Introduction to
Micro Economics
Definition and Scope of Economics
Science of Wealth:
An
Inquiry into the
Nature and Causes of the
Wealth of the Nations. –
Adam Smith (1776).
Definition and Scope of Economics
Science of Material well-being:
 Economic is a Study of Mankind in the
Ordinary Business of Life; it examines
that part of Individual & Social Action
which is most closely connected with
the attainment & with the use of the
Material requisites of Well Being.” –
Alfred Marshall (1890)
Definition and Scope of Economics
Science of Choice making:
Economic is a
Science which
Studies Human Behaviour as a
Relationship between Ends &
Scarce
Means
which
have
alternative use.” – Lionel Robbins
(1931)
Definition and Scope of Economics
The above definition deals
with the following four aspects
like
economic of science
 unlimited ends
 scarce means
alternative use
Science of Dynamic growth and
Development:
 Economic is the study of How Men &
Society choose, With or Without the
use of Money; to employ Scarce
Productive Resources which could have
alternative uses, to Produce Various
Commodities over time & Distribute
them for Consumption now & in
Future amongst various People &
Groups of Society
Prof.
Henry Smith (Inclusive
Definition)
“The study of how in a civilized
society one obtains the share of
what other people have produced
and of how the total product of
society
changes
and
is
determined
Jacob Viner (Pragmatic Definition)
“ Economics is what Economists
do”. In other words, what
economists do and what they
have been doing.
Economics is………
 Study
of Production, Distribution &
Consumption of Wealth in Human society.
 Study of making Choices.
 Study of Human Behaving in response to
having only Limited Resources to fulfill
Unlimited Wants & Needs.
 Study of Trade-Offs involved when choosing
between Alternate Sets of Decisions.
Micro Economic Theory
Factor
Pricing
(Theory of
Distribution)
Product
Pricing
Wages
Theory of
Demand
Theory of
Production and cost
Rent
Theory of
Economic
Welfare
Interest
Profits
Macro Economics
According the Boulding, “MacroEconomics is the study of the
Nature, Relationship & Behaviour
of Aggregates & Averages of
Economic Quantities.”
Macro Economics
According the Mc Connel,
“Macro-Economics deals with
forest and not the trees. Thus it
analyses and establishes the
functional relationship between
large aggregates”
Macro Economic Theory
Theory of Income
and Employment
Theory of General
Price Level and
Inflation
Theory of
consumption
function
Theory of Fluctuations
Or
(Business Cycles)
Theory of
Investment
The Theory of
Economic
Growth
Macro-theory
of
Distribution
(Relative
shares of
wages and
profits)
Nature of Economics
 Economics is a Science:
 A subject is considered science if
It is systematized body of knowledge
which studies the relationship between
cause and effects.
 It is capable of measurement
 It has its own methodological apparatus
 It should have the ability to forecast.

Economics is an art
 Art is nothing but practice of knowledge.
 Unlike science which is theoretical, art is
practical. Thus, Economics is both a science
and an art.
 It is science in its methodology and art in its
application.
 Study of unemployment problem is a science
but framing suitable policies for reducing the
extent of unemployment is an art.
Positive & Normative Science
 A positive or pure science analyses cause and effect
relationship between variable but it does not pass value
judgment. In other words it states what is and not what
ought to be. Economics should be neutral between the
ends.
 A normative science, Economics involves value
judgments. It is prescriptive in nature and described
‘what should be the things’. Thus normative economics is
concerned with welfare propositions.
Method of study
Deductive Method:
This method is also called
abstract, analytical and
priori method.
Under this method laws are
deduced logically.
Method of study
Deductive Method:
On
the basis of certain
fundamental assumptions or
accepted axioms or truths which
have been established
conclusions and generalizations
are drawn.
Inductive method
 Under this method conclusions are
drawn on the basis of collection and
analysis of facts relevant to the inquiry.
 the logic in this case proceeds from the
particular to the general.
 The generalizations are based on
observation of individual examples.
Central Economic Problems
The central economic problems
are:
What to produce?
How to produce?
For whom to produce?
What provisions (if any) are to be
made for economic growth?
Central Economic Problem
What to produce?
 Every society has to decide
which goods are to be
produced and in what
quantities
Central Economic Problem
How to produce?
There
are
various
alternative techniques of
producing a commodity
(E.g.. Labour or Capital
Intensive technique)
Central Economic Problem
For Whom to Produce?
