Micro vs macro economics
Economics is the study of how people use scarce resources to meet their wants.
Microeconomics looks at small units. One buyer. One firm. The price of one good, like onions. The word "micro" means small.
Macroeconomics looks at the whole economy. Total output of the country (GDP). Total jobs. The general price level. "Macro" means large.
| Micro | Macro |
|---|---|
| Demand for tea by one family | Total demand in India |
| Price of wheat | Inflation (all prices) |
| Output of one firm | National income |
Positive vs normative economics
A positive statement says what is, was or will be. You can check it with data. Example: "India's population is more than 140 crore."
A normative statement says what ought to be. It carries a value judgment (a personal view of good or bad), so people can disagree. Clue words: should, ought, must, better. Example: "The government should give free electricity."
A positive statement can be false and still be positive. What matters is that it can be tested.
What is an economy?
An economy is the system through which people earn a living: households give work, land and money; firms use them to produce goods and services; these are bought and sold. The goal is to meet people's wants.
Two facts create the economic problem:
- Scarcity: resources (land, labour, capital, time) are limited compared with wants.
- Alternative uses: each resource can be used in many ways (land for rice or for a factory).
So we must choose, and every choice gives something up.
Central problems of an economy
- What to produce and how much? Food or phones? More of one means less of another.
- How to produce? Which technique: labour-intensive (many workers) or capital-intensive (more machines)? India, with many workers, often prefers labour-intensive methods.
- For whom to produce? How is output shared among people? This depends on incomes and on government policy.
A market economy answers these through prices and demand. A centrally planned economy answers them through the government. A mixed economy (like India) uses both.
Production possibility frontier (PPF)
The PPF (also called production possibility curve, PPC) shows all the combinations of two goods an economy can produce when it uses all its resources fully and efficiently, with given technology.
Assumptions: only two goods; resources are fixed; technology is fixed; resources are fully and efficiently used.
| Point | Wheat (t) | Cloth (rolls) | Cloth given up for 1 more wheat (MRT) |
|---|---|---|---|
| A | 0 | 15 | – |
| B | 1 | 14 | 1 |
| C | 2 | 12 | 2 |
| D | 3 | 9 | 3 |
| E | 4 | 5 | 4 |
| F | 5 | 0 | 5 |
Points on, inside and outside
On the PPF: full and efficient use. Inside: some resources idle or wasted (unemployment). Outside: not possible with present resources and technology.
Shifts
More resources or better technology for both goods shift the PPF out (growth). A disaster, like an earthquake, shifts it in. Better technology for only one good rotates it along that good's axis.
Opportunity cost and MRT
Opportunity cost = the value of the next best alternative given up. If you use land for wheat, the cloth you could have made is the opportunity cost.
Marginal rate of transformation (MRT) = units of one good given up to get one more unit of the other = ΔCloth ÷ ΔWheat. It is the slope of the PPF.
Why is the PPF concave (bowed out)?
Because MRT rises. Resources are not equally good at making both goods. The first workers moved to wheat are the ones best at wheat and worst at cloth, so little cloth is lost. Later we move workers who are great at cloth, so much more cloth is lost. If resources were equally good at both, MRT would be constant and the PPF would be a straight line.
Try it at home
You have 2 hours this evening for study or cricket. Make a small table: 0, 30, 60, 90, 120 minutes of study, and write how many overs of cricket you could still play. Plot it. Is the line straight or bowed? What is the opportunity cost of the last 30 minutes of study?
Key formulas and definitions
- Opportunity cost = value of the next best alternative given up
- MRT = units of Y given up ÷ extra units of X = ΔY/ΔX (slope of PPF)
- Rising MRT → concave PPF; constant MRT → straight-line PPF
Worked examples
1. Say whether positive or normative: "Unemployment in India was about 3% last year."
Positive. It describes what was and can be checked with data.
2. Say whether positive or normative: "Rich people should pay more tax."
Normative. It uses "should" and is a value judgment.
3. From the table, find the MRT when moving from C (2, 12) to D (3, 9).
Cloth given up = 12 − 9 = 3. Extra wheat = 1. MRT = 3 ÷ 1 = 3 rolls of cloth per tonne of wheat.
4. An economy produces (3 wheat, 6 cloth) while the PPF allows (3, 9). What does this show?
The point is inside the PPF. 3 rolls of cloth are being lost because some resources are unemployed or used badly.
5. A new seed doubles wheat output but cloth technology is unchanged. How does the PPF change?
It rotates outward along the wheat axis. The cloth intercept (15) stays the same; the wheat intercept grows.
6. MRT values along a PPF are 2, 2, 2, 2. What is the shape of the PPF?
A straight line, because the opportunity cost stays constant.
Common mistakes
- Calling any statement with numbers "positive". It is positive only if it can be tested, not because it has numbers.
- Thinking a point inside the PPF is impossible. It is possible; it just wastes resources. Outside points are the impossible ones.
- Saying the PPF shifts out when unemployed workers get jobs. That moves the point from inside onto the PPF; the PPF does not shift.
- Forgetting that MRT is "given up ÷ gained", so writing 1/3 instead of 3.