
How to increase? By enhancing the technology.
So, by enhancing tech, we can move from AB to CD.

ASSUMPTIONS:
- With the help of resources, only 2 goods can be produced.
- Resources are fully and efficiently utilized.
- The level of technology is assumed to be constant.
- The amount of resources are fixed but can be transformed from one use to another.

PROPERTIES:
- PPC slopes downwards. Reason? Inverse relationship between change in quantity of one
good and change in quantity of other good.