BSEB Intermediate Economics cheat sheet

Scarcity means wants exceed the resources available to satisfy them; it forces choice and makes every economy answer what, how, and for whom to produce.

Opportunity cost is the value of the next best alternative forgone; it is measured in real terms, not in money spent.

Microeconomics studies individual units such as a household, firm, or single market; macroeconomics studies aggregates such as national income, general price level, and total employment.

A production possibility frontier shows the maximum combinations of two goods producible with given resources and technology; points on the curve are efficient, inside are inefficient, outside are unattainable.

The PPF is concave to the origin because resources are not equally efficient in both uses, so marginal opportunity cost rises as production shifts.

Positive economics describes what is and can be tested; normative economics prescribes what ought to be and involves value judgements.

Central problems of an economy: allocation of resources (what and how much), choice of technique (how), and distribution (for whom); market, planned, and mixed economies solve them differently.

Marginal analysis compares marginal benefit with marginal cost; an activity is expanded while marginal benefit exceeds marginal cost.

Law of demand: other things equal, quantity demanded falls as price rises, giving a downward-sloping demand curve; exceptions include Giffen goods and status (Veblen) goods.

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

Substitute goods have positive cross-price elasticity; complementary goods have negative cross-price elasticity; inferior goods have negative income elasticity.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; use the point formula (P/Q)x(dQ/dP) or the midpoint (arc) formula for discrete changes.

Demand is elastic when |Ed| > 1 (total expenditure moves opposite to price), inelastic when |Ed| < 1 (total expenditure moves with price), and unitary when |Ed| = 1.

Determinants of elasticity: availability of substitutes, share of income spent, necessity versus luxury, time horizon, and number of uses of the commodity.

Law of diminishing marginal utility: as consumption of a good increases, marginal utility from each extra unit falls; total utility is maximum where marginal utility is zero.

Consumer equilibrium under the utility approach: MUx/Px = MUy/Py = MUm; under indifference curve analysis: MRSxy = Px/Py at the tangency of budget line and indifference curve.

An indifference curve is convex to the origin because MRS diminishes; higher curves represent higher satisfaction and curves never intersect.

Law of variable proportions: with one input variable, marginal product first rises, then falls, then becomes negative; the stage of negative marginal product is irrational for a producer.

Total product is maximum where marginal product is zero; average product is maximum where marginal product equals average product.

Returns to scale are a long-run concept: increasing, constant, or decreasing returns occur when all inputs change in the same proportion.

Cost curves: total cost = total fixed cost + total variable cost; average fixed cost falls continuously; average variable cost and average total cost are U-shaped; marginal cost cuts both at their minimum points.

In the short run a firm shuts down if price falls below minimum average variable cost; in the long run it exits if price falls below minimum average total cost.

Profit maximisation condition: marginal revenue equals marginal cost with marginal cost rising; under perfect competition price equals marginal cost.

Law of supply: other things equal, quantity supplied rises with price; supply shifts with input prices, technology, taxes and subsidies, and prices of related goods.

Price elasticity of supply = percentage change in quantity supplied / percentage change in price; supply is more elastic in the long run and when factors are easily shifted between uses.

Producer's equilibrium with isoquants: tangency of isoquant and isocost line where MRTS = w/r, the least-cost input combination.

Perfect competition: many sellers, homogeneous product, free entry and exit, perfect information; the firm is a price taker with a horizontal demand curve, and equilibrium is at P = MC.

Monopoly: single seller, no close substitutes, strong entry barriers; the firm faces the market demand curve and equates MR = MC, with price above marginal cost and output below the competitive level.

Monopolistic competition: many sellers with differentiated products, free entry, downward-sloping but highly elastic demand; long-run equilibrium gives normal profit with price above marginal cost.

Oligopoly: few large firms, interdependence, price rigidity; the kinked demand curve explains sticky prices because rivals match price cuts but ignore price rises.

Relationship of revenue: total revenue rises while marginal revenue is positive, is maximum when marginal revenue is zero, and falls when marginal revenue is negative; average revenue is the demand curve.

Under monopoly and monopolistic competition, marginal revenue is less than price because selling extra units requires lowering price on all units.

Market equilibrium occurs where market demand equals market supply; an excess demand (shortage) pushes price up, an excess supply (surplus) pushes price down.

A price ceiling below equilibrium creates shortage and rationing; a price floor above equilibrium creates surplus, as with minimum support prices.

Deadweight loss arises when output is restricted below the equilibrium level, as under monopoly or a binding price control.

GDP at market price is the money value of all final goods and services produced within domestic territory in a year; it excludes intermediate goods to avoid double counting.

GDP at factor cost = GDP at market price - indirect taxes + subsidies.

