PART-B: INTRODUCTORY MICROECONOMICS

UNIT 1

INTRODUCTION

Economy
Economy

Meaning and Shape

(MRT)

Points to Remember
 Microeconomics
(i) Microeconomics, we study the behaviour of individual
economic agents in the markets
(ii) For different goods and services and try to figures out how
prices and quantities of goods and services are determined
through the interaction of individuals in these markets,
(iii) In this we study the consumer's equilibrium, producer's
equilibrium, price theory, Untility analysis etc.
(iv) Some of the important questions that are studied in
microeconomics are as follows

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 How the price of a goods is determined in a market? How
consumers equilibrium will be determined? What will be the level
of production of a producer? How producers will be in equilibrium
in perfectly competitive market? etc.
 Macroeconomics
(i) In macroeconomics, we try to get an understanding of the
economy as a whole
(ii) In this we focus our attention on aggregate measure such as
total output, employment and aggregate price level.
(iii) In Macro we are interested in finding out how the levels of
these aggregate measures are determined and how the levels
of these aggregate measures change over time.
(iv) Some of the important questions that are studied in
macroeconomics are as follows: What is the level of total output
in the economy? How is the total output determined? How
does the total out grow over time? Are the resources of the
economy (eg labour) fully employed? What are the reasons
behind the unemployment of resources? Why do prices rise?
 An economy is a system that helps to produce good and services
and enables people to earn their living.
 Economic problem is the problem of making the choice of the use
of scarce resources for satisfying unlimited human wants.
 Causes of economic problems are :
(a) Unlimited Human Wants
(b) Scarcity of Economic Resources
(c) Alternative uses of Resources
 Central Problems of an Economy

Allocation of Resources

What to produce How to produce? For whom to produce?

(Selection of goods) (Selection of technique) (Distribution of income
and Selection of final
use of final goods)

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 Central Problems of an Economy
• As we know that each society has unlimited wants and limited
resources that have alternative uses also so every economic agent
has to face the problem of allocation of resources.
• Every economy faces the problem of allocating the scarce
resources to the production of different possible goods and
services and of distributing the produced goods and services
among the individuals within the economy. The allocation of scarce
resources and the distribution of the final goods and services and
choice of technique are the central problems of any economy.
Following three are the central problems
(i) What to produce and in what quantities?
• Every society must decide on how much of each of the many
possible goods and services it will produce.
• Whether to produce more of food, clothing, housing or to have
more of luxury goods.
• Whether to have more agricultural goods or to have industrial
products and services.
• Whether to use more resources in education and health or to
use more resources in building military services.
• Whether to have more of basic education or more of higher
education.
• Whether to have more of consumption goods or to have
investment goods (like machine) which will boost production
and consumption tomorrow.
(ii) How are these goods produced?
• Every society has to decide on how much of which of the
resources to use in the production of each of the different goods
and services.
• Whether to use more labour (labour intensive technique) or
more machines (capital intensive technique).
• Which of the available technologies to adopt in the production
of each of the goods and services.

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(iii) For whom are these goods produced?
• Who gets how much of the goods that are produced in the
economy?
• How should the produce of the economy be distributed among
the individuals in the economy?
• Who gets more and who gets less?
• Whether or not to ensure a minimum amount of consumption
for everyone in the economy.
• Whether or not elementary education and basic health services
should be available freely for everyone in the economy
 Opportunity cost of a given resource can be defined as the value of
the next best use to which that resource could be put.
 Production possibility frontier shows all possible combinations of
two goods that an economy can produce with given resources and
available technology, assuming that all resources are fully and
efficiently utilised as shown in Fig. points K, L and M.
• Point H is beyond the capacity of production
Y
Full utilisation of Resources
A H
K Unattainable
L situation
Go o d y
G Under utilisation
of resources
M

O
Go o d x B X
• Any point below the PPF shows that Resources are either under
employed or employed in wasteful manners as point G. in Fig.
 Economising of resources means use of resources in best possible
manner.
 Features of Production Possibility Frontier

