Chapter 8: Introduction to Microeconomics
Economics is defined as the study of how people allocate their limited resources to satisfy unlimited wants. The study is divided into two major parts: Microeconomics and Macroeconomics.
Microeconomics vs Macroeconomics
- Microeconomics studies the behavior of individual economic units—such as a single consumer, firm, or industry. Topics include price determination of a commodity, consumer behavior, and producer behavior.
- Macroeconomics studies the economy as a whole. Topics include national income, aggregate demand, and inflation.
Positive and Normative Economics
- Positive Economics deals with “what is”, “what was”, and “what will be”. It involves facts that can be verified. Example: “The current poverty rate in Country X is 10%.”
- Normative Economics involves value judgments and opinions. It deals with “what ought to be”. Example: “The government should increase the minimum wage to eradicate poverty.”
Central Problems of an Economy
Due to the scarcity of resources and their alternative uses, every economy faces three fundamental economic choices:
- What to produce? (Choosing which goods and services to produce and in what quantities, e.g., consumer goods vs capital goods).
- How to produce? (Choosing the technique of production: Labour-Intensive vs Capital-Intensive).
- For whom to produce? (Choosing how the produced goods will be distributed among the members of society).
Production Possibility Frontier (PPF)
The PPF is a curve that shows all the possible combinations of two goods that can be produced in an economy with given resources and technology, assuming they are fully and efficiently utilized.
Opportunity Cost
Opportunity cost is defined as the value of the next best alternative forgone when making a choice. Since resources on a PPF are fully employed, increasing the output of Consumer Goods requires taking resources away from Capital Goods. The amount of Capital Goods sacrificed is the opportunity cost of producing more Consumer Goods.
Competency-Based Questions
Application-Based Question
Q1. The government of a developing nation passes a resolution adopting advanced, imported, robotic manufacturing technology instead of employing manual laborers for a massive textile project. Which of the central economic problems does this decision address? (a) What to produce (b) How to produce (c) For whom to produce (d) Why to produce
Answer: (b) How to produce. This problem relates directly to the choice of the technique of production (Capital-intensive technique using robotic manufacturing).
Analytical Questions
Q2. Widespread unemployment is observed in an economy. (a) Show this situation using a Production Possibility Frontier (PPF). (b) Will the elimination of this unemployment lead to an outward shift of the PPF? Give reasons.
Answer: (a) An economy experiencing widespread unemployment indicates that its resources are neither fully nor efficiently utilized. On the PPF diagram, this is represented by a point inside the PPF curve (like point C in the diagram above). (b) The elimination of unemployment will not lead to an outward shift of the PPF. The PPF shows the maximum possible output an economy can produce given fully utilized resources. Eliminating unemployment moves the economy from a point inside the PPF to a point on the PPF, but the PPF curve itself does not shift unless the amount of total available resources increases or technology improves.