Class XI

Notes: Micro Economics
Introduction Micro Economics



MICRO ECONOMICS:

It is a study of behaviour of individual units of an economy such as individual consumer, producer etc.
A science which studies the human behaviour as a relationship between ends and scare means which have alternative uses.

ECONOMY:An economy is a system by which people get their living.
TYPES OF ECONOMY:
(i) Capitalist economy / Market economy
(ii) Socialist economy / planned economy
(iii)Mixed economy


Market/CAPITALIST ECONOMY: -
  1. It is an economic system, in which all material means of production are owned and operated by the private with profit motive.
  2. In this type of Economy the factors of production are owned and operated by individuals or group of individuals.
  3. Main objective of production is self interest or profit maximization.
  4. Central problems are solved by price mechanism or market forces of demand & supply.
Socialist/ PLANNED ECONOMY:
  1. In this economy all material means of production are owned by the government or by a centrally planned authority.
  2. All important decisions regarding production, exchange and distributions, consumptions of goods and services are made by the government or by a centrally planned authority.
  3. Factors of production are owned and operated by Govt.
  4. Main objective of production is social welfare.
  5. Central problems are solved by central planning authority.
MIXED ECONOMY: -
  1. The Economy in which factors of production are owned and operated by both Govt. and private sector.
  2. Main objective is profit maximization(private sector) and social welfare(Gov. sector)
  3. Central problems are solved by central planning authority(in public sector) and price mechanism (in private sector)

ECONOMIC PROBLEM:“An economic problem is basically the problem of choice” which arises due to scarcity of resources having alternative uses”.
Main economic problem is how to allocate the scare resources so as to satisfy maximum of our unlimited wants. Economic problem arise mainly because human wants are unlimited and resources are limited and have alternative uses. This creates the problem of choice.


CAUSES OF ECONOMIC PROBLEM:

i) Scarcity of resources
ii) Unlimited wants
iii) Limited resources having alternative uses


BASIC (CENTRAL) ECONOMIC PROBLEMS

i) Allocation of resources
a. What to produce?
b. How to produce?
c. For whom to produce
ii) Efficient Utilization of resources
iii) Growth of resources


1. What to produce: -An economy have unlimited wants and limited means having alternative use. Economy can’t produce all type of goods like consumer goods, producer goods etc. So, Economy has to make a choice what type of goods and services are to be produced and in what quantities.

2. How to produce: -It is the problem of choice of technique of production. There are two techniques of production.

(a) Labour Intensive Technique: -It is the technique of production when labour is used more than capital.
(b) Capital Intensive Technique: -In this technique capital is used more than Labour.

3. For whom to produce: -It is the problem related to distribution of produced goods among the different group of the society.


Two Branches of Economics
Basis Micro Economics Macro Economics
Meaning It studies the economic behaviour of individual units of the economy It studies economic behaviour of aggregates of the economy as a whole.
Focus of Study Price determination, consumer/Producer Equilibrium Price determination, consumer/Producer Equilibrium
Instruments/tools Demand and supply Aggregate demand and aggregate supply
Method of study Partial equilibrium analysis General equilibrium analysis
Example Individual demand, Individual supply, Price of a commodity an equilibrium of industry, equilibrium of a firm etc. Aggregate demand aggregate supply, national Income, general price level total investment etc.

PRODUCTION POSSIBILITY CURVE (PPC) Transformation Curve/Production Frontier Curve

Meaning: - The curve which shows the various alternative production combinations of two goods that can be produced with given resources and technology when resources are fully and efficiently utilized.

Combination Cloth Wheat
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0


Features of PPC:-
1. It is concave to origin because of increasing marginal opportunity cost.
2. If the marginal opportunity cost is constant than PPC will be a straight line and
3. If MOC is decreasing than PPC will be convex to origin.



> 10. MARGINAL OPPORTUNITY COST: MOC of a particular good along PPC is the amount of other good which is sacrificed for production of additional unit of another good.


11. MARGINAL RATE OF TRANSFORMATION: MRT is the ratio of units of one good sacrificed to produce one more unit of other good.
Unit of one good sacrificed Δy
MRT = --------------------------------------------- = ----


  1. OPPORTUNITY COST: It is the cost of next best alternative foregone.
  2. POSITIVE ECONOMICS: Positive economics deals with what is, what was (or) how an economic problem facing the society is actually solved.
  3. NORMATIVE ECONOMICS: It deals with what ought to be (or) how an economic problem should be solved.
Positive Economics Normative Economics
It deals with what is what was. It deals with what ought to be.
It is based on cause and effect of facts. It is based on ethics.
It can be verified with actual data It cannot be verified with actual data.
In this value of judgments are not given. In this value of judgments are given.

How are fundamental problems solved in the capitalistic economy.
In a market-oriented or capitalist economy, the fundamental problems are solved by the market mechanism. Price is influenced by the market forces of demand and supply. These forces help to decide what, how and for whom to produce.

How are fundamental problems solved in the planned economy.
In a planned economy all the economic decisions regarding what, how and for whom to produce are solved by the state through planning. Economic planning replaces the price mechanism. The market is regulated by the state. The prices of the various products are fixed by the state called administered prices.