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 (a) Slopes downward from left to right because to increase the
production of one good, some units of other good has to be
sacrificed.
(b) Concave to the origin because of increasing Marginal
Opportunity Cost (MOC) or Marginal Rate of Transformation
(MRT). MRT is increasing because all resources are not
equally efficient in the production of both goods.
 Different type of shift of PPC
• Rightward shift in the PPF indicates the increase in
resources or improvement in technology in case of both the
goods
Y
A1
A0

G o o d -Y

O X
G o o d -X B 0 B1
Fig. 1
• Leftward shift of PPF indicates decrease in resources or
degradation in technology in case of both the goods
Y
A0
A2

G o o d -Y

O X
G o o d -X B2 B0
Fig. 2
• Rightward/Leftward shift in PPF when no change in quantity of
good Y and only change in quantity of good X.

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 Y

A0

G o o d -Y

O X
G o o d -X B 1 B 0 B 2
Fig. 3
• Upward/Downward shift in PPF when no change in quantity of
good Y and change only in good X.
Y
A2
A0
A1

G o o d -Y

O X
G o o d -X B0
Fig. 4
Upwards/Downward shift in PPF when no change in Quantity good X and
change only in Good Y.
 PPC will shift rightwards due to all those reasons which enhances
production potential, quantity and efficiency of resources in an economy.

Resons for Reasons for No Change in PPC

Rightwards shift Leftward Shift
1. Increase in Resources 1. Decrease in Resources 1. Transfer of Resources
2. Improvement in technology 2. Technological obsoletion 2. Unemployment
Eradication Programme
3. Skill Development 3. Natural Calamities (Flood,
Programme (Training) Earthquake, Tsunami,
Drought et(c))
4. Education for all (Health) 4. Migration
5. Clean India Campaign 5. War, terrorism
(Health)

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6. Yoga Enhancement Plans
(Health).
7. Beti Bachao, Beti Padhao
(Education)
8. Make in India (Investment)
9. Increase in Foreign Capital
(Foreign Investment)

 Marginal Rate of Transformation (MRT) is the ratio of number of

units of a good sacrificed to increase one more unit of the other
good.
Y
MRT 
X
 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.
 Slope of PPF depends on MRT/MOC.
• When MOC increases, PPF is concave to origin.
• When MOC decreases PPF is convex to origin.
• When MOC remains constant, PPF is downward sloping
straight line.
The slope of PPC depends on MRT/MOC
• In General MOC/MRT is increases therefore the PPC is
concave to the origin as shown in Fig. 1.

G o o d -Y

O X
G o o d -X B
F ig . 1

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 • If MOC is constant the PPC will be a straight line and downward
sloping as shown in Fig. 2.
• If MOC is Decreasing the PPC will be convex to the origin as
shown in Fig. 3.
Y Y

G o o d -Y
G o o d -Y

O X O X
G o o d -X B G o o d -X

Fig. 2 Fig. 3
 Positive Economics:
(i) In positive Economics analysis study we how the different
Mechanisms functions.
(ii) It deals with the things in the Actual “as they are”
(iii) It studies the facts which can be verified. Examples India is
over populated; prices are Rising in India.
 Normative Economic
(i) In normative Economics we try to understand whether the
different Mechanism are desirable or not.
(ii) It deals with the idealistic situation instead of actual situation.
(iii) It studies the statements about facts that can't be verified.
Example we should controll the over population. Prices should
not be Rise etc.

MULTIPLE CHOICE QUESTIONS (1 MARK)

1. Which of the following subject matter study in Micro Economics,
(a) Money supply (b) Aggregate demand
(c) Market demand of a good (d) National Income

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2. Which subject matter does not study in macro economics,
(a) Employment Level (b) Aggregate Supply
(c) National Income (d) Determination of market price
3. Economic Problem arises due to
(a) High population of a country
(b) Competition among buyers
(c) Resources have alternative uses
(d) Producer wants maximum profit
4. Which of these is a central problem of an Economy?
(a) Deficit demand
(b) Equilibrium of an economy
(c) For whom to produce
(d) Decreasing return to a factor
5. Any point beyond the PPF shows:
(a) Under utilisation of Resource
(b) Unattainable combination of output
(c) Efficient utilisation of Resources
(d) Decrease in resources.
6. In which situation PPF shifts towards right
(a) Increase in foreign capital
(b) Resources are reduced
(c) Fully efficient use of resources
(d) Increase in employment
7. Production Possibility Frontier can be a straight line: when
(a) Decrease in production of both goods
(b) More of both goods can be produced
(c) All resources are equally efficient in production of both goods
(d) All resources are not equally efficient in production of both goods.

