AP Intermediate Economics (BIEAP) cheat sheet

Scarcity: wants are unlimited but resources (land, labour, capital, entrepreneurship) are limited, so every choice has an opportunity cost - the value of the next best alternative forgone.

Production possibility frontier (PPF): points on the curve = full and efficient use of resources; points inside = underemployment or inefficiency; points outside = unattainable at current resources and technology.

PPF is concave to the origin because marginal opportunity cost rises (resources are not equally suited to both goods); a straight-line PPF implies constant opportunity cost.

Microeconomics studies individual units (consumer, firm, single market); macroeconomics studies aggregates (national income, general price level, total employment).

Positive economics is descriptive and testable ('what is'); normative economics involves value judgements and policy prescriptions ('what ought to be').

Central problems of every economy: what to produce, how to produce, and for whom to produce - plus the problem of full utilisation of resources and growth.

Market economy solves the three problems through the price mechanism; a centrally planned economy uses state directives; a mixed economy (India) combines both.

Law of demand: other things equal, quantity demanded rises as price falls - inverse relation, giving a downward-sloping demand curve.

Movement along a demand curve is caused only by own price change; a shift of the curve is caused by income, tastes, prices of related goods, or expectations.

Utility: total utility (TU) is the sum of satisfaction; marginal utility (MU) is the addition to TU from one more unit, MU = ΔTU/ΔQ.

Law of diminishing marginal utility: as consumption of a good increases, MU from each extra unit falls; TU is maximum where MU = 0.

Law of equi-marginal utility: consumer maximises satisfaction when MUx/Px = MUy/Py for all goods, i.e. equal marginal utility per rupee spent.

Indifference curve: locus of combinations giving equal satisfaction; it slopes downward, is convex to the origin, and higher curves represent higher satisfaction.

Properties: indifference curves never intersect and never touch the axes; the slope (MRS) diminishes as one moves down the curve.

Budget line: Px·X + Py·Y = M; its slope is −Px/Py and it shifts outward parallel when income rises, rotates when a price changes.

Consumer equilibrium under indifference analysis: MRSxy = Px/Py at the point where the budget line is tangent to the highest attainable indifference curve.

Income effect, substitution effect and price effect together explain the downward-sloping demand curve; for Giffen goods the income effect outweighs the substitution effect.

Elasticity of demand: Ed = (% change in quantity)/(% change in price); |Ed|>1 elastic, <1 inelastic, =1 unitary; demand is more elastic for luxuries and long run.

Production function: Q = f(L, K); short run has at least one fixed factor, long run has all factors variable.

Law of variable proportions: total product rises, then rises at a diminishing rate, then falls; marginal product cuts average product at AP's maximum.

Stages of production: Stage I ends where AP is maximum (MP = AP); Stage II runs from AP max to MP = 0; rational producers operate in Stage II.

Returns to scale are increasing, constant or decreasing when all inputs are scaled up proportionally in the long run.

Cost concepts: fixed cost (TFC) does not vary with output; TVC does; TC = TFC + TVC; AFC = TFC/Q always falls as Q rises.

MC = ΔTC/ΔQ; the MC curve cuts AVC and ATC at their minimum points; the vertical gap between ATC and AVC equals AFC and shrinks with output.

Short-run cost curves are U-shaped because of the law of variable proportions; the long-run average cost (LAC) curve is the envelope of short-run AC curves.

Revenue: TR = P·Q; AR = TR/Q = price; MR = ΔTR/ΔQ; under perfect competition P = AR = MR, while a monopolist faces a falling AR with MR below AR.

Producer equilibrium uses MR = MC; profit is maximised where MR = MC and MC is rising; if P < minimum AVC the firm shuts down in the short run.

Perfect competition: many buyers and sellers, homogeneous product, free entry and exit, perfect information - the firm is a price taker with a horizontal demand curve.

Equilibrium of a competitive firm: MR = MC (rising) for profit maximum; short-run supply is the portion of MC above minimum AVC.

Monopoly: single seller, no close substitutes, strong entry barriers; the firm is a price maker and MR < AR, with MR falling twice as fast as AR for a linear demand curve.

Monopolist equilibrium: MR = MC; price is read off the demand curve, so P > MC and output is lower than under competition.

Monopolistic competition: many sellers with differentiated products, free entry, downward-sloping but highly elastic demand; firms earn only normal profit in long-run equilibrium.

Oligopoly: few large firms, interdependence, price rigidity; the kinked demand curve explains sticky prices, and cartels (like OPEC) act jointly.

Price discrimination requires market separation and different elasticities; charge higher price in the inelastic market, lower in the elastic market.

Effects of a per-unit tax or subsidy shift the supply curve vertically; the burden falls more on the less elastic side of the market.

Price ceiling below equilibrium creates shortage and rationing; price floor above equilibrium creates surplus (e.g. minimum support prices).

Factor prices are determined by demand for and supply of factors; demand for a factor is a derived demand from the demand for its output.

Marginal revenue product MRP = MP × MR; under perfect competition MR = P, so MRP = VMP = MP × P.

A profit-maximising firm hires a factor until MRP equals the factor's marginal cost (wage, rent, interest or profit).

Marginal productivity theory: each factor is paid its marginal revenue product in equilibrium; the supply curve of labour reflects the work–leisure choice.

Backward-bending labour supply: beyond a wage level the income effect of a wage rise outweighs the substitution effect, reducing hours worked.

Ricardian theory of rent: rent is the payment for the original and indestructible powers of soil; it arises from differences in fertility.

Quasi-rent is a short-run surplus earned by a factor whose supply is temporarily fixed; economic rent is the surplus over transfer earnings.

