PART –B- INTRODUCTORY MICRO ECONOMICS

UNIT 4: INTRODUCTION
SECTION 1
MAIN POINTS/GIST OF THE CHAPTER

➢ Meaning of an economy
➢ Basic economic activities
➢ Scarcity of Resource
▪ Difference between Micro economics and macro economics
 Difference between Positive and Normative economic analysis
 Central problems of an economy:
(a) What to produce
(b) How to produce
(c) For whom to produce.
 Opportunity cost and Marginal opportunity cost
 Production possibility curve/frontier
 PPC table and graphical presentation
 Changes in PPC

• MICRO AND MACRO • POSITIVE

ECONOMICS AND
NORMATIVE
ECONOMICS
CENTRAL
PROBLEMS WHAT TO
OF AN PRODUCE
ECONOMY

FOR
HOW TO
WHOM TO
PRODUCE
PRODUCE
• OPPORTUNITY • PRODUCTION
• COST POSSIBILITY
• MARGINAL FRONTIER/CURV
OPPORTUNITY COST E
 CONCEPT NOTES

❖ Meaning of an economy: The term economy refers to a system or a process which helps
people to produce goods and services with the use of available resource and helps people
to earn their living.

❖ Basic economic activities: Production, exchange and consumption of goods and services
are the basic economic activities.

❖ Scarcity of Resource: The word ‘scarcity of resource’ refers to shortage of resources /

limited resources. But in economics, the word scarcity stands for less supply of resource in
relation to more demand. of resource.

❖ Micro economics: Microeconomics is a branch of economics that study the behavior of

individual economic agents in the markets for different goods and services and try to find
out how prices and quantities of goods and services are determined. The word micro
means small.

❖ Macroeconomics: Macroeconomics is a branch of economics that study the behavior of

an economy as a whole by focusing our attention on aggregate measures such as total
output, total employment and aggregate price level. The word macro means large.

❖ Positive economic analysis: In positive economic analysis, we study how the different
mechanisms of solving the central problems (what to produce, how to produce and for
whom to produce) of an economy function. Positive economic statement can be verified
because they are based on fact. They deal with realistic situation.

❖ Normative economic analysis: In normative economic analysis, we try to understand

whether the different mechanisms of solving the central problems (what to produce, how
to produce and for whom to produce) of an economy are desirable or not. The normative
economic statement cannot be verified because they are not based on fact but suggestive
only.

❖ Central problems of an economy: There are mainly three central problems relating to
allocation of resources.

❖ What to produce: What to produce is also called the problem of resource allocation.
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 items or 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 consumption
 goods or to have capital goods which will boost production and consumption of an
economy.

❖ How to produce: The problem of how to produce is also called the choice of technique
of production. 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. Goods and services can be
produced with the help of two techniques; they are labor intensive technique and capital-
intensive technique. In labor intensive technique we use more labor and less capital.
Whereas in capital intensive technique we use more capital and less labor.

❖ For whom to produce: The problem of for whom to produce is also called the problem
of distribution of goods and services. 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. There are two aspects in connection with this problem; one deals with the
distribution of production among the household and second is associated with distribution
of production among land labor capital and organization (four factors of production).

❖ Opportunity cost: Opportunity cost is an important basic concept in the subject

economics. There is always a cost of having a little more of one good in terms of the
amount of the other good that has to be forgone. This is known as the opportunity cost of
an additional unit of the goods. In short, we can define the term opportunity cost as the
value of the benefit that is avoided by selecting an alternative.

❖ Marginal opportunity cost: Suppose an economy produces only two goods X and Y.
We cannot increase the production of both goods. If we want to increase the production
of X good (Rice), we have to reduce the production of Y good (Wheat). This loss is
called marginal opportunity cost. If the resources are transferred from one use to another,
the less and less efficient resources will be transferred leading to rise in the marginal
opportunity cost which is technically termed as marginal rate of transformation. We can
now define MRT in general terms. MRT is the ratio of units of one good sacrificed to
produce one more unit of the other good.

❖ Production possibility curve/frontier: The production possibility frontier gives the

combinations of two goods say X and Y that can be produced when the resources of the
economy are fully utilized. The production possibilities (PP) curve is a graphical medium
of highlighting the central problem of 'what to produce' an in what quantity. This curve
shows the options that are obtainable, or simply the production possibilities.
 PPC Table:

PPC Graphical Presentation: Possibilities Wheat Rice

Y (Rice) A 0 10
B 1 9
10
9 C 2 7

7 D 3 4

4 E 4 0

0 1 2 3 4 X (Wheat)

❖ Changes in PPC:
There are two types of changes in PPC:
1. Shift in PPC – PPC may shift to right or left, when there is change in resource or
technology for both the goods, say X and Y.