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 8. Which of the followings are assumptions of PPF
(a) Available Resources are fully and efficiently utilized
(b) Technology remain stable
(c) Resources are not equally efficient in production of all goods
(d) All of the above
9. Which of these statement is correct about Opportunity cost?
(a) Opportunity cost is always higher than the given price.
(b) Opportunity cost is always less than the given price.
(c) Opportunity cost is always calculated in money.
(d) Opportunity cost can be less than, more than or equal to given
price.
10. Which of these is Normative Economics.
(a) 25 percent population of India is below poverty line.
(b) Increase in FDI has increased the GDP of India.
(c) Equal distribution of income will make India poverty free.
(d) Higher welfare spending by government increases the
Aggregate Deman(d)
11. ln which situation ,can PPF be a straight line:
(a) When MRT is decreasing
(b) When MRT is increasing
(c) When MRT is constant
(d) When MOC is decreasing
12. PPF is concave to the point of origin due to :
(a) increasing MRT
(b) decreasing MRT
(c) constant MRT
(d) decreasing MOC

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13. PPF can be convex to the point of origin due to:
(a) increasing MRT
(b) decreasing MRT
(c) constant MRT
(d) increasing MOC
14. Which of the following central problem of an economy deals with
technique of production ?
(a) What to produce
(b) How to produce
(c) For whom to produce
(d) When to produce
15. Which of the following central problem of an economy deals with
deciding the quantity of goods to be produced?
(a) What to produce
(b) How to produce
(c) For whom to produce
(d) When to produce
16. Which of the following central problem of an economy deals with
selection of category of people who will ultimately consume the
goods?
(a) What to produce
(b) how to produce
(c) For whom to produce
(d) When to produce
17. Which of the following will not lead to shift in PPF?
(a) Improvement in technology
(b) Growth of resources
(c) Degradation in technology
(d) Unemployment

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18. Which of the following will lead to shift PPF rightward ?
(a) Improvement in technology
(b) Destruction of resources
(c) Degradation in technology
(d) Unemployment
19. Which of the following will lead to shift PPF leftward?
(a) Improvement in technology
(b) Growth of resources
(c) Degradation in technology
(d) Unemployment
20. A point inside the PPF indicates:
(a) Efficient use of resources
(b) Unattainable combination
(c) Fuller utilization of resources
(d) Under utilization of resources
21. A point on the PPF indicates:
(a) Inefficient use of resources
(b) Unattainable combination
(c) Fuller utilization and efficient use of resources
(d) Under utilization of resources
22. An economic problem arises due to :
(a) Limited human wants
(b) Unlimited human wants and unlimited resources
(c) Limited human wants and limited resources
(d) Unlimited human wants and limited resources

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23. Opportunity cost is the :
(a) Number of units gained
(b) Number of units sacrificed
(c) Cost of the next best alternative foregone
(d) Cost of the next best alternative gained
24. Which of the following is an example of microeconomics?
(a) National income
(b) Income and employment
(c) Price of a commodity
(d) Price level
25. Which of the following is an example of macroeconomics?
(a) Individual income
(b) Income and employment
(c) Price of a commodity
(d) Demand for a commodity
26. Which of the following in not an example of economic activity
(a) Production
(b) Consumption
(c) Exchange
(d) social welfare
27. Positive economics deals with:
(a) Opinions
(b) Facts
(c) Value judgement
(d) Suggestions
28. Normative economics deals with:
(a) what was
(b) what ought to be
(c) what is
(d) what would be

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 29. Main characteristics of resources are
(a) they are limited
(b) they are unlimited
(c) they have alternative uses
(d ) b o th (a ) a n d (c)

Q.30. Ram : My corn harvest this year is poor.

