ECONOMICS PPT 1.pdf jnsjdhiahdbhbhcdjkab

 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.
 Economics is all about making choices in the
presence of scarcity and studies human behaviour as
a relationship between means (resources) and ends
(human wants).
Economics
Economy  An economy is a system in which people get a living
to satisfy their wants through the process of
production, exchange and distribution.
 For example : The Indian Economy consists of all
sources of production in agriculture, industry,
transport and communication, banking etc.

Scarcity  It refers to the limitation of
supply about the demand for a
commodity.
 Scarcity is universal, i.e. every
individual, organisation and
economy faces scarcity of
resources.
 Scarcity of resources calls for
economizing of resources.
Economizing of resources refers to
making optimum use of available
resources.

Economic
Problem
Economic Problem is a
problem of choice
involving the
satisfaction of unlimited
wants out of limited
resources having
alternative uses.

Reasons for Economic Problem
1) Scarcity of Resources :
 Resources are limited to people‟s demand and production due to which economic problems exist in all
economies.
 Scarcity is universal and applies to all individuals, organizations, and countries.
 If resources were not scarce, there would be no economic problem.
2) Unlimited Human Wants :
 Human wants are never-ending, they have two basic features.
a) Human wants are unlimited and recurring :
 Human wants to keep on increasing with the expansion of education, knowledge and economic growth.
 As soon as one want is satisfied, another want arises and wants to keep on multiplying and cannot be satisfied
due to limited resources.
b) Human wants to have different priorities :
 Every individual want is more important and urgent as compared to others, due to which people allocate
resources to satisfy some of their wants.
 If all human wants were of equal importance, it would have become impossible to make choices.
3) Alternate Uses :
 An alternative use implies that resources can be applied and used for alternative purposes.
 For example : Petrol is used not only in vehicles but also for running machines, generators etc.
 An economy has to choose between the alternative uses of the given resources.

Branches of Economics
Economics can be classified
into two main branches
Microeconomics
(Price
Theory)
Macroeconomics
(Income
Theory)

Microeconomics  Microeconomics is that part of economic
theory, that studies the behaviour of
individual units of an economy and its main
tools are „Demand‟ and „Supply‟.
 For example : Individual income, individual
output, price of a commodity, etc.
 It is derived from the Greek word „mikros‟
which means „small.
 Adam Smith is considered to be the founder of
the field of Microeconomics.
 Microeconomics deals with the analysis of
behaviour and economic actions of small and
individual units of the economy, like a
particular consumer, a firm or a small group of
individual units.

Macroeconomics  Macroeconomics is that part of economic theory
that studies the behaviour of aggregates of the
economy as a whole and its main tools are
„Aggregate demand‟ and „Aggregate supply‟.
 For example : National Income, aggregate
output, aggregate consumption, etc.
 It is derived from the Greek word „Macros‟ which
means „large‟.
 Aggregative economics examines the
interrelations among various aggregates, their
determination and the causes of fluctuations in
them.
 Macroeconomics deals with the overall
performance of the economy. It is concerned with
the study of problems in the economy like
inflation, unemployment, poverty, etc.

Differences Between Microeconomics and Macroeconomics
Basis Positive Economics Normative Economics
Meaning
Microeconomics is that part of economics
which studies the behaviour of individual
units of an economy.
Macroeconomics is that part of economics
which studies the behaviour of aggregates
of the economy as a whole.
Tools
Demand and Supply are the main tools of
Microeconomics.
Aggregate Demand and Aggregate Supply
are the main tools of Macroeconomics.
Basic
Objective
It aims to determine the price of a
commodity or factors of production.
It aims to determine the income and
employment level of the country.
Degree of
Aggregation
It involves a limited degree of aggregation.
For example: Market supply is derived by
aggregation of individual supply of all
producers in a particular market.
It involves the highest degree of
aggregation. For example: Aggregate
supply is derived for the entire economy.
Basic
Assumptions
It assumes all the macro variables are
constant like national income,
consumption, savings etc.
It assumes that all micro variables are
constant like prices of individual products.
Other Name It is also known as „Price Theory‟.
It is also known as the „Income and
Employment Theory‟.
Examples Individual Income, Individual Output. National Income, National Output.

