Hi, welcome you all to the lecture series
on microeconomics. We will continue with the
discussion on themes of microeconomics . So,
last time we have seen the definition of production
possibility frontier. Now let us have a graphical
illustration of the concept, and through that
graphical illustration I will explain how
these themes called trade off opportunity
cost and marginal analysis are linked and
they can be displayed through this concept
of production possibility frontier.
So, I am measuring the units of X Good, along
the horizontal axis and measuring the units
of Y Goods to be produced along the vertical
axis .
Now, let us have some data so, let us assume
that there are some possibilities . 
And these are the possibilities of different
combinations of good X and Y to be produced.
So, let me write X Good and Y Good here. So,
the possibility A gives 0 units of X Good,
but you can produce 160 units of Y Good . There
is also a possibility B which offers 40 units
of good X, and 140 units of good Y .
Similarly, a possibility C exists where you
will get 80 units of both the commodities.
And there is possibility D, where you get
100 units of X, but you will get 0 units of
Y Good . Now let us draw a diagram where we
represent these 4 possibilities. So, let us
see each mark here represent 20 units of goods.
So, 20 then 40 then we have 60, 80 100 , 120
, 140 and finally here . So now, let us plot
these ABCD 4 production possibilities. So,
the first production ah possibility is the
case of a where we are producing 0 of unit
of the X Good, but 160 units of the Y Good.
So, basically we are here . Now the other
extreme is basically the possibility D where
the firm produces 100 units of good X, but
0 units of good Y. Let us also plot the other
possibilities B and C. So, for point B we
have 40 and then 140 so, we are talking about
a point somewhere here. Then the possibility
C is basically 80 and 80 so, somewhere here
is point C . Now one thing is sure that the
shape of these production possibility frontier
will be obtained if we join these points.
And the curve or the frontier is going to
be a downward sloping.
One we do not know a prior whether it is going
to be a convex or concave or a straight line,
but it is definitely going to be a downward
sloping curve. And this is because the resource
constraint issue or the scarcity problem.
And the other issue that leads to these downward
sloping curve is the case of tradeoff or the
issue of trade off. As we have given resources
, we cannot produce one good by more units
without sacrificing some units of the other
good.
So, as one moves from A to B as someone wants
to produce some units of X, the firm has to
sacrifice some units of Y Good as well . So,
here the firm is producing 40 units of X and
140 units of Y. Now a point like this say
here where the firm say let us call this point
E . So, a point like E is infeasible or unattainable.
A firm cannot simultaneously produce 40 units
of X Good and 160 units of Y Good, because
of the resource constraint issue . So, if
the firm decides to produce more of X Good,
the firm has to reduce some amount of Y Good,
and that reduction or sacrifice has to follow
these straight lines or this frontier .
So, this is my PPF displaying resource constraint
or scarcity problem . Now note that a firm
faces a decision whether to produce at point
A or point B or point C or point D. So, these
are basically the possibilities that a firm
confronts with and there is a tradeoff of
course. So, what does the slope give there?
Slope gives that if I want to produce one
unit of extra X Good then how many units of
Y Good I have to sacrifice as a farm. So,
these gives the opportunity cost. So, the
slope of the production possibility frontier
has the opportunity cost or marginal cost
of production interpretation.
Now, this has got a name in economics, and
the name of this is marginal rate of transformation.
So, let us have a definition for marginal
rate of transformation which is associated
with the concept of opportunity cost . Now
can we comment on the curvature of production
possibility frontier. We have already opined
on the slope which is going to be a negative
one .
Yes, we can comment on the curvature of the
production possibility frontier, but that
depends on the production condition, and 3
types of curvatures possible. Production possibility
frontier can be a straight line, it can be
concave and it can be convex as well. But
convex PPF is not common in economic analysis
for ah some theoretical reasons. So, we are
going to concentrate on the cases where we
can obtain a straight line PPF or a concave
to origin PPF.
. So, it is not that easy to transfer the
resource from production of X to production
of Y . In that case, we get concave PPC so,
we can comment like this. In that case, we
have already seen that if we want to have
more units of commodity X we need to sacrifice
, the units of Y. Or if we want to have more
units of Y, we need to sacrifice some units
of X . So, in the case of a concave PPC or
in the case of lack of interchangeability
of resources, the reduction per unit of Y
production leads to an increase in X Good
production . 
