Every field of study has its own language and its own way of thinking.

So we will first go through the basic jargons and ideas that are used in
economics.
How do economists think?

What is an economy ?
An economy is a system of production and consumption activities that determine how
resources are allocated among all of its participants
Economy is a system which provides people with the means to work and earn a living
For example the Indian economy consists of all the sources of its production such as
agriculture industry transport communication and all of its people and all of the resources
such as rivers land for assets forests.

Vital processes of an economy

An economy is the result of 3 vital processes
Production- production refers to the transformation of inputs / resources into goods and
services.
Consumption
Distribution
Investment or capital formation

What is economising of resources?

Refers to making optimum use of available resources.
Add allocation efficiency and other efficiency.
Define economics / why study economics
Social science which studies the way is society chooses to use its limited resources which
have alternative uses to produce goods and services and distribute them among different
groups of people.
Hence economics is concerned with the selection of resources under conditions of
scarcity.
Economics can also be thought of as the study of human behaviour as a relationship
between means [resources] and ends [human wants

What is scarcity?
Stay cancer from an existing PPT

Is scarcity the only problem

scarcity is not the only problem
In addition to scarcity resources also have alternate uses. That is they can be put to more
than one use
For example petrol can be used both in bikes and in airplanes
Does whenever a scarce commodity is chosen for one use the other valuable alternative
uses will have to be sacrificed. This is the problem of choice

Economic problem
Economic problem is a problem of choice involving satisfaction of unlimited wants out
of limited resources having alternative uses.
Scarcity of resources means that all of our wants cannot be fulfilled.
But still in order to maximise satisfaction every consumer / society has to make some
choices as to what goods should be produced and Consumed

Why do economic why does an economic problem exist?

Unlimited human wants- human wants are never ending. As soon as one want is satisfied
another new want emerges. Human wants also differ in priorities. Some wants are more
important energetic as compared to others. Due to this reason people allocate their
resources in order of preference to satisfy some of their wants. If all wants had been of
equal importance it would have become impossible to make choices.
Resources are scarce- scarcity definition daal do
Scarcity is also universal and applies to all individuals organizations and countries.
Resources have alternative uses- because resources have alternative uses this gives rise to
the problem of choice.
What is opportunity cost?
Cost of next best alternative.

Positive economics and normative economics

Positive statements describe what was, what is or what will be under the given set of
circumstances these statements do not pass value judgments.
Positive statements are not statements of truth. They can be true or false
Positive statements can be verified as true or false by comparing them with actual data
Consider 2 statements
India is the most populated country in the world
China is the most populated country in the world
Both of these statements are positive statements although one is right false and the other
is true.
Positive economics deals with what economic problems are and how they are actually
solved.
Normative economics deals with what ought to be or how economic problems should be
solved.
According to Robbins economics is not concerned with moral or ethical questions and
economists should analyse the things as they are and have no right to give judgment.

Economics as a science
Positive science
What is?
What was?
What will be?
Normative science
What ought to be?
What should happen?
What should have happened?

Positive economics Normative economics

Deals with what is or how the Deals with with What ought to
economic problems are actually be or how the economic
solved problems should be solved
Can be verified with actual data Cannot be verified with actual
 data
Aims to make a real description Aims to determine the ideals
of an economic activity
Based upon facts Based upon individual opinions
therefore it is suggestive in
nature
Does not give any value Gives value judgements
judgments
Prices in Indian economy are Prices should not rise and the
constantly rising government must take steps to
control them
Income inequalities are Income inequality should be
increasing reduced

MICRO AND MACRO

Microeconomics- economic theory which studies behaviour of individual units of an
economy
Theory- most probable explanation.
Microeconomics - economic theory which studies the behaviour of aggregates of an
economy as an whole. Example total output [GDP], unemployment, price levels.

Microeconomics Macroeconomics
Studies the behaviour Studies the economy
of individual as a whole
unitsSuch as
households and firms
The main ideas are The main ideas are
demand and supply aggregate demand
and aggregate supply
The basic objective is Basic objective is
price determination Determination of
equilibrium level of
income and
employment
Micro economic
aggregates have
limited aggregation
Assumes all macro Assumes all micro
variables to be variables such as the
constant decisions of
households and firms
as constant
Known as price Known as income and
theory employment theory

Interdependence between macroeconomics and microeconomics.

