Skip to main content

Featured post

Fundamental principles of costing

19 comments

Introduction to Micro-economics

pic. Micro-economics

Meaning of micro economics
·         Economics has two major branches : micro economics and macro economics.
·         Micro economics is that branch of economics which deals with the economic behavior of individual units or small group of individuals. The study of a individual firm, a consumer or demand for a commodity or supply of a commodity or price determination of a commodity etc. is a micro economic study.
·         Macro economics is that branch of economics which deals with the behavior of aggregates of the economy. Macro economics is the study of the economy as a whole. The study of national income of a country, aggregate demand, aggregate supply, determination of level of employment in an economy, general price level etc. is macro economic study.
·         Micro economics and macro economics are both complementary branches of economics. They are interrelated. One helps the study of the other. We seek to explain the economic behavior of individual units in the context of the behavior of the economy as a whole and vice-versa.

Basic economic problem

·         Every individual has to face an economic problem. Human wants are unlimited but the economic resources to satisfy these wants are limited and have alternative uses. Since the resources are limited, the individual has to choose between alternative uses of the available resources. This is known as economic problem or the problem of choices. Economic problem or problem of choice arises from the scarcity of resources relative to human wants.
·         Scarcity of resources having alternative uses is the major cause of economic problem, if the resources are available in plenty, then there would be no economic problem(or choice problem). Micro economics is about making choice in the presence of scarcity at the individual and society level

Central problems of economy
pic. Central problems
·         Like an individual, every economy also possesses limited resources. It has to face various choice problems.
These are called the central problem of an economy. These are as follows:
I.                    What to produce?
II.                  How to produce? And
III.                For whom to produce?
·         All central problems of an economy arise due to scarcity of resources.
·         The central problem of ‘what to produce ‘ refers to which goods and services will be produced in an economy and in what quantities.
·         The central problem of ‘how to produce’ refers to what technique of production(i.e., labor intensive or capital intensive ) should be used to produce goods.
·         The central problem ‘for whom to produce’ is related to the distribution of produced goods and service (i.e., income and wealth) among factors of production in the form of rent, wages, interest and profit.
·         Different economic systems evolve different mechanisms to solve the central problems. In a capitalist or market-oriented economy, the central problems are solved through price mechanism. In a socialistic or centrally planned economy, the technique of economic planning is used. A mixed economy relies on economic planning along with an active role of price mechanism.
Concept of production possibility curve and opportunity cost
pic. Basic production possibility curve
·         all central problems of an economy can be explained clearly with the help of its production possibility curve. A production possibility curve depicts those different combinations of two commodities that an economy can produce with the help of available resources. A ppc is also called a production possibility frontier.
·         Generally, the production possibility curve slopes downwards and is concave to the origin. The shape of this curve is so because of increasing marginal opportunity cost.
·         Marginal opportunity cost of one commodity (say ‘x’) means the amount of another commodity (say ’y’) which is sacrificed to have an additional unit of the ‘X’ commodity. Marginal opportunity cost is generally increasing. It means more and more of the other good has to be sacrificed to have per unit increase of the former commodity.
·         If an economy is producing a combination of goods that lies on its PPC, it represents an efficient use of available resources. If the actual production is on a point which lies below the PPC, it would mean that a part of available resources is not being utilized.  Any point beyond PPC would be unattainable.
·         A PPC shifts to the right due to technological progress or increase in the supply of resources available to an economy or both. An upward shift of PPC always implies growth of resources in an economy.
·         The opportunity cost of a good is the value of the next best alternative good foregone for it. Suppose a given value of resources can used to produce either a car or 50 computers. Then, the opportunity cost of a car is not its market price but 50 computers which are foregone to produce one car.  


Also read:
Importance of marketing in economy 
Classification of taxes




Labels:

Comments

Post a Comment

Popular posts from this blog

The five M's of management explained

The factors of production consists of many factors such as land, labour, capital, entrepreneurship and management in which management is a vital factor of production, an entrepreneur may establishes the organization as its owner , but it is management that make various resources productive.they simply require the catalyst of management to produce results because it is management that coordinates various factors of production. therefore, management occupies a central place among all the factors of production. there are other factors of production too,which are money, manpower, materials, machinery and method s known as the five m's of management . these are known as the five m's of management because of there initials which is 'M' . The five M's of management are analyzed below: 1.        Money : money is the most critical and all purpose resource  because it is used to acquire or hire other resources. In organization , money is emplo
91 comments
Read more

Fundamental principles of costing

In this article you will read about the fundamental principles of costing 1.        Cost is related to its cause. A cost is related as closely as possible to its cause. Rent of the factory, for instance, cannot be charged to office expenses, repairing charges of a machine cannot be charged to some other machine, and in the same way, a foreman’s salary cannot be charged to one single unit, if many more units are produced in a department supervised by that foreman. The reason in all the above cases is that cost is related to its cause. 2.        Cost is charged after it is incurred. If a cost is not incurred either actually or notionally, it cannot be charged to a cost centre. For instance, a cost unit is not charged with selling costs while it is still under manufacture in the factory, as selling costs would occur only when the cost unit is finished in the factory and is sold. Similarly, normal loss or wastage is to be borne by the units of which it is a loss or wastage, su
19 comments
Read more

PRODUCTION FUNCTION: RETURNS TO A FACTOR AND RETURNS TO SCALE

1.        Production requires use of certain inputs like land, labour, capital, raw materials, etc. these inputs are classified as: (i)                   Factor inputs and (ii)                 Non-factor inputs Factor inputs include factors of production such as land, labour, capital and enterprise, whereas non-factor inputs include raw material and fuels. These inputs are further classified as (i)                   Fixed inputs and (ii)                 Variable inputs A fixed input is one whose supply cannot be increased in the short run such as, land whereas a variable input is one whose supply can be increased in the short run, such as labour. 2.        A production function expresses the technical relationship between inputs and output of a firm. It tells the maximum quantity of output that can be produced with any given quantities of inputs. If there are two factor inputs : labour (l) and capital (k), then the production function can be written as
6 comments
Read more