UNIT 1: INTRODUCTION
1. Microeconomics: It is that branch of economics which deals with individual economic units and whose main tools are demand and supply. It is also termed as 'price theory'.2. Macroeconomics: It is that branch of economics which deals with the economy as a whole and whose main tools are aggregate demand and aggregate supply. It is also termed as 'income and employment theory'.
3. Economy: It is a system which provides people the means to work and earn a living. An open economy has economic relations with other countries whereas a closed economy has no economic relations with other countries.
4. Mixed Economy: A mixed economy is one where there is coexistence of both the private and the public sector. The central problems arc solved on the basis of market forces as well as social considerations.
5. Scarcity: It is a situation in which demand is greater than supply. Scarcity applies to all individuals, organisations due to which all the needs of people cannot be satisfied and it gives rise to problem of choice.
Economising of Resources: It means using the resources available in the society in the most efficient and effective manner, and avoiding wastage.
6. Economic Problem: It is a problem of choice which arises due to:
(a) Unlimited human wants
(b) Limited resources
(c) Alternative uses of resources
7. Central problems of an economy: These are also known as the problems of allocation of resources which can be categorised into:
(a) What to Produce: This refers to the problem of deciding which good should be produced and in what quantities by the economy.
(b) How to Produce: This refers to the problem of deciding which technique (whether capital-intensive or labour-intensive) should be used for the production of goods in the economy.
(c) For Whom to Produce: It is the problem of distribution of output which is categorised as (i) personal distribution, and (ii) functional distribution. Functional distribution of income relates to income share of different factors of production between labour, capital, land and entrepreneur, while personal distribution refers to income share of individuals and household in the society.
8. Production Possibility Curve (PPC) or Production Possibility Frontier (PPF) or Transformation Curve or Opportunity Cost Curve: It is a curve which depicts all possible combinations of two goods which an economy can produce with the available resources and the given technology.
9. Properties of PPC
(a) PPC is a downward sloping curve because in a full employment economy, the production of one good can be increased only by sacrificing the other good.
(b) PPC is concave to the origin because of increasing marginal opportunity cost.
(c) PPC can shift leftwards or rightwards.
10. Rightward shift in PPC: PPC shifts towards right due to reasons such as increase in population, discovery of new natural resources, improvement in technology, introduction of foreign capital, etc.
11. Leftward shift in PPC: PPC shifts towards left due to depletion in resources (caused by natural disasters such as earthquakes, severe floods), breakdown of machinery, use of obsolete technology, decrease in population, etc.
12. Rotation of PPC: It happens when there is change in technology with respect to only one good, therefore, there can be two types of rotation possible:
(a) Rotation for good on X-axis: When there is technological improvement for commodity X, then PPC will rotate from PP to PA. However, in case of technological degradation, PPC will rotate from PP to PB. (Fig. 3)
(b) Rotation for good on Y-axis: When there is technological improvement for commodity Y, then PPC will rotate from PP to PA. However, in case of technological degradation, PPC will rotate from PP to PB. (Fig. 4)
13. Opportunity cost: It is the cost of the next best alternative foregone. For example, if 20,000 can be used to purchase a laptop and LCD TV and if you decide to buy a laptop, then opportunity cost of choosing laptop is the cost of LCD TV.
14. Marginal Opportunity Cost (MOC) or Marginal Rate of Transformation (MRT): It is the ratio of one good sacrificed for the production of one additional unit of a particular good. It is also the slope of PPC. MOC (or MRT) = goods sacrificed A goods produced
15. PPC is convex: When MOC is falling, PPC is convex to the origin.
16. PPC is straight line: When MOC is constant, PPC is a straight line.
17. Positive economics: Study of economic theory "as they are'.
18. Normative economics: Study of economic theory "as they ought to be."
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