But by a decreasing amount with expansion
of X production .
. So, in this case, let us draw this diagram
again . So, we measure X quantity production
along horizontal and Y community production
ah on or along vertical axis . And we are
saying that the production possibility frontier
which gives the resource constraint is going
to be of this shape. So, we can call this
P P prime . And note that as we have written
the implication of a concave PPC , here this
has another implication, and this is known
as increasing opportunity cost .
. So, what does that mean? That means, that
marginal cost of production 
increases in terms of good Y as the firm decides
to produce more units of X . Now you can see
this from the diagram also. Suppose this is
a point A , this is a point or possibility
B, and this is another possibility C . Now
if you draw tangent to this production possibility
frontier at these points, they will give the
slope of production possibility frontier at
these points. And you see the absolute value
of the slope is increasing.
So, that is the interpretation or implication
of increasing opportunity cost in terms of
calculus . Now what is the implication of
straight line PPC or you know what production
condition will lead to straight line PPC we
can summarize this as follows . If reduction
in Y Good production 
by one unit leads to an increase 
in X production 
by ; this time a constant amount , and vice
versa , then we have this straight line PPC
case .
So now, let us draw 
a straight line PPC here. So, we can again
call this P and P prime these extreme points.
And note that as the firm decides to move
from say one unit of X to the second unit
of X, and again from second to the third unit
of X, the sacrifice it has to make in terms
of the Y commodity is constant. And that is
basically given by the slope of this straight
line PPC. So, again the slope of PPF or PPC
this time it is constant . 
It gives the opportunity cost of the firm
.
Now, let us move to the 4th theme in the list,
and the theme is known as prices and market.
Prices and market mechanism are the core of
microeconomics. So, we will study that in
deeper details .
So, when in 1776 professor Adam Smith wrote
his famous book titled wealth of nations,
economics as a modern subject has begun it
is journey. And since then economists have
distinguished between value in use of a commodity
and value in exchange .
. So, the distinction is as follows, the value
in use is basically the utility or 
satisfaction derived from the consumption
of the commodity . So, of course, this is
subjective in nature . And by value in exchange
the classical economists mean that value in
exchange of a commodity is given the price
at which the commodity exchanges hands , or
in other words traded in markets .
So, we will start with the definition for
price system . What is price system? Price
system refers to a form of economic institution
in which individual agents which are basically
buyers and sellers interact through 
the medium of 
markets .
Now we will have another definition and that
is for market mechanism . So, market mechanism
refers to the tendency in a free market 
for price to change until the market clears
. It implies quantity demanded equals quantity
supplied .
Now, let 
us note that there is this word called free.
What do we mean by that? By the French phrase
Laissez Faire we mean that there is no interference
in the working of the market by government.
So, if that is the case, we call or Adam Smith
called that as a free market . So, here free
means this phrase holds . We have already
explained what equilibrium is, now we are
going to look at 2 different types of equilibrium
which is common in micro economic analysis.
And these 2 types of equilibrium are partial
equilibrium analysis 
and general equilibrium analysis.
In the case of partial equilibrium, we study
the problem of one single economic agent like
a firm or a consumer, or it can be even a
market or an industry . So, here in the case
of partial equilibrium analysis, we assume
that we treat one particular agent or one
particular goods market at a time. And that
is known as the assumption of Ceteris Paribus
. This Ceteris Paribus is a Latin phrase which
is commonly used in micro economic analysis
and; that means, other things held constant
.
Now, in the case of general equilibrium analysis,
we assume that these markets or this economic
agents are actually interlinked. So, if there
is a disturbance or perturbance in one sector
it will automatically influence the outcome
of the other sector. And so, we basically
leave the assumption of Ceteris Paribus and
we go for simultaneous determination of equilibrium
in this inter linked markets, that is in equilibrium
analysis. But for our course we are not going
to study general equilibrium, we are going
to concentrate on partial equilibrium analysis.
We will continue with these discussion in
the next lecture .
