CHSE Odisha Business Economics cheat sheet

Business economics applies microeconomic theory (demand, cost, pricing) to managerial decisions; it is normative and prescriptive rather than purely descriptive.

Scarcity plus unlimited wants forces choice; opportunity cost is the value of the next best alternative forgone, measured in real terms.

Production possibility frontier is concave to the origin because marginal opportunity cost rises; points inside are inefficient, points outside are unattainable with given resources.

Positive economics explains 'what is'; normative economics prescribes 'what ought to be' and involves value judgements.

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

Ceteris paribus means holding other variables constant; it isolates the effect of one variable in functional relationships such as Qd = f(P).

Marginal analysis: an activity should be expanded while marginal benefit exceeds marginal cost; optimum occurs where MB = MC.

Static analysis compares equilibrium positions; comparative statics compares two equilibria; dynamic analysis allows time lags to change the path.

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

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

Normal goods have positive income elasticity; inferior goods have negative income elasticity; substitutes have positive cross elasticity, complements negative.

Supply curve slopes upward because higher prices cover rising marginal costs; a shift occurs with input prices, technology, taxes, subsidies, or number of sellers.

Market equilibrium occurs where Qd = Qs; a price above equilibrium creates a surplus, a price below creates a shortage.

A price ceiling set below equilibrium causes excess demand, queues, and black markets; a price floor set above equilibrium causes surplus and unsold stock.

Law of supply states a direct relationship between price and quantity supplied, ceteris paribus.

Joint demand (complements) and competitive demand (substitutes) determine how price changes in one market spill into another.

Price elasticity of demand Ed = (% change in Qd) / (% change in P); use the midpoint formula for a range: Ed = (ΔQ/ΔP) × (P1+P2)/(Q1+Q2).

|Ed| > 1 elastic, |Ed| = 1 unitary, |Ed| < 1 inelastic; |Ed| = 0 perfectly inelastic (vertical), |Ed| = ∞ perfectly elastic (horizontal).

Total expenditure method: if price and total outlay move in opposite directions demand is elastic; same direction means inelastic; no change means unitary.

Income elasticity Ey = (% ΔQd)/(% ΔY); Ey > 1 luxury, 0 < Ey < 1 necessity, Ey < 0 inferior good.

Cross elasticity Exy = (% ΔQd of X)/(% ΔP of Y); positive means substitutes, negative means complements, zero means unrelated goods.

Price elasticity of supply Es = (% ΔQs)/(% ΔP); it is higher in the long run because firms can adjust all inputs.

Elasticity is greater when close substitutes exist, the good takes a large share of income, and the time period is longer.

Point elasticity on a linear demand curve: Ed = (lower segment)/(upper segment) of the price intercept; elasticity falls as price falls.

Total utility rises while marginal utility is positive and peaks when MU = 0; TU falls once MU becomes negative.

Law of diminishing marginal utility: as consumption of a good increases, MU of each additional unit declines, ceteris paribus.

Consumer equilibrium in single-good case: MUx = Px in utility terms, or MUx/Px = MUm (marginal utility of money).

Law of equi-marginal utility with two goods: MUx/Px = MUy/Py; reallocate spending from the low to the high MU-per-rupee good.

Indifference curve properties: downward sloping, convex to origin, never intersect, and higher curves represent higher satisfaction.

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

Consumer equilibrium under indifference analysis: MRSxy = Px/Py, with MRS falling along a convex indifference curve.

Price effect = substitution effect + income effect; for a normal good both reinforce, for an inferior good they oppose, and for a Giffen good the income effect dominates.

Short run has at least one fixed input; long run allows all inputs to vary.

Law of variable proportions: total product rises at an increasing rate, then diminishing marginal returns set in, and TP eventually falls when MP is negative.

TP, AP, MP relations: MP intersects AP at AP's maximum; MP = 0 when TP is maximum; AP = TP/L and MP = ΔTP/ΔL.

Returns to scale are increasing, constant, or decreasing when all inputs are scaled up in the same proportion.

