Tamil Nadu HSE Second Year Economics cheat sheet

Economics is defined by Lionel Robbins (1932) as the science which studies human behaviour as a relationship between ends and scarce means having alternative uses.

Alfred Marshall's welfare definition treats economics as the study of wealth and of man in the ordinary business of life; Adam Smith's Wealth of Nations (1776) is the classical starting point.

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

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

Deductive method proceeds from general premises to particular conclusions; inductive method builds general rules from observed particular facts.

Central problem of scarcity: unlimited wants versus limited resources, which gives rise to choice and opportunity cost.

Economics is both a science (systematic, verifiable) and an art (practical application); it is a social science because it studies human behaviour.

Ceteris paribus means holding all other variables constant, allowing isolation of the effect of one variable.

The four basic problems are what to produce, how to produce, for whom to produce, and the problem of full utilisation and growth of resources.

Opportunity cost is the value of the next best alternative forgone when a choice is made.

Production possibility frontier is concave to the origin because marginal opportunity cost rises as resources are shifted between uses.

A point inside the PPF indicates underutilisation of resources; a point on the frontier is full and efficient use; a point outside is unattainable with current resources.

Market economy solves allocation through the price mechanism; a centrally planned economy uses state directives; a mixed economy combines both.

Utility is the want-satisfying power of a commodity; total utility rises at a diminishing rate while marginal utility falls.

Law of diminishing marginal utility: as consumption of a good increases, the additional satisfaction from each extra unit falls.

Consumer surplus equals total utility minus total expenditure, that is, the excess of what a consumer is willing to pay over what is paid.

Equilibrium of a single-commodity consumer: MU = Price; for multiple goods, MUx/Px = MUy/Py = MUm.

Indifference curve properties: negatively sloped, convex to the origin, never intersect, and higher curves represent higher satisfaction.

Budget line equation: Px·X + Py·Y = Income; its slope is -Px/Py and it shifts outward when income rises.

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

Law of demand: other things equal, quantity demanded moves inversely with price; the demand curve slopes downward.

Elasticity of demand Ed = (% change in quantity demanded) / (% change in price); |Ed| > 1 elastic, = 1 unitary, < 1 inelastic.

Movements along a demand curve are caused by price changes; shifts of the curve are caused by income, tastes, prices of related goods, and population.

Giffen goods and articles of ostentation are exceptions where demand rises with price; Veblen effect refers to conspicuous consumption.

Factors of production: land (rent), labour (wages), capital (interest), and entrepreneurship (profit).

Law of variable proportions: with one variable factor, marginal product rises, then falls, then becomes negative, giving three stages of production.

Returns to scale are long-run: increasing, constant, and decreasing returns arise when all factors change in the same proportion.

Total cost = total fixed cost + total variable cost; TC = TFC + TVC.

Average cost AC = TC/Q; marginal cost MC = change in TC / change in output; MC cuts AC at its minimum point.

Short-run cost curves are U-shaped because of the law of variable proportions; fixed costs exist only in the short run.

Revenue: total revenue TR = P × Q; average revenue AR = TR/Q; marginal revenue MR = change in TR / change in Q.

Under perfect competition AR = MR = Price; under monopoly MR < AR because price must fall to sell more.

Perfect competition features: many buyers and sellers, homogeneous product, free entry and exit, perfect knowledge, and a single price; the firm is a price taker.

Equilibrium of a competitive firm: MR = MC with MC rising; the supply curve is the portion of MC above minimum average variable cost.

Monopoly: a single seller, no close substitutes, strong barriers to entry, and price discrimination possible; equilibrium at MR = MC with P > MC.

Monopolistic competition (Chamberlin): many sellers, differentiated products, free entry, selling costs, and downward-sloping but elastic demand.

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

In the long run, competitive firms earn only normal profit (P = minimum AC); monopolistically competitive firms have excess capacity.

Price discrimination requires separate markets with different elasticities and no resale; charge higher price in the less elastic market.

Shut-down point occurs where price falls below minimum average variable cost.

Factor prices are determined by demand for and supply of factor services; demand for a factor is a derived demand.

Marginal productivity theory: a factor is paid according to its marginal revenue product, MRP = MP × MR.

Ricardo's theory of rent: rent is the payment for the original and indestructible powers of soil; it arises on the intensive or extensive margin.

