0)

77
88
96
81
,9
m
l.co
ai
gm
s @
5.
.0
28
u.
am
(s
e
dg
s he
a.
sh
ik
m
sa
to
s
ng
lo
be
F
PD
is
Th
 0)
77
88
96
81
,9
m
l.co
ai
gm
s @
5.
.0
28
u.
am
(s
e
dg
s he
a.
sh
ik
m
sa
to
s
ng
lo
be
F
PD
is
Th
 Microeconomics
We study the behavior of individual economic agents in the markets for different goods
and services and try to figure out how prices and quantities of goods and services are
determined through the interaction of individuals in these markets. It is also known as
price theory.

Importance

Th
is
PD
F
be
Microeconomics plays a role in developing economic strategies that improve productive

lo
ng
efficiency and lead to increased social well-being.

s
to
Microeconomics elucidates the functioning of a capitalist system in which independent

sa
m
entities such as producers and consumers possess the freedom to make their own

ik
sh
a.
decisions.

s
he
dg
Microeconomics explains how individual entities achieve a state of balance in a free

e
(s
enterprise economy.

am
u.
It helps the government in formulating correct price policies.

28
.0
It helps business economist to make conditional predictions and business forecasts.

5.
@s
gm
ai
Limitations

l.
co
m
,9
81
96
Microeconomics do not provide a complete understanding of how an entire economy

88
77
operates. They are insufficient in explaining issues such as unemployment, poverty,

0)
illiteracy, and other societal problems that exist in a country.

Macroeconomics
Macroeconomics is defined as the study of overall economic phenomena, such as problem
of full employment, GNP, savings, investment, aggregate consumption, aggregate
investment, economic growth, etc. It is also known as Theory of Income and Employment.
Macroeconomics is a field of study that helps address a range of economic issues, such as
currency-related challenges, variations in economic activity, widespread joblessness, rising
prices, and imbalances in a country's international trade position.

Importance
It provides a thorough analysis of the expanding economic complexities and practical
methods for explaining how complex economic systems work.
It offers the fundamental and comprehensible foundation for developing suitable
macroeconomic policies (e.g., for inflation, poverty, unemployment, etc.) to direct and
control the economy in the direction of desired goals.
. It helps in analysing the reasons for economic fluctuations and provide remedies.

Limitations
Aggregate macroeconomics overlooks changes in individual structures, potentially leading
to misleading conclusions based on overall variables.
 Positive and normative economics
Positive Economics
Positive economics examines human decisions as verifiable data-based facts, rather than
subjective opinions or values. For e.g.
India is an overpopulated country.
A fall in the price of a good leads to a rise in its quantity demanded.

Th
is
Prices have been rising in India

PD
F
be
Normative Economics

lo
ng
s
to
sa
m
Normative economics deals with what ought to be or how an economic problem should be

ik
sh
solved. For e.g.

a.
s
he
Government should guarantee a minimum wage for every worker.

dg
e
(s
Government should stop Minimum Support Price to the farmers.

am
u.
India should not take loans from foreign countries.

28
.0
5.
s
Interdependence of positve and normative economics

@
gm
ai
l.
co
Economics has evolved with both positive and normative perspectives, which are closely

m
,9
intertwined. Economists are not only responsible for describing and investigating

81
96
economic phenomena (positive aspect), but also for expressing approval or disapproval

88
77
(normative aspect). This dual role is crucial for a robust and speedy development of an

0)
economy.
A rise in the price of a good leads to a fall in its quantity demanded; therefore,
Government should check rise in prices.
Rent Control Act provides accommodation to the needy people; therefore, the Act should
be honestly implemented.

Economy
An economy is a complex network of economic activities such as producing, consuming,
and investing, which allows people to earn a living. It includes all the production units
within a geographic or political area of a country that contribute to people's livelihood.