GNP = GDP + net factor income from abroad; NNP = GNP - depreciation; NNP at factor cost is national income.

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

Value added method: sum of gross value added by all producing units, where value added = value of output - intermediate consumption.

Income method: compensation of employees + operating surplus (rent, interest, profit) + mixed income + consumption of fixed capital, adjusted for net factor income from abroad.

Expenditure method: GDP at market price = private final consumption expenditure + government final consumption expenditure + gross domestic capital formation + net exports.

Real GDP uses constant (base year) prices; nominal GDP uses current prices; GDP deflator = (nominal GDP / real GDP) x 100.

Difficulties in measuring national income include non-monetised transactions, the underground economy, double counting, and imputed values for self-consumed output.

Functions of money: medium of exchange, unit of account, store of value, and standard of deferred payment; the first two are primary functions.

Money supply measures in India: M1 = currency with the public + demand deposits + other deposits with RBI; M3 = M1 + time deposits with banks; M3 is the broad money measure.

High-powered money (reserve money) = currency held by the public + cash reserves of banks with RBI; the money multiplier = money supply / high-powered money.

Commercial banks create credit through lending; the credit multiplier is 1 / reserve ratio, so a lower reserve ratio expands deposit creation.

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

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

Qualitative credit controls: margin requirements, consumer credit regulation, moral suasion, and direct action.

Quantity theory of money (Fisher): MV = PT, so if velocity and transactions are stable, the price level moves with the money supply.

Liquidity preference: demand for money comprises transaction, precautionary, and speculative motives; the rate of interest is determined by money demand and supply.

Keynesian consumption function: C = a + bY, where a is autonomous consumption and b is the marginal propensity to consume, 0 < b < 1.

Marginal propensity to consume = change in consumption / change in income; marginal propensity to save = 1 - MPC; average propensity to consume = C/Y.

Equilibrium income in a two-sector economy: Y = C + I, equivalently saving equals investment.

Investment multiplier k = 1 / (1 - MPC) = 1 / MPS; a higher MPC gives a larger multiplier effect on income.

With government and trade: Y = C + I + G + (X - M), where G is government expenditure and net exports are exports minus imports.

Excess demand causes inflationary gap; deficient demand causes deflationary gap; fiscal policy can close either gap by changing government spending or taxes.

Paradox of thrift: if all households raise saving at a given income, aggregate demand falls and equilibrium income drops, so total saving may not rise.

The multiplier works only when there is spare capacity; at full employment, extra spending mainly raises prices rather than output.

Autonomous investment is independent of income; induced investment responds to changes in income or expected profitability.

Budget receipts are revenue receipts (tax and non-tax) and capital receipts (borrowings, disinvestment, recoveries of loans); revenue receipts neither create a liability nor reduce an asset.

Revenue expenditure creates no asset and reduces no liability; capital expenditure either creates an asset or reduces a liability.

Revenue deficit = revenue expenditure - revenue receipts; fiscal deficit = total expenditure - total receipts excluding borrowings; primary deficit = fiscal deficit - interest payments.

Fiscal deficit equals the government's borrowing requirement for the year; it is financed by domestic borrowing, external borrowing, or drawing down cash balances.

Budgetary deficit = total expenditure - total receipts, including borrowings; it is covered by printing money or drawing on reserves.

Fiscal policy instruments: government expenditure, taxation, and public borrowing; expansionary policy raises demand, contractionary policy cools it.

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

Public debt is internal or external; crowding out occurs when heavy government borrowing raises interest rates and reduces private investment.

Deficit financing can be inflationary when it adds to money supply beyond the economy's absorptive capacity.

Balance of payments records all economic transactions between residents and the rest of the world; it always balances in accounting terms because of the accommodating capital flows.

Current account covers goods, services, primary income (investment income, compensation), and secondary income (remittances); the trade balance covers goods only.

Capital account covers foreign direct investment, portfolio investment, external loans, and changes in reserves.

A current account deficit must be financed by a capital account surplus or by drawing down foreign exchange reserves.

Depreciation of a currency makes exports cheaper and imports dearer, improving the trade balance if the Marshall-Lerner condition (sum of export and import elasticities > 1) holds.

Appreciation raises the external value of the currency; depreciation lowers it; devaluation and revaluation are official parity changes under a fixed regime.

Demand for foreign exchange comes from imports, tourism abroad, and foreign investment outflows; supply comes from exports, remittances, and capital inflows.

Flexible exchange rates are determined by market demand and supply; fixed rates are pegged by the central bank through intervention.

Nominal exchange rate is the rate actually quoted; real exchange rate adjusts the nominal rate for relative price levels between countries.