Two Aspect of Controlling:

There is a big problem in the Economy.

i.e. Human wants are unlimited but
(i) Resources, to satisfy those wants are limited and
(ii) Resources have alternative uses.
These above two points are limitations of Resources
 Difference between Micro and Macro Economics
MICRO ECONOMICS
Micro means small
It studies the behavior of an
individual or a product
Subject matter
Study about demand, supply,
determination of output and price
for an individual firm or industry
Price theory
e.g. income of a consumer, pricing
of a product, study about a single
tree in a forest
MACRO ECONOMICS
Macro means large
It studies economy as whole or
aggregate
Subject matter
Study about aggregate demand
aggregate supply, determination of
aggregate output and general price level in
an Economy
Income and employment theory
e.g. National income, general price level, stu
dy about the whole forest and per
capita income
Three Central Problems of an Economy

What to How to For Whom

Produce ? Produce ? to Produce
?
Market Economy:
In this market producer’s are free
to take decision about what goods
are
produced. How to and for whom t
o produce with the objective of Pr
ofit Maximization
Centrally Planning Economy:
Here decision relating to what to
produce. How to and for whom
to produce are taken by govt.
through policy commission. All
decisions are taken with a view
to maximizing social welfare not profit
maximization
Mixed Economy: Mixed economy has
the features of market
economy and centrally planned
economy. Decisions regarding
what, how and for whom to
produce are taken on the basis of
market forces as well as govt.
Motive is both profits and social
welfare
Production Possibility Curve/ Frontier:

It shows the various

Contents Here

combinations of two goods

which can be produced
with the given amount of
resources. It is also called
Transformation Curve
Assumptions:
(i) Resources are fully and efficiently utilized.
(ii) No change in technology or technique of production.
(iii) Income is constant
Combination Good X Good Y MOC
A 0 15 -
B 1 14 1Y:1X
C 2 12 2Y:1X
D 3 9 3Y:1X
E 4 5 4Y:1X
F 5 0 5Y:1X
Notes
✓ A PPC is concave to origin (due to increase in marginal opportunity cost)
✓ A PPC is downwardly sloping.
✓ All the combination on a PPC implies that Resources are fully employed or
utilized. (e.g. · A; B; C; D; E.)
✓ Point under the PPC (e.g. E’) shows under utilization of resources or resour
ces are underemployed. Point outside a PPC is unattainable combination (e
.g. · U). Where as point, A, B, C, D, E and E’ are attainable.
Opportunity Cost: It is the cost of next best alternative foregone
Let us take an illustration: A given piece of
land may be used to grow wheat (opportu-
unity-1) or rice (opportunity-2). Assume th
the output of wheat is 20 tonnes and that
of rice is 15 tonnes. If land is actually used
for the production of wheat (opportunity-
1, we get 20 tonnes of wheat. But, what we los
e is 15 tonnes of rice (opportunity-2). Accordingly opportunity
cost of using land for the production of 20 tonnes of what is equal
to the loss of output of 15 tonnes of rice.
 Marginal Opportunity Cost
Marginal opportunity cost is described as a
rate at which output of Good-Y is to be sacr
ificed for every additional unit of Good-X.
It is also called Marginal rate of Transformat
ion or it is also called a slope of PPC.
Marginal opportunity cost =

It means loss of output of good Y for an add

itional unit of good X
PPC can be a straight line when marginal opportunity
cost or marginal rate of transformation is constant
 Schedule of Marginal Opportunity Cost
Combination Good X Good Y MOC
A 0 15 -
B 1 14 1Y:1X
C 2 12 2Y:1X
D 3 9 3Y:1X
E 4 5 4Y:1X
F 5 0 5Y:1X
Q.1. Why is PPC concave? Explain.
Production possibility curve is concave to the origin because of
increasing marginal rate of transformation or MOC. i.e. More &
more units of one commodity are sacrificed to gain an additional unit o
f another commodity.

MRT/ MOC increases because it is assumed that no resource is

equally efficient in production of all goods. As resources are
transferred from one goods to another less and less efficiently
resources have to be employed, this raises cost and raises MRT
It deals with wha
t is Positive Economics
it shows the real
picture of an
economy It deals with
what ought to be
It is
Normative Economics suggestive in natu
re.
Thank you
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