Central problems of an economy

What to produce and how much to produce - Every economy must make choices about
how to allocate its limited resources in order to produce goods efficiently. If resources
were unlimited, there would be no need for such choices. However, because resources are
limited, economies must carefully decide which goods to produce and in what quantities
to ensure the optimal output and mix of goods. This means that economies must
prioritize certain wants and needs over others. For example, if an economy decides to
produce more cloth, it will inevitably have to reduce its production of food, since the
resources used to produce cloth and food are limited. The economy must therefore
carefully consider factors such as technological availability, production costs,
distribution costs, and demand in order to make these decisions.
How to produce - The choice of production technique is crucial as resources are limited
and inefficient techniques result in wastage and high costs. While some commodities
have limited production choices, alternatives are available for most. The goal is to choose
the technique that minimizes the cost per unit of the commodity, using the least

Th
quantity of scarce resources. Therefore, producers must always strive to use the most

is
PD
efficient technology to produce efficiently. It is essential for every economy to choose

F
be
the most efficient production technique. Mostly there are two techniques:

lo
ng
s
(i) Labour Intensive - More labour and less capital

to
sa
(ii) Capital Intensive - More capital and less labour

m
ik
sh
a.
For whom to produce - The distribution of a country's total output of goods and services

s
he
dg
depends on the purchasing power of its people, which is based on their income. However,

e
(s
am
with millions of people in a society, there is not enough income to fulfill everyone's

u.
28
wants. Therefore, the problem arises of how to distribute the national product among

.0
5.
different households to ensure everyone gets a minimum level of consumption. The

@s
gm
guiding principle is that the output of the economy should be distributed in a way that

ai
l.
co
meets the basic needs of all sections of society.

m
,9
81
96
Causes of economic problem

88
77
0)
Unlimited wants - People's desires are infinite and they
constantly seek to consume better and more goods and services.
Over time, the demand for certain things, such as housing and
transportation, has shifted from basic needs to more luxurious
options. As people's resources and capabilities expand, their
desires continue to grow without limits.

Limited resources - The fundamental cause of economic

problems is the limited availability of resources. Any resource
that can be used to fulfill human wants and needs is considered
a resource, but in economics, the scarce resources are natural
resources (such as land), human resources (such as labour),
capital resources (such as machines and buildings), and
entrepreneurship. The scarcity of resources is a relative concept,
meaning that resources are limited compared to the demand for
them. This scarcity of resources creates the need for people to
make choices, which is the root of economic problems.

Alternative resources - Resources are scarce and can be used for

multiple purposes. However, each use has a different return or
utility. This requires people to make choices between the
alternative uses, and by choosing one, they forgo the benefits of
the others. This is known as opportunity cost.
 Production Possibility Curve
Production possibility curve or frontier (PPF) shows the
various alternative combinations of goods and services that
an economy can produce when the resources are all fully
and efficiently employed. PPC shows the obtainable options.

Th

Product B
is
The production possibilities of an economy are limited by

PD
F
be
the available resources and the current level of technology.

lo
ng
These resources can be allocated towards producing

s
to
different goods, and the resulting graph that shows the

sa
m
ik
range of possible production options is called the

sh
a.
production possibility curve.

s
he
Product A

dg
e
Any point inside the curve indicates unemployment of resources or inefficient use of

(s
am
u.
resources. Any point outside the curve is unattainable given the scarcity of resources. An

28
.0
economy always produces on a PPC.

5.
s@
gm
ai
Assumptions

l.
co
m
,9
81
96
Economy produces only two goods, X and Y be it sugar and tea or bread and butter.

88
77
Amount of resources available in an economy are given and fixed.

0)
Resources are not specific, i.e., they can be shifted from the production of one good to
the other good.
Resources are fully employed, i.e., there is no wastage of resources. Resources are not
lying idle.
State of technology in an economy is given and remains unchanged.
Resources are efficiently employed (efficiency in production means output per unit of
an input).

Features of PPC
Downward slopping - The reason why a production possibility curve has a downward
slope from left to right is because when all resources are being fully utilized, producing
more of one good requires giving up some production of the other good. This is because
resources are limited, and as a result, it's not possible to increase production of both
goods simultaneously. Therefore, the PPC slopes downward.

Slope of PPC = ΔY = Amount of good Y lost = MRT or Marginal Opportunity Cost

ΔX = Amount of good X gained

Concave to the origin - A concave PPC indicates an increasing MRT, which means that
producing more of one good requires sacrificing more units of the other good due to
unequal resource efficiency. Therefore, transferring resources from one good to another
will result in an increase in MRT or MOC.
 *Kitna shift hoga
Shifts of PPC yrrr ye

PPC will shift to right

(a) New resources are discovered, or
(b) Advancement of technology
For e.g. Increase in the efficiency of employees due to use of
computer software.

