BSEH SS Economics cheat sheet

Scarcity: wants are unlimited but resources are limited and have alternative uses; this is the root of every economic problem.

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

Positive economics is fact-based and testable ('what is'); normative economics involves value judgements ('what ought to be').

Opportunity cost of a choice is the value of the next best alternative forgone, not the sum of all alternatives.

Production possibility frontier is concave to the origin because marginal opportunity cost rises (resources are not equally efficient in all uses).

Points inside the PPF indicate underutilisation of resources; points on the curve indicate full and efficient use; points beyond are unattainable with given resources and technology.

Rightward shift of the PPF follows from growth of resources or improvement in technology; a change in preference alone does not shift it.

Central problems of every economy: what to produce, how to produce, and for whom to produce; these are solved by the price mechanism in a market economy.

Law of diminishing marginal utility: as consumption of a good rises continuously, marginal utility from each additional unit falls; total utility is maximum when MU = 0.

Consumer's equilibrium in one good: MUx = Px in utility terms, or MUx/Px = MUm; in two goods: MUx/Px = MUy/Py, with income fully spent.

Indifference curve properties: slopes downward, convex to the origin, and higher curves represent higher satisfaction; two indifference curves never intersect.

Budget line equation: Px·X + Py·Y = M; slope = −Px/Py; a change in income shifts the line parallel, a change in price rotates it.

Law of demand: other things equal, quantity demanded falls as price rises - inverse price–quantity relationship, shown by a downward-sloping demand curve.

Movement along a demand curve is caused by own price change (change in quantity demanded); a shift is caused by income, tastes, price of related goods, or expectations.

Substitutes have positive cross-price elasticity; complements have negative cross-price elasticity; inferior goods have negative income elasticity.

Elasticity of demand (percentage method): Ed = (% change in quantity demanded)/(% change in price); use the negative sign convention or absolute value consistently.

Expenditure method rule: if price falls and total expenditure rises, demand is elastic (Ed > 1); if expenditure is unchanged, Ed = 1.

Law of variable proportions: with one input variable, MP first rises, then falls, then becomes negative; TP rises while MP > 0 and falls when MP < 0.

MP intersects AP at AP's maximum; when MP > AP, AP rises; when MP < AP, AP falls. TP = ΣMP and AP = TP/L.

Returns to scale are a long-run concept (all inputs change); law of variable proportions is short-run (at least one input fixed).

Cost identities: TC = TFC + TVC; AC = TC/Q; AVC = TVC/Q; MC = ΔTC/ΔQ = ΔTVC/ΔQ.

MC cuts AC and AVC at their minimum points; the vertical gap between AC and AVC equals AFC and narrows as output rises.

AFC falls continuously with output; the AC curve is U-shaped because of the combined effect of AFC falling and AVC rising.

Revenue: TR = P × Q; MR = ΔTR/ΔQ; under perfect competition AR = MR = Price, so the firm's demand curve is horizontal.

Law of supply: other things equal, quantity supplied rises with price; determinants of supply include input prices, technology, taxes/subsidies and number of firms.

Elasticity of supply Es = (% change in quantity supplied)/(% change in price); supply through the origin has unitary elasticity regardless of slope.

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.

Monopoly: single seller, no close substitute, strong entry barriers; the firm is a price maker and MR < AR, with MR falling twice as steeply as a linear AR.

Monopolistic competition: many sellers with differentiated products, free entry, selling costs and advertising; each firm faces a downward-sloping but elastic demand curve.

Oligopoly: few large firms, interdependence in decision-making, price rigidity and possibility of cartels; the kinked demand curve explains sticky prices.

Profit-maximising condition for all market forms: MR = MC and MC must be rising at the point of equality.

Short-run equilibrium: continue producing if price covers AVC; shut down if price falls below minimum AVC. Long-run equilibrium requires P ≥ AC.

Under perfect competition long-run equilibrium occurs where P = MR = MC = minimum AC, giving normal profit only.

Equilibrium price is set where market demand equals market supply; excess demand pushes price up, excess supply pushes it down.

Price ceiling below equilibrium creates shortage and rationing; price floor above equilibrium creates surplus and requires government purchase.

GDP at market price (GDPMP) = value of all final goods and services produced within domestic territory in a year; excludes intermediate goods to avoid double counting.

GNP = GDP + net factor income from abroad (NFIA). National income (NNPFC) = GNPMP − depreciation − net indirect taxes.

Net indirect taxes = indirect taxes − subsidies; factor cost = market price − net indirect taxes.

Value added method: sum of gross value added at market price by all sectors, then adjust to national income; avoid double counting by counting only value added.

Income method: compensation of employees + operating surplus + mixed income of self-employed = NDPFC, then add NFIA for national income.

Expenditure method: GDPMP = C + I + G + (X − M); private final consumption expenditure plus gross domestic capital formation plus government expenditure plus net exports.

Personal income = private income − corporate tax − undistributed profits; personal disposable income = personal income − direct taxes − fees.

Real GDP uses constant (base-year) prices and measures quantity change; nominal GDP uses current prices and also reflects price changes; GDP deflator = (nominal/real) × 100.

Transfer payments, second-hand sales, and financial asset transactions are excluded from national income because they create no current production.

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

Money supply measures: M1 = currency with public + demand deposits + other deposits with RBI; M2 = M1 + savings deposits with post office banks; M3 = M1 + net time deposits (broad money); M4 = M3 + total post office deposits.

