Short Notes: Introduction to Microeconomics | Economics Class 11 - Commerce PDF Download

• An economy is a system of production, distribution, and consumption of goods and services within a region (e.g., a country).
• It determines what to produce, how to produce, and how to distribute resources among people.
• Key participants:
  1. Individuals: Earn income through work and spend on goods/services.
  2. Businesses: Produce goods/services for profit.
  3. Government: Regulates activities, provides services, collects taxes.
• Markets (physical or virtual) facilitate buying and selling.
• Goal: Efficiently allocate limited resources (land, labour, capital) to meet population needs.
• Example: India’s economy includes farmers, factories, banks, consumers, and government programs like healthcare.

What is Economics?

• Economics studies how people, businesses, and governments make choices about scarce resources.
• Addresses three key questions:
  1. What to produce? E.g., prioritise education or defence.
  2. How to produce? E.g., use more machines or workers.
  3. For whom to produce? E.g., goods for all or only those who can pay.
• Analyses individual behaviour and large-scale economic trends.
• Example: Rising petrol prices may lead people to use public transport, reflecting economic decisions based on price and availability.

A Simple Economy

• Unlimited Needs: People have endless wants (food, clothing, shelter, etc.).
• Limited Resources: Resources (e.g., land, labour, time) are finite, forcing choices.
• Needs Exceed Resources: Individuals prioritise certain goods/services over others.
• Example: A farmer grows crops to sell and buy clothes; a teacher earns a salary to meet needs.
• Mismatches in production and wants lead to overproduction (wasted resources) or underproduction (shortages).
• Proper resource allocation and distribution are critical to avoid economic problems.

Central Problems of an Economy

• Economic Problem: Satisfying unlimited wants with limited resources, having alternative uses.
• Scarcity: Limited resources (money, time, labour, land) vs. unlimited wants force prioritisation.
• Alternative Uses: Resources can serve multiple purposes, requiring trade-offs.
• Three central problems:
  1. What to produce? Deciding which goods (e.g., consumer vs. capital, civil vs. war) and quantities to produce.
  2. How to produce? Choosing production techniques (labour-intensive vs. capital-intensive).
  3. For whom to produce? Determining distribution among individuals (personal) and factors of production (functional).
• Example: Choosing handlooms (labour-intensive) vs. power looms (capital-intensive) for cloth production.

Production Possibility Frontier (PPF)

• PPF shows combinations of two goods that an economy can produce using all resources efficiently.
• A concave curve reflects increasing opportunity cost: producing more of one good reduces the other.
• Key points:
  1. Efficient Production: Points on the curve (full resource use).
  2. Underutilisation: Points inside the curve (unused/misused resources).
  3. Unattainable: Points outside the curve (beyond current resources).

• Opportunity Cost: Value of the next best alternative given up (e.g., producing more wheat reduces cloth output).
• Example: Producing 10 units of cotton leaves no resources for corn; 9 units of cotton allows 1 unit of corn.

Q: What does a concave curve on the PPF indicate about opportunity cost?

View Answer  

A concave curve indicates increasing opportunity cost, meaning producing more of one good reduces the quantity of the other good.

Organisation of Economic Activities

• The government makes all decisions on production, exchange, and consumption.
• Aims for equitable resource allocation and distribution.
• Interventions: Subsidies, public enterprises, price controls, rationing.
• Example: The Soviet Union set production targets and controlled prices.

• Decisions made by buyers and sellers via markets (shops, online platforms).
• Prices guide what, how, and for whom to produce.
• Promotes freedom, competition, and efficiency but may require government intervention for fairness (e.g., healthcare, education).
• Example: U.S. emphasises economic freedom; China blends market and government control.

Positive and Normative Economics

• Positive Economics: Analyses how economic mechanisms function (objective analysis).
• Normative Economics: Evaluates how mechanisms should function (subjective, value-based).
• Both are interconnected; understanding outcomes (positive) informs ideal policies (normative).
• Helps evaluate resource allocation and distribution mechanisms for desirability.

Microeconomics vs. Macroeconomics

• Microeconomics: Focuses on individual agents (e.g., consumers, firms) and their market interactions.
• Macroeconomics: Examines the economy as a whole, analysing aggregates like total output, employment, and price levels.
• Macro questions: What determines total output? Why do prices rise? Why are resources unemployed?