UNIT 1 INTRODUCTORY MICRO ECONOMICS

(4 Marks)

What is an Economy? An economy is a system in which and by which people get a living to satisfy their wants through the processes of production, exchange and distribution. It is a framework within which all economic activities (Production, consumption, investment & distribution) are taken place. It is an organization that provides livelihood to the people of the nation. ECONOMIC PROBLEM: -economic problem is the problem of choice, choice between unlimited wants and limited resources which have alternatives uses in an economy. The problem of choice arises due to scarcity of resources. Prof. Left witch states, Economic problem is concerned with the use of scare resource among alternative human wants and in using these resources towards the end of satisfying wants as fully as possible. The main reasons of economics problem are (A) Unlimited and multiplicity wants: - Human wants are unlimited they go on multiplying with the expansion of education knowledge, scientific advancement and economic growth. They can be satisfied by consuming goods & services, but new wants keep arising. (B) Limited resources:-The resources required produce various goods & services are scarce in relation to demand. Scarcity of resources is the basic features of every economic problem. (C) Alternative uses of resources:- Resources are not only scarce in supply but they also have alternative uses. A choice between the alternative uses can be made. Central or Basic Problems of An Economy Which Arise Due to Scarcity 1. What to produce and what quantity:-

It refers to which goods and services will be produced and in what quantities with the limited resources which are to be used in optimally. An economy has to decided whether it will produce consumer goods or producer goods, war time goods (gun, tank) or peace time goods (car, chair and table) and what quantity. The guiding principle is to allocate the resources in such a way that it maximizes aggregate utility to the society. 2. How to produce

It refers to the choice of methods of production of goods & services i.e. whether labour intensive method (More labour & less capital) or capital intensive methods (More capital & less labour) for production of goods and service, The guiding principle is that we should use a technique of production which would maximize output or minimize cost.(least possible cost for optimum production). For example if we are constructing road in hill area we should use labour intensive method as it will be cheaper because heavy machine cant be carried there whereas for plain area we should use capital intensive method. PREPARED BY: - BHUPENDRA CHANDRA ([email protected]) http://economicsforyou.blogspot.com Page 1

3.

For whom to produce.

It concerns with the distribution of income & wealth which refers to who earns how much or who has more assets than others. An economy has to decide for whom goods and services is to be produce. Goods and services can be produce for rich or common people according to their requirements and their affordability. Or goods & services are only produced for those who have purchasing power to buy them. Purchasing power depends on distribution of national income. Micro Economics and Macro Economics: Micro Economics Macro Economics

1. Micro Economics is the branch of

economics that studies the behavior of the individual units e.g. behavior of an individual consumer, behavior of an individual firm, etc. 2. It deals with the problem of allocation of resources or the problem of pricedetermination. That is why it is also known as price theory. 3. Demand and Supply are the main tools of micro economics.

1. Macro Economics is the branch of

economics that studies the economy as a whole e.g. the level of output, income, employment, general price level, etc. 2. It deals with the problem of income & employment. That is why it is also known as income & employment theory. 3. Aggregate Demand and aggregate Supply are the main tools of macro economics. 4. The equilibrium in micro-economics is partial equilibrium 5. E.g. Aggregate Demand, aggregate Supply, poverty, unemployment etc.

4. The equilibrium in micro-economics is partial equilibrium 5. E.g. Demand, supply, cost, revenue etc.

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. It is the locus of all those possible combinations of two goods which can be produce with given resource and technology. A P.P. curve is drawn on the assumption that the law of increasing costs or the law of diminishing returns operates in production that is why the production possibility curve is concave to the origin

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Production Possibilities Production possibility A B C D E F 0 1 2 3 4 5 15 14 12 9 5 0 Commodity A Commodity B Marginal opportunity cost of commodity A _ 15-14=1 14-12=2 12-9=3 9-5=4 5-0=5

Commodity A
If the economy devotes all its resources to the production of commodity B, it can produce 15 units but then the production of commodity A will be zero. There can be a number of production possibilities of commodity A & B. If we want to produce more commodity of B, we have to reduce the output of commodity A & vise versa. Shape of PP curve and marginal opportunity cost. 1) A Production possibility curve is a downward sloping curve.:-

In a full employment economy, more of one goods can be obtained only by giving up the production of other goods. It is not possible to increase the production of both of them with the given resources. 2) The shape of the P P curve is concave to the origin due to increasing marginal opportunity cost. PREPARED BY: - BHUPENDRA CHANDRA ([email protected]) http://economicsforyou.blogspot.com Page 3

The marginal opportunity cost of a particular good along the PPC is defined as the amount sacrificed of the other good per unit increase in the production of the good. The opportunity cost for a commodity is the amount of other commodity that has been forgone in order to produce the first. Opportunity cost is next best alternative cost for forgone product or is the opportunity lost Example: Suppose a doctor having a private clinical in Delhi is earning Rs. 5 lakhs annually. There are two other alternatives for him. 1) Joining a Govt. hospital in Banglore earning Rs. 4 lakhs annually. 2) Opening a clinic in his home town in Mysore and earning 3 lakhs annually. The opportunity cost will be joining Govt. hospital in Banglore will be Rs 4 lakhs. Shift in PP curve Rightward Shift It depicts growth which is due to increase in resources or improvement in technology or both

Y Goods

Goods X

Leftward Shift It means that there is decrease in the productive capacity of the economy; hence the production possibilities of both the commodities will come down.

Y Good

X Good PREPARED BY: - BHUPENDRA CHANDRA ([email protected]) http://economicsforyou.blogspot.com Page 4

QUESTIONS FOR DISCUSSION 1. What is meant by an economy? 2. Give meaning of opportunity cost explain with the help of example. 3. Why there is a need for economizing of resource? 4. Why does PPC concave to the origin? Explain 5. Does production take place only on the PPC? Explain 6. Explain the problem of What to produce with the help of an example. 7. Explain the problem of How to produce with the help of an example. 8. Explain the problem of For whom to produce with the help of an example.

(1) (1) (1) (3) (3) (3) (3) (3)

9. Explain a production possibility curve. What does a point below this curve indicate? (4) 10. Distinguish between micro and macro economics with help of an example each. 11. What is economic problem? Explain why does it arise? 12. Define production possibility curve? When will it shift to the right or left? 13. Define Transformation curve. Why is it downward sloping from left to right? 14. An economy always lies on P.P. curve.' defend or refute. 15. Massive unemployment shift The PPC to the left Defend or refute 16. Draw a PPC and show the following on this curve. Give reasons of this shift. (i) Growth of Resource. (ii) Underutilization of resource. (iii) Fuller utilization of resource. (3) (4) (4) (3) (3) (3) (3)

17. Assume that scientific inventions have doubled the productivity of societys resources in butter and guns production. Redraw societys production possibilitys curve. 18. Many societies are rapidly depleting in natural resources. Assume that there are only two resources (Labour and natural resources) producing two goods, X and Y. With no improvement in technology:(a) Show what would happen to PPC overtime if natural resources are depleted. (b) How would invention and technological improvement modify your answer? (c) Explain why it is said that economic growth is a race between depletion and invention.

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