Micro economics in simple words

1. INTRODUCTION
MICRO ECONOMICS
VIVEK KUMAR
PGDBM, MBA, NISM CERTIFICATIONS,
UGC-NET, RESEARCH SCHOLAR(Ph.D)

2. ECONOMY
IT IS A SYSTEM WHICH PROVIDES PEOPLE, THE MEANS TO WORK AND
EARN A LIVING.

3. PARTS OF
ECONOMY ???

4. IMPORTANT FUNCTIONS OF AN ECONOMY
 Production
 Consumption
 Investment
 Exchange

5. IMPORTANT FUNCTIONS OF AN ECONOMY
 Production: It is defined as ‘creation of utility’. It is process in
which inputs are transformed to goods or services.
 Consumption: It is a process by which a good or a service is
completely used up to satisfy human wants.

6. IMPORTANT FUNCTIONS OF AN ECONOMY
 Investment: Part of production which is committed
for earning future income.
 Exchange: It means the process by which
ownership is transferred from seller to buyer for a
consideration.

7. ECONOMICS
 Economics is concerned with the study of economic
problems that arise because human wants are
unlimited and resources to satisfy those wants are
limited or scarce and these scarce resources have
alternative uses.
 Economics focuses on the rational management of
scarce resources in order to maximize economic
welfare. Hence, economics is about making choices
in the backdrop of scarcity.

8. WHY STUDY ECONOMICS?
THE MAIN REASON FOR STUDY OF ECONOMICS CAN BE SIMPLIFIED TO
A SINGLE WORD - SCARCITY

9. SCARCITY
Scarcity refers to a situation wherein supply of a
resource is limited when compared to its demand.
Economics is concerned with selection of
resources under conditions of scarcity.

10. RESOURCES
FACTORS OF PRODUCTION - FOP

11. ECONOMIZING OF RESOURCES
REFERS TO MAKING OPTIMUM USE OF THE AVAILABLE
RESOURCES.

12. TYPES OR ORGANISATION OF ECONOMY
 Market Economy/
Capitalist/ Free Economy
 Centrally Planned
Economy / Socialist
/Controlled Economy
 Mixed Economy

13. MARKET ECONOMY
All important decisions regarding production,
consumption and exchange of Goods and Services
are made through market i.e., forces of demand
supply intersect and decides the price and quantity.

14. CENTRALLY PLANNED ECONOMY
All important decisions regarding production,
exchange and consumption of Goods and Services
are made by government.

15. MIXED ECONOMY
An economy in which some important decisions are
taken by government and the economic activities
are conducted through the market.

16. ECONOMIC PROBLEM
IT IS A PROBLEM OF CHOICE INVOLVING SATISFACTION OF UNLIMITED
WANTS OUT OF LIMITED RESOURCES HAVING ALTERNATIVE USES.

17. REASONS FOR ECONOMIC PROBLEM
SCARCITY OF RESOURCES: Resources are
limited in relation to their demand and economy
cannot produce all what people want.

18. REASONS FOR ECONOMIC PROBLEM
UNLIMITED HUMAN WANTS: Human wants are
never ending, i.e. they can never be fully satisfied.
As soon as one want is satisfied, another new want
emerges.

19. REASONS FOR ECONOMIC PROBLEM
ALTERNATIVE USES: Resources are not only
scarce, but they can also be put to various uses. It
makes choice among resources more important.

20. ECONOMICS
Economics is a social science which studies the
way a society chooses to use its limited resources,
which have alternative uses, to produce goods and
services and to distribute them among different
groups of people.

21. MICRO AND MACRO ECONOMICS
MICRO ECONOMICS MACRO ECONOMICS

22. MICRO AND MACRO ECONOMICS
 Microeconomics deals
with the behaviour of
individual economic units.
 It is used determine the
price of a commodity or
factors of production.
 It is also known as ‘Price
theory’.
 Macroeconomics is the
study of the economy as
a whole.
 Used to determine the
income and employment
level of the economy.
 It is also known as
‘Income and Employment
Theory’.
MICRO ECONOMICS MACRO ECONOMICS

23. CENTRAL PROBLEMS OF THE ECONOMY
 What to produce and in what quantity - Luxury
goods, inferior goods, capital goods or consumer
goods
 How are these goods produced -
Problem of choice of technique.
 For whom to produce -
Distribution of income among all factors of
production

24. POSITIVE AND NORMATIVE ECONOMICS

25. POSITIVE AND NORMATIVE ECONOMICS
 Positive economics is objective and fact based, while
normative economics is subjective and value based.
 Positive economic statements do not have to be correct,
but they must be able to be tested and proved or
disproved. Normative economic statements are opinion
based, so they cannot be proved or disproved.
 In positive economics analysis, we study how the
different mechanisms function and in Normative
economics we try to understand whether these
mechanisms are desirable or not.

26. OPPORTUNITY COST
Opportunity cost for a
commodity is the
amount of other
commodity that has
been foregone in order
to produce the first, as
production of all the
goods cannot be
increased
simultaneously with
limited resources in
hand.

27. PRODUCTION POSSIBILITY CURVE
 Production Possibility Curve is a curve, which
shows the various alternative production
possibilities of two goods that can be produced with
given resources and techniques of production.
 It is also known as transformation curve or
production possibility frontier. It is an important tool
to solve the central economic problems.

28. PRODUCTION POSSIBILITIES SCHEDULE
The table showing different possibilities of production
of two goods is called production possibility schedule.

29. ASSUMPTIONS OF PPC
1. The resources available are fixed.
2. The technology remains unchanged.
3. The resources are fully employed.
4. The resources are not equally efficient in
production of all the goods. So, if resources are
transferred from the production of one good to
another, the Marginal Opportunity Cost increases.

30. PRODUCTION POSSIBILITY CURVE

31. PROPERTIES OF PPC
 It is a downward sloping curve from left to right. It is
so because to increase the production of one good,
we have to decrease the production of the other.
Because of this inverse relation, PPC is negatively
sloped.
 The shape of the Production Possibility Curve is
concave to the origin. It is so because the Marginal
Opportunity Cost tends to rise. MRT increases
because it is assumed that no resource is equally
efficient in production of all goods.

32. ATTAINABLE AND UNATTAINABLE
COMBINATIONS

33. MARGINAL OPPORTUNITY COST
MOC refers to the number of units of a commodity sacrificed
to gain one additional unit of another commodity. In case of
PPC, MOC is always increasing.
Reason:-
Increasing MOC operates because productivity and efficiency
of factors of production decrease as they are shifted from one
use to another.

34. CHANGE IN PPC
1. SHIFT IN PPC
2. ROTATION OF PPC

35. SHIFT IN PPC
The Production Possibility Curve will shift under
the following two conditions:
1. Change in resources.
2. Change in technology of production for both the goods.

36. ROTATION OF PPC
The Production Possibility Curve will rotate outward
under the following two conditions:
1. Improvement in technology in favour of one commodity.
2. Growth of resources for the production of one commodity.