Krishna: Don't worry price increase will compensate for fall in quantity
supplied.
Sita: Climate affects crop yields certain year are bad, others are good
Radha: The government ought to guarantee that our income should not
Fall. In this conversation, the normative statement is made by
(a) Ram (b) Krishana
(c) Sita (d) Radha
Ans. 1. (c); 2. (d); 3. (c); 4. (c); 5. (b); 6. (a); 7. (c); 8. (d); 9. (d);
10. (c) 11. (c) 12. (a) 13. (b) 14. (b) 15. (a) 16. (c) 17. (d) 18. (a) 19.
(c) 20. (d) 21. (c) 22. (d) 23. (c) 24. (c) 25. (b) 26. (d) 27. (b) 28. (b)
29. (d) 30. (d)

Question no.2: Fill appropriate word in the blanks-

(i) Scarcity of resources gives rise to problem of .................(plenty/
choice)
(ii) Choice is the result of..................(excess/scarcity)
(iii) Production possibility curve is.................to the point of origin,
(convex/concave)
(iv) ................. is the ratio of number of units of a good sacrificed to
increase one more unit of other good.(opportunity cost/ marginal
rate of transformation)
(v) ................. of a given resource can be defined as the value of the
next best use to which that resource could be put. (opportunity cost/
marginal rate of transformation)
(vi) ................. is the slope of production possibility curve, (marginal
rate of transformation/ marginal rate of substitution)

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Ans: (i) choice (ii) scarcity
(iii) concave (iv) marginal rate of transformation
(v) opportunity cost (vi) marginal rate of transformation

Short Answer Type Questions (3-4 Marks)

1. Distinguish between microeconomics and macroeconomics. Give
example.
2. Why does an economic problem arise? Explain the problem of
'How to Produce'?
3. Explain the problem of 'What to Produce' with the help of an
example.
4. 'For whom to produce' is a central problem of an economy. Explain.
5. Define opportunity cost with the help of an example, how does it
differ from marginal opportunity cost?
6. What is 'Marginal Rate of Transformation'? Explain with the help of
an example.
7. Why is a production possibility curve concave? Explain.
8. What is PP Frontier? Write its assumptions.
9. Show the following situation with PPF (PPC).
(a) Fuller utilisation of resources
(b) Increase in the resources
(c) Under utilisation of resources.
10. Distingush between positive economics and normative economics.
11. A lot of people died and many factories were destroyed because
of a severe earthquake in a country. How will it affect the country's
PPF?
12. Calculate MRT from following table. What will be the shape of PPF
and why?

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 Combinations Green Chilly (Units) Sugar (Units)

A 100 1

B 95 1
C 85 2

D 70 3

E 50 4

F 25 5

13. Given that no resource is equally efficient in producing all goods.

Write name of such curve which shows production potential of an
economy. Explain features of this curve along with the reasons?
14. If an Economy is not able to utilise its available resources efficiently,
what will be the effect on PPF? What will you suggest for economic
growth?
15. Govt started employment generation program MGNREGA explain
its impact on PPF.
16. 'Make in India' is a Govt. policy to attract foreign investment explain
its impact on PPF.
17. The to out break of covid-19 pan-demic. There was a complete
lock down. How was the utilisation of resources affected. Explain
with the help of PPF
Ans. Hint: 1. Under utilisation of resources
2. Suitable fig of PPF

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EXAM Oriented Questions with Answer
Very Short Answer Question (1 Mark)

Q. 1. Define Economy.
Ans. An economy is a system that helps to produce goods and services
and enables people to earn their living.
Q. 2. What is the meaning of scarcity of resources?
Ans. Scarcity of resources means shortage of resources as compared
to its deman(d)
Q. 3. Write the meaning of Economic Problem.
Ans. Economic problem is the problem of making the choice of the use
of scarce resources for satisfying unlimited human wants.
Q. 4. Define MRT.
Ans. Marginal Rate of Transformation (MRT) is the ratio of number of
units of a good sacrificed to increase one more unit of the other
Y
good MRT 
X
Q. 5. Define opportunity cost.
Ans. Opportunity cost of a resource is its value in next best alternative
use.
Q. 6. Government has started promoting foreign investments. What will
be its economic value in the context of PPF?
Ans. Production will increase with more foreign investments. Thus PPF
will shift rightwar(d)
Q. 7. What is the meaning of economising of resources?
Ans. Economising of resources means best possible use of available
resources.

