Introduction

• ECONOMY is a system which, through the way of Consumption

and Production, provides people the means of earning livelihood.

ECONOMICS
The Branch of Knowledge which is concerned with the production, consumption and transfer of
wealth.
 Why We Study Economics
• The most important reason for study of economics is Scarcity and its Choices.
(Scarcity refers to resources being finite and limited) And through the study of
economics, one can learn the way to make optimum utilisation of all the
available resources.
Reasons for Economic
Problem
1. Scarcity Of Resources:- Resources are limited in relation to their demand and an economy
can’t produce everything what people want. It is the basic reason for existence of economic
problem in every economy. Every economy faces the problem of scarcity as resources are limited.
There would have been no problem ,if resources were not scarce.
2. Unlimited Human Wants:- Human wants are never ending i.e. They can never be fully satisfied. As
soon as one want is satisfied, another new want emerges, Human wants also differ in priorities i.e. all
wants are not of equal intensity. For every individual, some wants are primary while others are
secondary. Due to this reason, people allocate their resources in order of preference to satisfy some of
their wants. And hence comes up the concept of choice, the selection of primary want before the
secondary one. If all human wants had been of equal importance, then it would become impossible to
make choices.
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• Alternate uses:- Resources are not only scarce but they can also be put to various uses. It makes
choices among resources more important. For example milk is not only used for direct consumption, it is
also used for making yogurt, Butter, cheese etc. As a result economy has to make choice between the
alternative uses of the given resources.
Central Economic Problems

Since Resources are scarce, every economy before producing goods and services, need to
answer some basic questions. These sets of questions are known as central problem of an
economy .
 What to Produce
This problem involves selection of goods and services to be produced and the quantity
to be produced of each selected commodity. For example:- Production of more books
would only be possible by reducing the production of some other goods. So, it depends
upon the requirement of an economy that what goods should be produced and in what
quantities.

•Again, this particular problem has two aspects:

• i) What possible commodities to produce:- An economy to decide, which consumer goods

(pulses, sugar etc) and which of capital goods (plant, equipments etc) are to be produced. In
same way an economy has to decide between civil goods (bread, butter etc) and war goods
(tanks, bombs etc)
• ii) How much to produce:- After deciding the goods to be produced, economy has to
decide the quantity of each selected commodity. i.e. quantity to be produced of consumer
goods and capital goods
 How to Produce
•:- This problem refers to selection of technique to be used for production of goods and
services a particular goods can be produced using different techniques.

•The techniques are generally of two types :

i) Labour intensive technique:- it means using more of labour and less of capital and it is suitable
for an economy where there is an abundance of labour. For example- India, China etc

ii) Capital intensive technique: - It means using more of capital and less of labour and it is
suitable for an economy where there is abundance of capital and shortage of labour for
example-USA, England etc
For whom to Produce
This problem relates to distribution of produced goods and services among the individuals. i.e.
selection of category of people who will ultimately consume the goods, i.e. whether to produce
more for rich and less for poor or more for poor and less for rich.

•This problem arises due to difference in paying capacity at people and paying capacity depends
upon their level of income. It means ,this problem is concerned with distribution of income among
the factor of production (land , labour, capital and Enterprise).
OPPORTUNIT Y COST
THE COST OF NEXT BEST ALTERNATIVE THAT HAS FOREGONE.
 PRODUCTION POSSIBILIT Y FRONTIER/CURVE(PPF/PPC)/
TRANSFORMATION CURVE

Production Possibility Curve refers to graphical representation of all possible combination of two
goods that can be produced with given resources and technology.

Assumptions:-

• PPC is based on the following assumptions:-

1. The amount of resources in an economy are fixed, but these resources can be
transferred from one use to another.

2. With given resources, only two goods can be produced.

3. Resources are fully and efficiently utilised.

4. The level of technology is assumed to be constant

 MARGINAL OPPORTUNIT Y COST (MOC)

MOC refers to the number of units of a commodity Sacrificed( Gun) to gain one
additional unit of another commodity( Butter).

• In case of PPC, MOC is always increasing, as more and more units of a commodity have to be
sacrificed in order to gain one additional unit of another commodity.

