Introduction to Microeconomics Test - 6

Since human wants are unlimited and the means to satisfy them are limited, every society is faced with the fundamental problem of choosing and allocating its scarce resources among alternative uses. The production possibility curve or frontier is an analytical tool which is used to illustrate and explain this problem of choice.

PPFs are normally drawn as bulging upwards or outwards from the origin ("concave "when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions. A PPF illustrates several economic concepts, such as  scarcity  of resources, opportunity cost, productive efficiency, allocative efficiency, and economies of scale.

Opportunity Cost is also known as Economic  Opportunity  Loss and it is the highest value alternative forgone. Moreover, Real cost is the  fixed cost, which you have paid and therefore, opportunity  cost is not a real cost.

Method which can be employed to solve the central problems is the adoption of economic planning. In this method, the solution of the various basic problems is not achieved through the free working of demand for and supply of goods and factors. But to solve these problems, Government sets up a central planning authority which has been called by several names, such as planning commission, planning ministry or planning board.

To solve the problems through market or price mechanism ie., what goods are to be produced and what quantities, which methods for production are to be employed for the production of goods and how the output is to be distributed, should be decided by the free play of the forces of demand and supply.

Micro economics deals with determination of prices and quantities in individual markerts and with the relationship among these markets.

Micro economics deals with the behaviour of individual economic units such as consumers and business firm and is concerned with the determination of relative prices of commodities and factors of production.

Macro economics is concerned with variables as the aggregate volume of output of an economy, with extent to which resources are employed, with the size of national income and with general price level.

This problem refers to selection of the category of people who will ultimately consume the goods, i.e. whether to produce goods for more poor and less rich or more rich and less poor. Since resources are scarce in every economy, no society can satisfy all the wants of its people. Thus, a problem of choice arises.