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Introduction to Microeconomics

XI Microeconomics Ch. 1

,

OBJECTIVES...

HERE

WE GO

  • Understand the difference between
  • Micro & Macroeconomics
  • Positive & Normative Economics
  • Analyse the Economy
  • Meaning, Components
  • Central Problems
  • Evaluate the concept of Opportunity Cost
  • Learn about Production Possibility Frontier

Basic Terms

  • When you produce goods (you may be a farmer or a manufacturing company), or provide services (you may be a doctor, porter, taxi driver or transporter of goods) you are called a producer
  • When you sell goods to make a profit for yourself (you may be a shopkeeper), you are called a seller
  • When you are in a job, working for some other person, and you get paid for it (you may be employed by somebody who pays you wages or a salary), you are called an employee
  • When you buy goods (you may want to satisfy your own personal needs or those of your family or those of any other person to whom you want to make a gift) you are called a consumer.
  • When you employ somebody, giving them a wage, you are an employer

Scarcity

  • All these Economic activities are undertaken for a monetary gain. Then Non-Economic activities...???

The scarce resources of the society have to be allocated properly in the production of different goods and services in keeping with the likes and dislikes of the people of the society. This is called the problem of allocation of resources.

  • An economy refers to the process or system by which goods and services are produced, sold, and bought in a country or region

Every economy has to face scarcity of resources. Scarcity of resources calls for economising of resources, which means making optimum or most efficient use of scarce resources.

We have to make a choice among alternative uses of the scarce resources so that optimum or most efficient use of resources is possible. This problem of choice is called the economic problem.

  • In an economy, people need many goods and services that are produced by utilizing all the available resources which are scarce.
  • 'Scarcity of resources' means limited resources in relation to unlimited wants. It refers to the situation, when wants of an individual or an economy exceed the available resources which can be put into alternative uses.

Economy

Economy refers to the whole collection of production units in an area by which people get their living.

Economy & Economics

Economics

Economics is the scientific study of human behavior in the presence of scarce resources which have alternative uses.

Types or Organisations of Economy

Economic System

  • Over the period of time, the economic system had evolved into various forms.

  • They are:
  • Capitalist Economy
  • Socialist Economy
  • Mixed Economy

Economics Thought has been studied in two different perspectives.

Economic Thought

Traditionally, the subject matter of economics (positive economic thought) has been studied under two broad branches.

Economic Study

Economic Problem

Economic Problems &

Central Problems

  • ‘Economic problem’ means the problem of making choice among alternative uses of resources since resources are scarce in relation to unlimited wants.

  • Due to:
  • Unlimited human wants
  • Scarcity of resources
  • Alternative uses of resources

Central Problems of an Economy

Central Problems

Central problems are economic problems faced by each and every economy. They arise due to:

What to produce & in what quantities?

1

  • The economy has to decide which goods and services should be produced with given resources, which are scarce, and have alternative uses. With fixed resources, the economy can produce several combinations of different goods and services selected. The problem is which combination should be produced.

  • Whether to produce more of consumption goods (food, clothing, etc.) or investment goods (like machines, tools and equipments).
  • Whether to use more resources in education and health or in building military services.

How to produce?

2

  • The central problem of ‘how to produce’ is the problem relating to the choice of technique of production. It means that which technique of production should be used in producing different goods and services selected. Broadly, the choice is between the two types of techniques–

  • The technique which uses more labour and less capital (machines) is labour intensive technique.

  • The technique which uses more capital and less labour is capital intensive technique.

For Whom to produce?

3

  • The central problem of 'For whom to produce' means that how should the final goods and services produced in the economy be distributed among people, i.e. Who gets how much? Who gets more and who gets less?

  • Since income gives people the purchasing power, these goods and services can be bought only by those who have income.

Opportunity Cost

Opportunity

It is defined as the value of the next best alternative foregone in availing the best.

  • Example: an individual is offered three jobs of Rs.10000, Rs.8000 and Rs.6000 per month. He will avail Rs.10000 a month job. In availing the best, he foregoes the next best job of `8000 which is the opportunity cost of choosing the best.

Marginal Opportunity Cost

MOC

Marginal Opportunity Cost (MOC) can be defined as the ratio of number of units of a good sacrificed (Good Y) to produce an additional unit of another good (Good X).

It is also known as Marginal Rate of Transformation (MRT)

MOC or MRT = Loss of output of Good Y /

Gain of output of Good X

= (dY)/(dX)

Why increasing MOC/MRT operates?

Why MOC?

  • Increasing MOC/MRT is based on the assumption that no resource is equally efficient in production of all goods.

  • In order to produce more units of good X, the economy has to transfer some resources from the production of good Y since it cannot produce more of both the goods because of limited resources.

  • the productivity (i.e., output produced per unit of an input) of these resources in good X will be low

Production Possibilities Curve

  • PPC is the locus of points representing different combinations of the two goods which an economy can produce with full and efficient utilisation of its given resources and technology.

PPC

  • Does production take place on the PPC?
  • Yes & No, Both

Features of PPC

Features

of

PPC

  • Downward sloping from left to right
  • because to produce more of one good, the economy has to sacrifice some production of other good.

  • Concave to the origin
  • due to increasing Marginal Rate of Transformation (MRT)

Can a production possibilities curve be a straight line?

Slope

The shape of production possibility curve will be a straight line, downward sloping from left to right if marginal

rate of transformation (MRT) is constant

Can the production possibilities curve move?

Movement of the curve

  • Based on the changes in the economy, the PPC will move

  • Movement in PPC is of 2 types

  • Shift of the PPC
  • rotattion of the PPC

Shift of PPC

  • Rightward Shift of PPC:

  • Increase in resources available to an economy (natural, physical or human resource)

  • Improvement in technology
  • Shift in the PPC is caused by two factors:

  • Change in availability of Resources
  • Change in available technology

Shift

  • Leftward Shift of PPC:

  • ???
  • ???

Rotation of PPC

  • Outward Rotation of PPC on Y-axis
  • use of advanced technology in the production of good Y
  • The PPC will rotate only when production of any one good change due to change in 2 factors

  • change in technology employed for producing any one particular good

Rotate

  • Inward Rotation of PPC on Y-axis

  • ???
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