Loanable funds and liquidity preference theories explain interest; Keynes holds interest is the reward for parting with liquidity, determined by money demand and supply.

Profit theories: risk-bearing (Hawley), uncertainty-bearing (Knight) and innovation (Schumpeter); normal profit is part of cost, supernormal profit is a residual.

GDP at market prices = value of all final goods and services produced within domestic territory in a year; GNP = GDP + net factor income from abroad (NFIA).

NNP at factor cost = GNP at market prices − depreciation − net indirect taxes; NNP at factor cost is national income.

Net indirect taxes = indirect taxes − subsidies; GDP at market prices = GDP at factor cost + net indirect taxes.

Three measurement methods: product/value added (sum of GVA), income (sum of factor incomes), and expenditure (C + I + G + X − M) - all should give the same total.

Value added = value of output − intermediate consumption; only final goods are counted to avoid double counting.

Personal income = national income − undistributed profits − corporate tax + transfer payments; disposable income = personal income − direct taxes.

Nominal vs real GDP: real GDP uses constant (base-year) prices; GDP deflator = (nominal GDP / real GDP) × 100.

Exclusions from national income: transfer payments, second-hand sales, financial transactions, illegal income, and non-market services of housewives.

Per capita income = national income / population; it is an average and ignores income distribution and non-monetary welfare.

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment; the primary function is medium of exchange.

Money supply measures (India): M1 = currency + demand deposits + other deposits with RBI; M3 = M1 + time deposits with banks (broad money).

Money multiplier = 1 / reserve ratio; an initial deposit of D creates total deposits of D × (1/r) in the banking system.

Central bank functions: currency issue, banker to government and banks, lender of last resort, credit control, custodian of foreign exchange reserves.

Quantitative credit tools: bank rate, repo/reverse repo, cash reserve ratio, statutory liquidity ratio and open market operations.

Inflation: sustained rise in the general price level; demand-pull arises from excess aggregate demand, cost-push from rising input costs.

Types by rate: creeping, walking, running and galloping/hyperinflation; stagflation combines high inflation with high unemployment.

Effects: inflation hurts fixed-income earners and creditors, benefits debtors; unanticipated inflation redistributes income arbitrarily.

Phillips curve shows a short-run trade-off between inflation and unemployment; monetarists argue the long-run curve is vertical at the natural rate.

Public finance studies government revenue, expenditure, debt and fiscal policy; public goods are non-rival and non-excludable, causing free-rider problems.

Budget components: revenue account (revenue receipts and revenue expenditure) and capital account (capital receipts and capital expenditure).

Revenue deficit = revenue expenditure − revenue receipts; fiscal deficit = total expenditure − total receipts excluding borrowings.

Fiscal deficit = revenue deficit + capital expenditure − non-debt capital receipts; it equals the government's borrowing requirement.

Primary deficit = fiscal deficit − interest payments; it shows the current year's fiscal stance excluding past debt burden.

Direct taxes (income, corporate, wealth) cannot be shifted and are progressive; indirect taxes (GST, customs) can be shifted and are often regressive.

Deficit financing means borrowing or creating new money to cover the gap; it can be inflationary if the economy is near full employment.

Public debt is internal (owed to residents) or external (owed to foreigners); internal debt redistributes income but does not reduce national wealth.

Fiscal policy tools include taxation, government spending and transfers; expansionary policy raises demand in recession, contractionary policy cools inflation.

Absolute advantage (Adam Smith): a country produces a good with fewer resources; comparative advantage (Ricardo): lower opportunity cost is the basis of mutually beneficial trade.

Terms of trade = (index of export prices / index of import prices) × 100; a rise means a country gets more imports per unit of exports.

Balance of trade = exports of goods − imports of goods; balance of payments records all external transactions, goods, services and capital.

Current account covers visible trade, invisibles (services, transfers, income); capital account covers FDI, portfolio flows, loans and reserves.

BoP always balances in accounting terms; a current account deficit must be financed by a capital account surplus or reserve drawdown.

Exchange rate: depreciation (under floating rates) makes exports cheaper and imports dearer, improving the trade balance subject to the J-curve lag.

Devaluation is a deliberate official reduction of a fixed parity; appreciation raises the currency's value and hurts exporters.

Tariffs and quotas reduce trade volume, raise domestic prices and can invite retaliation; they protect producers but hurt consumers.

Purchasing power parity holds that exchange rates adjust so identical baskets cost the same across countries in the long run.

Primary sector = agriculture, forestry, fishing; secondary = manufacturing, construction; tertiary = services; India's structural shift has moved output toward services.

Human Development Index combines life expectancy, education (mean and expected years of schooling) and GNI per capita (PPP) into a geometric mean.

Poverty measures: headcount ratio and poverty gap; India's official estimates historically used consumption expenditure with Tendulkar and Rangarajan lines.

Unemployment types: frictional, structural, cyclical and disguised (surplus labour in agriculture); seasonal unemployment is common in Indian farming.

Green Revolution raised foodgrain output via HYV seeds, irrigation and fertiliser; it was regionally concentrated in Punjab, Haryana and western UP.

Economic reforms of 1991: liberalisation, privatisation and globalisation, triggered by a balance of payments crisis and IMF conditionality.

Planning: Five-Year Plans ran from 1951 to 2017; NITI Aayog replaced the Planning Commission in 2015 as a policy think tank.

GST (2017) replaced multiple indirect taxes with a destination-based value-added tax; it is a single tax with slabs and a council for rate setting.

Inclusive growth requires reducing regional and income inequality; microfinance, MGNREGA and financial inclusion schemes target rural and unorganised workers.