UNIT 1
Introductory Micro Economic theory
Weightage (1+3 Marks)
Ques : What is micro economics?
Ans : It is a branch of economics which deals with individual economics units or small group such as a consumer,
producer, market etc.
Ques :What is an Economy?
Ans : It is a system where people earn their livelihood.
Ques :Why problem of choice does arises?
Ans : The problem of choice arises because of scarcity.
Ques :Why does a central Problem or economic problem arise?
Ans : The main causes of economic problems are as follows:1. Human wants are unlimited.
2. Limited means or scarcity of resources.
3. Alternative uses
Ques :What do mean by scarcity of resources?
Ans : Scarcity of resources means demand for resources is more than their supply.
Ques :What do mean by alternative uses of resources?
Ans : Alternative uses of resources means resources have more than one use.
Central Problems or Basic Problems or Economic Problems or Problems of choice or Problems of allocation of
resources.
1. What to produce
This problem is related to the choice of goods and services to be produced and in what quantities with the limited
resources i.e. whether to produce consumer goods like sugar,cloth,wheat etc or capital goods like tractors, machines etc
and in what quantities.
2. How to produce
This problem is related to the choice of techniques of production according to the need of economy. For example: should
we produce cloths by labour intensive technique i.e. handlooms where more labour is used comparing to capital or by
capital intensive technique i.e. machines where more capital is used comparing to labour.
3. For whom to produce.
This problem is related to the distribution final goods and services among individuals and different factors of production
i.e. land, labour, capital and entrepreneur in such a manner that the inequality of income and wealth would be minimized.
Opportunity Cost: Opportunity cost is the value of next best sacrificed alternative.
Marginal Opportunity Cost: loss in production of one good to produce one additional unit of another good.
Production Possibility Curve or Production Possibility Frontier or Transformation Curve
PPC shows the production possibilities of two different commodities when the resources are fully and efficiently
employed/ulilised.
S.
N
o
Combination
s
1
2
3
4
5
6
A
B
C
D
E
F
Guns
15
14
12
09
05
0
Butte
r
0
1
2
3
4
5
𝐌𝐎𝐂
Loss in production
=
Gain in production
-1
2
3
4
5
P
GunsP
P
O
Butter
Features/Properties of PPC.
1) Production possibility curve always slopes downward from left to right
Cause: After full utilization of resources to increase the production of one good we have to
decrease the production of another good.
2) Production possibility curve is concave to the origin.
Cause: PPC is concave to origin because of increasing marginal opportunity cost.
P
Points Below, On and Above PPC
Any point A below PPC shows not full and
efficient use of resources.
Any point B on PPC shows full and efficient
use of resources.
P
C●
B●
P
Guns
P
A ●
Any Point C above PPC shows not reachable
combination of two goods.
O
Shift of PPC
P1
Right ward shift of PPC shows the growth of
resources or development of economy or
increase in production capacity of an economy
due to discovery of new oil reserves, increase in
supply of skilled manpower etc.
P
Butter
P
P2
Guns
Left ward shift of PPC shows decrease in resources
or decrease in production capacity of an economy
due to flood, earthquake, spread of plague etc.
O
Butter
P 2 P P1
Ques :Can PPC be a straight line?
Ans: Yes PPC can be a sloping downward straight line when MOC remains constant.
Difference between Central Planned Economy and Market Economy:
Central Planned Economy
1. Decisions about central problems are taken by govt.
2. Public sector dominates the economy.
3. Factor of production are owned by the govt.
4. Prices are determined by the government
5. Social welfare is the main motive.
Market Economy
1. Decisions about central problems are taken by market.
2. Private sector dominates the economy.
3. Factor of production are owned by private individuals.
4. Prices are determined by the market forces of
demand and supply.
5. Profit is the main motive.
Mixed Economy
In the mixed economy both public as well as private sector plays an important role. Most of the decisions are taken by
market forces but government plays an important role in regulating the functioning of economy in such a manner that
both public as well as private sector both get benefited.
Difference between Positive Economics & Normative Economics:
Positive Economics
Normative Economics
1. It deals with the statements like ‘what is’.
1. It deals with the statements like ‘what ought to be’.
2. Verifiable from the facts.
2. Not Verifiable from the facts.
3. It does not include value judgements.
3. It does not include value judgements.
4. Example: India’s population is 122 crore.
4. Example: India’s govt. should take the steps to control
Population.
Difference between Micro Economics and Macro Economics:
Micro Economics
Macro Economics
1.Microeconomics is the study individual economics units
1. Macro Economics is the study of whole Economy.
or small group
2. Subject matter of micro economics includes Consumer
2. Subject matter of macro economics includes National
behavior, producer behavior, Market etc.
income, foreign exchange, employment etc.
3. Limited degree of aggregation.
3. Aggregation at the level of economy.
4. It is partial equilibrium analysis.
4. It is general equilibrium analysis.
5. It is also called as Price Theory.
5. It is also called as Theory of Income and Employment.