Chapter - Introduction (Micro Economics)

RAJAN SETHI (B.COM [H] , B.ED. , M.A.
[Economics] 9999688995; 9999488995
Class–11th, Economics
Micro Economics
Chapter 1 – Introduction
1. Economy :
“Economy is a system which provides people with the means to work and earn a
living”.
2. Scarcity :
“Scarcity refers to short supply in relation to the demand for a commodity”.
In other words, “Scarcity refers to limitation of supply in relation to demand for a

commodity”.
3. Economic Problem :
“Economic problem is a problem of choice involving satisfaction of unlimited wants

out of limited resources having alternative uses”.
Taking an example of a piece of land. It can be used for constructing a house, a

factory, a school, a park etc. It can also be used for growing wheat, rice, vegetables
etc. The economic problem here is that for which purpose this piece of land should
be used.
RAJAN SETHI: 9999688995; 9999488995 (Maths and Economics) (Class 9th , 10th ,11th ,12th, B.A. , B. Com. , M.A. ,M. Com.)
RAJAN SETHI (B.COM [H] , B.ED. , M.A. [Economics] 9999688995; 9999488995
4. Reasons for economic problem:
(a) Wants are unlimited:
# This is a basic fact of human life.Human wants are unlimited.
# They are not only unlimited but also grow and multiply very fast. As soon as one
want is satisfied, another new want arise.
(b) Resources are limited:
# The resources (land, labour, capital, entrepreneur)are limited in relation to their

demand and an economy can not produce all what people want.
# For example, Indian economy has relatively more labour but less capital and land.
The U.S. economy has relatively more land but less labour. No economy in the world
is rich in all the resources.
(c) Resources have alternative uses:
# Generally resources are not only scarce, but they can also has many alternative
uses.
# For example, A worker can be employed in a factory, in a school, in a government

office, self employed and so on.
# Like this, nearly all resources have alternative uses. But the problem is that which
resource should be put to which use.
5. Difference between Micro Economics and Macro
Economics.
Basis Micro economics Macro Economics
(I) Meaning # “Microeconomics studies the # “Macroeconomics is that

behaviour of individual part of economic theory which
economic units of an economy”. studies the economy as a
whole”.
(II) Tools # Demand and Supply # Aggregate demand and

Aggregate supply.
(III) Objective # It’s basic objective is to # It’s basic objective is to

determine price of commodity. determine income and
employment level of the
economy.
(IV) Concept # It is a narrow concept. # It is wider concept.
(V) Other It is also called ‘Price Theory’. It is also called the ‘Income
Name Theory’ or ‘Employment

Theory’
(VI) Example Individual income, Individual National income, National

output output
6. Difference between Positive Economics and Normative

Economics.
Basis Positive Economics Normative Economics
1. Meaning # “It deals with what is or how # “It deals with what ought to
the economic problems are be or how the economic
actually solved’. problem should be solved ”.
2. Verification # It can be verified with actual # It cannot be verified with

data. actual data.
3. Aim # It aims to make real # It aims to determine the

description of an economic ideal.
activity.
4. Value # It does not give any value # It gives value judgement.
judgement judgement.
5. Suggestive # It is based upon facts thus, it # It is based on opinion thus,

is not suggestive. it based on suggestive.
6. Example 1. The population of India rising 1. India should take steps to

constantly control rising population.
2. There are inequality in Indian 2. Income inequality should be

economy. reduced.
3. The price in Indian economy 3. India should take some

are constantly rising. steps to control rising price.
7. Central Problems Of An Economy:
“The problem of making a choice among alternative uses of resources is known as

basic or central problem of an economy”. There are three basic or central problems
of an economy :-
(a) What to produce (b) How to produce (c) For whom to produce
(a) What to produce?
1. What to produce refers to a problem in which decision regarding which goods

and services should be produced is to be taken.
2. Since its resources are limited, every economy has to decide what commodities
are to be produced and in what quantities.
3. In view of limited resources when we produce more of a commodity, it means we

will be able to produce less of another. Because more production of one commodity
would force us to withdraw resources from the production of the other commodity.
4. So, the economy has to choose between capital goods (like machines, tools, etc.),
civil goods (like cloth, watch, radio etc.), consumer goods (like wheat, cloth, shoes,
sugar, etc.), military goods (like guns, bombs, tanks, etc.) necessities of life (such as
food, clothing, housing, etc.) and luxury goods (such as car, colour TV, etc).
“The guiding principle for an economy here is to allocate resources in such a way
that gives maximum aggregate utility to the society”.
(b) How to produce?
“How to produce refers to a problem in which decision regarding which technique

