Economics: Micro Tools and Macro Applications
Economics in the BIEAP Intermediate Commerce stream covers microeconomics-consumer behaviour, demand and supply, elasticity, production, cost, revenue and market forms-and macroeconomics-national income, money and banking, public finance, international trade and Indian economic development.
Core rules
- Law of demand: other things equal, quantity demanded falls as price rises. A price change causes movement along the curve; a change in income, tastes or related-good prices shifts the curve.
- Elasticity: Ed = percentage change in quantity demanded ÷ percentage change in price.
- Cost: fixed costs do not vary with output in the short run; variable costs do. Marginal cost is the addition to total cost from one more unit.
- National income can be measured by product, income and expenditure methods; avoid double counting by using value added.
- Money supply, CRR, repo rate and open market operations are tools of monetary policy; taxation and public expenditure are fiscal tools.
Worked example
Price falls from ₹10 to ₹8 and quantity demanded rises from 100 to 150 units. Percentage change in quantity = (150 − 100) ÷ 100 × 100 = 50%. Percentage change in price = (8 − 10) ÷ 10 × 100 = −20%. Ed = 50 ÷ (−20) = −2.5; taking the absolute value, demand is elastic (2.5 > 1). The reasoning is that the percentage change in quantity is larger than the percentage change in price, so total revenue moves in the direction of quantity.
Traps
Confusing a shift of demand with a movement along it; calling stock a flow; mixing GDP with GNP; writing that CRR is a fiscal instrument; and giving definitions without a diagram or numerical application when the question asks for one.