Introduction to Micro Economics Class 12 Notes CBSE Micro Economics Chapter 1 (Free PDF Download)

Economy: 

• The economy of a society is a web of organizations and institutions that help or hinder the production and distribution of goods and services. 

• The distribution of a society's resources, the value of goods and services, and even what can be traded or bartered in exchange for those services and goods are all determined by the economy.

Different Types of Economy:

1. Centrally Planned Economy: A centrally planned economy is one in which the government or a central authority plans all the economy’s major activities. All major decisions regarding the production, exchange, and consumption of goods and services are made by the government. The central authority attempts to achieve a specific resource allocation and also the distribution of the final combination of goods and services that is deemed desirable for the society as a whole.  The primary goal is social welfare.

2. Market Economy: All economic activities in a market economy are organised through the market. Free interaction of individuals who pursue their respective economic activities takes place in a market.

In other words, a market is a collection of arrangements in which economic agents freely exchange their endowments or products with one another. Also, no interference of government takes place, and there exists the influence of the private sector . the forces of demand and supply, as well as the behavior of economic participants determines the economy. The main objective is profit maximisation

3. Mixed Economy: The economy in which both the government and the private sector own and operate production factors. Profit maximisation in the private sector and social welfare in the public sector are the primary goals. The central planning authority and the price mechanism solve central problems.

Economics: 

• It is a branch of social science that studies the production, distribution, and consumption of goods and services. 

• The origin of economics can be traced back to Adam Smith’s 1776 book, ‘An Inquiry into Nature and Causes of Wealth of Nature.’ Economics was defined as managing a home with limited funds in the most cost-effective way possible. 

• It aims to solve the scarcity problem, which occurs when human wants for goods and services outnumber available supplies.

• The term ‘economics’ is derived from two Greek words: ‘eco’, which means ‘home’, and ‘nomos’, which means ‘accounts.’ 

• The topic has evolved from how to keep the family accounts to the wide-ranging subject at present.

The Real Meaning of Economics:

• It is the actual study of scarcity and choices.

• It seeks ways to reconcile unlimited wants with limited resources.

• Economics explains community living problems in terms of underlying resource costs and consumer benefits.

• Economics is concerned with the coordination of activities that result from specialization. 

Definition of Economics:

• The formal definition of economics can be traced back to the great Scottish economist Adam Smith (1723-90). Adam Smith and his followers, following the mercantilist tradition, regarded economics as a science of wealth that studies the processes of wealth production, consumption, and accumulation.

• The emphasis in Alfred Marshall's book “Principles of Economics,” published in 1890, was on human activities or welfare rather than wealth. “A study of men as they live, move, and think in the ordinary business of life,” Marshall defines economics. He claimed that economics is a study of wealth on one hand and a study of man on the other.

Difference Between Microeconomics and Macroeconomics:

Difference Between Positive and Normative Economy:

Problems of an Economy:

• The basic economic problem is one of choice, which is exacerbated by resource scarcity. 

• It's also known as the problem of resource economization, or the problem of making better and more efficient use of limited resources to meet the needs of the greatest number of people.

• Natural resources, such as land and air, human resources, such as labour, capital resources, such as machines and buildings, and entrepreneurial resources, such as a person willing to take risks, are all examples of factors of production. 

• Unlimited human wants, limited economic resources, and alternative uses of resources are the main causes of central problems.

Central Problems of an Economy:

1. What to produce: An economy has an infinite number of wants and a finite number of resources that can be put to other uses. The economy is unable to produce all types of goods, such as consumer and producer goods. As a result, the economy must decide what types of goods and services will be produced and in what quantities. 

2. How much to produce: It's a problem of deciding on a production technique. There are two types of production techniques:

1. Labor-Intensive Technique: This is a production technique in which labour is used more than capital.

2. Capital-Intensive Technique: Capital is used more than labour in this technique.

3. From whom to produce: It is a problem involving the distribution of manufactured goods among various social groups. It has two aspects:

1. Personal distribution: When the national income is distributed according to who owns the production factors.

2. Functional distribution: When the national income or production is distributed among various factors of production such as land, labour, capital, and entrepreneurship for the purpose of providing their services in terms of rent, wages, interest, and profit.

Problem Relating to the Efficient Use and Fuller Utilization of Resources:

Production efficiency refers to producing the greatest amount of goods and services possible with the resources available. Resources are already scarce in comparison to the demand for them, so an economy must ensure that its resources are not wasted by remaining underutilized.

Problem Relating to Resource Growth:

It has to do with increasing the economy's production capacity in order to increase the quantity of output.

Production Possibility Frontier:

• The production possibility frontier is a curve that depicts all possible combinations of two goods that can be produced in a given economy with given resources and technology.

• The production possibility frontier is also known as the transformation curve or the production possibility curve.

