INTRODUCTION TO MICRO ECONOMICS
ECONOMICS :
A 20 0
B 13 5
C 10 7
D 4 10
E 0 15
Production Possibility Curve
A Production Possibility Curve is a curve, which be produced with given resources and technique commodities are in production wine and Cotton
From the above table it is clear that with the given resources and of wheat and machines that can be produced are A, B, C, economy has to choose one out of various combinations of Production Possibilities. All points on PPC or inside PPC are attainable with the given resources and Points on PPC Show Full Employment of Resources. The shape of PPC is concave to the origin.
Shift in PPC
If the economy is able to increase the resources due to process of growth (advancement of technologies and availability of resources of the economy), the production possibility curve shifts rightward (a1b1). Thus, the economy can produce more of both goods than before. Similarly if resources are reduced, the economy would produce less of both goods than before. Accordingly the Production Possibility curve shifts leftwards (a2b2)
The word Economics is derived from the Greek word ‘Oikonomia' which means ‘household Management’. In early days Economics was known as political economy. Adam Smith is considered as the father of Economics. Alfred Marshall for the first time used the term Economics instead of ‘political economy’. The following table shows the important definitions in Economics.
BRANCHES OF ECONOMICS. Economics is broadly dived into two branches. They are
the following.
MICRO ECONOMICS: It is the branch of Economics which deals with individual units. It is also called price theory, demand theory, cost theory etc.
MACRO ECONOMICS: It is another branch of Economics which deals with aggregates. John Maynard Keynes is considered as the father of Macro Economics. It is otherwise called income theory. The main difference between MICRO and MARCO Economics are the following.
CENTRAL PROBLEMS OF AN ECONOMY
INTRODUCTION :
The resources available to the human are limited,but their wants are unlimited. Due to the scarcity of resources,the economy faces the problem of choice. This mismatch between unlimited wants and limited resources that gives rise to three Central problems faced by every economy.
Contents:
1 WHAT TO PRODUCE AND IN WHAT QUANTITIES?
Every society wants thousands of goods and services. Since resources are scarce, all these goods and services cannot be produced. So one has to decide what type goods are produced.
2. HOW TO PRODUCE:
It is the problem related with the technique of production. There are two techniques of production --- Labour intensive and Capital intensive. Labour intensive is a production technique, which uses more amount of labour and less amount of capital. Capital intensive is a production technique, which uses more amount of capital and less amount of labour.
Under Developed Economies where labour is abundant and cheep, use labour intensive techniques of production and Developed Economies where capital is abundant and cheep adopt capital-intensive techniques of production.
Under Developed Economies where labour is abundant and cheep, use labour intensive techniques of production and Developed Economies where capital is abundant and cheep adopt capital-intensive techniques of production.
3. FOR WHOM TO PRODUCE :
It is the problem related with distribution. It means distribution of output among the factors of production. This is called functional distribution.
How to achieve fuller and efficient use of resources?
The fourth problem of an economy is the problem of achieving optimum utilization of resources. Since the means of production are always scare in relation to the demand for goods and services they produce, every efforts has to be made to achieve fuller and efficient use of resources. That is, resources should not be kept idle or underutilized.
The Problem of growth of resources:
Since the means of production are scare and will exhaust on being constant use, growth of resources has become another problem of an economy. The economy should strive for discovering new resources to substitute older resources.
The Problem of economic Growth:
Every economy of the world intends to increase its rate of economic growth in order to achieve higher standard of living of the people. In order to achieve this objective it has to decide the rate of savings and investment and about the use of technology. It is therefore essential for the Economist to think about the problem of economic growth.
How to achieve fuller and efficient use of resources?
The fourth problem of an economy is the problem of achieving optimum utilization of resources. Since the means of production are always scare in relation to the demand for goods and services they produce, every efforts has to be made to achieve fuller and efficient use of resources. That is, resources should not be kept idle or underutilized.
The Problem of growth of resources:
Since the means of production are scare and will exhaust on being constant use, growth of resources has become another problem of an economy. The economy should strive for discovering new resources to substitute older resources.
The Problem of economic Growth:
Every economy of the world intends to increase its rate of economic growth in order to achieve higher standard of living of the people. In order to achieve this objective it has to decide the rate of savings and investment and about the use of technology. It is therefore essential for the Economist to think about the problem of economic growth.
CONCLUSION:
Thus it can be concluded that every economic system faces three basic economic problems. Solution of these economic problems depend upon the Nature of the economic system.
ORGANISATION OF ECONOMIC ACTIVITIES /Economic Activity and Economy
Economic Activity: is all those activities that are paid (Remunerated in Economics terminology)
Economy: The sum total of all Economic activities of the society is called an Economy. According to
Brown “Economy is the system of earning livelihood”
Economic Activity: is all those activities that are paid (Remunerated in Economics terminology)
Economy: The sum total of all Economic activities of the society is called an Economy. According to
Brown “Economy is the system of earning livelihood”
Every economy tries to solve Central problems differently. According to the way to solve Central problems economies broadly divided into three.
