Prelims High-Yield Explanations & Traps

• that a point lying strictly below the
• that the concept of opportunity cost is applicable to the individual as well as the
• and is widely used in economics
• activities in the economy
• decisions regarding
• for the prosperity and
• to note that the term ‘market’ as used
• information to all the individuals across
• decisions are taken by the government and the economic activities are by and
• to understand which of these alternative mechanisms is more
• questions that are studied in macroeconomics are as follows: What is the level of
• physical, tangible objects used to satisfy people’s wants and needs

Essential Definitions & Formulas

The amount of corn that the family farm can produce

limited by the amount of resources it has, and hence, the amount of different goods 1 By goods we means physical, tangible objects used to satisfy people’s wants and needs.

Introductory Microeconomics and services that it can procure in exchange of corn

also limited.

The same

the case with all other individuals in society.

Similar

the case with all other goods or services.

Here we assume that all the goods and services produced in a society are consumed by the people in the society and that there

no scope of getting anything from outside the society.

Introduction What

produced and in what quantities? Every society must decide on how much of each of the many possible goods and services it will produce.

The collection of all possible combinations of the goods and services that can be produced from a given amount of resources and a given stock of technological knowledge

called the production possibility set of the economy.

This curve

called the production possibility frontier.

This

known as the opportunity cost a of an additional unit of the goods.

Note that the concept of opportunity cost

applicable to the individual as well as the society.

The concept is very important and

widely used in economics.

ORGANISATION OF ECONOMIC ACTIVITIES Basic problems can be solved either by the free interaction of the individuals pursuing their own objectives as

done in the market or in a planned manner by some central authority like the government.

The central authority may try to achieve a particular allocation of resources and a consequent distribution of the final combination of goods and services which

thought to be desirable for society as a whole.

It

important to note that the term ‘market’ as used in economics is quite different from the common sense understanding of a market.

This signals to the producers of that good that the society as a whole wants more of that good than

currently being produced and the producers of the good, in their turn, are likely to increase their production.

The only difference

in terms of the extent of the role of the government in deciding the course of economic activities.

The closest example of a centrally planned economy

the China for the major part of the twentieth century.

An institution

usually defined as an organisation with some purpose.

Often a distinction

made between positive economic analysis and normative economic analysis depending on whether we are trying to figure out how a particular mechanism functions or we are trying to evaluate it.

The positive and the normative issues involved in the study of the central economic problems are very closely related to each other and a proper understanding of one

not possible in isolation to the other.

Related PYQs (1)