 Normative Economics deals with what ought to be or how the economic
problems should be solved.
 For example : India should not be an overpopulated country and prices
should not rise.
 Normative economics given by Prof. Marshall Deals with how the world ought
to be.
 Normative economics discusses what are desirable things and should be
realized and what are undesirable things and should be avoided. It gives
decisions regarding value judgement.
Positive and Normative Economics
Positive
Economics
 Positive Economics deals with what are economic problems and how are they
solved.
 For example : India is an overpopulated country and prices are constantly
rising.
 Positive economics statements should not be confused as statements of truth
as they may be true or false.
 Positive statements describe what was, what is or what will be under the
given state of circumstances. These statements do not pass any value
judgement.
Normative
Economics

Differences Between Positive Economics and Normative Economics
Basis Positive Economics Normative Economics
Meaning
It deals with what is or how the
economic problems are solved.
It deals with what ought to be or how
the economic problems should be solved.
Purpose
It aims to make a real description
of economic activity.
It aims to determine the ideals.
Verification It can be verified with actual data. It cannot be verified with actual data.
Value
Judgments
It does not give any value
judgments, i.e. it is neutral
between ends.
It gives value judgments.
Suggestive
It is based upon facts, and thus, not
suggestive.
It is based upon individual opinion and
therefore, it is suggestive in nature.
Examples
 Prices in the Indian Economy are
constantly rising.
 There are inequalities of income
in an economy.
 India should take steps to control
rising prices.
 Income inequalities should be
reduced.

Central Problems of an Economy
Production, distribution and disposition of goods and services are the basic economic
activities of life. In the course of these activities, every society has to face a scarcity
of resources. Because of this scarcity, every society has to decide how to allocate
scarce resources. It leads to the following central problems, that are faced by every
economy :
1) What to Produce :
 This problem involves the selection of goods and services to be produced and the quantity to be produced
by each selected community.
 In every economy, the resources are limited and hence an economy cannot produce all the goods.
 More of one good usually means less of the other. The problem of what to produce has two aspects :
a) What Possible Commodities to Produce :
 Every economy has to decide which consumer goods and which capital
goods are to be produced.
 Similarly, the economy has to choose between civil goods and war goods.
b) How Much to Produce :
 It involves a decision regarding the quantity to be produced of consumer
and capital goods, civil and war goods etc.
 Therefore, we can say that it is a problem of allocation of resources among different goods.

2) How to Produce :
 This problem refers to the selection of techniques to be used for the production of goods and
services.
 A good can be produced using different techniques of production;
generally, two techniques are used :
a) Labour Intensive Technique (LIT) : In this technique more Labour
and less capital are used.
b) Capital Intensive Technique (CIT) : In this technique more
capital and less Labour are used.
 The selection of technique is made to achieve the objective of raising the standard of living of
people to employ everyone.
 For example : In India, LIT is preferred due to the abundance of labour; whereas, countries
like the USA prefer CIT due to the shortage of labour and abundance of capital.
3) For Whom To Produce :
 This problem involves the selection of a category of people who will ultimately consume the
goods i.e., whether to produce goods for poorer and less rich or richer and less poor.
 Goods are produced for those who have the paying capacity and the paying
capacity depends upon the level of income.
 It means this problem is concerned with the distribution of income among
the factors of production.

Opportunity
Cost
 It is the cost of the next best alternative
foregone.
 For example : Mr. X is working in a
bank at a salary of Rs 40,000 per
month and he receives two more job
offers :
a) To work as an executive at Rs
30,000 per month.
b) To become a journalist at Rs 35,000
per month.
 The opportunity cost of working in the
bank is the cost of the next best
alternative foregone i.e., Rs 35,000.

Production Possibility Curve
 PPC refers to a graphical representation of possible combinations of two goods that can be produced with
given resources and technology.
 It is also known as Production Possibility Frontier, Transformation Curve, Transformation Boundary and
Transformation Frontier.
Possibilities
Guns
(in units)
Butter
(in units)
MOC MRT =
∆ 𝐺𝑢𝑛𝑠
∆ 𝐵𝑢𝑡𝑡𝑒𝑟
A 21 0 --- -
B 20 1 1 1G : 1B
C 18 2 2 2G : 1B
D 15 3 3 3G : 1B
E 11 4 4 4G : 1B
F 6 5 5 5G : 1B
G 0 6 6 6G : 1B
X
G
F
E
D
C
B
A
|
6
|
5
|
4
|
3
|
2
|
1
3 --
6 --
9 --
12 --
21 --
15 --
O
Butter (in units)
Guns
(in
units)
PPF of Guns and Butter
Y
18 --
●
●
●
●
●
●
●
Explanation of Curve :
 If the economy uses all its resources to produce only guns, then a maximum of 21 units of guns and no butter can be
produced. (point A).
 If all resources are used for butter, then a maximum of 6 units of butter and no guns can be produced. (Produced G).
 There are various possibilities with different combinations of guns and butter in between.
 When A, B, C, D, E, F and G points are joined, we get a curve AG, known as the „Production Possibility Frontier‟.
 AG curve shows the maximum limit of production of guns and butter.