Micro dependence on macro.
Start list price of a commodities increase by general price level.
Lock demand has been derived from an analysis of the behavior of a group of people.

Macro dependence on micro.

National income of a country is the sum total of incomes of individual units
Aggregate demand depends on the demands of individual households of an economy.

Micro macro paradoxes

paradox is a seemingly absurd or contradictory statement but sometimes it is true
For example if an individual saves his family will be benefited but if the whole economist
starts saving it will result in a contraction of demand output employment and income as a
result the whole economy will suffer. This is known as the paradox of thrift.

Central problems

Central problems
What to produce? What goods and services should be produced and in what quantities?
How to produce? What techniques must be used for production? Should the economy use
more labour [labour intensive techniques] or should the economy use more capital
[capital intensive techniques]
For whom to produce? How should the goods and services produced be distributed within
the economy?
Production possibilities frontier / curve / model SUMMARY
Production possibilities means what all can be produced and in what quantities new line
Definition
Slopes downwards as more of one good can be produced only by taking resources away
from the production of other good.
Concave shaped because of increasing Marginal Rate of Transformation [MRT]. Means
more and more units of one commodity would have to be sacrificed to gain additional
unit of another commodity.
All points inside PPF are inefficient.
All points on the curve are efficient
Points outside the curve are impossible to achieve [unattainable combinations]
Rotation of PPF occurs when there is change in technology or resources for one
commodity only.
Shift in PPF occurs when there is a change in technology or resources for both the goods.
When there is an increase in resources or technological upgradation the PPF shifts to the
rightWhen there is a decrease in resources or technological degradation the PF shifts
towards left.

Diamonds or Water PARADOX OF VALUE

Water is useful and yet it is cheap on the other hand diamonds are not of much use still
they are very expensive. How do you explain this paradox?
The economic reason is scarcity. Water is useful and cheap but because it is abundant it is
not very expensive whereas diamonds are expensive because they are scars and hence
people are ready to pay high price.

Only scars goods attract price?

All resources are not scarce in the economy for example the air which we breathe is
abundant in relation to wants. Such goods are available free of cost and are known as non
economic goods. But on the other hand there are many goods which are scars in relation
to their owns for example petrol, apples hence these goods commander price and are
known as economic goods. Hence we can say it is scarcity which attracts price. what
would happen if more and more air gets polluted, wood air then attract price?
What does the slope and shape of PF indicate?
Downward slope
Concave shape

Scarcity and choice go together. Comment

Scarcity of resources means that human beings have to make a choice as to what all they
need what all needs they want to satisfy. For example take USA which is a very rich and
developed country but even USA faces scarcity of resources and hence has to decide what
goods it has to produce how to produce and for whom to produce and how to make the
best possible use of available resources. Had resources been available in plenty the
problem of choice would not have a reason.

What is the problem of choice?

What to produce
for whom to produce
How to produce

An economy always produces on the PPF? Do you agree.

the PDF does not show the point at which an economy actually operates it only shows
the maximum production possibility
the exact point of operation depends on how well the resources of economy are used
economy will operate on the PDF only when resources are fully and efficiently used
economy will operate at any point inside the PF if resources are not fully and efficiently
used
economy cannot operate at any point outside the PF as it is unavailable within the
available productive capacity
so we can see that the curve creates 2 sections- attainable combinations and unattainable
combinations
attainable combinations are those combinations on which the economy can actually
operate.
when there is an optimum utilization of resources then economy will operate on points
on the curve
when there is an inefficient utilization of resources the economy will operate on the
points inside the curve
unattainable combinations are those points which lie outside the curve and the economy
cannot operate on those points with the given amount of resources and technology
Measuring the marginal rate of transformation from the PPF
the slope of the PPF is a measure of the art
slope of a concave curve increases as we move downwards thus Mart also rises as we
move downwards along the curve
can the PF be a straight line?
If the Mart is constant then the PF can be a straight line. This is possible only When the
same amount of commodity is sacrificed to gain additional unit of another commodity.
This can happen only when the resources are equally efficient in the production of both
the goods
can the PF be convex to origin?
PF can be convex to the origin if Mart is decreasing that is less and less units of a
commodity are sacrificed to gain additional unit of another commodity

