MICRO ECONOMICS

INTRODUCTION
AND PPC
1
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

INTRODUCTION
WARM UP:
Economics is a living subject. In this, we study the economic activities of human beings.
Economic activities are those activities which are concerned with the satisfaction of unlimited wants
by using limited resources. These activities are the part of the subject matter of the Economics.

The word Economics originates from the Greek word “Oikonomikos” which can be divided into two
parts
(a) ‘Oikos’ which means home and
(b) ‘nomos’ means management.
Thus, Economics means home management. The head of the family faces the problem of managing
the unlimited wants of the family members with the limited income of the family. Economics is the
social science that studies economic activities.

In other words, Economics is the branch of knowledge which studies those human activities
which deal with production, consumption, exchange and distribution of scarce means of wealth.
Economy includes all the production units in a defined area which provide people with the
means to work and earn an income.
There are two branches of Economics: Micro Economics and Macro Economics.

POINT 1: DIFFERENCE BETWEEN MICRO ECONOMICS

AND MACRO ECONOMICS
BASIS MICRO ECONOMICS MACRO ECONOMICS
i)Meaning Micro Economics studies economic Macro Economics studies economic
relationship or economic problems at relationship or problems at the level
the level of an individual--an of economy as a whole.
individual firm, an individual
household or an individual consumer.

ii)Scope It is a narrow Concept. It is a broader

concept.

iii)Evolution Micro Economics is It is developed

developed before after Micro.
Macro.

iv)Subject Matter It is concerned with demand and It is concerned with Aggregate

supply, determination of output and Demand & Aggregate Supply,
price for an individual firm or industry. determination of Aggregate output
and general price level of an
economy as a whole.

v)Alternate It is briefly referred to as “Theory of It is briefly referred to as “Theory of

Names Price”. Income and Employment”.

vi)Problems In micro-economics there are In macro-economics, there are

problems of product pricing, factor problems of unemployment,
pricing, etc poverty, inflation, etc.
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 MICRO ECONOMICS
INTRODUCTION
AND PPC
2
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

vii)Role Played Market mechanism plays a significant Government plays a significant role
role in solving the micro economic in solving macroeconomic problem.
problem.

POINT 2: DIFFERENCE BETWEEN POSITIVE

ECONOMICS AND NORMATIVE ECONOMICS
BASIS POSITIVE ECONOMICS NORMATIVE ECONOMICS
i)Meaning A branch of economics based on data A branch of economics based on
and fact is positive economics. values, opinion and judgement is
normative economics.

ii)Statements Positive statements make real Normative statements make an

description of an economic activity. assessment of an activity.

iii)Nature Descriptive Perspective

iv)Information These are factual statements. These are ideal or model

statements.
v)What it does? Analyses causes and effect
relationship. Passes values judgement.

vi)Study of What actually is What ought to be

vii)Testing Statements can be tested using Statements cannot be tested.

scientific method.

viii)Economic It clearly describes economic issues It provides solution for the

issues economic issue, based on value.

 India is an overpopulate  The fundamental principle

ix)Examples country. of economic development
 There is an inequality of should be the development
income in our economy. of rural India.
 Prices in India are constantly  Agricultural income should
rising. also be taxed.
 Private sector should be
encouraged for accelerating
the pace of our
industrialization.

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 MICRO ECONOMICS
INTRODUCTION
AND PPC
3
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

POINT 3: CENTRAL PROBLEMS OF AN ECONOMY

Human wants and means (resources) available to satisfy them are two fundamental facts of
life which give rise to various economic problems.
Economic Problem is essentially a problem arising from the necessities of choice, choice of
the manner in which limited resources with the alternative uses are disposed off.

A. CAUSES OF AN ECONOMIC PROBLEM

i) Unlimited Wants ii) Limited Means (Resources) iii) Alternative Uses

B. TYPES OF CENTRAL PROBLEMS OF AN ECONOMY

I. PROBLEM OF ALLOCATION OF RESOURCES II. OTHER PROBLEMS OF AN

ECONOMY
a) What to Produce? a)Problem of Fuller Utilization
b) How to Produce? b)Growth of Resources
c)For Whom to Produce?

