CHSE Odisha Elective Economics cheat sheet

Economics studies how scarce resources with alternative uses are allocated to satisfy unlimited wants; scarcity plus choice is the core problem.

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

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

Three central problems: what to produce and in what quantities, how to produce (choice of technique), and for whom to produce (distribution).

Production possibility frontier (PPF) is concave to the origin because marginal opportunity cost rises as resources are shifted between goods.

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

Rightward shift of the PPF follows growth of resources or improvement in technology; a single-good-specific improvement rotates the frontier outward on that axis.

Opportunity cost of a good is the quantity of the other good sacrificed; MRT = ΔY/ΔX equals the slope of the PPF.

Central problems arise in every economy; capitalist economies solve them through the price mechanism, socialist economies through planning, mixed economies through both.

Law of diminishing marginal utility: as consumption of a good rises continuously, utility from each extra unit falls; total utility rises while marginal utility is positive.

Consumer equilibrium in one good: MUx = Px in utility terms, or MUx/Px = MUm (marginal utility of money); in two goods: MUx/Px = MUy/Py.

Indifference curve properties: downward sloping, convex to the origin (diminishing MRS), higher curve means higher satisfaction, 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.

Consumer equilibrium under indifference analysis: MRSxy = Px/Py, with the budget line tangent to the highest attainable indifference curve.

Law of demand: other things equal, quantity demanded falls as price rises; causes are income effect, substitution effect and new buyers.

Movement along a demand curve is caused only by own price; shifts of the demand curve are caused by income, prices of related goods, tastes, and expectations.

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

Price elasticity of demand Ed = (% change in quantity)/(% change in price) = (ΔQ/Q)÷(ΔP/P); demand is elastic if Ed > 1, inelastic if Ed < 1, unitary if Ed = 1.

Production function shows maximum output obtainable from given inputs: Q = f(L, K); short run has fixed factors, long run has all factors variable.

Law of variable proportions: with one variable input, MP first rises, then falls, then becomes negative; TP rises at a diminishing rate after the inflection point.

Relationships: AP = TP/L; MP = ΔTP/ΔL; MP cuts AP at AP's maximum; TP is maximum when MP = 0; TP rises while MP is positive.

Three stages of production: Stage I ends where AP is maximum (MP = AP), Stage II ends where MP = 0; a rational producer operates in Stage II.

Returns to scale: increasing, constant and decreasing returns occur when all inputs are scaled up proportionally in the long run.

Isoquant shows input combinations giving equal output; its slope is the marginal rate of technical substitution, MRTS = MPL/MPK.

Law of returns to factor underlies the U-shaped short-run cost curves; economies and diseconomies of scale underlie the long-run average cost curve.

Total product, average product and marginal product are all physical measures; revenue product equals marginal product multiplied by price of output.

Law of supply: other things equal, quantity supplied rises with price; the supply curve slopes upward.

Movement along a supply curve is caused by own price; shifts are caused by input prices, technology, taxes/subsidies, prices of related goods and expectations.

Elasticity of supply Es = (% change in quantity supplied)/(% change in price); Es = 0 for perfectly inelastic supply, infinite for perfectly elastic.

TC = TFC + TVC; TFC is constant and positive at zero output, TVC is zero at zero output and rises with output.

AC = TC/Q; AVC = TVC/Q; AFC = TFC/Q; MC = ΔTC/ΔQ = ΔTVC/ΔQ.

MC cuts both AVC and AC at their minimum points; AFC falls continuously as output rises.

AC and MC are U-shaped because of the law of variable proportions; the vertical gap between AC and AVC equals AFC and shrinks as output rises.

Fixed cost exists only in the short run; in the long run all costs are variable and there is no fixed cost.

Revenue concepts: TR = P×Q; AR = TR/Q = price; MR = ΔTR/ΔQ; under perfect competition AR = MR = P.

Perfect competition: many buyers and sellers, homogeneous product, free entry and exit, perfect knowledge, no transport cost; firm is a price taker with AR = MR = P.

Under perfect competition a firm's short-run equilibrium is at MC = MR with MC rising; it earns supernormal profit if P > AC, normal profit if P = AC, and incurs loss if P < AC.

Shut-down point is where P = minimum AVC; below this price the firm stops production in the short run.

Monopoly: single seller, no close substitute, strong entry barriers; the firm is a price maker and the demand curve slopes downward, so MR < AR.

Monopoly equilibrium: MR = MC with MC rising; a monopolist can earn supernormal profit in the long run and produces less at a higher price than perfect competition.

Monopolistic competition: many sellers with differentiated products, free entry, selling costs and advertising; equilibrium in the long run is at AR = AC with excess capacity.

Oligopoly: few large firms, interdependence, price rigidity; the kinked demand curve explains sticky prices.

Price discrimination charges different prices to different buyers for the same product; it requires market separation and different elasticities of demand.

Equilibrium price is set where market demand equals market supply; an excess demand (price below equilibrium) pushes price up, excess supply pushes it down.

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.

