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
