UNIT 1 Microeconomics

1. The Economic Problem: Scarcity and Choice

 Scarcity: Limited resources available to satisfy unlimited wants,

forcing individuals and societies to make choices.

 Choice: Due to scarcity, choices must be made about how to allocate

resources efficiently.

 Basic Economic Problems:

o What to produce?: Deciding which goods and services to produce

with limited resources.

o How to produce?: Deciding on the production method (labour-

intensive vs capital-intensive).

o For whom to produce?: Deciding how goods and services are

distributed among individuals.

2. The Scope of Economic Theory and Basic Economic Problems

 Economic Theory: The study of how individuals, firms, and

governments make choices in the allocation of scarce resources.

 Basic Economic Problems:

o Allocation of Resources: Determining which resources to allocate

for different types of goods and services.

o Distribution of National Income: Ensuring fair distribution of the

nation's output (GDP) among its population.

o Economic Efficiency: Maximizing output from available resources

with minimum waste.

o Full Employment: Utilizing all resources (labour, capital) to their

fullest potential.

o Economic Growth: Ensuring long-term expansion of the economy.

3. The Problem of Allocation of Resources

 Resource Allocation: The process of deciding where to allocate limited

resources in order to satisfy various needs.

 Factors of Production: Land, labor, capital, and entrepreneurship are

allocated among different sectors like agriculture, industry, and
services.

 Market Economy: Prices act as signals for resource allocation.

  Central Planning: In centrally planned economies, the government
makes allocation decisions.

4. Choice of a Production Method

 Labour-Intensive Production: More labor, less capital. Suitable for

economies with high unemployment or low capital.

 Capital-Intensive Production: More machinery, less labor. Suitable for

economies with high capital availability.

 Choice Factors:

o Costs: The cost of labor vs capital.

o Efficiency: Maximizing productivity with the least cost.

o Technology: Technological advancements may make one method

more efficient.

5. The Problem of Distribution of National Product

 National Product: The total value of goods and services produced

within a country.

 Distribution: The manner in which income (wages, profits, rent,

interest) is distributed among individuals and factors of production.

 Equity vs. Efficiency: Governments often face the challenge of

balancing fair income distribution (equity) with economic efficiency
(maximizing output).

 Methods of Distribution:

o Wages: For labor.

o Profits: For capital and entrepreneurship.

o Rent: For land.

6. The Problem of Economic Efficiency

 Economic Efficiency: Producing the maximum output with given

resources, or using the least resources to produce a given output.

 Types of Efficiency:

o Productive Efficiency: Producing goods at the lowest cost (using

the least amount of resources).

o Allocative Efficiency: Allocating resources to produce the mix of

goods and services most wanted by society.
7. The Problem of Full Employment of Resources

 Full Employment: When all available resources (labour, capital) are

being used efficiently in the economy.

 Underemployment: Resources are not being used to their full potential

(e.g., unemployment).

 Consequences of Full Employment:

o Increased production.

o Economic growth.

o Improved standards of living.

8. The Problem of Economic Growth

 Economic Growth: The increase in a country's output of goods and

services over time.

 Measuring Growth: GDP (Gross Domestic Product) and GNP (Gross

National Product) are common indicators.

 Sources of Growth:

o Capital Accumulation: Investment in physical capital (machines,

infrastructure).

o Technological Progress: Innovations that increase productivity.

o Labour Force Growth: Increasing the working-age population.

9. Problem of Scarcity vs. Problem of Affluence

 Scarcity: A condition where resources are insufficient to meet all

human wants.

 Affluence: A situation where there is more wealth than needed, leading

to concerns like overconsumption, inequality, and environmental
degradation.

 Scarcity vs. Affluence:

o In scarcity, the problem is how to distribute limited resources.

o In affluence, the issue becomes how to use excess resources

efficiently and equitably.

10. Critical Evaluation of Robbins' Definition of Economics

  Robbins' Definition: Economics is the science that studies human
behavior as a relationship between ends and scarce means which have
alternative uses.

 Criticism:

o Over-simplification: It focuses only on scarcity and ignores non-

economic factors like social, psychological, and political
influences.

o Normative Issues: Robbins’ definition is primarily positive and

does not adequately address issues of welfare or fairness.

o Ignores the Role of Institutions: Robbins does not emphasize the

role of institutions (e.g., governments, markets) in shaping
economic behavior.

11. Positive Economics, Normative Economics, and Welfare Economics

 Positive Economics: Concerned with describing and explaining

economic phenomena as they are (objective analysis).

o Example: "The inflation rate is 6%."

 Normative Economics: Deals with what ought to be (subjective

judgment, value-laden).

o Example: "The government should reduce inflation."

 Welfare Economics: Studies the well-being of individuals in the

economy, focusing on income distribution, public goods, and social
welfare.

12. Production Possibility Curve (PPC): A Basic Tool of Economics

 PPC: A graphical representation of the maximum combination of two

goods that an economy can produce given its resources and
technology.

o Shape: Typically concave due to the law of increasing opportunity

cost.

 Points on the Curve: Represent efficient resource allocation.

 Inside the Curve: Inefficiency or underutilization of resources.

 Outside the Curve: Unattainable with current resources.

 Opportunity Cost: The cost of forgoing the next best alternative when
a decision is made.

13. Economic Growth and Shift in Production Possibility Curve

  Economic Growth: An outward shift of the PPC due to an increase in
resources (labour, capital) or technological improvements.

 Impact of Growth:

o More goods can be produced.

o The economy becomes more capable of meeting societal needs.

14. Methodology of Economics: Economic Statics and Dynamics

 Economic Statics: The study of economic systems at a particular point

in time, assuming no change (short-run analysis).

o Focuses on equilibrium states.

 Economic Dynamics: The study of how economic systems evolve over

time (long-run analysis).

o Deals with changes in the economy, such as shifts in supply and

demand, or the effects of technological advancements.