C. EXPLANATION TO ABOVE TERMS

I a)What to Produce?
Land, labour, capital, machines, tools and natural means are limited. Every demand of every
individual in the economy cannot be satisfied, so the society has to decide what commodities are to
be produced and in what context. Therefore we can see that what to produce has to parts. The first
part deals with what is to be produced or to say what is not to be produced, under given
circumstances. The second part is related to the quantities of goods to be produced.
An Economy has to decide the quantities of resources which should be allocated for capital
goods and also for consumer goods respectively. While using the resources we need to also think
for future requirements since the resources are limited.

I b)How to Produce?
After the decision regarding What to be produced next problem arises as to what techniques
should be adopted to produce commodity. Goods can be produced in large scale industries or in
small scale industries and cottage industries. The economy has to decide between automatic
machines (capital intensive) and handicrafts (labour intensive). Every method has got its own
advantages and disadvantages. Machines increase the productivity but unemployment problem in
the economy arises whereas labour intensive reduces unemployment but the quantity of production
is lesser.
In a Capitalistic Countries, the issue of how to produce is decided by the entrepreneur,
keeping in view the prevailing price mechanism in the country such that the cost is minimum.

Labour Intensive
Capital Intensive

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 MICRO ECONOMICS
INTRODUCTION
AND PPC
4
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

I c) For Whom to Produce?

This is the problem of distribution of income. Goods and services produced in the economy
are consumed by its citizens. The individual may belong to economically weaker sections or rich
class of people. Actually this is the problem of distribution. In case of capitalism, the decision is
taken on the basis of purchasing power of the consumers. Socialistic Economy takes decisions on
the basis of the requirements of the individuals. It becomes highly important that decisions about
production and distribution of goods must be consistent with each other.

Weaker Sections
Rich Section

II a) Problem Of Fuller Utilisation

This is the problem of employment of resources. As sufficient amount of resources are
available in the economy, it is our prima facie duty to make sure that the resources are not idle or
unemployed. Unemployment or under employment of resources implies that production capacity
goes waste. Thus every company has to ensure the full employment of resources to maximize
economic growth and welfare.

Clothes wastage
in Cutting

Classroom not
fully Utilised

II b) Problem of Growth Of Resources

Increase in population is the common feature of the economy. It becomes necessary that the
rate of economic development must be faster than the rate of increase in population, so that
economic development may take place, and the reasonable standard of living of citizens can be
maintained. Efforts are made for the economic development of the society so that it may be able to
face the real challenges of time.

Population Rising Extensively

but not Resources.

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 MICRO ECONOMICS
INTRODUCTION
AND PPC
5
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

POINT 4: PRODUCTION POSSIBILITY CURVE/

FRONTIER / TRANSFORMATION CURVE
A. MEANING
 Production Possibility Curve( PPC or PPF or Transformation Curve) is a curve
 which shows the various alternative
 of production possibilities
 of two goods
 which can be produced
 with given resources and techniques of production.
B. ASSUMPTIONS
i) Technology remains same
ii) Productive resources remain fixed
iii)All resources are not equally efficient in the production of all goods.
iv) All productive resources are fully and efficiently employed.
v)Economy is producing two or more goods.

C. ASSUME TABLE
PRODUCTION POSSIBILITIES WHEAT (Kg) RICE (Kg)
A 0 15
B 1 14
C 2 12
D 3 09
E 4 05
F 5 00

D. DIAGRAM
RICE (Kg)

15
14
13 P
12
11 PRODUCTION POSSIBILITY CURVE
10
09
08 M
07
06
05
04
03 N Q
02
01
00
1 2 3 4 5
WHEAT (Kg)

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 MICRO ECONOMICS
INTRODUCTION
AND PPC
6
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

E. FEATURES OF PPC
i) It Slopes Downwards to Right
PPC slopes downwards to the right indicating that the economy have to forego(sacrifice)
some quantity of some commodity to have more quantity of other commodity i.e., negative
relationship between the production of two goods.

ii) It is Concave to the Point Of Origin

This shows the operation of the Law of Increasing Marginal Opportunity Cost/Marginal
Rate of Transformation. The Law of increasing Marginal Opportunity Cost states that as we
produce more and more units of the commodity, its opportunity cost increases. In other words, we
have to sacrifice more and more quantity of the next best commodity with every addition made to
the quantity of the commodity.