Assumptions for PPC
 The resources are fully and efficiently utilized.
 With the help of the given resources, only two goods
can be produced.
 The amount of resources in the given economy is
fixed but these resources can be transferred from one
use to another.
 Level of technology is assumed to be constant.
 When resources are transferred from the production
of one good to another, productivity decreases,
therefore resources are not equally efficient in the
production of all products.

Characteristics or Properties of PPC
 PPC is downward sloping from left to right
because there exists an inverse relationship
between the change in the quantity of one commodity
and the change in the quantity of another commodity.
 In other words, more of one good can be produced only by
taking resources away from the production of another
good.
PPC Slopes
Downwards
 PPC is concave shaped because of increasing MOC
(Marginal Opportunity Cost) i.e. more and more units of
one commodity are sacrificed to gain an additional unit of
another commodity.
PPC is Concave
Shaped
 If the resources are increasing then the curve
shifts rightward and if the resources are
decreased then the curve shifts leftward.
Shift Either Rightward or
Leftward Depending on the
Availability of Resources

Marginal
Rate of
Transformation MRT is the ratio of the
number of units of a
commodity sacrificed to
gain an additional unit
of another commodity.
MRT =
∆ 𝐔𝐧𝐢𝐭𝐬 𝐒𝐚𝐜𝐫𝐢𝐟𝐢𝐜𝐞𝐝
∆ 𝐔𝐧𝐢𝐭𝐬 𝐆𝐚𝐢𝐧𝐞𝐝

Marginal
Opportunity
Cost
 MOC refers to the number of
units of a commodity sacrificed
to gain one additional unit of
another commodity.
 In the case of PPF, MOC is
always increasing, i.e. more
and more units of a commodity
have to be sacrificed to gain an
additional unit of another
commodity.

Whether the economy will always operate on PPF?
The exact point of operation depends on how well the resources of the economy are used.
 Economy will operate on PPF only when
resources are fully and efficiently utilized.
 Economy will operate at any point inside
PPF if resources are not fully and
efficiently utilized.
 Economy cannot operate at any point
inside PPF as it is unattainable with the
available productive capacity.
 Economy can either operate on PPF or inside PPF, known as „Attainable
Combinations‟.
 Economy cannot operate outside PPF, known as „Unattainable Combinations‟.

 It refers to those combinations at which the
economy can operate.
 There can be two attainable options :
a) Optimum utilization of resources;
b) Inefficient utilization of resources.
Attainable and Unattainable Combinations
C
B
•
A
F •
• Any point on PPF
(Points A to D) or
any point inside
PPC (Point E)
are attainable
combinations.
• Any point outside
PPF (point F) is
an unattainable
combination.
3 --
6 --
9 --
12 --
15 --
18 --
21 -
X
|
6
|
5
|
4
|
3
|
2
|
1
Butter (in units)
Guns
(in
units)
Y
O
E •
•
•
•
D
Attainable Combinations
Unattainable Combinations
 With the given amount of available resources it is
impossible for the economy to produce any
combination more than the given possible
combination.
 An economy can never operate at any point outside
the PPF.

Can PPF be a Straight Line?
PPF can be a straight line
if we assume that MRT is
constant, i.e. the same
amount of a commodity is
sacrificed to gain an
additional unit of another
commodity.
PPF will be a straight line
as shown in figure :

Can PPF be convex to the origin?
PPF can be convex to the origin if MRT is decreasing,
i.e. fewer units of a commodity are sacrificed to gain an
additional unit of another commodity.
PPF will be a convex-shaped curve as shown below Fig :
It must be noted that both the
above situations would not arise,
as MRT always increases, so, PPF
is always concave shaped.

Relationship between PPF and MRT
Butter (in units)
21 --
18 --
15 --
12 --
9 --
6 --
3 --
|
1
|
2
|
3
|
4
|
5
|
6
X
G
F
E
D
C
B
I
H
O
Y
PPF and MRT
Guns
(in
units)
A
 We can measure MRT on the
PPF and PPF is a concave-
shaped curve.
 The slope of PPF is a measure of
the MRT.
 The slope of a concave curve
increases as we move
downwards along with the
curve.
 The MRT also rises as we move
downwards along the curve.