of production should be used is taken”.
Goods and services can be produced in two ways:
(I) By using labour intensive techniques (II) By using capital-intensive techniques.
Under labour intensive techniques, more of labour and less of capital per unit of
output is used in producing goods and services.
capital-intensive techniques more of capital and less of labour per unit of output is
used.
Thus, the economy has to decide whether the chosen goods and services should be
produced with the help of labour intensive technique or capital intensive technique.
Every technique of production has its own advantages and disadvantages.
“The guiding principle for an economy in such a case is to decide about the
techniques of production on the basis of cost of production”.
(c) For whom to produce? (Problem of Distribution of income among factor

of production)
“For whom to produce refers to a problem in which decision regarding which

category of people are going to consume a good, i.e., economically poor or rich”.
1. As we know, goods and services are produced for those who can purchase them
or have the capacity to buy them.
2. Capacity to buy depends upon how income is distributed among the factors of
production. Higher the income, the higher will be the capacity to buy and lower the
income, the lower will be the capacity to buy. So, this is a problem of distribution
of income (rent, wages, interest, profit) among factors of production (Land, Labour,
Capital, Entrepreneur).
“The guiding principle is that the economy must see here that important and
urgent wants of its citizens are being satisfied to the maximum possible extent or
not”.
8. Opportunity Cost:
“Opportunity cost is the cost of next best alternative foregone”
9. Marginal Opportunity cost:
“ MOC refers to the number of units of a commodity sacrificed to gain an additional

unit of another commodity.”
10. Marginal Rate of Transformation:
“ MRT refers to the ratio of number of units of a commodity sacrificed to gain an

additional unit of another commodity.”
MRT = Units sacrificed / Units gain
MRT = Tank / Rice
11. Production Possibility Curve:
“PPC is a curve that represents combinations of two goods that an economy can
produce with the given resources and technology”
# Production Possibility Frontier Schedule and Curve
Combinations Rice Tank MOC MRT
A 0 15 _ _
B 1 14 1 1G:1R
C 2 12 2 2G:1R
D 3 9 3 3G:1R
E 4 5 4 4G:1R
F 5 0 5 5G:1R
MRT = Tank / Rice
The concept of PP curve is based on the following assumptions:
 First, the amount of resources in the economy is fixed.
 Second, the technology is given and unchanged.
 Third, the resources are efficient and fully employed.
 Fourth, all the resources are not equally efficient in production of all goods.
12. Properties or Characteristics of PPC:
 PPC is downward sloping: The downward slope of PPC means that if the
country wants to produce more of one good, it has to produce less quantity of
the other goods.
 PPC is concave to the point of origin: Concave shape of PPC implies that
increasing MRT(increasing MOC/slope of PPC increases.)i.e, more and more units
of one commodity are sacrificed to gamin an additional unit of another
commodity.
13. Attainable and Unattainable combinations on PPC:

 Point b and c represent maximum
attainable combination
 Point a represents unattainable

combination
 Point represents attainable but

inefficient combination
 Full Employment and Underemployment Under PP Curve:
14. Shapes of PPC:
Case1: When MRT/MOC/Slope of PPC Decreasing then PPC would be Convex to the
point of origin, as shown below.
10
Combinations COM-X COM-Y MOC MRT
A 0 15 _ _
B 1 10 5 5Y:1X
C 2 6 4 4Y:1X
D 3 3 3 3Y:1X
E 4 1 2 2Y:1X
F 5 0 1 1Y:1X
Case2: When MRT/MOC/Slope of PPC constant then PPC would be a straight line,
as shown below.
11
Combinations COM-X COM-Y MOC MRT
A 0 5 _ _
B 1 4 5 1Y:1X
C 2 3 4 1Y:1X
D 3 2 3 1Y:1X
E 4 1 2 1Y:1X
F 5 0 1 1Y:1X
15. Changes in PPC:
The change in PPC indicates either an increase or a decrease in the production

capacity of the economy. The change in PPC can be of two types:
(I) Shift in PPC (II) Rotation of PPC
(I) Shift in PPC: PPC will shift when there is change in productive capacity i.e,
change in resources or technology with respect to both the commodities.
(II) Rotation of PPC: PPC will rotate when there is change in productive capacity i.e,
change in resources or technology with respect to one of the commodity.
12
Shift in PPC
It can either Rightward shift or Leftward shift.
 Rightward shift in PPC:
When there is increase in resources or/and advancement in technology in respect to