• MARGINAL RATE OF TRANSFORMATION (MRT)

• MRT is the ratio of number of units sacrificed to gain an additional unit of another commodity.
• MRT= Sacrificed /Y
Gain/ X
Production Possibility
Schedule
Possibilities Guns (Units) Butter (Units) MOC MRT=∆Guns/∆Butter

A 21 0 _ _

B 20 1 1 1G : 1B

C 18 2 2 2G : 1B

D 15 3 3 3G : 1B

E 11 4 4 4G : 1B

F 6 5 5 5G : 1B

G 0 6 6 6G : 1B
Fig 1.1 Production Possibility Curve (PPC/PPF)
 Observations Drawn on the basis of Diagram
 The following observation can be drawn from figure

• If an economy uses all its resources to produce only guns, then maximum of 21 guns and no butter
can be produced which is represented by Point A

• On the other hand, if all the resources are used for butter then maximum of 6 units of butter can be
produced which is represented by Point G.

• Between Point ‘A’ & ‘G’ , there are different combination of Butter and Guns are available which
can be produced using available resources.

• AG Curve shows the maximum limit of production of Guns and Butter.

CHARACTERISTICS OF PPF

• PPC Slopes Downwards:- PPC shows all maximum possible combination of two goods which
can be produced with the available resources and technology. In such case , more of one good
can be produced by taking resources away from the production of other goods . As there exists
inverse relationship between change in quantity of one commodity and change in quantity of
other commodity , PPC slopes downwards from left to right.

• PPC is concave shaped:-PPC is concave shaped because of increasing MRT/MOC i.e. more
and more units are sacrificed to gain an additional unit of another commodity . And the reason
for increased MRT is the fact that no resources is equally efficient in production of all goods .
As resources are transferred from one good to another , less & less efficient resources have to
be employed.
 Attainable Combinations:-

• It refers to those combination at which economy can

operates . These can be two such combinations:-
• 1) Optimum Utilization of Resources:- If resources
are fully utilized, then economy will operate on any point.
• 2) Under Utilization of Resources:- If the available
resources are not utilized to its fullest, economy will
operate an any point inside PPC.
 Unattainable Combinations

• With the given level of resources, it is impossible for

an economy to operate an any point outside PPC.
• These Points which are outside PPC are unattainable
Combination . In the given figure Points S and G
symbolizes Unattainable Combinations.
 CHANGE IN PPC

• PPC is based on an assumption, that resources of an

economy are fixed . However , if the resources available
with economy changes , it leads to shifts in PPC. Or
Rotation of PPC.
• 1)Shift in PPC :- If Resources or technology of an
economy changes with respect to both of the goods, it
is a shift in PPC, It can be of two types:-
Rightward Shift in PPC :- When the resources available with economy increases, the
Production of both goods can be increased which leads to Rightward Shift in PPC.
Leftward Shift in PPC :- When the availability of resources with an economy falls, it leads to
fall in production of both the goods which leads to leftward shift in PPC.
2)Rotation of PPC :- When the resources available with an economy changes with respect to
only one good, it leads to Rotation of PPC
Rotation for Commodity on Y-axis :- when there is a increase in resources for production of
commodity on Y-axis, then there will be rightward rotation and when there is a fall in
resources for production of commodity on Y-axis, then there will be a leftward Rotation.
 Difference Between Microeconomics and Macroeconomics.

Basis Microeconomics Macroeconomics

Meaning Microeconomics refers to that part of Macroeconomics refers to that part of

economic theory which studies the economic theory which studies the
behaviour of individual units of an behaviour of aggregate of the economic
economy. as a whole.

Tools Demand and Supply. Aggregate demand and aggregate

Supply.

Basic Objective It aims to determine price of a It aims to determine income and

commodity or factor of Production. employment level of the economy.
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Basic Assumptions It assumes all macro variables to It assumes that all micro variables like
be constant i.e. it assumes that decision of household and firms,
national income, consumption, prices of individual product etc are
saving, etc are constant. constant.

Basis Microeconomics Macroeconomics

Degree of Aggregation It involves limited degree of It involves the highest degree of

Meaning aggregationMicroeconomics
. For example market
refers aggregation.
to that MacroeconomicsFor refers
example, aggregate
to that
demand ispart derived by aggregating
of economic demand
theory which is derived
part of fromtheory
economic entire economy.
which
studies of
individual demand the all behaviour
buyers in of studies the behaviour of
individual
particular market. units of an economy. aggregate of the economic as a
whole.
Tools Demand and Supply. Aggregate demand and aggregate
Supply.
Other Names It is also known as ‘Price Theory’. It is also known as ‘Income & Employment
Basic Objective It aims to determine price of Theory’.
a It aims to determine income and
commodity or factor of employment level of the economy.
Examples Production.
Individual Income, Individual Output. National Income, National Output.