• Economics - study of economic issues that arise due to

scarce resources in relation to our needs and that scarce

resources have alternative uses

• Economics 1s making choices 1n scarcity

• It has two branches - M icro & Macro

Eeonomcs
• Deals with - Issues at lnd1v1dual levels - Individual person,
firm, industry, market etc (microeconom,c variables)

• Studies how price of goods and services and price of factors

of production are determined

• Vital theories or studies of microeconomacs are-:

✓ Theory of Consumer Behaviour
✓ Theory of Price
✓ Theory of producer behaviour

• Concerned with determination of output and price for an

lndiv,dua,l firm or Industry
• Deals with - behaviour of economy as a whole, studies
aggregates, covering entire economy

• National Income, Full employment, aggregate consumption

etc

• Vital theories or studies of microeconom1cs are -:

✓ Theory of Multlpher
✓ Theory related to equilibrium level of output &
employment
✓ Theory related to inflationary & deflationary gap 1n
the economy
✓ Study of Government budget
✓ Study of exchange rate & BOP
Meaning Studies lnd1v1dual Stud,es aggregate
economic variables econom1c variables
Area of Study ' Deals with Deals with
determination of
I

determ1nat1on of prfce
& output 1n 1nd1v1dual general price level
market and nat,ona1 output
of the country
Scope Narrow Wide

Degree of Minor MaJor

aggregation
• Production

• Consumption

• Investment

• Exchange
• Market Economy

• Centrally planned Economy

• Mixed Economy
• Human wants are unlimited

• Economic resourc,es are limited

• Resources have alternative uses

• What to produce
, Tvpes of goods to be produced
, Qty of goods to be produced

• How to produce
~ Labour Intensive technique
, Cap ital Intensive techn ique

• For whom to produce

► How to distribute income among factors of
producti on
• Also known as Production Possibility Frontter/
Tiransformation curve
• Shows the various alternative production poss1bihties of
two goods that can be produced with given resources and
techniques of productions
• Important t,ool to solve central economic problems
• Consider an economy which can produce Wheat or Pulses
by using its resources

B 1 14
C 2 13
D 3 12
E 4 11
• The collect,on of all possible comb1nat1ons of the goods and
serv,ces that can be produced from a given amount of
resources and a given stock of technolog1cal knowledge 1s
called t he producti on poss1b1hty set of the economy.

• The curve gives the maximum amount of \.vheat that can be

produced ,n the economy for any given amount of pulses
and vice-versa. lt:11s curve 1s called the production
poss1b1llty frontier
A

E
• Assumptions

✓ Resources available are fixed

✓ Technology remain unchanged
✓ Resources are fully employed
✓ Resources are not equallv effic,ent ,n production of all
goods

• Properties of PPC

✓ Downward sloping curve from left to right due to

Inverse relation
✓ Shape of PPC as concave to the or1g1n. This 1s so as
Marginal cost of Opportunity tends to r,se
• Also known as Marginal rate of transm1ss10n (MRT)

• Is the rate at which quantity of output of o,ne commodity 1s

sacrificed to produce one or more unit of other commodity

• MOC as calculated ,n terms of loss of output

= ~Y
• MOC= Unit of one good sacr1f1ced
rv1ore units of other goods produced
-
6X
Cak ulat e the Marginal oppo rtun ity cost (MOC) whe n 4 Metric
Whe at Is prod uced

Pulses(1n 200 190 140 90

metnc tonnes)

Marginal oppo rtun ity cost (MOC) whe n 4 metr ic tonnes of

wheat Is prod uced

• loss of Pulses
Gain of Wheat

• 140-90
4-3
• so
• If MRT fs rrs1ng than PPC will be Concave to the origin which
1s always the case

y
•

..______....,__ _.x
GoodX
Production Poss1b1hty Curve
• If MRT 1s constant than PPC w,11 be straight line

Constant slope constant

Opportunlcy CiOSt

L-------b_..u._tt_c_.,r X
• If MRT Is falling than PPC will be convex to orrg1n

A
• Change 1n resources
• Change an technology of production of both goods
• Shift t,o Right
✓ When resources increase or grov,, more of the two
goods can be produced and more PPC shifts to r ight
✓ When technology Improves of both goods, more of
the two goods can be produced and more PPC shifts
to right.

I
•
• Shih to Left

✓ When resources decreases, less of the two goods can

be produced
✓ When technology degrades of both goods, less of the
t wo goods can be produced

4
• PPC curve rotates 1n t\YO ways; vert1cally or horizontally as
technology of one goods improves and other remains
constant.
• Rotation on X axis: When there ts improve in technology of
X commodity it \Viii rotate to right and ff there is
degradation tn technology of X 1t \VIII rotate left, here we
assume that technology of Y remains constant.
• Rotation on Y axis: When there Is improve in technology of
Y commodity 1t will rotate to right and 1f there 1s
degradation in technology of Y 1t ,viii rotate left, here we
assume that technology of X remains constant.
Exercise I -

1. Give the meaning of Economy?

• An economy ,s the system 1n, \Vh1ch and by whfch

people get a l,vlng to sat,sfy their wants through the
process of production, consumption, exchange &
investment

1. What do you mean by opportunity cost?

• Opportuntty cost for a commodity 1s the amount of

commodity that has been ror:egone in order to
produce the frrst
EJ11rclle U-F II In the blanks
• The usual shape of PPC ts ....... Towards the or11in1
✓ Concave

• In free mar ket economy the allocation of resources is

dete rmin ed by ..........
✓ Consumer preferences

• The study of micr o & macro economics 1s . .. ...... to each

other
✓ Interrelated

• The study of cott on texttle indu stry ,s a ......... stud y

✓ Mkr oeco nom k

• Accord1na to economic 1~owth, PPC will show ......

✓ An outward shif t
Exercise Ill -

• If India imports new technology from developed nations

like US, would 1t solve the central problem - '*How to
produce"

✓ Imports from developed economy would expand

India's production capacity.
✓ Ho\vever, 1t cannot solve the problem - How to
produce? to full extent due to unhm1ted & recurring
nature of wants & technology as we cannot import ,n
unlimited quant1t1es
Exercise IV - Calculate the Marginal opportunity cost (MOC)
when 4 mllllon suits are produced

Cars (In 20 190 170 140 90

thousands) 0

Marglnal opportunity cost (MOC} when 4 m llllon suits are

produced

= Loss of Cars
Gain of Suits

= 140.90
4-3
= 50