The shares of different
people in the national
cake of goods and
services
Central Economic Problem
What provision should be
made for economic
growth?
Not only for the present but
also for the future
Production Possibilities Curve
In
Economics,
a
production
possibility
curve
(PPC)
or
“transformation curve” is a graph
that shows the different rates of
production of two goods that an
individual
or
group
can
efficiently produce with limited
productive resources.
Assumption of PPC
The given amount of productive
resources are remain fixed;
Resources are neither unemployed
nor underemployed;
Technology does not change.
Alternative Production
Possibilities
Production Possibilities Curve
Opportunity Cost and PPF
 Opportunity cost of a given activity is
defined as the value of the next best
activity
 In the context of PPC, since there are
only two goods, therefore opportunity
cost of producing one good is in terms
of sacrifice made of the other good.
Opportunity Cost and PPF
Increasing opportunity cost
makes the PPC concave to the
origin.
If opportunity costs were
constant, PPC would be a
straight line
Shift in the PPC
Economic Activity
Capitalist Economy:
 An Economy is called capitalist or a free
market economy if it has the following
feature like
 the right of private property,
 freedom of enterprise,
 freedom to choice for the consumers,
 profit motive,
 competition and
 inequalities of income.
Merits of Capitalist Economy
To attract the consumer the
producer will bring out newer and
finer varieties of goods.
The existence of private property
and the driving force of profit
motive result in high standard of
living.
Merits of Capitalist Economy
Capitalism works automatically
through the price mechanism.
The freedom of enterprise
results in maximum efficiency
in production
Merits of Capitalist Economy
All activities under capitalism enjoy
the maximum amount of liberty and
freedom.
Under capitalism freedom of choice
brings maximum satisfaction to
consumers.
Merits of Capitalist Economy
 Capitalism preserves fundamental rights
such as right to freedom and right to
private property
 It rewards men of initiative and
enterprise.
 Country as a whole benefits through
growth of business talents, development
of research etc.
Demerits of Capitalism
In capitalism the enormous wealth
produced is appropriated by a few.
This causes rich, richer and poor,
poorer.
Welfare is not been protected under
capitalism, because their aim is
profit, not welfare of the people.
Demerits of Capitalism
Economic instability like over
production, economic depression,
unemployment,
etc.,
is
very
common under capitalism.
The producer spends huge amounts
of money on advertisement and sale
promotion activities like fair,
exhibitions etc.
Demerits of Capitalism
 Class conflict arises between employer
and employee. They will be paid low
wages and this leads to strikes and lockouts.
 Capitalism leads to the formation of
monopolies.
 There is no security of employment
under capitalism.
Socialist economy:
In this economy the material
means of production i.e.
factories, capital and mines
etc., are owned by the whole
community represented by the
state.
Merits of Socialism
Equitable
distribution
of
wealth and income and
provision
of
equal
opportunities for all help to
maintain social justices.
Merits of Socialism
In socialistic economy there will be
better utilization of resources and it
ensures the maximum production.
Socialist economy means planned
economy.
Waste of all kinds is avoided
through strict economic planning.
Merits of Socialism
In
planned
economy
unemployment is removed,
business
fluctuation
are
eliminated and stability is
bought about and maintained.
Merits of Socialism
 The absence of profit motive helps the
community to develop a co-operative
mentality and avoids classwar.
 Socialism ensures liberty for the
individual by right to work and
minimum standard of living to people.
Demerits of Socialism
 Socialism involves the predominance of
bureaucracy. Moreover, there may also
be corruption, redtapism, favouritism,
etc.
 It restrict the freedom of individuals
due to state ownership of the material
means of production and state direction
and control of economic activity.
Demerits of Socialism
Socialism
takes away the
fundamental rights of the people
such as right of private property.
It will not provide necessary
incentive to hard work in the
form of profit
Demerits of Socialism
 State monopolies created by socialism will
sometime become uncontrollable. This will be
more dangerous than the private monopolies
under capitalism.
 Under socialism the consumers have no
freedom of choice. Therefore, what state
produce has to be accepted by the consumers.
 The extreme form of socialism is not at all
practicable.
Mixed Economy:
In a mixed economy the aim is to
develop a system which tries to
include the best features of both
the controlled economy and the
market economy while excluding
the demerits of both.
Merits of Mixed Economy
Mixed economy secures the
merits of both capitalism
and
socialism
while
avoiding the evils of both.
