Introduction to Microeconomics

Economics is the social science that studies how individuals, households, firms, and governments make choices in conditions of scarcity — how they allocate limited resources to satisfy unlimited wants. Microeconomics: • Microeconomics studies the economic behaviour of individual units — a consumer, a firm, or a market. • It examines how individual decision-makers allocate their resources and how prices are determined in individual markets. • Examples: how a household decides how much of a good to buy; how a firm decides how much to produce; how the price of wheat is determined in the wheat market. • Key concepts: demand, supply, market equilibrium, consumer behaviour, theory of the firm, market structures. Macroeconomics: • Macroeconomics studies the economy as a whole — the behaviour of aggregate variables. • It examines national output (GDP), overall price levels (inflation), employment, money supply, government budgets, and international trade. • Examples: what determines the GDP of a country; why does unemployment rise during a recession; what is the effect of government spending on the economy. • Key concepts: national income, aggregate demand, aggregate supply, money and banking, fiscal policy, monetary policy. Key difference in a tabular form: 1. Unit of study: Micro — individual units (consumer, firm, industry); Macro — the economy as a whole. 2. Focus: Micro — price determination, resource allocation; Macro — national income, employment, inflation. 3. Variables: Micro — individual demand, individual supply, price; Macro — GDP, price level, unemployment rate. 4. Policy tools: Micro — competition policy, price regulation; Macro — fiscal and monetary policy.

The central problem of every economy is SCARCITY — resources (land, labour, capital, entrepreneurship) are limited while human wants are unlimited. This fundamental conflict forces every society to make choices about how to use its resources. Because of scarcity, every economy must solve three basic economic problems: 1. WHAT to produce (and in what quantities)? • An economy cannot produce everything in unlimited amounts. It must decide which goods and services to produce and how much of each. • Example: Should the country produce more consumer goods (food, clothing) or more capital goods (machinery, infrastructure)? More defence goods or more civilian goods? • This involves choosing among alternatives — the concept of opportunity cost. 2. HOW to produce? • Once the economy decides what to produce, it must decide the method of production. • Should it use labour-intensive methods (using more workers) or capital-intensive methods (using more machines)? • The choice depends on the relative availability and cost of factors of production. In labour-abundant countries like India, labour-intensive methods may be preferred. 3. FOR WHOM to produce (distribution of output)? • Who gets the goods and services that are produced? How is the national output distributed among the members of society? • This is the problem of distribution — between rich and poor, between different groups, between different regions. • It involves questions of wages, profits, rent, and interest — the functional distribution of income. These three problems arise in every type of economy — whether capitalist (market economy), socialist (command economy), or mixed — and each type solves them through different mechanisms.

A Production Possibility Frontier (PPF) — also called a Production Possibility Curve (PPC) — is a curve that shows all possible combinations of two goods that an economy can produce when all resources are fully and efficiently employed, given the existing state of technology. Illustrations from the PPF: 1. Scarcity: Only combinations on or inside the PPF are attainable. Points outside the curve are unattainable with current resources and technology. 2. Choice and opportunity cost: Moving along the PPF — producing more of one good means producing less of the other. The slope of the PPF represents the opportunity cost of producing one extra unit of a good. 3. Increasing opportunity cost (concave shape): The PPF is typically concave (bowed outward) because resources are not perfectly adaptable between uses. As more of one good is produced, the opportunity cost (in terms of the other good sacrificed) increases — this is the Law of Increasing Opportunity Cost. 4. Efficiency: A point on the PPF represents full employment and productive efficiency. A point inside the PPF represents unemployment or underutilisation of resources. Causes of a shift (outward shift = economic growth): 1. Increase in resources: Discovery of new natural resources, growth in population/labour force, increase in capital stock. 2. Technological progress: Better technology allows more output from the same resources — the entire PPF shifts outward. 3. Improvement in quality of resources: Better education, skills, and training of the labour force. An inward shift (contraction) occurs due to: • War or natural disaster destroying resources • Depletion of natural resources • Emigration reducing the workforce