F. SOME IMPORTANT NOTES

i) Any economy which lies below the PPC means that underutilization of resources and techniques.
(In diag M&N)

ii) Any Point lying on the PPC indicates fuller and efficient utilization of resources or techniques. It
means there is no involuntary unemployment. ( In diag A,B,C,D,E & F)

iii) Any point the above the PPC, indicates unattainable. The economy has not got sufficient
resources to attain combination outside the PPC. (In diag P&Q)

iv) GROWTH AND DOWNFALL IN RESOURCES

GOOD 1 AB A1B1 (Growth of Resources)

A1 AB A2B2 (Downfall in Resources)

A2

B2 B B1 GOOD 2

iv) GROWTH AND DOWNFALL IN RESOURCES OF GOOD 1

GOOD 1
A1 AB A1B (Growth of Resources of Good 1)
AB A2B (Downfall in Resources of Good 1)
A

A2

B GOOD 2

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 MICRO ECONOMICS
INTRODUCTION
AND PPC
7
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

v) GROWTH AND DOWNFALL IN RESOURCES OF GOOD 2

GOOD 1
AB AB1 (Growth of Resources of Good 2)
A AB AB2 (Downfall in Resources of Good 2)

B2 B B1 GOOD 2

v) OPPORTUNITY COST
It is the cost of next best alternative which is foregone in any production activity.
Example: A farmer on a same area of land produces 50kg of wheat by using a given quantity
of resources. Further, suppose he can also produce 40kg of rice with the same factor. Therefore,
the opportunity cost of producing 50kg of wheat is 40kg of rice which is foregone.

THE END

QUESTION BANK
1 - Mark Questions
1) Define Economics.
2) Define Economic Problem.
3) Is study of general price level a macro economic study.
4) Give one reason why Micro Economics and Macro Economics are interdependent.
Ans. Because we seek to explain the behaviour of Individual Units in the context of the behavior of economy and vice versa.
5)What do you understand by Positive Economic Analysis? [NCERT]
Ans. Positive Economic Analysis deals with “things as they are”. It analyses cause and effect. It remains strictly neutral as
regard ends.
6)What do you understand by normative Economic Analysis? [NCERT]
Ans. Normative Economic Analysis deals with “things ought to be”. It indicates which things are good or which are bad. It will
not be neutral about ends.
7)What is meant by Scarcity of Resources?
Ans. means limited availability of resources in relation to demand.
8)Why is it that on one hand coal is found in plenty, yet it is scarce, while a rotten fruit is rare but not
scarce?
Ans. Coal is scarce because its demand is greater than its supply. On the other hand, a rotten fruit is not scarce because
there is no demand for rotten fruit.
9)How are the central problems solved in capitalist or market oriented economy?
Ans. solved by Market Mechanism. It is the market price of the commodity which guides the producers ‘what,how and for
whom to Produce’.
10)How are Central Problems solved in Centrally Planned economy?
Ans. solved by Economic Planning.
11)Why is a PPC concave?
12)What does movement from one point to another along a PPC show?
OR
What does the movement along the PPC indicate?
Ans. Indicates that more of one good can be produced only by giving the production of another good and the resources are
fully employed and efficiently used.
13)Can there be an Economy without Central Problems.
14)What do you mean by Opportunity Cost?
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 MICRO ECONOMICS
INTRODUCTION
AND PPC
8
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

15)What is Marginal Opportunity Cost/Marginal Rate of Transformation?