1. Centrally Planned Economy OR Socialist Economy.
It is an economic system where all the means of production are under the ownership and control of the government. Centralized planning, public welfare, public sector etc. are the important features of centrally planned economy.
2. Market Economy OR Capitalist Economy:
It is an economic system where all the means of production are under the ownership of private individuals. Price mechanism, Private sector, Profit motive etc. are the features of market economy.
3. Mixed Economy:
It is an economic system where all the means of production are under the ownership and control of both private individuals and government.
POSITIVE AND NORMATIVE ECONOMICS:
Positive economics evaluate how different mechanism works. It deals with ‘what is'.
Normative economics evaluate mechanisms desirable or not. It deals with ‘what ought to be’.
Positive Science deals with the facts. it presents the real picture of a fact without any comments or suggestions.. There is no chance for value judgement. Examples: India is an over populated country, India follows Mixed Economy, Marginal utility of money for rich is low, and there is inverse relationship between price and quantity demanded.
Normative Science: deals with norms of fact and recommend what ought to be and what ought to have been. There is chance for value judgement
Examples: Agricultural income should be taxed, India requires balanced growth in all sectors of the economy, Unemployment can be eradicated by wise economic policy, and there should be equitable allocation of resources between centre and states
Positive Science deals with the facts. it presents the real picture of a fact without any comments or suggestions.. There is no chance for value judgement. Examples: India is an over populated country, India follows Mixed Economy, Marginal utility of money for rich is low, and there is inverse relationship between price and quantity demanded.
Normative Science: deals with norms of fact and recommend what ought to be and what ought to have been. There is chance for value judgement
Examples: Agricultural income should be taxed, India requires balanced growth in all sectors of the economy, Unemployment can be eradicated by wise economic policy, and there should be equitable allocation of resources between centre and states
PRODUCTION POSSIBILITY CURVE OR PRODUCTION POSSIBILITY FRONTIER
It is defined as the locus of points of two goods which an economy can produce with the available resources and the given level of technology. The following is a PPC.
In the above PPC, OX axis OY axis represents quantities of GOOD 1 and GOOD 2. A,B,C and D are the different production possibilities.
PRODUCTION POSSIBILITY SET:
Production possibility set of two goods are produced, with the given technology and resources. The following table shows different production possibilities of two goods --- Rice and Wheat.
PRODUCTION POSSIBILITIES
RICE WHEATA 20 0
B 13 5
C 10 7
D 4 10
E 0 15
The graphical representation of the above table is called production possibility curve.
OPPORTUNITY COST :
Opportunity cost is the next best alternative product or service that has been sacrificed
or forgone.
MARGINAL OPPORTUNITY COST:
It means the additional cost in terms of a number of units of good sacrificed to
produce an extra unit of other good. In other words it is the ratio between ΔX and ΔY.
MOC=ΔY/ ΔX
ΔY = change in the quantity of good Y
ΔX = change in the quantity of good X
There is an important relationship between MOC and PPC. If the MOC increases, PPC
become Concave in shape. If the MOC decreases, PPC become Convex in shape. If the
MOC,constant PPC become a straight line in shape. This can be illustrated with the following table
Production Possibility Curve
A Production Possibility Curve is a curve, which be produced with given resources and technique commodities are in production wine and Cotton
If the economy is able to increase the resources due to process of growth (advancement of technologies and availability of resources of the economy), the production possibility curve shifts rightward (a1b1). Thus, the economy can produce more of both goods than before. Similarly if resources are reduced, the economy would produce less of both goods than before. Accordingly the Production Possibility curve shifts leftwards (a2b2)
Rotation of Production Possibility Curve
When the technologies are efficient for commodity X, PPC rotates from aq to aq1 as this will raise the productivity of X. When the technologies are efficient for commodity Y, PPC rotates PPC rotates from aq to a1q as will raise the productivity of Y
Concept of Opportunity Cost
Our resources are scare. These resources can be put to alternative uses This can be under stood with the help of an example, if one acre of land produces rice worth Rs.5000/- and wheat worth Rs. 8000 the rational producer will forgo the production of rice worth Rs.5000 for the sake of wheat worth Rs. 8000 Then the opportunity cost for producing wheat is Rs. 5000/- the cost of producing rice.
Opportunity or alternative cost of producing one unit of commodity X is the amount of commodity Y that must be sacrificed in order to use resources to produce commodity X rather than commodity Y. Opportunity cost is also known as Transfer earning of a factor production or the cost of next best forgone alternative. Opportunity Cost is also means Opportunity Lost
Marginal Opportunity Cost
Opportunity or alternative cost of producing one unit of commodity X is the amount of commodity Y that must be sacrificed in order to use resources to produce commodity X rather than commodity Y. the rate of this sacrifice is called Marginal opportunity Cost. In general, for increasing the production of one commodity, we will have to make sacrifice of another commodity. This can be under stood with the help of an example
Marginal Opportunity Cost (MOC) the rate at which output of one commodity is sacrificed to produce one more unit of the other commodity. MOC=Unit of One Good Sacrificed / More Units of Other Good Produced
MOC =Δy/Δx
Comments