Isoquant is convex and shows input combinations giving the same output; MRTS = MPL/MPK equals the input price ratio at the optimum.

Fixed costs do not vary with output; variable costs do; TC = TFC + TVC.

Average cost curves are U-shaped; MC cuts AC and AVC at their minimum points.

Long-run average cost (LAC) is the envelope of short-run AC curves; economies of scale explain its falling segment, diseconomies its rising segment.

Perfect competition: many buyers and sellers, homogeneous product, free entry and exit, perfect information; the firm is a price taker with horizontal demand (P = MR = AR).

Short-run equilibrium under perfect competition: MR = MC and MC rising; P > AC gives supernormal profit, P = AC normal profit, P < AC loss.

Long-run equilibrium under perfect competition occurs at minimum LAC where P = MR = MC = AC, yielding only normal profit.

Monopoly: single seller, no close substitutes, entry barriers; downward-sloping demand means MR < AR, and equilibrium is at MR = MC with P > MC.

Price discrimination requires market separation, different elasticities, and no resale; charge higher price in the inelastic market.

Monopolistic competition: many firms, differentiated products, free entry; short-run excess profit attracts entry and drives long-run profit to normal.

Oligopoly is characterised by interdependence and price rigidity; the kinked demand curve explains sticky prices.

A monopolist maximises revenue where MR = 0 and maximises profit where MR = MC; it never operates on the inelastic portion of its demand curve.

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

NNP at factor cost = GNP − depreciation − net indirect taxes; it is also called national income.

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

Value added method avoids double counting by summing only value added at each stage, or by counting only final goods.

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

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

Only factor incomes are included; transfer payments, sale of second-hand goods, and financial transactions are excluded.

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

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment.

Money supply measures: M1 = currency + demand deposits; M2 = M1 + savings deposits with post offices; M3 = M1 + time deposits with banks.

Commercial banks create credit; the money multiplier = 1/reserve ratio, so credit creation is limited by cash reserves and leakages.

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

Quantitative credit controls: bank rate, repo rate, reverse repo, CRR, OMO; qualitative controls include margin requirements and moral suasion.

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

Types by rate: creeping (low), walking, running, galloping, hyperinflation; stagflation combines stagnation with inflation.

Quantity theory of money: MV = PT (Fisher) or MV = PY; inflation results when money supply grows faster than real output.

Public finance covers public revenue, public expenditure, public debt, and financial administration.

Budget is an annual statement of estimated receipts and expenditure; revenue budget covers revenue receipts and expenditure, capital budget covers capital items.

Revenue receipts are non-redeemable (tax and non-tax); capital receipts create liabilities or reduce assets (borrowing, disinvestment).

Budget deficit types: revenue deficit = revenue expenditure − revenue receipts; fiscal deficit = total expenditure − total receipts excluding borrowings.

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

Direct taxes (income tax, corporate tax) cannot be shifted; indirect taxes (GST, customs) can be shifted to consumers.

Deficit financing means borrowing or creating new money to cover the fiscal gap; it may be inflationary.

Fiscal policy uses government spending and taxation to influence aggregate demand, employment, and price stability.

Absolute advantage: a country produces a good using fewer resources; comparative advantage: it produces at lower opportunity cost, which is the basis of mutually beneficial trade.

Terms of trade = (index of export prices / index of import prices) × 100; a rise means better terms of trade.

Balance of trade = exports of goods − imports of goods; balance of payments includes goods, services, transfers, and capital flows.

Current account covers visible and invisible trade plus unilateral transfers; capital account covers investment, loans, and reserves.

Exchange rate is the price of one currency in another; depreciation lowers export prices and raises import prices.

Tariffs are taxes on imports; quotas are quantity limits; subsidies and dumping are other trade policy tools.

Business environment components: economic, political, legal, social, technological, and competitive factors.

Globalisation, liberalisation, and privatisation (LPG) affect firm decisions on location, pricing, and sourcing.