TOPIC -INTRODUCTION

1. Study of Economics is divided into two branches:(a) Micro

economics
(b) Macro economics
2. Micro economics studies the behaviour of individual economic
units.Ex-Consumer equilibrium, producers equilibrium, product
pricing, factor pricing etc.
3. Micro economics is also called price theory.
4. Macro economics studies the behavior of the economy as a
whole.Ex- National income, aggregate demand, aggregate supply,
general price level, Inflation etc.
5. Macro economics is also called theory of income and employment.
6. Economy is a system in which people earn a living to sastisfy their
wants through process of production, consumption, investment and
exchange.
7. Economic problem is the problem of choice arising from use of
limited means which have the alternative use for the satisfaction of
various wants.
8. Cause of economic problems are :(a) Unlimited Human Wants(b)
Limited Economic Resources
(c) Alternative uses of Resources.
9. Central Problems of an Economy

1. The central problem of “what to produce” refers to which goods and

services will be produced in an economy and in what quantities. An
economy has to produce those goods and services where there will
be maximum social utility. This problem is studies under price
theory.The central problem of “how to produce” refers to what
technique of production (i.e.., labour intensive or capital intensive)
should be used to produce goods. An economy has to select that
technique which maximizes the output at minimum cost. This
problem is studies under theory of production.
The central problem “for whom to produce” is related to distribution
of produced goods and services(i.e.., income and wealth) among
factors of production in the form of rent, wages, interest and
profit.This is explained under the theory of distribution.
2. For the selection of an opportunity, the sacrifice of next best
alternative use is called opportunity
3. cost.In other words, it is the amount of one commodity that is to be
sacrificed to increase the production of other commodity.
4. Production possibility frontier or production possibility
curve shows all possible combinations of two set of goods that an
economy can produce with available resources and
 given technology, assuming that all resources are fully and
efficiently utilized.
5. Economizing of resources means utilisation of resources in best
possible manner to maximize output.
6. Production Possibility Frontier or CurveFeatures(a) Slopes
downward from left to right because if production of one
commodity is to be increased then production of other
commodity has to be sacrificed as there is scarcity of resources.
7.
(b) Concave to the origin because of increasing marginal
opportunity cost or (MRT)

8. The Production possibility curve will shift under following

two condition:(a) change in resources, (b) Change in technology of
production for both the goods.

9.
10. Rightward shift of PPF shows increase in resources or
improvement in technology.Ex- Labour becoming more skilled,
improvement in technology, increase in productivity of land.
11. Leftward shift of PPF shows the decrease in resources or
degradation of technology in the economy.
12. The Production possibility curve will rotate
outward under following two condition: (a) Improvement in
technology in favour of one commodity (b) Growth of resources for
the production of one commodity
 13.
14. Marginal Rate of Transformation (MRT)– It is the
amount of one commodity that is to be sacrificed to increase the
production of other commodity by one unit.
15. MRT can also called Marginal Opportunity Cost. It is
defined as the additional cost in terms of number of units of a good
sacrificed to produce an additional unit of the other good.
16. MARGINAL RATE OF TRANSFORMATION: MRT is the ratio
of units of one good sacrificed to produce one more unit of other

good.
17. (Marginal= at the border or adjacent/next to/adjoining)
(Transformation= a change in form, shape appearance or size)

ECONOMY: It is a system spread over a particular area that reveals the

nature and level of economic activities in that area. It shows how people
of a particular area earn their living.
SERVICES: A type of economic activity that is intangible, is not stored
and does not result in ownership. A service is consumed at the point of
sale. Services are one of the two key components of economics, the other
being goods.e.g; services of a doctor.

WANTS: Wants are mere desires to buy the object irrespective of price and
capacity.

RESOURCES: service or asset which is used to produce goods and services that
meet human needs and wants are called resources.
GOODS: All physical and tangible things which are used to satisfy people’s want,
provide utility and have

HOUSEHOLD: All persons living under one roof having either direct access to
the outside or a separate cooking facility. Where member of a household is
related by blood or law, they constitute a family.
FIRMS: Firm is an organisation that employ productive resources to obtain
products and/or services which are offered in the market with the aim of making
a profit

PRODUCTION: Production is a process through which inputs are transformed

into output(i.e. in order to make something for consumption).
CONSUMPTION: The process of using up of goods and services for direct
satisfaction of individual or collective human wants are called consumption.
MICROECONOMICS: It is that branch of economics which deals with the
behavior of individual economic units of the economy such as individuals or
households.
MACROECONOMICS: Macroeconomic is that branch of economics which deals
with the behaviour of the economy or as a whole. It is the study of aggregates
such as national income, full employment, aggregate consumption etc.
ECONOMIC PROBLEM: Economic problem is the problem of choice arising out
of fact that, resources are scarce and it has the alternative uses.It is mainly the
problem of choice.