2. Rotation of PPC – When there is change in technology or resources for only one
good, say Y or X, PPC will rotate.
 SECTION II: QUESTION BANK

1-MARK QUESTIONS

1) Read the following statements carefully and choose the correct alternatives given below:

Statement 1: Economic problem is a problem of choice.

Statement 2: Economic problem will not arise if the resources that satisfy wants are limited.

Alternatives:

a) Statement 1 is true and statement 2 is false

b) Statement 1 is false and statement 2 is true
c) Both Statement 1 and 2 are true
d) Both Statement 1 and 2 are false

2) Read the following statements carefully and choose the correct alternatives given below:

Statement 1: The problem of How to produce is a problem of resource allocation.

Statement 2: For Whom to Produce is also called the problem of distribution of national income
among the factors of production.

Alternatives:

a) Statement 1 is true and statement 2 is false

b) Statement 1 is false and statement 2 is true
c) Both Statement 1 and 2 are true
d) Both Statement 1 and 2 are false

3) Read the following statements carefully and choose the correct alternatives given below:

Statement 1: Those combinations which could be produced using the help of given resource and
technology are termed as feasible combination.

Statement 2: Those combinations which could not be produced with the help of given resource
and technology are termed as unattainable combinations.

Alternatives:

a) Statement 1 is true and statement 2 is false

b) Statement 1 is false and statement 2 is true
c) Both Statement 1 and 2 are true
d) Both Statement 1 and 2 are false
4) Read the following statements carefully and choose the correct alternatives given below:

Statement 1: Positive economic analysis deals with ‘what ought to be.’

Statement 2: Normative economic analysis deals with ‘things as they are.’

Alternatives:

a) Statement 1 is true and statement 2 is false

b) Statement 1 is false and statement 2 is true
c) Both Statement 1 and 2 are true
d) Both Statement 1 and 2 are false

5) Read the following statements - Assertion (A) and Reason (R). Choose one of the correct
alternatives given below:
Assertion (A): When there is change in resource or technology for goods X and Y, PPC will
show rightward shift.
Reason (R): Increase in availability of resource or improvement in technology for X and Y
goods.

Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true.

6) Read the following statements - Assertion (A) and Reason (R). Choose one of the correct
alternatives given below:
Assertion (A): The problem of making choice is called economic problem.
Reason (R): Economizing resources is the essence of economic problem.

Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true.
7) Read the following statements - Assertion (A) and Reason (R). Choose one of the correct
alternatives given below:
Assertion (A): The value of the benefit that is sacrificed by choosing an alternative is known as
opportunity cost.
Reason (R): Shape of PPC does not depend on MOC.

Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true.

8) Read the following statements - Assertion (A) and Reason (R). Choose one of the correct
alternatives given below:
Assertion (A): More production of X good is associated with more production of Y good.
Reason (R): In a situation of fuller utilization of resources, production of X and Y cannot be
increased simultaneously.

Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true.

9) What does a point on PPC shows?

(Choose the correct alternative)

a) Underutilization of resources
b) Fuller utilization of resources
c) Growth of resources
d) All of the above
10) PPC is straight when marginal opportunity cost is ---------
(Choose the correct alternative)

a) Rises
b) Falls
c) Remains constant
d) None of the above

11) What is efficient technique of production?

(Choose the correct alternative)

a) Fuller utilization of resources

b) Economizing resources
c) Produces maximum at a minimum cost
d) None of the above

12) What does the downward slope of PPC indicate?

(Choose the correct alternative)

a) Decrease in production of one good will bring fall in the production of other good
b) Increase in the production of one good will bring increase in the production of other good
c) Production of both goods remain constant
d) Increase in the production of one good will bring fall in the production of other good

13) A farmer can produce 500 Kg of groundnuts on a piece of land. With the same resource the
farmer could also produce 300 Kg of peanuts. What is the opportunity cost of producing
groundnuts?