Merits of Mixed Economy
Mixed economy protects individual
freedom.
Under
the
system
individual have the freedom of
consumption, choice of occupation,
freedom of enterprise, freedom of
expression.
Price mechanism is allowed
operate under mixed economy.
to
Merits of Mixed Economy
 Reducing the inequalities of wealth
and class struggle.
 Economic fluctuations can be avoided
due to centrally planned economy.
 Mixed economy helps under-developed
countries to have rapid and balanced
economic development.
Demerits of Mixed Economy
 Mixed economy is difficult to operate.
Balancing and adjusting the public and
private sector is often difficult.
 Excessive controls and heavy taxes are
likely to prevail under mixed economy.
These will discourage production in the
private sector.
Demerits of Mixed Economy
 Mixed economy is described by Schumpeter
as “Capitalism in the oxygen tent”. According
to him it is only a trick of the capitalists to
cheat the working class by offering them
some temporary advantage like social
security, uplift of the depressed classes,etc.
 Redtapism,
nepotism,
favouritism,
officialdom, etc. are also found in this type of
economic system.
Question
 ‘Economics is what Economists do’
is given by
Jacob Viner
Henry Smith
Pigou
Paul A. Samuelson
Answer
Jacob Viner
Lionel Robbins Published his
famous book “Nature of
significance of Economics” in the
year
1935
1933
1931
1937
Answer
1931
When productivity increases
Prices rise
Living standards improve
There are fewer good jobs
Living standards deteriorate
Answer
Living standards improve
Production Possibility curve is
also know an
Demand curve
Supply curve
Indifference curve
Transformation curve
Answer
Transformation curve
Scarcity is a situation in which
Wants exceed the resources
available to satisfy them
Something is being wasted
People are poor
None of the above
Answer
Wants exceed the resources
available to satisfy them
Economics may be defined as the
science that explains
The choice that we make as we cope
with scarcity
The decision made by politicians
The decision made by households
All human behaviour
Answer
The choice that we make as we
cope with scarcity

If a consumer get more utility from the
consumption of a commodity it means:
a. He is willing to pay less price for the
product
b. He is willing to pay more price for the
product
c. He is willing to pay same price for the
product
d. None of the above
Answer
a.He is willing to pay more
price for the product
 According to J.B. Say Science
which deals with
 Health
 Wealth
 Scarcity
 Nature
Answer
 Wealth
 Positive science means
 What ought to be
 What is
 How is
 None of these
Answer
 What is
 The related concept of micro
economics is
 Inflation
 Population
 Individual income
 Total investment
Answer
 Individual income
 Inductive method is known as
 Analytical method
 Empirical method
 Prior method
 None of these
Answer
 Empirical method
 Freedom of choice by consumer is
important feature of
 Socialist economy
 Russian economy
 Capitalist economy
 Communist economy
Answer
 Capitalist economy
In a free market economy the
allocation of resources is
determined by
A. votes taken by consumer
B. a central planning authority
C. consumer preference
D. the level of profits of firms
Answer
consumer preference
Question
 In a free market economy, when consumers increase
their purchase of goods and the level of ------- exceeds
------then price tends to rise.




Demand, supply
Supply, demand
Prices, demand
Profits, supply
Answer
 In a free market economy, when consumers increase
their purchase of goods and the level of ------- exceeds
------then price tends to rise.




Demand, supply
Supply, demand
Prices, demand
Profits, supply
The central problem in economics is that of
 Comparing the success of command versus
market economies
 Guaranteeing that production occurs in the
most efficient manner
 Guaranteeing a minimum level of income for
every citizen.
 Allocating scarce resource in such a manner
that society’s unlimited needs or wants are
satisfied as well as possible.
Answer
Allocating scarce resource in
such a manner that society’s
unlimited needs or wants are
satisfied as well as possible.
 Which of the following would be
considered a disadvantage of allocating
resources using a market system?
 Income will tend to be unevenly
distributed
 Significant unemployment may occur
 It cannot prevent the wastage of scares
economic resources
 Profits will tend to be low.
Answer
Income will tend to be unevenly
distributed
Identify the correct statement:
 In deductive method logic proceeds from the
particular to the general
 Micro
and
Macro
economics
are
interdependent
 In a capitalist economy, the economic
problems
are
solved
by
planning
commission.
 Higher the prices lower is the quantity
demanded of a product is a normative
statement.
Answer
Micro and Macro economics are
interdependent