Ans. Marginal Opportunity Cost of A good along the PPC is defined as the amount sacrificed of the other good, per unit
increase in the production of the good. It is also called rate of sacrifice.
MOC=Loss(of output of Good 2)
Gain(of output of Good 1)
16)A teacher is getting Rs6000 per month as salary. If he leaves the job and starts tuition work, he is
expected to earn Rs5000 per month. What would be his opportunity cost?
17)A doctor has a private clinic in New Delhi and his annual earnings are Rs10lakhs. If he works in a
government hospital in New Delhi, his annual earnings are Rs8lakhs.If he works in Private hospital
he earns Rs12lakhs. What is the opportunity cost of having a clinic in New Delhi?
18)What are the assumptions of PPC?
19) There is no unemployment if a point lies on the PPC. Comment.
20)Give two examples of underutilization of Resources.
21)What are Attainable combinations and unattainable combinations on PPC?
22)Draw the shapes of PPC when MOC is i) Constant and ii) Increasing.
23) A lot of people died and many factories were destroyed in an earthquake. How will it affect the
PPC?
24)Does Production takes place only on PPC?
25)Invention of new technologies and discovery of new resources will solve the central problems
completely. Defend or Refute.
26)Production in an economy is below its potential due to unemployment. Government starts
employment generation schemes. Explain its effect using PPC.
27)What is Rotation of PPC?
Ans. It takes place when there is change in resources or technology for one commodity only.
28)A country’s resources are fully and efficiently employed. The problem of scarcity exists. What
advice will be given to raise the efficiency level of the human resources to fight scarcity? [CBSE SP
2013-14]
Ans. Human resource Development in the form of increased expenditure on education, skill development and through on the
job or off the job training programmes can fight scarcity

3 - Mark Questions
1)What are the three Central Problems of an Economy? Why do they arise?
2)Explain the central problem of “What to Produce?” with the help of an example.
3)Why does an Economic Problem arise? Explain the Problem of “How to Produce?”
4)Explain the central problem of “For whom to produce” with the help of an example.
5)Explain the concept of Production Possibility Curve with the help of a schedule and diagram.
6)Explain the features of PPC/
7)Does massive unemployment shift the PPC to the left?
8)Explain the problem of ‘Fuller Utilization’ and ‘Growth of Resources’.
9) Explain the properties of PPC.
10)Unemployment is reduced due to measure taken by the government. State its economic value in
the context of PPF. [CBSE D 2014]
11)Large number of technical training Institutions have been started by the govt. State its economic
value in the context of PPC. [CBSE 2014]
12) The government has started promoting foreign capital What is its economic value in the context
of PPF?
13)Explain the concept of Opportunity Cost with the help of example.
14)Distinguish between Micro Economics and Macro Economics.
15)Calculate MOC and draw PPC from the following data:

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 MICRO ECONOMICS
INTRODUCTION
AND PPC
9
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

GOOD X 0 1 2 3 4 5
GOOD Y 30 28 24 18 10 0
16)Complete the following table:
GOOD A 0 1 2 3 4
GOOD B 14 _ _ _ _
MOC _ 1 2 3 6
17)A country produces two goods: Green Chilli and Sugar. Its Production possibilities are show in
the following table. Plot the PPC in a graph Paper and verify that it is concave to the origin. What is
the pattern in the table that give rise to the concave shape of the PPC?
POSSIBILITY A B C D E F
Sugar 0 1 2 3 4 5
Green Chilli 100 95 85 70 50 25

THE END

INTROSPECTION TIME

 Don’t Stop When You Are Tired. Stop when You Are Done.

 Build Your Own Dreams, Or Someone Else will hire You To Build
Theirs.

 Winners Are not People Who Never Fail, But people Who Never
Quit.

 If Your Dreams Don’t Scare You, They Aren’t Big Enough.

 Rise, Awake and Do Not stop until your Goal Is Reached.

 If You Want to Have The Fruit, You must “Climb” The Tree.

 Believe In yourself And The World will Be At Your Feet.

 The Only Way To Do GREAT WORK is to LOVE What you Do.

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