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PART-A
INTRODUCTORY MICRO ECONOMICS
UNIT 1: INTRODUCTION
KEY CONCEPTS
MICRO ECONOMICS
ECONOMY
TYPES OF ECONOMY
• PLANNED ECONOMY
• MARKET ECONOMY
CENTRAL PROBLEMS OF AN ECONOMY | BASIC ECONOMIC PROBLEMS
• WHAT TO PRODUCE?
• HOW TO PRODUCE?
• FOR WHOM TO PRODUCE?
CAUSES OF AN ECONOMIC PROBLEM
PRODUCTION POSSIBILITY CURVE
MARGINAL OPPORTUNITY COST –MOC
MARGINAL RATE OF TRANSFORMATION
SCARCITY OF RESOURCES
OPPORTUNITY COST
1. MICRO ECONOMICS: It is a study of behaviour of individual units of an economy such as individual consumer, producer etc. 2. ECONOMY: An economy is a system by which people get their living. 3. TYPES OF ECONOMY: (i) Capitalist economy / Market economy (ii) Socialist economy / Planned economy (iii)Mixed economy 4. MARKET ECONOMY: It is an economic system, in which all material means of production are owned and operated by the private with profit motive. 5. PLANNED ECONOMY: In this economy all material means of production are owned by the government or by a centrally planned authority. All important decisions regarding production, exchange and distributions, consumptions of goods and services are made by the government or by a centrally planned authority 6. ECONOMIC PROBLEM: “An economic problem is basically the problem of choice” which arises due to scarcity of resources having alternative uses”. 7. CAUSES OF ECONOMIC PROBLEM : i) Scarcity of resources ii) Unlimited wants iii) Limited resources having alternative uses
8. BASIC (CENTRAL) ECONOMIC PROBLEMS
i) Allocation of resources a. What to produce? b. How to produce? c. For whom to produce ii). Efficient Utilization of resources iii.) Growth of resources
9. PRODUCTION POSSIBILITY CURVE (PPC): PP curve shows all the possible combination of two goods that can be produced with the help of available resources and technology. 10. MARGINAL OPPORTUNITY COST: MOC of a particular good along PPC is the amount of other good which is sacrificed for production of additional unit of another good. 11. MARGINAL RATE OF TRANSFORMATION: MRT is the ratio of units of one good sacrificed to produce one more unit of other good. Unit of one good sacrificed ∆y MRT = --------------------------------------------- = ---- More unit of other good produced ∆x 12. SCARCITY OF RESOURCES: Scarcity of resources means shortage of resources in relation to their demand. 13. OPPORTUNITY COST: It is the cost of next best alternative foregone. 14. POSITIVE ECONOMICS: Positive economics deals with what is, what was (or) how an economic problem facing the society is actually solved. 15. NORMATIVE ECONOMICS: It deals with what ought to be (or) how an economic problem should be solved.
VERY SHORT ANSWER QUESTIONS (1 MARK)
1. What is economics about? Ans : - Economics is the study of the problem of choice arising out of scarcity of resources having alternative uses. 2. Define scarcity. Ans : - Scarcity means shortage of resources in relation to their demand is called scarcity. 3. What is an economy? Ans : - An economy is a system by which people get their living. 4. Define central problem. Ans : - Central problem is concerned with the problems of choice (or) the problem of resource allocation.
17. What does the problem for whom to produce indicate? Ans :- The problem of for whom to produce refers to the distribution of goods and services produced in the economy. 18. Give two examples each of micro economics & macroeconomics. Ans :- Microeconomics – Individual demand, individual supply Macroeconomics – Aggregate demand and aggregate supply 19. What does a rightward shift of PPC indicate? Ans :- It indicates a) growth of resources b) improvement in technology 20. What is meant by economising of resources? Ans :- It means making best use of available resources.
SHORT ANSWER QUESTIONS (3 / 4 MARKS)
1. What is production possibility frontier? Ans :- It is a boundary line which shows that maximum combination of two goods which can be produced with the help of given resources and technology at a given period of time. Ex: An economy can produce two goods say rice or oil by using all its resources. The different combination of rice and oil are as follows: Production Possibilities Rice (quintals) Oil (litres) A 0 10 B 1 9 C 2 7 D 3 4 E 4 0 10 A
9 B
8
7 C
6
5
4 D
3
2
Oil
PPC
E
Rice
- Draw a production possibility curve and mark the following situations:
a) underutilization of resources b) full employment of resources c) growth of resources
Ans. Every point on PP curve like ABCDEF indicates full employment and efficient uses of resources. Any point below or inside PP curve like G underutilization of resources. Any point above PP curves like H indicates growth of resources.
A
B H (Growth of resources) C Full employment of resources D
G
E
Cloth
Production Possibility Curve And Opportunity Cost
It refers to a curve which shows the various production possibilities that can be produced
with given resources and technology.
Production Possibilities
Production Possibility
Commodity A
Commodity B
Marginal opportunity cost of commodity A A 0 15 - B 1 14 15-14=
2
4
6
8
14
12
10
F
Under utilization of resources
Wheat
x
Increasing marginal opportunity cost implies that PPC is concave.
Shift in PP curve (1) Upward shift (a) When there is improvement in technology. (b) Increase in resources. Y
Commodity B
o Commodity A X
(2) Downward shift
When Resources depletes
y
Commodity B
O
Commodity A
3. Distinguish between a centrally planned economy and a market economy.
SNo Planned Economy Market Economy 1 All the materials means of production are owned by government.
All the materials means of production are owned by private individuals.
2 Main objectives of production is social welfare
Main objectives of production are maximization of profit.
3 Ownership of property is under government control.
There is no limit to private ownership of property.
X
4 All the economic problems are solved as per direction of the planning commission.
All the economic problems are solved through price mechanism i.e., demand and supply.
4. Distinguish between micro economics and macroeconomics.
SNo Micro economics Macro economics 1 It studies individual economic unit. It studies aggregate economic unit 2 It deals with determination of price and output in individual markets
It deals with determination of general price level and output in the economy. 3 Its central problems are price determination and allocation of resources.
Its central problem is determination of level of Income and employment in the economy.
HOTS
1. Does massive unemployment shift the PPC to the left?
Ans:- Massive unemployment will shift the PPC to the left because labour force remains underutilized. The economy will produce inside the PPC indicating underutilization of resources.
2. What does the slope of PPC show?
Ans. The slope of PPC indicates the increasing marginal opportunity cost.
3. From the following PP schedule calculate MRT of good x.
Production possibilities A B C D E
Production of good x units 0 1 2 3 4
Production of good y units 14 13 11 8 4
Production of good X units Production of good Y units
MRT = ∆y / ∆x
0 14 - 1 13 1: 2 11 2: 3 8 3: 4 4 4: How are fundamental problems solved in the capitalistic economy.
