RBSE SS Economics cheat sheet

Scarcity is the root of all economic problems: human wants are unlimited but resources are limited and have alternative uses.

Opportunity cost is the value of the next best alternative forgone when a choice is made; it is the true cost in economics.

Microeconomics studies individual units (consumers, firms, markets); macroeconomics studies aggregates (national income, general price level, employment).

Production possibility frontier (PPF) shows maximum combinations of two goods an economy can produce with given resources and technology; it is concave to the origin due to increasing marginal opportunity cost.

Points inside the PPF indicate underutilisation of resources; points on the PPF are efficient; points outside are unattainable with current resources.

Positive economics deals with 'what is' (factual, testable statements); normative economics deals with 'what ought to be' (value judgments).

Central problems of every economy: what to produce, how to produce, and for whom to produce; these arise from scarcity and choice.

A market economy solves central problems through price mechanism; a centrally planned economy through government planning; a mixed economy uses both.

Marginal analysis: marginal cost is addition to total cost from one more unit; marginal benefit is addition to total benefit; optimal decision occurs where marginal benefit equals marginal cost.

Law of demand: other things equal, quantity demanded of a good falls when its price rises, and rises when its price falls (inverse relationship).

Demand curve slopes downward due to income effect, substitution effect, and the law of diminishing marginal utility.

Movement along demand curve is caused by a change in the good's own price; shift of demand curve is caused by non-price factors (income, tastes, prices of related goods, expectations, number of buyers).

For normal goods, income and demand move in the same direction; for inferior goods, they move in opposite directions.

Substitute goods have positive cross-price elasticity (rise in price of tea increases demand for coffee); complements have negative cross-price elasticity.

Price elasticity of demand (Ed) = percentage change in quantity demanded ÷ percentage change in price; use midpoint formula for arc elasticity: Ed = (ΔQ/ΔP)×(P1+P2)/(Q1+Q2).

Ed > 1 is elastic; Ed < 1 is inelastic; Ed = 1 is unitary elastic. Demand is more elastic when close substitutes exist, the good is a luxury, or the time horizon is longer.

Total expenditure method: if price and total expenditure move in opposite directions, Ed > 1; same direction, Ed < 1; no change in expenditure, Ed = 1.

Law of diminishing marginal utility: as consumption of a good increases, marginal utility from each additional unit declines; total utility rises at a decreasing rate and is maximum when marginal utility is zero.

Consumer's equilibrium under utility analysis: MUx/Px = MUy/Py = MUm (marginal utility of money); under indifference curve analysis: MRSxy = Px/Py at the tangency point with the budget line.

Law of variable proportions (short run): as more units of a variable factor are added to fixed factors, marginal product first rises, then falls, and eventually becomes negative.

Total product (TP) is maximum when marginal product (MP) is zero; average product (AP) is maximum where AP = MP.

Returns to scale (long run): increasing returns to scale when output increases more than proportionately to inputs; constant returns when proportionately; decreasing returns when less than proportionately.

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

Movement along supply curve is caused by change in own price; shift of supply curve is caused by changes in input prices, technology, taxes/subsidies, and number of sellers.

Price elasticity of supply (Es) = percentage change in quantity supplied ÷ percentage change in price; Es > 1 elastic, Es < 1 inelastic, Es = 1 unitary.

Costs in short run: TC = TFC + TVC; MC = ΔTC/ΔQ; AC = TC/Q; AVC = TVC/Q; AFC = TFC/Q.

MC curve cuts AVC and AC at their minimum points; AC falls when MC < AC, rises when MC > AC.

Revenue: TR = P×Q; MR = ΔTR/ΔQ; AR = TR/Q. Under perfect competition, P = AR = MR; under monopoly, MR < AR.

Producer's equilibrium: under perfect competition, produce where P = MC and MC is rising; under monopoly/monopolistic competition, produce where MR = MC and MC is rising.

Perfect competition features: many buyers and sellers, homogeneous product, free entry and exit, perfect knowledge, no transport costs; firm is a price taker, demand curve is horizontal.

Monopoly: single seller, no close substitutes, strong barriers to entry; firm is price maker and can practise price discrimination.

Monopolistic competition: many sellers, differentiated products, free entry and exit, some price-setting power; firm faces downward-sloping demand.

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

Equilibrium under perfect competition: market price determined where market demand equals market supply; firm produces where P = MC.

Equilibrium under monopoly: MR = MC determines output; price is read off the demand curve above MR.

In perfect competition, firm earns normal profit in long run because free entry and exit drive price to minimum AC.

Deadweight loss arises under monopoly because output is restricted below the competitive level and price is higher.

Price ceiling (maximum price) below equilibrium creates shortage; price floor (minimum price) above equilibrium creates surplus.