both commodities, then PPC will shift to the right.
 Leftward shift in PPC:
When there is decrease in resources or/and degradation in technology in respect to

both commodities, then PPC will shift to the left.
13
Rotation of PPC
It can be either for the commodity on the X-axis OR for the commodity on the Y-axis.
 Rotation for the commodity on the X-axis:
 When there is increase in the resources or/and advancement in technology with

respect to commodity represent on X-axis then PPC will rotate rightward along
X-axis.
 On the other hand, when there is decrease in resources or/and degradation in

technology with respect to commodity on X-axis then PPC will rotate leftward
along X-axis.
14
 Rotation for the commodity on the Y axis:
 When there is increase in the resources or/and advancement in technology with

respect to commodity represent on Y-axis then PPC will rotate upward along
Y-axis
 On the other hand when there is decrease in resources or/and degradation in

technology with respect to commodity on Y axis then PPC will rotate downward
along Y axis.
Note: Synonyms of PPC:
PPF = Production Possibility Frontier PPB= Production Possibility Boundary
TB= Transformation Boundary TF= Transformation Frontier
TC= Transformation Curve

15
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RAJAN SETHI (B.COM [H] , B.ED. , M.A.

[Economics] 9999688995; 9999488995

“Scarcity refers to short supply in relation to the demand for a commodity”.

In other words, “Scarcity refers to limitation of supply in relation to demand for a

“Economic problem is a problem of choice involving satisfaction of unlimited wants

Taking an example of a piece of land. It can be used for constructing a house, a

4. Reasons for economic problem:

(a) Wants are unlimited:

# This is a basic fact of human life.Human wants are unlimited.

(b) Resources are limited:

# The resources (land, labour, capital, entrepreneur)are limited in relation to their

(c) Resources have alternative uses:

# For example, A worker can be employed in a factory, in a school, in a government

5. Difference between Micro Economics and Macro

Basis Micro economics Macro Economics

(I) Meaning # “Microeconomics studies the # “Macroeconomics is that

(II) Tools # Demand and Supply # Aggregate demand and

(III) Objective # It’s basic objective is to # It’s basic objective is to

(IV) Concept # It is a narrow concept. # It is wider concept.

Name Theory’ or ‘Employment

(VI) Example Individual income, Individual National income, National

6. Difference between Positive Economics and Normative

Basis Positive Economics Normative Economics

2. Verification # It can be verified with actual # It cannot be verified with

3. Aim # It aims to make real # It aims to determine the

4. Value # It does not give any value # It gives value judgement.

5. Suggestive # It is based upon facts thus, it # It is based on opinion thus,

6. Example 1. The population of India rising 1. India should take steps to

2. There are inequality in Indian 2. Income inequality should be

3. The price in Indian economy 3. India should take some

7. Central Problems Of An Economy:

“The problem of making a choice among alternative uses of resources is known as

(a) What to produce?

1. What to produce refers to a problem in which decision regarding which goods

3. In view of limited resources when we produce more of a commodity, it means we

(b) How to produce?

“How to produce refers to a problem in which decision regarding which technique

Goods and services can be produced in two ways:

(I) By using labour intensive techniques (II) By using capital-intensive techniques.

(c) For whom to produce? (Problem of Distribution of income among factor

“For whom to produce refers to a problem in which decision regarding which

“Opportunity cost is the cost of next best alternative foregone”

9. Marginal Opportunity cost:

“ MOC refers to the number of units of a commodity sacrificed to gain an additional

10. Marginal Rate of Transformation:

“ MRT refers to the ratio of number of units of a commodity sacrificed to gain an

MRT = Units sacrificed / Units gain

MRT = Tank / Rice

11. Production Possibility Curve:

# Production Possibility Frontier Schedule and Curve

Combinations Rice Tank MOC MRT

MRT = Tank / Rice

The concept of PP curve is based on the following assumptions:

 First, the amount of resources in the economy is fixed.

 Second, the technology is given and unchanged.

 Third, the resources are efficient and fully employed.

12. Properties or Characteristics of PPC:

13. Attainable and Unattainable combinations on PPC:

 Point a represents unattainable

 Point represents attainable but

 Full Employment and Underemployment Under PP Curve:

14. Shapes of PPC: