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CHAPTER-01
BASIC ECONOMIC CONCEPTS
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Prepared By: Malik Mumtaz Ahmed (0300-4907961)

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01-BASIC ECONOMIC CONCEPTS

MICROECONOMICS:
Microeconomics is the study of an individual decision-making unit ,e.g. price of a good, consumption of an individual consumer etc. In Microeconomics we study the following: Consumption theory Production theory Exchange theory Distribution theory
27-Mar-12

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01-BASIC ECONOMIC CONCEPTS

The following Assumptions are made while analyzing Microeconomic problems:

Full employment . Leissez-faire.

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01-BASIC ECONOMIC CONCEPTS

MACROECONOMICS:
Macroeconomics is the study of aggregates and averages of a country as a whole, e.g. National income, Employment, Inflation etc. The followings are studied in Macroeconomics: National income Employment Inflation Growth
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01-BASIC ECONOMIC CONCEPTS

WANTS:
Wants are goods and services which people desire for satisfaction. Wants have the following characteristics: Unlimited in number. Repeated in nature. Varying importance.

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Free goods Free goods are those goods, which posses utility but have no price e.g. air, sunshine etc.
Characteristics of free goods: (a) Unlimited. (b) Posses utility. (c) Have no price.
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Economic goods Economic goods are those goods which posses utility and price e.g. T.V., Book etc.
Characteristics of economic goods: (a) Limited. (b) Posses utility. (c) Have a price.
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01-BASIC ECONOMIC CONCEPTS

SPECIALIZATION:
Specialization occurs where a worker make just one type of product or provide one type of service e.g. A Farmer, a doctor.

DIVISION OF LABOUR:
Division of labour means sub-specialization. Division of labour occurs when a task is divided in to sub-specialty, which makes worker more expert in their part of work.

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01-BASIC ECONOMIC CONCEPTS

TECHNOLOGY:
Technology means the methods and techniques to produce goods and services.

SCARCE RESOURCE:
A scarce resource is a resource for which the quantity demanded at nil price would exceed the available supply. e.g: labour, time, etc.

27-Mar-12

Prepared By: Malik Mumtaz Ahmed (0300-4907961)

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01-BASIC ECONOMIC CONCEPTS

PRODUCTION POSSIBILITY FRONTIER/CURVE (PPF):

Production possibility frontier is a curve showing the possible production of two commodities or groups of commodities with the use of given limited resources.

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01-BASIC ECONOMIC CONCEPTS

Books 400 360 300 260 200 100 B

C R

T D

M 3

Missiles

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01-BASIC ECONOMIC CONCEPTS

OPPORTUNITY COST:
Opportunity cost means next best alternative forgone. It is the quantity of a commodity sacrificed to produce an alternative commodity.

Opportunity cost of:

1st Missile=40 Books, 2nd Missile=100 Books and 3rd Missile=260 Books.

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01-BASIC ECONOMIC CONCEPTS

Since the factors of production are incomplete substitute of each other, the opportunity has an increasing trend. o Point R shows inefficient allocation of resources. o Point T can be attained only when the entire PPF shifts outwards.

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01-BASIC ECONOMIC CONCEPTS

Books

B1
B
T S

400 360 300 260 200

100
O
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M 3

M1
Missiles
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01-BASIC ECONOMIC CONCEPTS

CAUSES OF SHIFT IN PPF:

Change in technology. Change in natural resources. Change in capital. Change in human capital.

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Prepared By: Malik Mumtaz Ahmed (0300-4907961)

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