GDP at market price (GDPMP) = value of all final goods and services produced within domestic territory in a year.

GDP at factor cost = GDPMP – indirect taxes + subsidies.

GNP = GDP + net factor income from abroad (NFIA).

NNP at factor cost = National Income = GNP – depreciation – indirect taxes + subsidies.

Personal income = National income – undistributed profits – corporate tax – net interest + transfer payments.

Disposable income = Personal income – personal taxes.

Expenditure method: GDPMP = C + I + G + (X – M).

Income method: NDPFC = compensation of employees + operating surplus + mixed income + consumption of fixed capital.

Value added method: GDPMP = sum of gross value added at market prices by all sectors.

Real GDP uses constant prices; nominal GDP uses current prices; GDP deflator = (nominal GDP ÷ real GDP) × 100.

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

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

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

Credit control instruments: quantitative (bank rate, repo rate, reverse repo rate, open market operations, cash reserve ratio, statutory liquidity ratio) and qualitative (margin requirements, moral suasion, selective credit controls).

Repo rate is the rate at which RBI lends short-term funds to commercial banks against securities; reverse repo is the rate at which RBI absorbs liquidity.

CRR is the percentage of net demand and time liabilities (NDTL) that banks must keep as cash reserves with RBI; SLR is the percentage to be held in approved securities.

Money multiplier = 1 ÷ reserve ratio; it shows how an initial deposit creates credit through the banking system.

Commercial bank creates credit based on primary deposits and cash reserves; credit creation is limited by CRR, SLR, and cash leakage.

High-powered money (M0) = currency in circulation + bankers' deposits with RBI.

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

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

Saving function: S = –a + (1–b)Y; MPS = ΔS/ΔY.

Equilibrium income in two-sector model: Y = C + I, or equivalently S = I.

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

In a three-sector model with government: Y = C + I + G; equilibrium where S + T = I + G.

In an open economy: Y = C + I + G + (X – M).

Excess demand causes inflationary gap; deficient demand causes deflationary gap; government uses fiscal policy to correct them.

Paradox of thrift: an increase in saving may reduce equilibrium income when investment is unchanged.

Budget is an annual statement of estimated receipts and expenditure of the government.

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

Revenue expenditure does not create assets or reduce liabilities; capital expenditure creates assets or reduces liabilities.

Revenue deficit = revenue expenditure – revenue receipts.

Fiscal deficit = total expenditure – total receipts excluding borrowings; it indicates total borrowing requirement.

Primary deficit = fiscal deficit – interest payments.

Deficit financing may be through borrowing from public, RBI, or abroad; monetised deficit increases money supply and can cause inflation.

Fiscal policy instruments: government expenditure, taxation, and public borrowing; used to influence aggregate demand, income, and employment.

Public debt includes internal and external liabilities; burden of debt depends on use of borrowed funds.

Balance of payments (BoP) records all economic transactions between residents of a country and the rest of the world in a year.

Current account includes trade in goods and services, income, and unilateral transfers; capital account includes foreign investment, loans, and banking capital.

Balance of trade = value of exports of goods – value of imports of goods.

BoP always balances in accounting sense; current account deficit is financed by capital account surplus or reserve depletion.

Foreign exchange rate is the price of one currency in terms of another.

Fixed exchange rate is pegged by central bank intervention; flexible (floating) rate is determined by market demand and supply.

Managed floating: market determines rate but central bank intervenes to smooth fluctuations.

Currency depreciation makes exports cheaper and imports dearer; appreciation has the opposite effect.

Devaluation is a deliberate reduction in the value of a currency under a fixed exchange rate system.

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

India adopted a mixed economy with Five Year Plans starting 1951; emphasis on agriculture, industry, and public sector.

Green Revolution increased foodgrain output through HYV seeds, irrigation, and fertilisers, especially in Punjab, Haryana, and western UP.

Industrial policy 1956 classified industries into three schedules; public sector played a leading role.

Economic reforms of 1991 included liberalisation, privatisation, and globalisation (LPG) in response to a balance of payments crisis.

New Economic Policy 1991: abolition of industrial licensing (except few industries), reduction in public sector monopoly, foreign direct investment liberalisation, and rupee devaluation.

Liberalisation reduced tariffs and controls; privatisation involved disinvestment of public sector units; globalisation integrated India with world economy.

Agriculture remains the largest employer; industry and services have grown faster in post-reform period.

Human Development Index (HDI) measures life expectancy, education, and per capita income; India ranks medium on HDI.

Poverty ratio declined from about 45% in 1993-94 to about 22% in 2011-12 (Tendulkar methodology).

Sustainable development balances economic growth with environmental protection and equity; India faces challenges of unemployment, inequality, and infrastructure.