• Due to scarce and finite resources, the production of a commodity could only be increased if there is a reduction in the other commodity. Hence, the PPC curve is concave.

Assumptions

The PP curve concept is founded on the following assumptions:

• The economy's resource base is fixed.

• The technology is pre-installed and unmodified.

• The resources are effective and fully utilized.

• In the production of all goods, all resources are not equally efficient.

Diagram:

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In the diagram, there are different combinations of good X and good Y, that is combination A,B,C and D which could be produced when the the resources in the economy are optimally and fully utilized. Any point on or below the production possibility frontier gives a combination of goods that could be produced given the resources and technology, however any combination under the PPC (Point E) signifies the underutilization or wasteful utilization of resources.

Shifts in Production Possibility Curve.

• Reasons:

i. Changes in resources. 

ii. Changes in manufacturing technology for both goods.

• Rightward Shift: 

Production Possibility Curve shift to the right indicates an increase in resources or technological advancement. Example skilled labour, technological advancements, and increased land productivity are all factors that are contributing to increased productivity.

• Leftward Shift: 

Production Possibility Curve shift to the left indicates a decrease in resources or a deterioration in technology in the economy. Example unskilled labour, technological obsolescence, and decreased land productivity are all factors that are contributing to decreased productivity.

Methods for Resolving Fundamental Issues in Capitalistic and Planned Economies Include:

The market mechanism solves the fundamental problems in a capitalist or market-oriented economy. 

• The market forces of demand and supply have an impact on price. These forces assist us in determining what, how, and for whom we should produce.

• In a planned economy, the government makes all of the economic decisions about what, how, and for whom to produce. 

• The price mechanism is replaced by economic planning. The state sets the prices for various products, which are referred to as administered prices.

Introduction to Economics Chapter 1 Class 12th

Notes of Chapter 1 Microeconomics Class 12: An Introduction to Microeconomics

The first and most important topic in the Microeconomics Class 12 Chapter 1 notes is the central problems of the economy. The central problems of the economy are based on three simple questions:

a) What to produce?

b) How to produce?

c) For whom to produce?

Next, you will find that the central problems of the economy are briefly discussed in the Microeconomics Class 12 Chapter 1 notes.

a. What to Produce?

The dearth of resources is faced by almost every society. We belong to a finite world and the resources must be allocated on the basis of our collective requirements and wants. As per the Class 12th Economics Chapter 1 notes at this juncture, the problem of choice arises. You might have to select between the various products which can be produced with identical accessible resources. 

b. How to Produce?

There are several ways and procedures that people and government can select from when they are producing a commodity or service. For instance, production can occur through either capital-intensive or labour-intensive procedures on the basis of the way in which capital and labour are operated.

c. For Whom to Produce?

In the context of Class 12th Economics Chapter 1 notes, this might be the most significant question. Every society consists of some degree of uneven members. The inner meaning of the question is to derive the people who get benefits from the commotion of economic production. If only luxury commodities are produced, then those will be afforded by only the rich. A broad range of daily commodities at affordable rates will definitely benefit the low-income groups. 

Production Possibilities of An Economy

Chapter 1 Economics Class 12 Microeconomics depicts the production possibilities of an economy. It is the capacity of an economy to produce various commodities with accessible resources, obtainable technologies and other resources of production. 

Production Possibility Frontier

As per Introduction to Microeconomics Class 12 notes, Production Possibility Frontier (PPF) can be derived by a mathematical curve by which the equilibrium between the production levels of two separate products within restricted resources is shown. 

The Basics of Economics

Notes of Economics Class 12 Chapter 1 also deal with the basic subject matter of Economics. The subject matter of Economics is classified into two categories namely Macroeconomics and Microeconomics. Sometimes the production, distribution and consumption of commodities and services are termed as Economics.

Microeconomics deals with individual consumers and entrepreneurship whose decisions and behaviour impact the economy and vice versa. For instance, consumer behaviour comes under Microeconomics.

The other side of Economics is termed as Macroeconomics. It deals with the way the economy operates as a whole. For instances, National Income, RBI Monetary Policy, IS-LM Curve etc. are the major topics of Macroeconomics.

Centrally Planned Economy

According to Class 12th Economics Chapter 1 notes, the government takes important decisions in the centrally planned economy. In this type of economy, all the production and distribution are owned by the government. The government also sets all the prices.

Market Economy

As per Economics Class 12 Microeconomics Chapter 1 notes, different economic decisions are taken in the free market on the basis of laws of supply and demand in a market economy. Relative demand and supply of the products determine the prices.

Positive Economic Analysis

In the Microeconomics Class 12 Chapter 1 notes, the concept of positive economic analysis has been vividly explained. It is all about the economic facts, objective measurements and procedures. Class 12 microeconomics Chapter 1 notes PDF describes the cause and effect relationships between different economic factors and phenomena. 

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