Fundamentals of

Economics
UNIT - I
 Positive economics state what is and what has been
occurring in an economy as the basis for any
statements about the future. Positive economics is
Positive concerned with the development and testing of
Economics positive statements about the world that are objective
and verifiable. Positive economics can be referred to
as “what is, what was, and what probably will be”
economics.
Economics

Normative economics is the study or presentation of

“what ought to be” rather than “what actually is”.
Normative Normative economics deals heavily in value
Economics judgments and theoretical scenarios. In other words,
normative economics focuses on opinions and
theoretical scenarios, rather than actual facts.
• A positive economics example is a statement, “Government-funded
healthcare increases public expenditures.” This statement is based on facts
and has a considerable value judgment involved in it. Therefore, its
credibility can be proven or dis-proven via a study of the government’s
involvement in healthcare.

• A normative economics example is, “The government should provide

basic healthcare to every citizen”. You can understand that this statement
is based on personal perspective and satisfies the need for ‘should be’ or
‘ought to be’.
Examples
• An example of normative economics would be the statement: "We
should cut taxes in half to increase disposable income levels." By
contrast, a positive or objective economic observation would be,
"Based on past data, big tax cuts would help many people, but
government budget constraints make that option unfeasible."
Here are more examples of normative statements:
• Women should earn the same salary as men.
• People should drive electric cars instead of consuming fossil fuels.
• Companies should not use child labor.
• Normative statements cannot be tested or proved, and they typically
contain keywords such as "should" and "ought."
1. Which of the following is a positive statement?
A positive statement describes the actual theory
A. Technology determines changes in price and not the expected or believed one. It
describes information or raises questions which
are based on proven facts and figures. Therefore,
technology determines changes in price as it
B. The fair price should rise either increases the value of the product or
decreases the value of the raw materials which is
a positive statement

C. Rate of inflation should be less than 5%

D. Ethics makes employees reliable

2. Which of the following is a positive statement?

A. To check inflation RBI should restrict money flow

B. Government spends Rs.5000 crore annually on public health

C. To reduce the burden on the oil pool account Government

should reduce subsidy on petroleum products.
Positive statements study the facts of life i.e it
deals with 'things as they are'. It deals with what
D. To check prices of essential commodities Public Distribution
are the economic problems and how are they
system should be strengthened actually solved. It explains the cause and effect
relationship and avoids giving suggestions.
Both the statements A, C, and D are giving
suggestions but B is stating a fact and it not
suggesting anything. Thus option B is a positive
statement. 
3. Which of the following is a normative statement?

A. Large government deficits cause an economy to grow more

slowly

B. People work harder if the wage is higher

C. The unemployment rate should be lower
A normative statement explains what should be
base of the subject according to the belief
through valued judgement that describes the
fairness of the subject on public policy.
Therefore, the unemployment rate should be
lowered is a valued judgement based on the
belief that it will bring economic welfare.

D. Printing too much money causes inflation

Central problems of an economy are:
What to produce, How to produce, and For whom to produce.
• 'What to produce' relates to the problem of choice of goods and
services to be produced.
• 'How to produce' relates to the choice of technique of production. It
involves a choice between labor-intensive technique and capital -
intensive technique.
• 'For whom to produce' relates to the distribution of goods and
services across different sections of society. It focuses on the issue of
Economic Equality.
• Due to scarcity of resources, society cannot satisfy all its wants.

• In an economy, even if all the resources are used in the best possible
manner, the capabilities of the economy are restricted due to the
scarcity of resources.

• Thus, society has to decide what to produce out of an almost infinite

range of possibilities. This is where the concept of the Production
Possibility Curve (PPC) comes into the picture.
Production Possibility Curve (PPC)
• Production Possibility Curve (PPC) is the graphical representation of the possible
combinations of two goods that can be produced with given resources and level of
technology.

• Since the choice is to be made between infinite possibilities, economists assume that
there are only two goods being produced. The PPC is the locus of various possible
combinations of two goods that can be produced with given resources and technology.

• The Production Possibility Curve is also known as the Production Possibility Frontier,
Production Possibility Boundary, Transformation Curve, Transformation Frontier or
Transformation Boundary.
Definition

• A production possibilities curve in economics measures the

maximum output of two goods using a fixed amount of input. The
input is any combination of the four factors of production: natural
resources (including land), labor, capital goods, and entrepreneurship.
Assumptions for Production Possibility Curve
(PPC)
The concept of the Production Possibility Curve is based on the
following assumptions –
• The amount of resources in an economy is fixed. Although, these
resources can be transferred from one use to another.
• Using the given resources only 2 goods can be produced.
• These resources are fully and efficiently utilized.
• Resources are not equally efficient in the production of both goods.
Therefore, when resources are transferred from one product to
another, their productivity or efficiency in production decreases.
• The level of technology is constant.
• Let us consider an economy where two goods, good X and good Y are produced is
produced. The production Possibility Curve is given below for such a situation.

• With the given resources, many combinations of the two goods can be produced in
the economy. If XA amount of Good X, it will be possible to produce only YA amount of

Good Y. Similarly for XB amount of Good X, only YB amount of Good Y can be produced.

• This means that more of one good can be produced by sacrificing the other. To
produce one more unit of Good X, less of Good Y can be produced. When all these
points of different combinations of production of the two goods are joined, they form
a Production Possibility Curve.
The production of 20,000 watermelons and 1,20,000
pineapples is shown on point B in the graph. If the
production of watermelons needs to be more, then the
production of pineapples should be less.
On the graph, point C indicates that if the production of
watermelons has to be 45,000, then the company can
deliver only 85,000 pineapples. With this trade-off, the
curve shows the idea of opportunity cost.
The production possibility curve also shows the choice of
society between two different products.
1. If an economy is working at a point left to PPF curve it shows
that………..?

A. The economy is working at less than the full employment level

If an economy is working at a point left to PPF curve
it shows that the economy is working at less than the
B. The economy is at full employment level full employment level. The PPC shifts towards the
left, when there is a technological degradation
and/or decrease in resources with respect to both
the goods. For example, destruction of resources in
an earthquake will reduce the productive capacity
C. The country is faced with excess production
and as a result, PPF shifts towards the left.  

D. There is a glut of imports

2. What is the opportunity cost of moving from point A to point B?

A. 100 units of capital goods

B. 8 units of consumer goods

C. 90 units of capital goods

The opportunity cost of moving from
point A to point B is 10 units of capital
D. 10 units of capital goods goods (100−90).