PF and opportunity cost

PF also illustrates the concept of opportunity cost.
As one moves from one point on the curve to another a certain amount of goods have to
be given up to gain an additional unit of other goods and this is the cost opportunity cost
of producing the additional unit of the other good.new line

PF as transformation curve
as one moves along the PF one good resources are being given up transferred from the
production of one good to the other This is why PPF is also known as a transformation
curve

change in P PF
 in the real world the productive capacity of an economy is constantly changing due to
changes in technology as well as changes in the amount of resources.
These changes lead to changes in the PF and the PF exhibits 2 types of changes new line
shift of PPF- PPF can shift to the left or the right when there is a change in productive
capacity [ resources or technology] with respect to both of the goods
Rotation of PF- the PF rotates when there is change in productive capacity [ resources or
technology] with respect to only one good

changes in PF
rightward shift- when there is the technological advancement or growth of resources the
PF shifts to right
for example if more resources are available for the production of wheat or oranges more
of both of the commodities can be produced
growth of resources takes place when
quantity of resources increases- due to discovery of new resources, inflow of foreign
capital, increase in labour force
quality of resources increases for example due to skill development programs run by the
government or improved sanitation and hygiene
leftward shift of PPF PF shift to the left when there is a technological degradation and
Oregon decrease in resources with respect to both of the goods. For example destruction
of resources in north quake or thunderstorm.

Changes in PPF
rotation of PF
When there is a change in the productive capacity [ resources or technology] of only one
good
rotation can be
either for the commodity on X axis or for the commodity on y axis
rotation for commodity on the X axis
caused by technological improvement or an increase in the resources for the production
of commodity on X axis. PF rotates from point AB to AC
if there is a technological degradation or decrease in the resources for production of
commodity on X axis then the PF will rotate from AB to ad
rotation for commodity on y axis
when there is a change in the productive capacity [ resources or technology] of the
commodity on y axis
rest is same
What would be the impact of the following events on the production
possibilities of an economy? Also describe how the PPF would shift
Earthquake destroyed many factories and killed a lot of people
Massive unemployment results due to decline in exports.

Identify the following as microeconomic or macroeconomic studies.

Production of cotton in cotton mills new line
Rate of inflation
Car industry
Attrition in software industry
Money supply
Salaries offered by a company
Allocation of resources
Household expenditure
Aggregate demand
Foreign exchange rates
Market demand for apples.

Both macro and microeconomics have the same level of aggregation.

What do you think? Defend your viewpoint.
Microeconomics involves limited degree of aggregation. For example market demand is a
micro economic concept which involves aggregating individual demands of all the buyers
in a particular market.
Whereas macroeconomics involves the highest degree of aggregation. For example
aggregate demand is a macroeconomic concept and is derived by adding the demand for
all the goods and services of all the sectors of an economy.
Microeconomics is the lesser important branch of economics as
compared to macroeconomics. Justify
Both have different objects of study. Microeconomics concentrates on the working of
individual economic agents such as households and firms whereas macroeconomic
studies the general economy. So both the approaches are not in contradiction to each
other but they are complement and supplement each other.

Central problems of an economy

Why do central problems arise?
Unlimited human wants
Because of scarcity of resources
Alternative uses of resources
Every society has to decide or make a choice as to how to allocate the scarce resources.
This gives rise to 3 problems
What to produce
How to produce
For whom to produce
These are called as central problems because these are the most basic problems of an
economy and all other problems revolve around them.

What is allocation of resources?

It refers to the problem of assigning scarce resources in such manner so that maximum
wants of the society are fulfilled. Any economy has to allocate its resources and choose
from different potential bundles of goods [what to produce], select from different
techniques of production [how to produce] and decide who will consume the goods [for
whom to produce]
What to produce?
This problem involves selection of goods and services to be produced and the quantity to
be produced of each selected commodity.
Because of scarcity of resources and alternative uses of resources any economy cannot
produce all the goods. More of one good or service usually means less of others
This problem is sometimes referred to as the gun versus butter problem.
This problem has 2 aspects
What possible commodities to produce- economy has to decide which consumer goods
[rice, clothes] and which capital goods [machinery, roads, guns] have to be produced.
How much to produce- once selection of goods has been done the next question is to
decide what quantities of goods consumer and capital commerce civil and war etcetera
would be produced
. For example production of more rice is possible only by reducing the production of
other goods. In times of war production of more war goods is possible only by reducing
the production of civil goods.
Guiding principle- allocate the resources in a manner which gives maximum aggregate
satisfaction.

