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.

EconomyA 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.

Economy3. 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 Economy1) 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 emergenceEconomic problem means problem of choice arising out due to limited resources having alternative uses. Main causes of economic problems:

1. Human wants are unlimited2. Resources are limited3. Resources have alternative uses

Central Problems of the EconomyAny 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 DevelopmentEconomic development that meets the needs of the present without compromising the ability of future generation to meet their own needs.

Production Possibility CurveProduction Possibility Curve is a curve, whichshows 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 ScheduleThe table showing different possibilities of production of two goods is called production possibility schedule.

Assumptions of PPC1) 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 PPCIt 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 MarginalOpportunity Cost tends to rise.

Marginal Opportunity CostThe 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 PPCThe shape of PPC depends on Marginal Rate ofTransformation, as stated below:

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

2)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 PPCThe Production Possibility Curve will shift under the following two conditions:

Change in resources.

Change in technology of production for both the goods.

Rotation Of PPCThe Production Possibility Curve will rotate outwardunder the following two conditions:

Improvement in technology in favour of onecommodity.

Growth of resources for the production of onecommodity.

Opportunity CostOpportunity 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 EconomicsPositive 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 & MacroeconomicsThe 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 SuriTGT 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