Relationship Between PPF And Opportunity Cost
 The opportunity cost of a product is the alternative that must be given up to produce that
product.
 The opportunity cost of producing more butter is fewer guns.
 As we move the point from point „E‟ to „F‟, the production of butter rises from 4 units to 5 units,
but the number of guns decreases from 11 units to 6 units.
 Opportunity cost of the 5th unit of butter is the sacrifice of 5 units of guns.
Possibilities
Guns
(in units)
Butter
(in units)
MOC
A 21 0 ---
B 20 1 1
C 18 2 2
D 15 3 3
E 11 4 4
F 6 5 5
G 0 6 6
●
A
●
●
●
G
F
E
D
C
B
3 --
6 --
9 --
12 --
18 --
21 --
15 --
|
6
|
5
|
4
|
3
|
2
|
1
Butter (in units)
1
Butter
5 Guns
O
X
PPF of Opportunity Cost
Guns
(in
units)
Y
●
●
●

PPF as
Transformation
Curve
 Slope of PPF indicates the ease or
difficulty in transforming one good
into another.
 In the PPC curve when we move
down the curve, we transform guns
into butter.
 When we move up, we transform
butter into guns.
 Due to this, PPF is known as the
„Transformation Curve‟.

Change In PPF
The change in PPF can be of two types
Shift in PPF
PPF will shift when there is a
change in productive capacity
concerning both goods.
Rotation in PPF
PPF will rotate when there is a
change in productive capacity
concerning only one good.
The change in PPF indicates either an increase or a
decrease in the economy‟s productive capacity.

Shift in PPF
1) Rightward Shift in PPF :
 When there is “Advancement or Upgradation of
Technology” or “Growth of Resources” concerning both
the goods, then PPF will shift to the right.
 For Example: If there is an increase in resources for the
production of butter and guns, we came to produce
more of both goods and as a result, PPF will shift to
the right by P1P1.
2) Leftward Shift in PPF :
 PPF will shift towards the left when there is a
technological degradation or decrease in resources
concerning both goods.
 For Example: The destruction of resources in an
earthquake will reduce the production capacity and as
a result, PPF will shift to the left from PP to P1P1.
PPF shifts to the right from PP
to P1P1 when there is growth of
resources or/and technological
degradation of both guns and
butter.
P1
P
X
Rightward shift in PPF
Butter (in units)
O
Guns
(in
units)
P
P1
Y
P
P1
X
Butter (in units)
O
Guns
(in
units)
P
P1
Y
PPF shifts to the left from PP
to P1P1 when there is decrease
in resources or/and
technological degradation of
both guns and butter.
Rotation of PPF

Rotation of PPF
1) Rotation for Commodity on the X-axis :
 When there is a technological improvement or an
increase in resources for the production of the commodity
on the X-axis, then PPF will rotate from AB to AC.
 In case of technological degradation or a decrease in
resources for the production of butter, PPF will rotate to
the left from AB to AD.
X
A
Guns
(in
units)
C
B
D
Butter (in units)
Leftward rotation
Rotation for Commodity
on the X-axis
O
Rightward
rotation
Y
2) Rotation for Commodity on the Y-axis :
 Technological improvement or an increase in resources
for the production of the commodity on the Y-axis will
rotate the PPF from PP to PA.
 In case of degradation in technology or a decrease in
resources for the production of guns, PPF will rotate to
the left from PP to PB.
X
P
Good X
O
Good
Y
B
P
A
Y Rotation for Commodity
on the Y-axis

Overview
of PPF
 PPF is concave-shaped due to increasing MRT.
 PPF shows the maximum available possibilities and
operations depending on how well the resources of the
economy are used.
 If the economy operates at any point inside PPF, it means
resources are not fully and efficiently utilized.
 An outward shift in PPF, means that the economy can
produce more of both commodities.
 PPF slopes downwards, as an increase in the production of
one good requires a decrease in the production of the other.
 PPF shows transformation, not physically, but by diverting
resources from one use to the other.
 If the economy operates on PPF, it means resources are fully
and efficiently utilized.
 An outward shift in PPF means, that the economy can
produce more of both commodities.

ECONOMICS PPT 1.pdf jnsjdhiahdbhbhcdjkab

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ECONOMICS PPT 1.pdf jnsjdhiahdbhbhcdjkab