GNP = GDP + net factor income from abroad (NFIA); NFIA = factor income earned abroad by residents − factor income earned domestically by non-residents.

NNP at factor cost = GNP at market price − depreciation − net indirect taxes; net indirect taxes = indirect taxes − subsidies.

Domestic income (NDP at FC) = compensation of employees + operating surplus + mixed income + consumption of fixed capital.

Personal income = private income − corporate tax − undistributed profits; disposable income = personal income − direct taxes − non-tax payments.

Value added method: sum of (value of output − intermediate consumption) across sectors, plus net factor income from abroad for national income.

Income method sums factor incomes (rent, wages, interest, profit); expenditure method sums C + I + G + (X − M).

Real GDP uses constant (base-year) prices and measures growth; nominal GDP uses current prices and is affected by price changes; GDP deflator = (nominal/real) × 100.

Items excluded from national income: transfer payments, sale of second-hand goods, financial transactions, intermediate goods, and non-market services.

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment; money removes the double coincidence of wants.

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; M4 = M3 + total post office deposits.

High-powered money (M0) = currency issued by RBI + bankers' deposits with RBI; money multiplier = 1/reserve ratio, so money supply = multiplier × high-powered money.

Commercial banks create credit; total deposit creation = initial deposit × 1/CRR when there is no currency leakage.

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

Quantitative instruments: repo rate, reverse repo, bank rate, CRR, SLR and open market operations; qualitative instruments include margin requirements, moral suasion and credit rationing.

Repo rate is the rate at which RBI lends short-term funds to banks against securities; a rise in repo rate contracts credit.

CRR is the share of net demand and time liabilities kept as cash reserve with RBI; SLR is held by banks in approved securities and cash.

Expansionary policy cuts repo rate, CRR and SLR and buys securities; contractionary policy does the opposite to control inflation.

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

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

Saving function: S = −a + (1 − b)Y; saving equals investment at equilibrium in a two-sector economy.

Equilibrium income: Y = C + I, equivalently S = I; planned expenditure equals output, so there is no unintended inventory change.

Investment multiplier k = 1/(1 − MPC) = 1/MPS = ΔY/ΔI; a higher MPC gives a larger multiplier.

Excess demand causes inflationary gap; deficient demand causes deflationary gap; both are corrected by fiscal and monetary measures.

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

Full employment equilibrium occurs where aggregate demand equals aggregate supply at full employment; underemployment equilibrium is Keynes's case where AD is deficient.

Aggregate demand components: AD = C + I + G + (X − M); government spending and exports are autonomous injections.

Budget is an annual statement of estimated receipts and expenditure of the government; it has revenue account and capital account.

Revenue receipts are non-debt creating (tax and non-tax); capital receipts create liabilities or reduce assets (borrowings, disinvestment, recovery of loans).

Revenue expenditure does not create assets or reduce liabilities (salaries, interest, subsidies); 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 shows total borrowing requirement of the government.

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

Budgetary deficit = total expenditure − total receipts; it is financed by borrowing from RBI, the public, or abroad.

Fiscal policy instruments are government expenditure, taxation and public borrowing; expansionary fiscal policy raises demand, contractionary reduces it.

Public debt is internal (owed to residents) or external (owed to foreigners); deficit financing through RBI borrowing can create inflationary pressure.

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

Current account covers goods, services, income and unilateral transfers; capital account covers foreign investment, loans, banking capital and reserve changes.

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

Current account deficit means receipts on current account fall short of payments; it must be financed by capital inflows or reserve depletion.

Depreciation of currency makes exports cheaper and imports dearer, improving the trade balance if elasticities are sufficiently high.

Fixed exchange rate is pegged by the central bank; flexible rate is set by market demand and supply of foreign exchange.

Managed floating lies between the two: market determines the rate, with central bank intervention to smooth fluctuations.

Appreciation raises the external value of a currency; it makes exports costlier abroad and imports cheaper at home.

Demand for foreign exchange arises from imports, tourism abroad and repayment of foreign loans; supply comes from exports, remittances and capital inflows.

Planning in India began in 1950 with the Planning Commission; the First Five-Year Plan (1951–56) focused on agriculture and irrigation.

The Second Plan (1956–61) adopted the Mahalanobis model, emphasising heavy industry under import substitution.

The 1991 New Economic Policy introduced liberalisation, privatisation and globalisation, with devaluation of the rupee and removal of industrial licensing.

Green Revolution raised foodgrain output through HYV seeds, irrigation and fertiliser, mainly in Punjab, Haryana and western Uttar Pradesh.

Poverty measures: headcount ratio, poverty gap; Tendulkar Committee and Rangarajan Committee gave different poverty lines.

Occupational structure problem: agriculture employs a large share of workers but contributes a much smaller share of GDP, showing low productivity.

Infrastructure includes energy, transport, communication and social sectors like education and health; both are essential for growth.

Sustainable development means meeting present needs without compromising future generations; key issues include pollution, deforestation and groundwater depletion.

Current issues: inflation, unemployment, fiscal deficit, current account deficit, financial inclusion and the shift towards a service-led economy.