Chapter 1 – Introduction to Micro Economics
Definition of Economics
Economics as a Science
Economics can be seen as a science because it uses scientific methods in its researches and investigations. Economics uses ‘Money’ as its measurement unit to measure the business and individual motives.
Economics as an Art
As an art, Economics can be understood as a knowledge stream which helps in solving practical problems relating to an economy in everyday life. As an art it puts knowledge into practice.
Economics – Positive and Normative Science
Economics is a Positive science because it deals with the question – “What is?” It means economics studies the problem in its true nature and take into consideration the real situation, facts and figures.
Economics is a Normative Science because it tries to answer the question – “What Should be?” It ventures into the dangerous zone by suggesting the possible solutions to a given economic problem. It examines the events from economic, ethical and social angles and judge the events accordingly.
Micro Economics and Macro Economics Analysis
Micro Economics deals with smaller units of an economy e.g. an individual bread maker, a single garment seller. Hence it may be defined as a branch of economics which studies about an individual unit rather a group of similar units.
Macro Economics on the other hand deals with the grouped units of an economy. It sees the economic activities from a larger perspective. It does not study the behaviour of a single unit rather it studies group of units like GDP, National Income, Balance of Payment, Government Budget etc.
Interdependence between Micro Economics and Macro Economics
Hence we can say that these two complement each other in such a way that one is incomplete without the other.
Central Problems of Economics
There are three basic economic problems which every economy faces:-
- What to Produce – The economy has scarce resources and the resources has multiple uses. So the economy has to make a choice between the goods to be produced. It has to decide what should be produced and in what quantity.
- How to Produce – There are two main alternatives available with the economy for carrying on the production activity. It may choose Labour Intensive technique (More labour and less capital) or Capital Intensive technique (More Capital less Labour).
- For Whom to Produce – Here the economy has to decide on the distribution of the goods and services to the various sections of the society.
Types of Economies
Mainly three types of economies exist:-
- Capitalist Economy – In this type of economy, the central problems are solved by the market forces of demand and supply and the government plays a minimal role. The factors of production function under private ownership. The whole economy works for profit motive. There exists a great inequality of income which results in a class struggle. The people are free to choose their area or field of economic activity.
- Socialist Economy – This type of economy is just opposite to the Capitalist economy. Here, all the factors of production are under the control of the Government of the central authority. Hence, welfare is the main motive behind all the economic activities. People are given guarantee in job (job security) by the government. Profit motive takes a back-seat here. Production of only those goods and services are undertaken which are decided by the government in accordance with the people’s choice. Government ensures economic equality for all.
- Mixed Economy – This type of economy has all the best features of the Capitalist Economy as well as Socialist Economy. The factors of production are jointly owned by the private forces and government. Both these sectors charge different prices for the goods manufactured by them. Government ensures the availability of the essential commodities at fair prices.
Production Possibility Curve
PPC is a famous method of showing the choice opted by a producer when the resources are limited and various combinations can be framed between the two products.
As shown in the diagram, any two products or resources or factors can be placed on the Y axis and X axis. The Curve shows the highest possible production of goods or service.
The curve is concave in shape because of the increasing Marginal Opportunity Cost.
The curve is downward sloping because increase in production of one product is possible only when the other is sacrificed.
Shifting of PPC
In a situation of technological improvement, capital infusion etc. the PPC tends to shift rightwards and in opposite case it shifts leftwards.