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 3-4 Marks Questions
Q. 1. Why is a production possibility curve concave? Explain.
Ans. The production possibility curve being concave means that MRT
increases as we move downward along the curve. MRT increases
because it is assumed that no resource is equally efficient in
production of all goods. As resources are transferred from one
good to another, less and less efficient resources have to be
employe(d) This raises cost and raises MRT.
Q. 2. Explain properties of a production possibility curve.
Ans. There are two properties of a production possibility curve.
1. Downward sloping : It is because as more quantity of one good
is produced some quantity of the other good must be sacrificed as
resources are scarce. More of both goods cannot be produce(d)
2. Concave to the origin : It is because the marginal rate of
transformation increases as more of one good is produce(d)
Q. 3. Explain the problem of 'what to produce'.
Ans. An economy can produce different possible combinations of goods
and services with given resrouces. The problem is that, out of these
different combinations, which combination is produce(d) If
production of one good increases then less resources will be
available for other goods, because resources are limited and have
alternative uses.
Q. 4. What is 'Marginal Rate of Transformation'? Explain with the help of
an example.
Ans. MRT is the rate at which the units of one good have to be sacrificed
to produce one more unit of the other good in a two goods
economy. Suppose an economy produces only two goods X and
Y. Further suppose that by employing these resources fully and
efficiently, the economy produces 1X + 10Y. If the economy decides
to produce 2X, it has to cut down production of Y by 2 units. Then
2Y is the opportunity cost of producing 1X. Then 2Y : 1X is the
MRT.
Q. 5. Explain the problem 'How to produce'.
Ans. The central problem 'How to Produce' is the problem of choosing
the appropriate technique of production for producing goods. There
can be more than one method for producing a good More labour

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 and less capital (i.e., labour intensive technique) or more capital
and less labour (i.e., capital intensive technique) can be used for
production of a good. Since resources are scarce, decision has
to be taken about which technique should be used on the basis of
availability of recources.
Example : A given quantity of cloth can be manufactured by
combining factors of production in different proportions, making it
capital-intensive or labour intensive metho(d)
Q. 6. For labourers working under MGNREGA Government has
increased minimum employment from 100 to 150 days. How will
this affect real and potential level of production.
Ans. Real level of production will be increased by improvement in
employment. But potential level of production will not increase (No
shifting of PPC will take place). Reason being PPC is based on
the assumption that available resources are fully utilise(d)
Y

Good Y A
G

O X
Good X b

Tends to shift towards PPF cas shown in the above may or may
not be on PPF
Q. 7. Explain the central problem 'for whom to produce'.
Ans. For whom to produce means that who will buy the goods and
services produce(d) Clearly, those people who have income will
be able to buy. So, the problem amounts to how the national income
is distributed in an economy.
Q. 8. Giving reason comment on the shape of Production Possibilities
curve based on the following schedule :

God X (units) 0 1 2 3 4

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 Good Y (units) 10 9 7 4 0
Ans.

Good X (units) Good Y (Units) MRT

0 10 –
1 9 1Y : 1X
2 7 2Y : 1X
3 4 3Y : 1X
4 0 4Y : 1X

Since MRT is increasing, the PP curve is downward sloping and

concave to the origin.
Q. 9. Explain the effects of floods in Jammu and Kashmir on its
production possibilities frontier.
Ans. Floods have damaged and reduced resources. Since potential
production declines, the production possibility frontier shifts to the
left.
Y

a
a1
A
Good-Y

O X
b1 b
Good-X

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