Introduction to Microeconomics

Class 12 (CBSE)
Synopsis
• Meaning of Goods, Services, Individual, Resource.
• Meaning of Economics
• Economy
• Types of Economy/ Organisation of Economic Activities
• Economic problem
• Why an economic problem arise
• Central problem of economy
• Production Possibility Frontier
• Positive and Normative Economics
• Microeconomics and Macroeconomcs
Key Terms
• Goods: It means physical, tangible objects used to
satisfy people’s wants and needs.
• Services: It means the intangible satisfaction of
wants and needs.
Key Terms
• Individual: It means an individual decision making
unit, it can be a person or a group like a household, a
firm etc.
• Resource: It means those goods and services which
are used to produce other goods and services. For
instance, land, labour, tools and machinery. Etc.
Meaning of Economics
• Economics is concerned with the study
of economic problems that arise
because human wants are unlimited
and resources to satisfy those wants
and limited or scarce and these scarce
resources have alternative uses.

• Economics focuses on the rational

management of scarce resources in
order to maximize economic welfare.
Hence, economics is about making
choices in the backdrop of scarcity.
Economy
A system in which people get a living to satisfy their wants
through the processes of Production, Consumption, Investment
and Exchange. It has four components:

1. Production: It is defined as ‘creation of utility’. It is process in

which inputs are transformed to goods or services.
2. Consumption: It is a process by which a good or a service is
completely used up.
Economy
3. Investment: Part of production which is committed
for earning future income.
4. Exchange: It means the process by which ownership
is transferred from seller to buyer for a
consideration.
Types or Organisation of Economy
1) Market Economy/ Capitalist/ Free Economy: All
important decisions regarding production,
consumption and exchange of G&S are made
through market i.e., forces of demand supply
intersect and decides the price and quantity
2) Centrally Planned Economy / Socialist /
Controlled Economy: All important decisions
regarding production, exchange and
consumption of G&S are made by government
3) Mixed Economy: An economy in which some
important decisions are taken by government
and the economic activities are conducted
through the market.
Economic Problems & its emergence
Economic problem means problem of choice arising out
due to limited resources having alternative uses. Main
causes of economic problems:

1. Human wants are unlimited

2. Resources are limited
3. Resources have alternative uses
Central Problems of the Economy
Any economy faces below mentioned problems:

1. What to produce and in what quantity?

Luxury goods, inferior goods, capital goods or consumer goods

2. How are these goods produced?

Problem of choice of technique.

3. For whom to produce?

Distribution of income among all factors of production

4. Growth of Resources & Sustainable Development

Economic development that meets the needs of the present without
compromising the ability of future generation to meet their own needs.
Production Possibility Curve
Production Possibility Curve is a curve, which
shows the various alternative production possibilities of
two goods that can be produced with given resources
and techniques of production.

It is also known as transformation curve or production

possibility frontier. It is an important tool to solve the
central economic problems.
Production Possibilities Schedule
The table showing different possibilities of production
of two goods is called production possibility schedule.
Assumptions of PPC
1) The resources available are fixed.

2) The technology remains unchanged.

3) The resources are fully employed.

4) The resources are not equally efficient in production

of all the goods. So, if resources are transferred from
the production of one good to another, the Marginal
Opportunity Cost increases.
Production Possibility Curve
Properties Of PPC
It is a downward sloping curve from left to right. It is so
because to increase the production of one good, we
have to decrease the production of the other. Because
of this inverse relation, PPC is negatively sloped.

The shape of the Production Possibility Curve is

concave to the origin. It is so because the Marginal
Opportunity Cost tends to rise.
Marginal Opportunity Cost
The Marginal Opportunity Cost is the rate at which the
quantity of output of one commodity is sacrificed to
produce one more unit of the other commodity.
Shape Of PPC
The shape of PPC depends on Marginal Rate of
Transformation, as stated below:

1)If MRT is rising, then PPC will be concave to the origin which is
always the case.

1)If MRT is constant, then PPC will be a straight line.

3) If MRT is falling, then PPC will be convex to the origin which is

the best shape.
Shift of PPC
The Production Possibility Curve will shift under
the following two conditions:

Change in resources.

Change in technology of production for both the

goods.
Rotation Of PPC
The Production Possibility Curve will rotate outward
under the following two conditions:

Improvement in technology in favour of one

commodity.

Growth of resources for the production of one

commodity.
Opportunity Cost
Opportunity cost for a commodity
is the amount of other commodity
that has been foregone in order to
produce the first, as production of
all the goods cannot be increased
simultaneously.

Because of its importance in

economics, sometimes
opportunity cost is also called the
economic cost.
Positive and Normative Economics
Positive economics is objective and fact based, while normative
economics is subjective and value based.

Positive economic statements do not have to be correct, but

they must be able to be tested and proved or
disproved. Normative economic statements are opinion based,
so they cannot be proved or disproved.

In positive economics analysis we study how the different

mechanisms function and in Normative economics we try to
understand whether these mechanisms are desirable or not.
Positive and Normative Economics
Microeconomics & Macroeconomics
The difference between micro and macro economics is
simple. Microeconomics is the study of economics at an
individual, group or company level. Macroeconomics,
on the other hand, is the study of a national economy
as a whole.
Microeconomics focuses on issues that affect
individuals and companies. Macroeconomics focuses
on issues that affect the economy as a whole.
 Thank You!

Lesson by:
Anjali Kaur Suri
TGT Maths, PGT Economics

M.A. (Economics), M.Com (Finance), PGD Banking & Finance, B.A. Hons (Economics), B.Ed (Maths
& SST), NISM, NSDL and IELTS certified.
For enquiries, email contact@geniusedu.co.in