Tamil Nadu HSE First Year Economics cheat sheet

Adam Smith (1776, Wealth of Nations) defined economics as the science of wealth; his emphasis on wealth earned it the label 'dismal science' and 'bread-and-butter science'.

Marshall's definition (1890): economics is 'the study of mankind in the ordinary business of life', examining wealth and the material welfare of man - a welfare definition.

Robbins' scarcity definition (1932): economics studies human behaviour as a relationship between unlimited wants and scarce resources having alternative uses; it makes economics a positive science of choice.

Samuelson's growth definition treats economics as the study of how people and society choose to employ scarce productive resources over time, including growth and development.

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

Positive economics states 'what is' and is verifiable; normative economics states 'what ought to be' and involves value judgements - Robbins placed economics in the positive category.

Central problems of every economy: what to produce, how to produce, and for whom to produce; these arise because resources are scarce relative to wants.

Production possibility curve is concave to the origin because the marginal opportunity cost of shifting resources rises; points inside the curve show unemployment and points outside are unattainable.

Methods: deductive (from general to particular) and inductive (from particular to general); economics is both a science and an art, and its laws are statements of tendency, not exact laws like physics.

Law of Diminishing Marginal Utility: as a consumer consumes more units of a commodity, the utility from each additional unit falls; total utility rises while marginal utility is positive and is maximum when marginal utility is zero.

Law of Equi-Marginal Utility (consumer equilibrium, one commodity): MUx = Px in utility terms, or MUx/Px = MUm; for many goods equilibrium requires MUx/Px = MUy/Py = ... = MUm.

Indifference curve properties: downward sloping, convex to the origin (diminishing marginal rate of substitution), never intersecting, and a higher curve represents higher satisfaction.

Budget line equation: PxX + PyY = M; its slope is −Px/Py, and a change in income shifts the line while a change in one price rotates it.

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

Law of Demand: other things equal, quantity demanded and price move in opposite directions; reasons include income effect, substitution effect and diminishing marginal utility.

Elasticity of demand formula: Ed = (percentage change in quantity demanded) ÷ (percentage change in price); use the point formula Ed = (P/Q)·(ΔQ/ΔP).

Elasticity ranges: |Ed| > 1 elastic, |Ed| = 1 unitary, |Ed| < 1 inelastic, Ed = 0 perfectly inelastic, Ed = ∞ perfectly elastic; demand is more elastic for luxuries, goods with substitutes and the long run.

Exceptions to the law of demand: Giffen goods, status or Veblen goods, fear of future price rise, and ignorance of price changes; a movement along the curve is caused by price, a shift by income, tastes, prices of related goods or population.

Production function: Q = f(L, K); short run has at least one fixed factor, long run has all factors variable.

Law of Variable Proportions (short run): total product rises at an increasing rate, then at a diminishing rate, then falls; marginal product cuts average product at AP's maximum, and TP is maximum when MP = 0.

Returns to scale (long run): increasing, constant and decreasing returns to scale; the Cobb-Douglas form Q = AL^αK^β has increasing returns when α + β > 1.

Cost classification: fixed cost does not vary with output; variable cost does; total cost = TFC + TVC; average fixed cost falls continuously and never touches the axis.

MC = ΔTC/ΔQ = ΔTVC/ΔQ; MC cuts AC at AC's minimum point; AC is U-shaped because of the law of variable proportions.

Relationship: when MC < AC, AC falls; when MC > AC, AC rises; when MC = AC, AC is at its minimum.

Revenue concepts: TR = P × Q; AR = TR/Q = price; MR = ΔTR/ΔQ; under perfect competition AR = MR = price, while under monopoly MR < AR and MR is twice as steep as AR for a straight-line demand curve.

Laws of returns in terms of revenue: increasing returns when MR > MC, diminishing returns when MC > MR; profit is maximum where MR = MC and MC is rising.

Producer's equilibrium under perfect competition requires MC = MR = price with MC rising; the supply curve is the rising portion of MC above minimum AVC.

Perfect competition features: very large number of buyers and sellers, homogeneous product, free entry and exit, perfect knowledge, perfect mobility, and a single uniform price - the firm is a price taker.

Under perfect competition the firm's demand curve is horizontal (perfectly elastic) at the market price, so AR = MR; the industry demand curve slopes downward.

Monopoly: single seller, no close substitutes, strong barriers to entry, price maker; equilibrium where MR = MC with MC rising, and MR < AR.

Price discrimination under monopoly is possible when markets can be separated and resale prevented; the higher price is charged in the market with less elastic demand.

Monopolistic competition (Chamberlin): many sellers, product differentiation, free entry, selling costs and advertising; the firm faces a downward-sloping but fairly elastic demand curve.

Oligopoly: few large firms, interdependence, price rigidity; the kinked demand curve explains sticky prices because rivals ignore price rises but match price cuts.

Duopoly is a special case of oligopoly with exactly two sellers; cartels act like a monopoly while non-colluding firms may follow price leadership.

Equilibrium condition for any firm: MR = MC with MC cutting MR from below; price is read from the AR curve at that output.

Market supply is the horizontal sum of individual supply curves; equilibrium price is set where market demand equals market supply, and excess demand pushes price up while excess supply pushes it down.

Factor prices are determined by demand for and supply of factors; factor demand is a derived demand, derived from demand for the goods the factor helps produce.

Marginal Revenue Product: MRP = MP × MR; under perfect competition in the product market MR = P, so MRP = VMP = MP × P.

A profit-maximising firm hires a factor until MRP equals the factor's marginal cost (the wage rate in a competitive factor market).

