PSEB SS Economics cheat sheet

Law of Diminishing Marginal Utility: as consumption of a good rises within a period, marginal utility from each extra unit falls; total utility rises while MU is positive and peaks when MU = 0.

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

Indifference curve properties: downward sloping, convex to the origin (diminishing MRS), never intersect, and a higher curve shows higher satisfaction.

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

MRS(xy) = MUx/MUy = Px/Py at the tangency point of indifference curve and budget line - the ordinalist equilibrium condition.

Demand determinants: own price, income, prices of related goods, tastes, expectations, population. Movement along the curve = price change; shift = other determinants.

Elasticity: Ed = (% change in quantity)/(% change in price) = (ΔQ/ΔP)·(P/Q). |Ed| > 1 elastic, < 1 inelastic, = 1 unitary; at the midpoint of a linear demand curve Ed = 1.

Income elasticity: positive for normal goods (Ey > 1 luxury, 0 < Ey < 1 necessity), negative for inferior goods. Cross elasticity is positive for substitutes, negative for complements.

Production function: Q = f(L, K). Short run has at least one fixed input; long run has all inputs variable.

Law of Variable Proportions: TP rises at an increasing rate, then at a diminishing rate, peaks, and falls; MP cuts AP at AP's maximum, and MP = 0 when TP is maximum.

Returns to a factor (short run) versus returns to scale (long run): increasing, constant, decreasing returns to scale occur when inputs are scaled by the same proportion.

TP = ΣMP; AP = TP/L; MP = ΔTP/ΔL. When MP > AP, AP rises; when MP < AP, AP falls.

Isoquant: combinations of two inputs giving the same output; convex to origin, MRTS(LK) = MPL/MPK.

Isocost line: C = wL + rK; slope = −w/r. Producer equilibrium at tangency: MRTS = w/r, equivalently MPL/w = MPK/r.

Total Product and Marginal Product relationship: MP is the slope of the TP curve; the inflection point on TP corresponds to maximum MP.

Short-run costs: TC = TFC + TVC; TFC is constant, TVC rises with output and is zero at zero output.

AC = TC/Q; AVC = TVC/Q; AFC = TFC/Q; MC = ΔTC/ΔQ = ΔTVC/ΔQ. MC cuts AVC and AC at their minimum points.

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

Long-run AC is the envelope of short-run AC curves; economies of scale cause its falling portion, diseconomies its rising portion.

Revenue: TR = P·Q; AR = TR/Q = price; MR = ΔTR/ΔQ. Under perfect competition MR = AR = P; under monopoly MR < AR and MR = AR(1 − 1/|Ed|).

Profit maximisation: MR = MC and MC rising; normal profit when TR = TC, supernormal when TR > TC, loss when TR < TC.

Break-even point: TR = TC; shutdown point in the short run: P = minimum AVC (below it, the firm stops producing).

Law of Supply: positive price–quantity relationship, upward-sloping supply curve; shifts occur with input prices, technology, taxes/subsidies, and number of firms.

Supply elasticity: Es = (% change in quantity supplied)/(% change in price) = (ΔQ/ΔP)·(P/Q); always positive.

Perfect competition: many buyers and sellers, homogeneous product, free entry and exit, perfect information, price taker; demand curve is horizontal at market price.

Monopoly: single seller, no close substitutes, strong entry barriers; downward-sloping demand, price maker, MR < AR.

Monopolistic competition: many sellers, differentiated products, free entry; short-run supernormal profits attract entry until long-run normal profit.

Oligopoly: few large firms, interdependence, kinked demand curve, price rigidity, and non-price competition; cartels act like a monopoly.

Equilibrium under perfect competition: market demand equals market supply; a firm produces where P = MC (with MC rising).

Monopoly equilibrium: MR = MC with MC rising; price is read off the demand curve above MR, so P > MC and output is lower than under competition.

Price ceiling (below equilibrium) creates excess demand and shortages; price floor (above equilibrium) creates excess supply and surpluses.

Effects of a shift in demand or supply: a demand rise raises both price and quantity; a supply rise lowers price and raises quantity.

GDP(MP) = sum of final goods and services valued at market prices produced within domestic territory in a year; excludes intermediate goods to avoid double counting.

GDP(FC) = GDP(MP) − indirect taxes + subsidies; NDP = GDP − depreciation; NNP = GNP − depreciation.

GNP = GDP + net factor income from abroad (NFIA); NNP(FC) = National Income.

National Income = NNP(FC) = compensation of employees + operating surplus + mixed income + net factor income from abroad (income method).

Expenditure method: GDP(MP) = C + I + G + (X − M), with I including changes in inventories and gross fixed capital formation.

Value-added method: sum of gross value added at market prices = GDP(MP); GVA = value of output − intermediate consumption.

Personal income = National Income − undistributed profits − corporate tax + transfer payments + net interest; disposable income = personal income − direct taxes.

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

Precautions: exclude second-hand sales, financial assets, transfer payments, and intermediate goods; include own-account production and imputed rent.

Money functions: medium of exchange, unit of account, store of value, standard of deferred payment; M1 = currency with public + demand deposits + other deposits with RBI.

Money supply measures: M1 (narrow money), M2 = M1 + savings deposits with post offices, M3 = M1 + net time deposits, M4 = M3 + total post office deposits.

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

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

Credit control: quantitative tools - repo rate, reverse repo, CRR, SLR, open market operations; qualitative - margin requirements, moral suasion, credit rationing.

Commercial bank balance sheet: liabilities = deposits + borrowings; assets = reserves + loans + investments; primary deposits create credit, secondary deposits are created by lending.

Budget: revenue receipts (tax and non-tax) + capital receipts (borrowings, disinvestment) = revenue expenditure + capital expenditure + fiscal deficit financing.

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

Deficit financing raises money supply and can cause inflation; crowding out occurs when government borrowing raises interest rates and reduces private investment.

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: goods (visible trade), services (invisibles), income, and unilateral transfers; capital account: FDI, FPI, loans, banking capital, changes in reserves.

Trade balance = exports of goods − imports of goods; current account balance includes services and transfers.

Exchange rate: price of one currency in terms of another; depreciation (market-determined) versus devaluation (fixed regime) make exports cheaper.

Demand for foreign exchange comes from imports, tourism abroad, and external debt servicing; supply from exports, remittances, and capital inflows.

Managed floating: RBI intervenes to smooth volatility without a fixed target; sterilisation offsets the money-supply effect of intervention.

Indian development: 1950–90 import substitution and licensing; 1991 reforms - liberalisation, privatisation, globalisation, and LPG policy.

Poverty and human development: Multidimensional Poverty Index, HDI (health, education, income), and the role of PDS, MGNREGA, and public health spending.

Planning: Five-Year Plans from 1951; NITI Aayog replaced the Planning Commission in 2015; key sectors - agriculture, industry, and services growth patterns.