IIT JAM Economics cheat sheet

Utility maximization: choose the bundle where MRS (MUx/MUy) equals the price ratio Px/Py; tangency of indifference curve and budget line gives the interior optimum.

Slutsky equation: total effect of a price change = substitution effect (always negative for own price) + income effect; sign of income effect distinguishes normal, inferior, and Giffen goods.

Cobb-Douglas U = x^a y^b gives demand x* = a/(a+b), y* = b/(a+b); expenditure shares are constant.

Perfect substitutes (linear indifference curves) yield corner solutions; perfect complements (L-shaped) yield x = y at the kink, so demand is proportional to income.

Elasticity: price elasticity = (dQ/dP)(P/Q); |e|>1 elastic, |e|<1 inelastic. Revenue rises with price only when demand is inelastic.

Costs: MC = dTC/dQ crosses AVC and ATC at their minimum points. ATC = AFC + AVC; AFC falls continuously with output.

Short-run shutdown rule: exit if P < minimum AVC; long-run exit if P < minimum ATC. Perfect competition long-run equilibrium: P = MC = minimum ATC.

Monopoly: MR = MC sets output; MR = P(1 + 1/e). Markup is larger where demand is less elastic; deadweight loss arises because P > MC.

Consumer and producer surplus measure welfare; a price floor above equilibrium or price ceiling below it creates deadweight loss equal to the lost surplus triangle.

National income identity (open economy): Y = C + I + G + (X − M). GDP is domestic production; GNP = GDP + net factor income from abroad.

Real vs nominal GDP: real GDP uses base-year prices (Laspeyres-type); GDP deflator = (nominal/real) × 100.

Consumption function C = a + bY, where b = MPC (0<b<1); saving S = −a + (1−b)Y, and MPS = 1 − MPC.

Simple Keynesian multiplier = 1/(1 − MPC); with proportional tax it is 1/[1 − MPC(1 − t)]; with imports subtract marginal propensity to import.

Equilibrium income in a closed economy with government: Y = (a − bT + I + G)/(1 − b) for lump-sum tax T.

IS curve slopes down (higher r lowers investment and output); LM slopes up (higher Y raises money demand and r). Fiscal policy is strongest when LM is flat.

Quantity theory: MV = PY; money is neutral in the long run, so sustained inflation is a monetary phenomenon.

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

Balance of payments: current account + capital/financial account + errors = 0; a current-account deficit must be financed by net capital inflow.

Mean, median, mode: median is robust to outliers; for a symmetric distribution mean = median = mode.

Variance = E(X²) − [E(X)]²; standard deviation is its square root. Coefficient of variation = SD/mean, used to compare dispersion across units.

For independent variables, Var(aX + bY) = a²Var(X) + b²Var(Y); if correlated, add 2ab·Cov(X,Y).

Correlation r = Cov(X,Y)/(σx·σy), with −1 ≤ r ≤ 1; r measures linear association only, and r = 0 does not imply independence.

OLS simple regression: slope b = Cov(X,Y)/Var(X) = r(σy/σx); intercept a = ȳ − b·x̄; the line passes through (x̄, ȳ).

R² = explained sum of squares / total sum of squares; adding regressors never lowers R², so use adjusted R² to compare models with different numbers of regressors.

Classical linear regression assumptions: zero-mean errors, homoskedasticity, no autocorrelation, no perfect multicollinearity; violations bias standard errors.

Probability: P(A∪B) = P(A) + P(B) − P(A∩B); P(A|B) = P(A∩B)/P(B). Bayes' rule: P(A|B) = P(B|A)P(A)/P(B).

Index numbers: Laspeyres uses base-year quantities, Paasche uses current-year quantities; Laspeyres tends to overstate the cost of living.

Solow model: y = k^α with capital accumulation; steady state where sf(k) = (n + δ)k. Long-run growth per capita comes only from technical progress.

Golden-rule capital stock maximizes steady-state consumption, where marginal product of capital f'(k) = n + δ.

Harrod-Domar: growth rate g = s/v, where s is the saving rate and v the incremental capital-output ratio.

Human Development Index combines life expectancy, education (mean and expected years of schooling), and GNI per capita (log scale), each normalized 0–1; HDI is their geometric mean.

Lorenz curve plots cumulative income share against cumulative population; the Gini coefficient equals twice the area between the Lorenz curve and the 45° line (0 = equality, 1 = inequality).

Purchasing power parity converts incomes to a common currency using price levels; PPP-adjusted GDP per capita differs from exchange-rate GDP.

Indian economy: primary (agriculture), secondary (industry), tertiary (services) sectors; structural transformation means a falling GDP share of agriculture.

Fiscal deficit = total expenditure − total receipts excluding borrowings; revenue deficit = revenue expenditure − revenue receipts.

Repo rate is the rate at which the RBI lends to banks; raising it tightens liquidity and is the main inflation-control instrument of monetary policy.