Rent (Ricardo): payment for the original and indestructible powers of the soil; differential rent arises from differences in fertility and situation.

Quasi-rent is a short-run surplus earned by a machine or factor whose supply is temporarily fixed; it disappears in the long run as supply adjusts.

Economic rent is the surplus over transfer earnings; transfer earnings are the minimum amount needed to keep a factor in its present use.

Wages: nominal wage is money paid, real wage is purchasing power; real wage depends on the price level and on payments in kind.

Interest is the reward for waiting or for capital; the loanable funds theory and liquidity preference theory explain interest rate determination.

Profit is the residual reward to the entrepreneur for risk-bearing and uncertainty; normal profit is part of cost while supernormal profit is not.

GDP at market prices = 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 at market prices − depreciation − net indirect taxes; it is also called national income.

Personal income = national income − undistributed profits − corporate taxes + transfer payments; disposable income = personal income − direct taxes.

Three methods: product or value-added method (sum of GVA), income method (factor incomes), and expenditure method (C + I + G + NX).

Avoid double counting by counting only value added or only final goods; intermediate goods and second-hand sales are excluded.

Expenditure method components: private final consumption expenditure, government final consumption expenditure, gross domestic capital formation, and net exports.

Only factor incomes are included in the income method; transfer payments, capital gains, windfall gains and illegal incomes are excluded.

Real vs nominal GDP: real GDP is measured at constant (base-year) prices and removes price effects; GDP deflator = (nominal GDP ÷ real GDP) × 100.

Difficulties in measuring national income in India include non-monetised transactions, unpaid services, illiteracy, and the problem of double counting.

Functions of money: medium of exchange, measure of value, store of value, standard of deferred payment; primary function is medium of exchange.

Money supply measures in India: M1 = currency with public + demand deposits + other deposits with RBI; M1 is narrow money; M3 = M1 + time deposits with banks is broad money.

Credit creation by commercial banks: total deposits = initial deposit × 1/reserve ratio; the money multiplier = 1/CRR (or 1/legal reserve ratio).

RBI functions: currency issue (minimum reserve system), banker to government, banker's bank, lender of last resort, custodian of foreign exchange reserves, and credit control.

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

Repo rate is the rate at which RBI lends to banks against securities; reverse repo is the rate at which RBI absorbs liquidity; an increase in CRR reduces credit creation.

Public finance deals with government revenue, expenditure, debt and financial administration; the Union Budget is presented annually on 1 February.

Direct taxes (income tax, corporate tax) cannot be shifted and are progressive; indirect taxes (GST, customs) can be shifted to consumers and are regressive in effect.

Deficit concepts: revenue deficit = revenue expenditure − revenue receipts; fiscal deficit = total expenditure − total receipts excluding borrowings; primary deficit = fiscal deficit − interest payments.

India is classified as a developing economy with mixed features: coexistence of public and private sectors, planning, and dualism between organised and unorganised sectors.

Sectors of the economy: primary (agriculture, mining), secondary (manufacturing, construction), tertiary (services); India's structural shift has been from primary to tertiary, with services contributing the largest share of GDP.

NITI Aayog replaced the Planning Commission on 1 January 2015; it acts as a policy think tank without financial allocation powers.

Five Year Plans ran from 1951 to 2017; the Twelfth Five Year Plan (2012–17) was the last, with the theme 'Faster, More Inclusive and Sustainable Growth'.

Tamil Nadu economy: one of the most industrialised states, with a strong automobile and auto-components base (Chennai is called the 'Detroit of India'), textiles in Coimbatore, leather in Chennai and firecrackers in Sivakasi.

Tamil Nadu's agriculture depends heavily on monsoon and canal irrigation; major crops include paddy, sugarcane, groundnut and cotton, with the Cauvery delta as the rice bowl.

Tamil Nadu has a high urbanisation rate and a large services sector including IT parks in Chennai and Coimbatore; human development indicators are above the national average.

Poverty and unemployment concepts: absolute vs relative poverty, poverty line based on calorie norms, and types of unemployment - seasonal, disguised, structural, cyclical and frictional.

Economic reforms of 1991 (LPG): liberalisation, privatisation and globalisation, introduced to address the balance of payments crisis.

Statistics in economics has two senses: singular (the science of collecting, organising and analysing data) and plural (numerical facts); it deals with aggregates of facts affected by multiplicity of causes.

Types of data: primary (collected first-hand) and secondary (already collected); sources include census, sample surveys such as NSSO, and published reports.

Measures of central tendency: mean = ΣX/N (arithmetic), median is the middle value of ordered data, mode is the most frequent value; for grouped data use class midpoints.

Median for grouped data: Median = L + [(N/2 − cf)/f] × h, where L is the lower limit, cf the cumulative frequency before the median class, f its frequency and h the class width.

Mode for grouped data: Mode = L + [(f1 − f0)/(2f1 − f0 − f2)] × h, where f1 is the modal class frequency.

Quartiles: Q1 = L + [(N/4 − cf)/f] × h; Q3 uses 3N/4; quartile deviation = (Q3 − Q1)/2.

Dispersion measures: range = L − S; mean deviation = Σ|X − mean|/N; variance = Σ(X − mean)²/N; standard deviation = √variance; coefficient of variation = (SD/mean) × 100.

Correlation: Karl Pearson's r = Σxy/(N·σx·σy), lying between −1 and +1; rank correlation uses Spearman's formula 1 − 6ΣD²/[N(N² − 1)].

Index numbers measure relative change; Laspeyres uses base-year quantities, Paasche uses current-year quantities, and Fisher's ideal index is the geometric mean of the two.