Th
It shows economic growth and PPC shifted outward because it is

is
PD
possible to produce more of both the goods.

F
be
lo
ng
PPC will shift to left

s
to
sa
(a) Resources are destroyed, or

m
ik
sh
(b) Use of outdated technology

a.
s
he
For e.g. Destruction of raw material due to any natural calamity

dg
e
If due to earthquake and floods mass destruction takes place

(s
am
then the country will stagnate and the PPC curve will shift inwards

u.
28
.0
5.
@s
gm
When change takes place only for one

ai
l.
co
good then PPC expands as these two ways

m
,9
like in first graph technology improved for

81
96
only good X and in the second one, it

88
77
improved for good Y.

0)
Opportunity Cost
Opportunity cost is defined as the cost of alternative
opportunity given up or surrendered. For example, on a
piece of land both wheat and sugarcane can be grown
with the same resources. If wheat is grown then
opportunity cost of producing wheat is the quantity
of sugarcane given up. In terms of production
possibility curve, the slope of the curve at every point
measures the opportunity cost of producing more units
of good X in terms of good Y given up.
Movement from point A to point B shows decrease in mobile phone and increase in
cameras which means amount change in mobile phones become opportunity cost for
amount change in cameras.

Marginal Opportunity Cost

PPC is also called opportunity cost curve because slope of the curve at each and every
point measures opportunity cost of one commodity in terms of alternative commodity
given up. The rate of this sacrifice is called the Marginal Opportunity Cost.
 Marginal rate of transformation
MRT (Marginal Rate of Transformation) is the amount of one good that must be given
up in order to produce an additional unit of another good. It is calculated as the slope
of the Production Possibility Curve (PPC). MRT represents the rate at which resources are
shifted from the production of one good to the production of another.
MRT = ΔY = Amount of good Y lost

Th
ΔX = Amount of good X gained

is
PD
F
be
lo
Shape of PPC with different MRT

ng
s
to
sa
m
ik
sh
a.
s
he
dg
e
(s
am
u.
28
.0
5.
@s
gm
ai
l.
co
m
,9
81
96
88
77
0)
Constant MRT Increasing MRT Decreasing MRT

Important questions with answers

QuestionDefine economy?
Answer An economy is a complex network of economic activities such as producing,
consuming, and investing, which allows people to earn a living. It includes all the
production units within a geographic or political area of a country that
contribute to people's livelihood.

QuestionWhat does a PPC show?

Answer Production possibility curve or frontier (PPF) shows the various alternative
combinations of goods and services that an economy can produce when the
resources are all fully and efficiently employed. PPC shows the obtainable
options.

QuestionGive one point of difference between micro and macro economics.

Answer Microeconomics studies s the behaviour of individual units of an economy
whereas studies the behaviour of aggregates of the economy as a whole.
QuestionExplain the problem of allocation of resources faced by an economy.
Answer The problem of allocation of resources in an economy refers to the challenge of
efficiently distributing limited resources, such as labor, capital, and natural
resources, among competing demands. This involves making choices regarding
what goods and services to produce, how much to produce, and for whom to
produce.

Th
is
PD
QuestionWhat is the effect of economic growth on a PPC?

F
be
lo
Answer Economic growth leads to shift in PPC either outwards or inwards. If there is

ng
s
to
increase in economic growth, then PPC shifts outward and if decreases, then

sa
m
ik
PPC shifts inwards.

sh
a.
s
he
dg
QuestionExplain the central problem of “how to produce”.

e
(s
am
Answer When choosing a production technique, it's important to avoid inefficiency and

u.
28
.0
waste due to scarce resources. Two common techniques are labor-intensive (using

5.
@s
more labor and less capital) and capital-intensive (using more capital and less

gm
ai
l.
labor), with the goal of maximizing output or minimizing cost.

co
m
,9
81
96
QuestionWhat is opportunity cost?

88
77
0)
Answer Opportunity cost is defined as the cost of alternative opportunity given up or
surrendered. For example, on a piece of land both wheat and sugarcane can be
grown with the same resources.

*You after studying padhley akshay notes

*NOTE : Worksheet (Important questions of all typology with

answers) is provided as a seperate PDF on website
padhleakshay.com*