CHAPTER -1 INTRODUCTION TO MICROECONOMICS

NOTES
KEY WORDS
ECONOMY: It is a system spread over a particular area that reveals the nature and level of economic
activities in that area. It shows how people of a particular area earn their living.
SERVICES: A type of economic activity that is intangible, is not stored and does not result in
ownership. A service is consumed at the point of sale. Services are one of the two key components
of economics, the other being goods.e.g; services of a doctor.
WANTS: Wants are mere desires to buy the object irrespective of price and capacity.
RESOURCES: service or asset which is used to produce goods and services that meet human needs
and wants are called resources.
GOODS: All physical and tangible things which are used to satisfy people's want, provide utility and
have an economic value. e.g. books
HOUSEHOLD: All persons living under one roof having either direct access to the outside or a separate
cooking facility. Where member of a household is related by blood or law, they constitute a family.
FIRMS: Firm is an organisation that employ productive resources to obtain products and/or services
which are offered in the market with the aim of making a profit.
PRODUCTION: Production is a process through which inputs are transformed into output(i.e. in order
to make something for consumption).
CONSUMPTION: The process of using up of goods and services for direct satisfaction of individual or
collective human wants are called consumption.
MICROECONOMICS: It is that branch of economics which deals with the behavior of individual
economic units of the economy such as individuals or households.
MACROECONOMICS: Macroeconomic is that branch of economics which deals with the behaviour of
the economy or as a whole. It is the study of aggregates such as national income, full
employment, aggregate consumption etc.
ECONOMIC PROBLEM: Economic problem is the problem of choice arising out of fact that, resources
are scarce and it has the alternative uses.It is mainly the problem of choice.
Economic problem is the problem of choice arising from use of limited means which have the
alternative use for the satisfaction of various wants.
Cause of economic problems are :
(a) Unlimited Human Wants
(b) Limited Economic Resources
(c) Alternative uses of Resources.
Central Problems of an Economy

The central problem of "what to produce" refers to which goods and services will be produced in an
economy and in what quantities. An economy has to produce those goods and services where there
will be maximum social utility. This problem is studies under price theory.

The central problem of "how to produce" refers to what technique of production (i.e.., labour
intensive or capital intensive) should be used to produce goods. An economy has to select that
technique which maximizes the output at minimum cost. This problem is studies under theory of
production.

The central problem "for whom to produce" is related to distribution of produced goods and
services(i.e.., income and wealth) among factors of production in the form of rent, wages, interest
and profit.This is explained under the theory of distribution.
For the selection of an opportunity, the sacrifice of next best alternative use is called opportunity
cost.In other words, it is the amount of one commodity that is to be sacrificed to increase the
production of other commodity.

Production possibility frontier or production possibility curve shows all possible combinations of two
set of goods that an economy can produce with available resources and given technology, assuming
that all resources are fully and efficiently utilized.

Economizing of resources means utilisation of resources in best possible manner to maximize output.
Production Possibility Frontier or Curve
Features:
(a) Slopes downward from left to right because if production of one commodity is to be increased
then production of other commodity has to be sacrificed as there is scarcity of resources.(b) Concave
to the origin because of increasing marginal opportunity cost or

The Production possibility curve will shift under following two condition:
(a) change in resources
(b) Change in technology of production for both the goods.

Rightward shift of PPF shows increase in resources or improvement in technology.Ex- Labour

Marginal Rate of Transformation (MRT)- It is the amount of one commodity that is to be sacrificed to
increase the production of other commodity by one unit.
MRT can also called Marginal Opportunity Cost. It is defined as the additional cost in terms of number
of units of a good sacrificed to produce an additional unit of the other good.
MARGINAL RATE OF TRANSFORMATION: MRT is the ratio of units of one good sacrificed to produce
one more unit of other good.
(Marginal= at the border or adjacent/next to/adjoining)
(Transformation= a change in form, shape appearance or size)
MARGINAL OPPORTUNITY COST: It is the rate at which the quantity of output of one commodity is
sacrificed to produce one more unit of other commodity.
Example of Opportunity Cost: Mohan decides to use the train to get to work rather than driving each
day. The train fare each month will be Rs.350. After one month, he calculates that he is spending
Rs.250 less on petrol and about Rs.25 less on maintaining her car. What is the opportunity cost of
using the train?
Cost of using train pm= Rs.350. Cost of using the car pm = Rs.250 + Rs.25 = Rs. Opportunity cost of
using the train = Rs.350 - Rs.275 = Rs.75 per month
PRODUCTION POSSIBILITIES: Different combination of goods and services which an economy can
produce with its available resources and given technology.
A PRODUCTION POSSIBILITY CUVRE: It is a curve which depicts all possible combination of two goods
that an economy can produce with the utilization of available resources and technique of production.
It is an important tool to solve central economic problem. It is also known as transformation curve or
production possibility frontier.
LABOUR-INTENSIVE TECHNOLOGY: When goods are produced using large quantity of labor and only a
very few simple machines it is L I technology.
The degree of labor intensity is typically measured in proportion to the amount of capital required to
produce the goods or services; the higher the proportion of labor costs required, the more labor
intensive the business.
CAPITAL-INTENSIVE TECHNOLOGY: Under this technique, capital is used more than labour. That is
investment in purchase, maintenance, and amortization of capital equipment is more than labour.It is
C I technology.
CAUSES OF ECONOMIC PROBLEM:
i) Scarcity of resources
ii) Unlimited wants
iii) Limited resources having alternate uses (Scarcity= a state of being in short supply) (Alternate =
happen/do by turns /; alternate uses = other uses)
Features of resources -1) limited 2) alternate uses
Features of wants - 1) unlimited 2) recurring 3) can be satisfied by using goods and services.
CENTRAL ECONOMIC PROBLEMS
i) Allocation of resources
a)What to produce and of what quality :-consumer goods or capital goods, war time goods or peace
time goods
b)How to produce:- technology –capital intensive or labour intensive
c)For whom to produce:- functional distribution or personal distribution
ii). Efficient Utilization of resources-no wastage- no over utilization nor underutilization. Economic
efficiency refers to efficiency in production and efficiency in distribution.
iii.) Growth of resources:-It refers to increase in productivity of resources through improvement in
technology.
(Allocation = the act of sharing something/ an amount of resources allowed or assigned for something)
SCARCITY OF RESOURCES: Scarcity of resources means shortage of resources in relation to their
demand.
OPPORTUNITY COST: It is the cost of next best alternative foregone.