Money multiplier = 1/reserve ratio; total deposit creation = initial deposit × money multiplier.

Credit creation is limited by the cash reserve ratio, currency held by the public, and availability of borrowers with acceptable collateral.

Commercial bank balance sheet: liabilities = deposits + borrowings + net worth; assets = reserves + loans + investments.

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

Quantitative credit controls: repo rate, reverse repo rate, cash reserve ratio, statutory liquidity ratio, open market operations, marginal standing facility.

Qualitative instruments: margin requirements, credit rationing, moral suasion, direct action, selective credit controls.

Repo rate is the rate at which RBI lends short-term funds to banks against securities; an increase in repo rate tightens liquidity and raises borrowing costs.

Keynesian equilibrium condition: planned aggregate demand (AD) = aggregate supply (AS), equivalently planned saving = planned investment.

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

APC = C/Y and APS = S/Y; APC + APS = 1; MPC = ΔC/ΔY and MPS = ΔS/ΔY; MPC + MPS = 1.

Investment multiplier k = 1/(1 − MPC) = 1/MPS; ΔY = k × ΔI.

Excess demand (AD > AS) causes inflationary gap; deficient demand (AD < AS) causes deflationary gap.

Fiscal measures to correct deficient demand: raise government expenditure, cut taxes, increase transfer payments; monetary measures: cut repo rate and CRR, buy securities in open market operations.

Paradox of thrift: an attempt by all to save more can lower equilibrium income and leave total saving unchanged or reduced.

In an open economy equilibrium: Y = C + I + G + (X − M); exports are injections into the circular flow and imports are leakages.

Full employment equilibrium occurs where AD equals AS at full employment output; underemployment equilibrium may persist because wages and prices are sticky.

Budget receipts = revenue receipts + capital receipts; revenue receipts are non-debt creating (tax and non-tax), capital receipts include borrowings and disinvestment.

Revenue expenditure creates no asset or reduces no liability; capital expenditure creates assets or reduces liabilities.

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 indicates total borrowing requirement of the government.

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

Budgetary deficit = total expenditure − total receipts (including borrowings); it is financed by money creation by RBI.

Deficit financing may raise aggregate demand and income but risks inflation and crowding out of private investment.

Public debt is a stock; fiscal deficit is a flow that adds to it.

Disinvestment of public sector units is a capital receipt and does not reduce the fiscal deficit in the same way as tax revenue.

Balance of payments records all economic transactions between residents and the rest of the world in a year; it always balances in accounting terms.

Current account includes visible trade (goods), invisibles (services, income, transfers); capital account includes FDI, portfolio investment, loans, banking capital, and reserve changes.

Balance of trade = exports of goods − imports of goods; it is a component of the current account, not the whole of it.

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

Depreciation of domestic currency makes exports cheaper and imports dearer, improving the trade balance subject to the J-curve lag.

Appreciation of domestic currency raises import capacity but hurts export competitiveness.

Fixed exchange rate requires central bank intervention and reserves; flexible (floating) rate is determined by demand and supply of foreign exchange.

Managed float combines market determination with central bank intervention to limit volatility.

Currency depreciation is a fall in value under a floating regime; devaluation is a deliberate official reduction of a fixed parity.

Planning in India: First Five-Year Plan (1951–56) focused on agriculture; Second Plan (1956–61) adopted Mahalanobis heavy-industry strategy.

Green Revolution raised wheat and rice output through HYV seeds, irrigation and fertilisers, mainly in Punjab, Haryana and western UP.

Economic reforms of 1991: liberalisation, privatisation and globalisation, triggered by a balance of payments crisis and high fiscal deficit.

Reform measures: abolition of industrial licensing (except select industries), reduction of tariffs, rupee devaluation, new industrial and trade policy, opening to FDI.

New Economic Policy 1991 reduced the role of public sector through disinvestment and dereservation, while retaining strategic sectors.

India's growth in services (IT, BPO, finance) outpaced agriculture and manufacturing; agriculture's share in GDP fell while its employment share remained high.

Human Development Index combines life expectancy, education (mean and expected years of schooling) and per capita income (GNI) in PPP terms.

Poverty measures: Tendulkar committee used consumption expenditure with revised poverty lines; headcount ratio measures the proportion below the poverty line.

Structural reforms after 2014 include GST (2017), Insolvency and Bankruptcy Code (2016), and Make in India; these aim at formalisation and ease of doing business.

CPI measures retail inflation using a consumer basket; WPI measures wholesale price changes and excludes services; CPI is the RBI's nominal anchor for inflation targeting.

Inflation targeting framework: RBI keeps CPI inflation at 4% with a tolerance band of ±2 percentage points.

GDP growth rate = [(GDPt − GDPt−1)/GDPt−1] × 100; use real GDP to measure growth excluding price effects.

Unemployment rate = (unemployed/labour force) × 100; labour force participation rate = (labour force/working-age population) × 100.

Mean = Σx/n; median is the middle value of ordered data; mode is the most frequent value; mean is sensitive to outliers, median is not.

Standard deviation = square root of variance; a higher value indicates greater dispersion around the mean.

Index numbers: base year = 100; a price index above 100 shows inflation relative to the base period.

Fiscal and monetary policy coordination: loose monetary policy with high fiscal deficit risks inflation; tightening repo rate is the standard anti-inflation response.

Balance of payments vulnerability indicators include import cover (reserves/imports per month) and the current account deficit as a share of GDP.