MARGINAL OPPORTUNITY COST: It is the rate at which the quantity of output

of one commodity is sacrificed to produce one more unit of other commodity.
Example of Opportunity Cost: (i) Mohan decides to use the train to get to
work rather than driving each day. The train fare each month will be Rs.350.
After one month, he calculates that he is spending Rs.250 less on petrol and
about Rs.25 less on maintaining her car. What is the opportunity cost of using
the train?
Cost of using train pm= Rs.350. Cost of using the car pm = Rs.250 + Rs.25 = Rs.
Opportunity cost of using the train = Rs.350 – Rs.275 = Rs.75 per month

(ii) Ruth has a mobile shop. She wants to employ 2 students to work for her
between June and August. She expects each employee to generate Rs.250 a day
each of the 78 working days of this period. However, if she lost 2 days at the
start of the period and fully trained her employees they could generate Rs.260 a
day. What is the opportunity cost of not training her employees?
Earnings from her 2 employees without training = (Rs.250 x 78) x 2 = Rs.39000
If she trained the employees she would lose 2 working days worth of revenue.
The revenue would be = (260 x 76) x 2 = Rs.39520 The opportunity cost of not
training her employees = Rs.39520 – Rs.39000 = Rs.520
(iii) Jim, a consultant, earns Rs.85 an hour. Instead of working one night, he goes
to a Premier League cricket match in Delhi which costs him Rs.55 and lasts two
hours. What is the opportunity cost of watching the football instead of working?
Jim earns Rs.85 per hour. In 2 hours he earns 2 x 85 = Rs.170
Opportunity of attending match = Rs.170 + 55 = Rs.225

PRODUCTION POSSIBILITIES: Different combination of goods and services

which an economy can produce with its available resources and given
technology.
A PRODUCTION POSSIBILITY CUVRE: It is a curve which depicts all possible
combination of two goods that an economy can produce with the utilization of
available resources and technique of production. It is an important tool to solve
central economic problem. It is also known as transformation curve or production
possibility frontier.
LABOUR-INTENSIVE TECHNOLOGY: When goods are produced using large
quantity of labor and only a very few simple machines it is L I technology.
The degree of labor intensity is typically measured in proportion to the amount of
capital required to produce the goods or services; the higher the proportion of
labor costs required, the more labor intensive the business.
CAPITAL-INTENSIVE TECHNOLOGY: Under this technique, capital is used
more than labour. That is investment in purchase, maintenance, and
amortization of capital equipment is more than labour.It is C I technology.
CAUSES OF ECONOMIC PROBLEM:
i) Scarcity of resources
ii) Unlimited wants
iii) Limited resources having alternate uses (Scarcity= a state of being in short
supply) (Alternate = happen/do by turns /; alternate uses = other uses)
Features of resources -1) limited 2) alternate uses
Features of wants – 1) unlimited 2) recurring 3) can be satisfied by using
goods and services.
CENTRAL ECONOMIC PROBLEMS
i) Allocation of resources
a)What to produce and of what quality :-consumer goods or capital goods, war
time goods or peace time goods
b)How to produce:- technology –capital intensive or labour intensive
c)For whom to produce:- functional distribution or personal distribution
ii). Efficient Utilization of resources-no wastage- no over utilization nor
underutilization. Economic efficiency refers to efficiency in production and
efficiency in distribution.
iii.) Growth of resources:-It refers to increase in productivity of resources through
improvement in technology.
(Allocation = the act of sharing something/ an amount of resources allowed or
assigned for something)
SCARCITY OF RESOURCES: Scarcity of resources means shortage of resources
in relation to their demand.
OPPORTUNITY COST: It is the cost of next best alternative foregone.

WORKSHEET NUMBER

1 Mark Questions
Q1: Give meaning of micro economics.
Q2: What is opportunity cost?
Q3: Define an Economy.
Q4 What is
Q5: What is
Q6: Give two examples of Micro economic studies.
Q7: Define macro economics.
Q8 How is production possibility curve affected by unemployment in the economy? Explain.
Q9: explain how a production possibility curve is affected when resources are inefficiently
employed in the economy?
3/4 Marks Question
Q10: Explain the problem of ‘What to Produce’.
Q11: Explain the problem of ‘How to Produce’.
Q12 Why do problems related to allocation of resources arise in the economy?
Q13: Explain the problem of ‘What to Produce’.
Q14: Explain the problem of ‘For whom to produce’.
Q16: Explain any two main features of PPC curve.
Q17: Distinguish between micro economics and macro economics. Give examples.
Q18: Giving suitable examples, explain the meaning of micro economics and macro
economics.
Q19: Distinguish between Micro economics and Macro economics. Give examples.
Q20: Why is Production possibility curve concave? Explain.
Q21 Why does an economic problem arise? Explain.
HOT (High Order Thinking Skill Questions)
1 Mark Questions
Q1: Define Scarcity.
Q2 Study of primary sector is a part of micro economics or macro economics?
Q3 Give two examples of normative economics.
Q4 Define Positive economics.
3/4 marks questions
Q1: Even when resources are fully employed, economy may not operate on PPC. True or
false?
Q2: Explain the shape of PPC.
Q3: Explain central problems of an economy. Why are they called so?
Q4: Scarcity is the mother of all economic problems. Do you agree? Justify.