How to produce?
This problem refers to selection of technique to be used for production of goods and
services. Technique refers to the particular combination of inputs to be used. Technique is
classified into 2 types
Labour intensive technique- more labour and less capital [ in the form of machines,
equipment] is used
Capital intensive technique- more capital and less labour is used.
Is it easy to select the technique?
It is not easy to select the technique of production for various reasons. For example
textiles can be produced either with a lot of labour and little capital or with less labour
and more capital. The technique to be used depends on availability of factors and their
relative prices and also on broad societal objectives. For example in India labour
intensive techniques are preferred because of abundance of labour whereas developed
economies like USA and England prefer capital intensive techniques because of labour
shortages. In India labour intensive techniques are used 2 attain the objective of providing
employment to everyone. Q line
For whom to produce?
This problem relates to the distribution of produced goods and services or among
individuals within the economy that is who will ultimately consume the goods
In market economy goods and services are produced for people who have the paying
capacity which depends on the incomes that they earn.
This means that people who do not have sufficient incomes might not be able to afford
the goods and services that they need. some countries have socialist economies wherein
the government decides what goods and services are to be produced and how they are to
be distributed.

Does the problem of for whom to produce is also a problem of distribution of income
among the factors of production

Opportunity cost
add to existing slides
To produce more of one good resort in amount of other good has to be sacrificed
[ FOREGONE, Give Up]

For example a certain amount of land labour and capital can be used to build a factory
and the same resources can be used to make houses

Opportunity cost of a good or service is the amount of other goods and services that have
to be sacrificed to obtain more units of anyone good.

For example if one has 20,000 can you purchased the laptop because both of them cost
20,000 there in this case one can either buy a laptop or led TV. If one decides to purchase
a laptop then importunity cost of purchasing the laptop is the cost of satisfaction given up
had the person brought the led TV
Production possibility frontier
even if an economy uses all of its resources in the best possible manner its production
capability is restricted by the scarcity of resources.
Does a decision has to be taken as to what combination of goods and services has to be
produced which will best satisfy the needs of the society
does the society must decide what to produce out of a range of almost infinite range of
possibilities
this gives rise to the production possibility frontier
economists assume a very basic economy with only 2 goods for example say guns and
butter.
and the range of production choices is represented by a production possibility schedule
when the schedule is represented graphically it is called a production possibility frontier
or a production possibility curve

production possibility frontier

refers to the graphical representation of possible combinations of 2 goods that can be
produced with given resources and technology
sometimes it is also defined as the locus of various possible combinations of 2 goods that
can be produced with given resources and technology
Synonyms- production possibility curve production possibility boundary, transformation
boundary, transformation curve, transformation frontier

assumptions of PPF
amount of resources in an economy is fixed
resources can be transferred from one user to another
only 2 goods are produced
resources are fully and efficiently used
resources are not equally efficient in the production of both the goods that is when the
sources are shifted from the production of one good to another the productivity decreases
level of technology is is assumed to be constant
Description of the schedule slash curve
economy uses all its resources to produce only good at there a maximum of
if the economy uses all its resources to produce good b then a maximum of
in between these 2 maximum points there are various possibilities which produce
different combinations of
when we join all of these points we get a curve which is known as the production
possibility frontier

marginal opportunity cost-

number of units of a commodity sacrifice to gain one additional unit of
another commodity.
It is always increasing as more and more units of a commodity have to
be sacrificed to gain one additional unit of another commodity
why does marginal operating cost increase?
Because productivity an efficiency of factors of production decrease as they are shifted
from one user to another. This is because of specialization of factors of production. A
worker employed in the production of apples over a period of time specialises in the
production of apples and thus when he shifted to the production of oranges he might not
be as efficient and thus his productivity will decline. Thus in order to produce the same
number of oranges more workers were will have to be employed that is more workers
will have to be shifted from the production of apples into oranges

Marginal rate of transformation

Ratio of number of units of a commodity sacrifice to gain an additional unit of another
commodity
for example referred table

Use garg summaries as summaries

Possibilities apples oranges MOC MRT=

A 21 zero
B 20 1 1 1A:1B 1A:1B
C 18 2 2
D 15 3 3
E 11 4 4
F 6 5 5
g zero 6 6
shree