14) PPC can have three shapes. (True or false)

15) When PPC is convex in shape

(Choose the correct alternative)

a) Due to increasing MOC

b) Due to constant MOC
c) Due to decreasing MOC
d) None of the above

16) Scarcity and choice go together and they are inseparable. (True or False)
17) The problem of resource allocation stands for?
a) How to produce
b) Whom to produce
c) What to produce
d) None of the above

18) An economy can achieve the objective of growth of resource through

a) Improvement in technology only
b) Increase in supply of resource only
c) Improvement in technology and increase in supply of resource
d) None of the above

19) Identify the correct sequence of alternatives given in Column 11 by matching them with

Respective terms in Column 1

Column 1 Column 11

(i) MOC (a) Loss / Gain

(ii) How to produce (b) Not verifiable

(iii) Normative economics (c) Differ in urgency

(iv) Human wants (d) Choice of technique of

production

Choose the correct alternative:

a) (i c) , ( ii d) , ( iii b), ( iv a)
b) (i a) , ( ii d) , ( iii b), ( iv c)
c) (i d) , ( ii c) , ( iii b), ( iv a)
d) (i c) , ( ii b) , ( iii d), ( iv a)
 CASE STUDY BASED
20) Read the text carefully

In general, every individual in society is engaged in the production of some goods or

services and wants a combination of many goods and services, not all of which are
produced by them Needless to say that there has to be some compatibility between what
people in society collectively want to have and what they produce. For example, the total
amount of Rice produced by family farm along with other farming units in a society must
match the total amount of Rice that people in the society collectively want to consume. If
people in the society do not want as much Rice as the farming units are capable of
producing collectively, a part of the resources of these units could have been used in the
production of some other goods or services which is in high demand.
On the other hand, if people in the society want more Rice compared to what the farming
units are producing collectively, the resources used in the production of some other goods
and services may be reallocated to the production of Rice. Similar is the case with all
other goods or services. Just as the resources of an individual are scarce, the resources of
the society are also scarce in comparison to what the people in the society might
collectively want to have. 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. Any allocation of resources of the society would
result in the production of particular combination of different goods and services. The
goods and services thus produced will have to be distributed among the individuals of the
society. The allocation of the limited resources and the distribution of the final mix of
goods and services are two of the basic economic problems faced by the society.

(Source: NCERT Introductory Microeconomics textbook)

On the basis of the given text and common understanding, answer the following questions:
a) Why does economic problem arise?

b) Define the term economizing resources.

c) Mention the main economic activities.

21) Read the text carefully

In microeconomic theory, the opportunity cost of a choice is the value of the best alternative
forgone where, given limited resources, a choice needs to be made between several mutually
exclusive alternatives. Assuming the best choice is made, it is the "cost" incurred by not
enjoying the benefit that would have been had by taking the second-best available choice. As
a representation of the relationship between scarcity and choice, the objective of opportunity
cost is to ensure efficient use of scarce resources. It incorporates all associated costs of a
decision, both explicit and implicit.
 Thus, opportunity costs are not restricted to monetary or financial costs: the real
cost of output forgone, lost time, pleasure, or any other benefit that provides utility should
also be considered an opportunity cost.

On the basis of the given text and common understanding, answer the following questions:
a) What is opportunity cost?

b) Mention the objective of opportunity cost.

c) ‘The real cost of output forgone, lost time, pleasure, or any other benefit that
provides utility should also be considered an opportunity cost.’(True or False)

22) Read the following text and answer the following questions on the basis of the same:

Efficiency in production means productivity i.e. output per unit of an input. Let the input
be worker. Suppose an economy produces only two goods X and Y. Suppose a worker is
employed in production of X because he is best suited for it. The economy decides to
reduce production of X and increase that of Y. The worker is transferred to Y. He is not
that efficient in production of Y as he was in X. His productivity in Y will be low, and so
cost of production high.
The implication is clear that if the resources are transferred from one use to another, the
less and less efficient resources will be transferred leading to rise in the marginal
opportunity cost which is technically termed as marginal rate of transformation.

a) If Marginal Opportunity Cost is increasing then the shape of PPC will be -----------.

b) Why PPC is sloping downwards from left to right?

c) Marginal opportunity cost is technically known as ------.

23) Read the following text and answer the following questions on the basis of the same:
(Case study)

Just as individuals face scarcity of resources, the resources of an economy as a whole are
always limited in comparison to what the people in the economy collectively want to
have. The scarce resources have alternative usages and every society has to decide on
how much of each of the resources to use in the production of different goods and
services. In other words, every society has to determine how to allocate its scarce
resources to different goods and services. An allocation of the scarce resource of the
economy gives rise to particular combination of different goods and services.

a) Economic problem is a problem of -----------.

b) Mention two important features of resources.

