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Chapter 1 - Introduction

The document provides an introduction to microeconomics, defining an economy as a system for work and production of goods and services. It discusses key economic activities such as production, consumption, and investment, while addressing the concepts of scarcity, opportunity cost, and the interdependence of micro and macroeconomics. Additionally, it explains the Production Possibility Frontier (PPF) and its implications for resource allocation and economic choices.

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Avneet Kaur
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2 views

Chapter 1 - Introduction

The document provides an introduction to microeconomics, defining an economy as a system for work and production of goods and services. It discusses key economic activities such as production, consumption, and investment, while addressing the concepts of scarcity, opportunity cost, and the interdependence of micro and macroeconomics. Additionally, it explains the Production Possibility Frontier (PPF) and its implications for resource allocation and economic choices.

Uploaded by

Avneet Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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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.
• What is?
Positive • What was?
science • What will be?

• What ought to be?


Normative • What should happen?
science • What should have
happened?
Micro Economics and Macro
Economics
 Economics

Micro Economics ( Macro Economics (


price Theory) Income 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. – OC = 90,000
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=
80
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 – certain res
 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
Possibilities Guns Butter MOC MRT =
∆Guns/∆Butt
er
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
Possibilities Guns Butter MOC MRT =
∆Guns/∆Butt
er
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 PPF Rotation in PPF


Shift in PPF
 Rightward shift  Leftward shift
 Advancement or up  Technological
gradation of technology degradation or decrease
or growth of resources in 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
resources for commodity on X 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

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