Modern theory: rent is a surplus, the difference between actual earnings and transfer earnings; transfer earnings are the minimum needed to keep a factor in its present use.

Wages: nominal wages are money payments; real wages are purchasing power, adjusted for price level.

Subsistence theory (Ricardo), wage fund theory (Mill), and marginal productivity theory are competing explanations of wages.

Loanable funds theory and liquidity preference theory (Keynes) explain interest; interest is the reward for parting with liquidity or for waiting.

Profit is a residual reward for entrepreneurship and risk-bearing; Schumpeter links profit to innovation and dynamic change.

GDP is the money value of all final goods and services produced within a country's domestic territory in a year.

GNP = GDP + net factor income from abroad; NNP = GNP − depreciation; NNP at factor cost is national income.

Personal income is income received by households; disposable income is personal income minus direct taxes.

Three measurement methods: product (value added), income, and expenditure; all should give the same total, avoiding double counting and transfer payments.

Expenditure approach: GDP = C + I + G + (X − M).

Per capita income = national income / population; it is an average and ignores distribution.

Nominal GDP uses current prices; real GDP uses constant base-year prices, and the GDP deflator = nominal/real × 100.

Difficulties in measuring national income in developing economies: non-monetised transactions, illiteracy, unorganised sectors, and double counting.

Functions of money: medium of exchange, measure of value, store of value, standard of deferred payment, and transfer of value.

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

Commercial bank credit creation: total deposits = primary deposits × 1/reserve ratio; the money multiplier = 1/CRR.

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

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

Inflation is a sustained rise in the general price level; types include demand-pull, cost-push, and imported inflation.

Demand-pull inflation is explained as too much money chasing too few goods; the Phillips curve shows a short-run trade-off between inflation and unemployment.

Deflation is a fall in the general price level; stagflation combines high inflation with high unemployment.

Public finance covers public revenue, public expenditure, public debt, and financial administration.

Direct taxes are levied on income and wealth and cannot be shifted (income tax, corporation tax); indirect taxes are on goods and services and can be shifted (GST, customs).

Principles of taxation: equality, certainty, convenience, and economy (Adam Smith's canons); the benefit principle and ability-to-pay principle guide equity.

Budget is an annual statement of estimated receipts and expenditure; revenue budget covers revenue receipts and expenditure, capital budget covers capital items.

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

Primary deficit = fiscal deficit − interest payments.

Fiscal policy tools: taxation, public expenditure, and public debt management, used to influence aggregate demand.

Public debt is internal (raised within the country) or external; burden shifting and crowding out of private investment are key concerns.

Balance of trade covers only visible goods; balance of payments covers visible goods, invisible items, and capital transactions.

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

A BOP deficit is met from reserves or by borrowing; the BOP always balances in an accounting sense.

Absolute advantage (Adam Smith) and comparative advantage (David Ricardo) explain gains from trade based on opportunity cost differences.

Exchange rate is the price of one currency in terms of another; it may be fixed, floating, or managed.

Depreciation of a currency makes exports cheaper and imports dearer; appreciation does the opposite.

Devaluation is a deliberate official reduction of a fixed exchange rate; revaluation is its upward counterpart.

Terms of trade = (index of export prices / index of import prices) × 100; tariffs and quotas are instruments of trade protection.

India adopted economic planning in 1950 with the Planning Commission; the First Five Year Plan (1951-56) focused on agriculture.

The Mahalanobis Second Plan (1956-61) emphasised heavy and basic industries under the industrial policy of 1956.

The New Economic Policy of 1991 introduced liberalisation, privatisation, and globalisation, with LPG reforms in trade, industry, and finance.

NITI Aayog replaced the Planning Commission in 2015; the NITI Aayog prepares the SDG India Index.

Sectoral trend: the share of agriculture in GDP has declined while that of services has risen; agriculture still employs the largest share of the workforce.

Human Development Index combines life expectancy, education, and per capita income; Tamil Nadu ranks among the higher HDI states in India.

Tamil Nadu economy: a leading industrial state with automobile, textile, leather, electronics, and software clusters; Chennai is a major services and auto hub.

Tamil Nadu has high urbanisation and literacy relative to the national average; its economy is one of the largest state economies in India.