24) Read the following text and answer the following questions on the basis of the same:

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 labor or
more machines. Which of the available technologies to adopt in the production of each of
the goods? 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. Thus, 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.

a) Mention two techniques by which goods can be produced.

b) Why countries like India prefer labor intensive technique for producing goods?

c) Which technique country like America use for the production of goods and why?

1 MARK QUESTIONS ANSWER:

[Link] ANSWER
1 a) Statement 1 is true and statement 2 is false

2 b) Statement 1 is false and statement 2 is true

3 c) Both Statement 1 and 2 are true

4 d) Both Statement 1 and 2 are false

5 a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A)

6 b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the
correct explanation of Assertion (A)

7 c) Assertion (A) is true but Reason (R) is false.

8 d) Assertion (A) is false but Reason (R) is true.

9 b) Fuller utilization of resources

10 c) Remains constant

11 c) Produces maximum at a minimum cost

12 d) Increase in the production of one good will bring fall in the production
of other good

13 300 Kg
14 True
15 c) Due to decreasing MOC
16 True
17 c) What to produce

18 c) Improvement in technology and increase in supply of resource

19 c) ( i a) , ( ii d) , ( iii b), ( iv c)

20 a) Because the available resource is scarce in relation to unlimited human

wants.
b) The efficient utilization of available resource.
c) Production, Consumption and capital formation.
21 a) The value of a factor in its next best alternative use.
b) Ensure efficient use of scarce resources.
c) True
22 a) Concave
b) Production of both commodities cannot be increased simultaneously. If
production of one good (say X) increases, we have to reduce the production
of other (say Y).
c) MRT

23 a) Problem of choice
b) 1. Resources are scarce 2. It has alternative use.

24 a) 1. Labor intensive technique, 2. Capital intensive technique

b) Availability of more labored force.
c) Capital intensive technique.
Availability of capital is high compared to that of the availability of
laborers.
 3MARKS / 4MARKS QUESTION ANSWERS

1) What are the main causes of economic problems?

Answer: the main causes of economics problems are as follows:
1. Limited resources
2. Unlimited human wants
3. Resource can be put to different uses
4. Human wants differ in priority

2) Explain the problem of “what to produce and in what quantity”

Answer: The problem of what to produce and in what quantity is actually the problem of
resource allocation. We can produce various combinations goods and services with the available
resource. 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, and 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 capital goods which will boost production and
consumption.

3) Distinguish between Positive and Normative Economic Analysis?

Answer: This distinction between positive and normative economic analysis is not a very sharp
one. The positive and the normative issues involved in the study of the central economic
problems are very closely related to each other and a proper understanding of one is not possible
in isolation to the other.

Positive economic analysis Normative economic analysis

In positive economic analysis, we study how In normative economics, we try to understand
the different mechanisms function. whether these mechanisms are desirable or
not.
Positive statements are verifiable. Normative statements are not verifiable.

These are based on facts These are not based on facts, these are
suggestions.
4) Distinguish between micro and macroeconomics?

Answer: the subject matter of economics has been studied under two broad branches:
(a) Microeconomics (b) Macroeconomics

Micro economics Macro economics

(a)In microeconomics, we study (a) In macroeconomics, we try to get an
the behavior of individual economic agents understanding of the economy as a whole.

Example: a textile industry, a household etc. Example: all industries, all household etc.

(b) In micro economics, we try to figure out (b) Here, we are interested in finding out
how prices and quantities of goods and how
Services are determined. the total output, employment and
Aggregate price level is determined.

(c)The main tools to study micro economic

problems are demand and supply (c) The main tools to study macro-economic
problems are aggregate demand and
(d)It is again called “price theory” aggregate supply
(d) It is again known as “theory of income
(e) in short, Micro means small and employment”
(e)in short, Macro means large

5) Calculate MOC from the following schedule.

