This document provides an introduction to microeconomics, including: 1) It defines a simple economy as one where individuals are interdependent and specialized in production but need to exchange goods and services. 2) It outlines the three central problems faced in any economy due to scarce resources: what to produce, how to produce, and for whom to produce. 3) It describes the three main types of economic systems - centrally planned, market, and mixed - and provides examples and key features of each.

1. INTRODUCTION TO MICRO ECONOMICS

2. Simple economy
 Generally people in the society need many goods and
services in their everyday life, including food, clothing,
shelter, facilities like roads and railways, doctors, teachers,
etc.
 In fact, no individual in society has all things he needs.

3. Example
 Farmer:
A family may own a plot of land, farming implements, a
pair of bullocks, etc. They will produce food grains, use a
part of the produce for self-consumption and procure
clothing, housing or other needs from the rest of produce.

4. Weaver:
Similarly a weaver can get goods and services that he wants in
exchange for the cloth he produces.
Teacher:
A teacher can earn some money by teaching students and use the
money for obtaining goods and services that he wants.

5. Conclusion:
Likewise in a society there is no individual holding all
resources satisfying their needs and all individuals are
interdependent on each other. This is called as simple
economy.
An economic system or economy is a mechanism where
the scarce resources are organized for the production of
different goods and services, as demanded by the people.

6. Central problems of an economy
There are 3 basic problems that arise in an economy due to the scarcity of resources.
They are as follows:
i) What to produce?
The very first problem for any economy is to decide what goods are to be produced
and in what quantity, with the limited resources available.
There is a lot be decided, whether to produce consumer goods or capital goods,
agricultural goods or industrial goods.
Agricultural production Industrial production Service sector production

7. ii) How to produce?
This problem relates to the choice of technique in the process of production. i.e..,
-Labour intensive – use of more labour
- Capital intensive – use of more machinery
Labour intensive Capital Intensive

8. iii) For whom to produce?
This problem refers to the selection of category people who will ultimately consume the
goods i.e., the distribution of final goods and services.
It is the problem deciding whether to produce for low income group or high income
group. It depends on the level of distribution of income and wealth.
Poor people Rich People
Public distribution system Shopping Malls

9. Organization of economy
There are 3 Organizations of economy as follows:
➢ Centrally planned economy (Socialist economy or Command
economy)
Operation and control of all economic activities by government is
known as centrally planned economy.
Ex: China, Cuba, North Korea, Vietnam, etc.

10. Features
i) In this system all important decisions regarding economic activities are
taken by government.
ii) Government seeks to control what to produce and how to allocate the
resources.
iii) Main objective of this system is attaining maximum social welfare.
iv) Profit maximization is not the main motive in this economy.
v) Government produces the goods preferably for poor people with less
prices.
vi)The government also has greater emphasis on quality of life like
elimination of poverty, facilitate education, health & eradicate
unemployment etc.
vii) Government solves all economic problems.

11. Market Economy
(Capitalist Economy)
Meaning:
If all economic activities are operated and controlled by private sector
then it is known as market economy.
Ex: U.S.A, Japan, Germany, etc.
Japan U.S.A Germany Australia

12. Features
i) Private individuals own the factors of production.
ii) In this economic system Profit is the sole motive.
iii) There are no interferences by the government in the
economic activities.
iv) Private people solve the basic problems.
v) The price of the goods is determined by market forces. This
process is also called price mechanism.
vi) Private sector fixes high prices to get more profit.

13. Mixed Economy
Meaning:
If economic system is operated and controlled by both
private and government sectors side by side then it is known
as Mixed economic system.
Ex: India, Srilanka, Nepal, Pakistan, etc.
India Srilanka Nepal Pakistan

14. Production Possibility Frontier (PPF & PPC)
Meaning:
Production possibility frontier is a collection of all possible
combinations of goods & services produced, from given amount
of resources and technological knowledge in an economy.
Ex: Consider in an economy which can produce cotton or wheat
by using its resources, as shown in the table
Cotton wheat

15. Possibilities Cotton Wheat
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0

16. Explanation of table:
➢The above table shows, if all resources are used to produce cotton, the
maximum amount of cotton produced is 4 units (Possibility E), or
maximum amount of wheat produced is10 units (Possibility A).
➢Apart from these possibilities B, C, D show other possibilities of
production.
Explanation of Diagram:
- PPC curve has a shape which is Concave to the origin
- PPC explains a graphical representation of combinations of 2 goods
that can be produced, when resources of economy are fully utilized.

17. Positive Economics & Normative Economics
Positive Economics:
Positive economics explains the study of ‘what is?’ & ‘what
was?’ under the given set of circumstances.
Features:
➢ It deals with what is? & what was?
➢ It is descriptive.
➢ It is objective and fact based.

18. Normative Economics
Normative Economics:
Normative economics Explains ‘what ought to be’ or what should
be done or not done, which is right or wrong in economic activities.
Features:
➢ It deals with what ought to be?
➢ It is prescriptive.
➢ It is subjective and value based.

19. Positive and Normative Economics
Positive Economics Normative Economics
• Positive economics is the study of
‘what was’ and ‘what is’ under a given
set of circumstances.
• It deals with the scientific explanation
of working of the economy.
• Here we study how the different
mechanisms function (Functioning of
the Mechanism).
• Positive Economics establishes the
relationship between cause and effect
of economic variables.
• Positive economics can be verified
with actual data
• Normative economics studies ‘what
ought to be’.
• It explains about ‘what should be and
should not be done’.
• Here we try to understand whether
the mechanisms are desirable or not
(Evaluating the Mechanism).
• Normative economics advocates
solutions to the economic problems.
• Normative economics cannot be
verified with actual data

20. Micro Economics and Macro Economics
MACRO ECONOMICS
MICRO ECONOMICS
Microeconomics is derived from a Greek
word MIKROS which means small.
Macroeconomics is derived from a Greek
word MAKROS which means large or whole.
Microeconomics is the study of individual
units so its scope is narrow.
Macroeconomics is the study of economy as
a whole (aggregate) so its scope is wider.
Microeconomics follows the method of
slicing and it studies individual unit
Macroeconomics follows the method of
lumping and it studies in aggregates.
Microeconomics deals with Consumer
behavior, Market structure and Prices of
goods.
Macroeconomics deals with National
income, Total output and General price
level.
Microeconomics adopts Partial Equilibrium
analysis.
Macroeconomics adopts General
Equilibrium analysis.
Microeconomics is based on assumptions,
like full employment.
Macroeconomics is not based on
assumptions, like full employment.
Microeconomics gives worm’s eye view of an Macroeconomics gives bird’s eye view of an

21. Micro & Macro economics
Features Micro Economics Macro Economics
Scope Narrow scope Wider scope
Study Individual units Aggregate units
Method Slicing method Lumping method
Equilibrium Partial equilibrium General equilibrium