The Production Possibility Frontier

Countries cannot have unlimited amounts of all goods. They are limited by the resources and the technologies available to them. The need to choose among limited opportunities is dramatized during wartime. In debating whether the United States should go to war in Iraq, people wanted to know how much the war would cost. Would the war effort divert$50 billion or$100 billion, or even more from the civilian economy to occupying and rebuilding Iraq? And, as numbers begin to climb, people naturally asked, why are we policing Baghdad rather than New York or repairing the electrical system in the Middle East rather than in the U.S. Midwest? The more output that goes for military tasks the less there is available for civilian consumption and investment.

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Basic Problems of the Economy

The main problem of an economy is of economizing scarce resources. In this sense economics is the study of the allocation of scarce resources to alternative ends. The problem of scarcity arises because human wants are numerous and the means to satisfy them are limited. This leads to the problem of choice-of selecting alternative uses to which scarce resources can be put. The solution to this problem of allocating scarce resources lies in the pricing system. This exists in every economic system, whether it is capitalist, socialist or mixed economy. For this the economic system must solve five basic problems. 

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Scarcity and Efficiency

“Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.” 

Behind this definition there are two key ideas in economics: 

1. Those goods are scarce and 
2. That society must use its resources ‘efficiently’. 

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Limitations of Micro Economics

Despite its importance, microeconomics analysis suffers from certain limitations, which are as follows. 

• What is true in the case of an individual unit may not be true in the case of aggregates. For example, individual thrift may be good, but social thrift is definitely harmful for the community. If the entire community starts saving more, effective demand will be reduced and employments retarded. Likewise wage cutting in a particular firm may promote employment, but general wage cutting may actually result in reducing the volume of employment in a community. The result of microeconomic analysis should therefore be applied to the aggregates with caution.

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Importance of Micro Economics

Today microeconomics occupies a very important place in the study of economic theory. It is an important method of economic analysis, which Professor Keynes regards as “a necessary part of one’s apparatus of thought. It is microeconomics that tells us how a free market economy with its millions of consumers and producers work to decide about the allocation of productive resources among the thousands of goods and services.”

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Types and Scope of Micro Economics

Scope of microeconomics 

Micro economics studies: 

1. Theory of product pricing with its two constituents, namely the theory of consumers behavior and the theory of production and costs. 
2. The theory of factor pricing with its four constituents, namely theories of wages, rent, interest and profits. 
3. Theory of economic welfare. 

Microeconomics is sometimes referred to as ‘price theory’, because prices are the core of microeconomics.

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Meaning and Definitions of Micro Economics

Introduction 

It has become fashionable these days to approach economic theory via micro or macro analysis. In fact the two terms have become quite current in the economic jargon's and economic theory is divided today under two heads. They are;

1. Microeconomics 
2. Macroeconomics

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Reasons for Studying Economics

John Maynard Keynes, one of the most influential economists once remarked:” The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe they to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist”. 

Most of the ideologies of the modern world have been shaped by prominent economists of the past like Prof Adam Smith, David Ricardo, J.S.Mill, Karl Marx, and J.M.Keynes and current world leaders seek the advice and policy suggestions of today’s economists.

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Meaning and Definition of Economics

People’s economic wants are of a very large number and they are also diverse in character. Biologically humans need only air, water, food, clothing and shelter. But in contemporary society we also seek many goods and services associated with comfortable or affluent standard of living. 

Fortunately, society is blessed with productive resources-labour and managerial talent, tools and machinery, land and mineral deposits-that are used to produce goods and services. This production satisfies many of our economic wants and occurs through the organizational mechanism called the economic system, or, more simply, the economy. 

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