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Introductory Micro Economic Theory Unit-1st Class 12th Notes JKBOSE

Economics 12th Notes Download
12th Economics

Syllabus (Marks - 4)

a) Microeconomics -meaning.

b) Central problems of an economy. Production possibility curve and opportunity cost.{alertSuccess}

1.What is Micro Economics:-

The word micro is derived from a Greek word "Mikros" which means samll. In the context of economics Micro-economics mean the study of individual units of economy. Microeconomies includes the study of demand theory, price determination and factor pricing.It is also called price theory.

2. Central problems of an Economy.

Meaning of economic problem:- Human wants are unlimited but means to satisfy these wants are limited. These resources can also be put to alternative uses Therefore satisfaction of unlimited wants with limited means creates the problem of choice. Hence we can say economic problem is essentially a problem, of choice.

Causes of Economic Problem:- Economic problem arise due to the followinge Rasons.


1.Unlimited wants:- Human wants are unlimited. Because no man can satisfy all his wants. Also, wants of all human beings increase day by day. Moreover when we satisfy a human want, after some time it comes up again


2. Means are limited:- Most of the goods and services satisfying human wants are limited or scarce. Scarcity refers to that situation in which the demand is their supply. It is also a cause of economic problem.


3. Means have alternative uses:- Another cause of economic problem is that means have alternative uses. Eg. a particular piece of land can be used either for  construction of a house or for cultivation for a crop.


4. Wants vary in priorities:- all wants not equally important, some wants are more important and some are less important. So a man has to satisfy his wants in priorities.


Central problems:


1. Allocation of Resources:- It is the basic problem related to use of resources for the production of different goods and services. It has three aspects which are as under:

a) What to produces- To satisfy unlimited wants with the help of limited resources very economy has to decide what goods and services should be produced. It is undoubtedly a basic problem because if we want to produce more of one commodity we have to produce less of another commodity.


b) How to produce:-This refers to the choice between techniques of production. There are two techniques of production One is labour intensive technique under which more labour is used and another is capital intensive technique in which more capital is used in production of a commodity. An economy has to decide which technique should be used in production of a commodity.


c) For whom to produce:-This refers to the problem of distribution of goods and services among different individuals of the society. Under capitalism the decision regarding distribution is taken on the basis of purchasing power of consumers and under socialism it is taken on the basis of requirements of the individuals.


2. Fuller utilization of Resources:-This refers to the problem of use of resources. Since the resources are limited they should be fully utilized so that maximum production should be made possible without loss of resources If resources remain idle or underutilized economic development will suffer.


3. Growth of resources - Another central problem is to increase the level of production. This is also known as problem of growth of resources. Every economy is faced with the problem of how to increase the production capacity so that total production is increased Through technological progress, a country can achieve the objective of growth of resources.


3. Production Possibility Curve

It is a curve which shows various alternative production possibilities which can be produced with given resource and technique of production. It is also called production possibility frontier because it shows limit of what is possible to produce. Along a PPC if we want to increase the production of one commodity then we have to reduce the production other commodity. Hence it is sometimes called the production transformtion curve.

PPC is further explained with the help of following table and diagram.Here for the sake of simplicity we assume that only two goods wheat and cloth are produced with given resources and technique of production.


Production Possibility Schedule
Production Possibilities Production of Wheat (in lakh tonnes) Production of Clothes (in meters)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0


Production Possibility Curve

From the above schedule and diagram it is clear that with given resources and technique of production, there are various production possibilities such as A,B,C,D and F. By joining all such points we get a curve known as PPC.

Every point on PPC shows fuller utilization of resources. Any point which is inside the PPC such as K shows inefficient utilization or under utilization on of resources. If PPC shifts to right as shown by dotted lines in the diagram, it implies the process of growth of resources.  


Meaning of Opportunity Cost:-

Opportunity cost refers to the value of a factor in its next best(or second best).Let us suppose that a given set of resources have two uses .Use 1 and Use 2.If value of output in Use 1 is Rs. 400 and value of output in use 2 is Rs 500,common sense will dictate that resources with be employed in Use 2. Given this situation opportunity cost may be defined of output in Use I=Rs 400). When resources are employed not in  USE 1 but in Use 2. Hence opportunity cost refers to value of a factor in its alternative use. 

Opportunity Cost is The Cost of next best alternative use forgone. It is also Known as Alternative Cost.


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