Rice 0 1 2 3 4 5
(tones)
Wheat(tones) 150 140 120 90 50 0
Answer: solution

Rice (quintile) Wheat(quintile) MOC=loss/Gain

0 150 ----
1 140 10/1=10
2 120 20/1=20
3 90 30/1=30
4 50 40/1=40
5 0 50/1=50

6) What is opportunity cost? Explain with the help of an example

. Answer: Opportunity cost is an important basic concept in the subject economics. we can
Define the term opportunity cost as the value of a factor in its next best alternative use. For
example, if more of the scarce resources are used in the production of Good X, then fewer
resources is available for the production of good Y and vice versa. Therefore, it is very clear that
if we want to have more of one of the goods, we will have less of the other good. Thus, there is
always a cost of having a little more of one good in terms of the amount of the other good that
has to be forgone. This is known as the opportunity cost of an additional unit of the goods. In
short, we can define the term opportunity cost as the value of the benefit that is avoided by
selecting an alternative.

7) What is Marginal Opportunity Cost or Marginal Rate of Transformation? Explain the concept
With the help of a schedule.

Answer: Suppose an economy produces only two goods X and Y. we cannot increase the
production of both goods. If we want to increase the production of X good (Rice), we have to
reduce the production of Y good (Wheat). This loss is called marginal opportunity cost. If the
resources are transferred from one use to another, the less and less efficient resources will be
transferred leading to rise in the marginal opportunity cost which is technically termed as
marginal rate of transformation
We can now define MRT in general terms. MRT is the ratio of units of one good sacrificed to
produce one more unit of the other good. Or, MRT is the rate at which the units of output of one
good are sacrificed to produce on more units of the other good.

MOC SCHEDULE

Rice (quintile) Wheat(quintile) MOC=loss/Gain

0 10 ----
1 9 1/1=1
2 7 2/1=2
3 4 3/1=3
4 0 4/1=4

8) What are the assumptions of PPC?

The main assumptions of PPC areas follow

(a) The resources available are fixed.

(b) The technology remains unchanged.
(c) The resources are fully employed.
(d) The resources are efficiently employed.
(e)The resources are not equally efficient in production of all products.

9) Why is PPC slopes downward? Use diagram

PPC slopes downward, because in order to produce more units of one good say X, some units
of the other good say Y must be sacrificed (because of limited resources). Production of both
goods cannot be increased simultaneously.
(Use diagram)
10) Why is PPC concave in shape? Use diagram

A typical PP curve is taken to be a concave curve because it is based on a more realistic

assumption that no resource is equally efficient in production of all goods. So, when
Resources are transferred from production of good Y to production of good X, more and more
units of good Y are to be transferred to produce one more unit of good X. (Use diagram)

6MARKS QUESTIONS

1) What do you understand by Production Possibility Curve (PPC)? Mention the main
features of PPC using diagram.
Ans: We know that resources are limited in relation to demand for them. So every society has
to decide how to distribute its limited resources to different goods and services. It is possible
to distribute the resources in different ways, hence achieving different combinations of all
goods and service. The collection of all such combinations of goods and services is termed as
Production Possibility set of an economy.
In short, PPC is a graphical presentation of different combinations of two goods that could be
produced with the available resource and technology assuming that these resources are fully
and efficiently utilized.

The main features of PPC are as follows:

1. PPC slopes downwards
2. PPC is concave in shape

Y Y

X
X
a) PPC slope downwards b) PPC concave in shape

2) Draw a PPC and identify the points marked on PPC and mention what does each point
Represent.
 Ans: (i) PPC is a graphical presentation of different combinations of two goods that could be
produced with the available resource and technology assuming that these resources are fully
and efficiently utilized.

(a) Point E represents growth of resources

(b) Point A, B, C, D represents fuller utilization of resources
(c) Point U and F shows underutilization of resources

3) Why does economic problem arise? And explain the problem of “how to produce”.

Ans: We know that production, exchange and consumption of goods and services are among
the basic economic activities of life. In the course of these basic economic activities, every
society has to face scarcity of resources and it is the scarcity of resources that gives rise to the
problem of choice. The scarce resources of an economy can be put to alternative uses. But
human wants are unlimited and differ in urgency. Thus, the causes of economic problem are:
(i) Scarcity of resources
(ii) Unlimited human wants
(iii) Resources can be put to different uses
(iv) Human wants differ in urgency

There are three central problems namely, what to Produce, How to Produce and for whom to
Produce.
How to Produce: The problem of How to produce is the problem of choice of technique of
production. Mainly there are two techniques, they are as follows

Labor intensive technique- Here we use more of labor and less of capital.

Capital intensive technique- In this case we use more of capital and less of labor.

Whatever technique we use, aim of every economy is to produce maximum at minimum cost
and use of technique of production varies from economy to economy.