UPMSP Intermediate Economics - Code 136 cheat sheet

Economics is the study of how scarce resources with alternative uses are allocated to satisfy unlimited wants; scarcity and choice are its twin foundations.

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

Positive statements are verifiable claims about what is; normative statements are value judgements about what ought to be.

Opportunity cost of a good is the value of the next best alternative forgone, measured in real terms, not money terms.

Production possibility frontier is concave to the origin because marginal opportunity cost rises as more of one good is produced (increasing MOC).

Points inside the PPF indicate underutilisation of resources; points on the curve are efficient; points beyond are unattainable with current resources and technology.

Central problems of every economy: what to produce, how to produce, and for whom to produce; market, planned and mixed economies answer them differently.

A rightward shift of the PPF follows from growth of resources or technological improvement; a change in the goods' prices does not shift it.

Statistics tools used: mean, median, mode for central tendency; these describe data but do not by themselves establish causation.

Law of diminishing marginal utility: as consumption of a good rises, marginal utility from each extra unit falls; total utility rises while MU is positive.

Consumer equilibrium in one good: MUx = Px in utility terms, or MUx/Px = MUm (marginal utility of money).

Two-good equilibrium (equi-marginal principle): MUx/Px = MUy/Py = MUm.

Indifference curve properties: negatively sloped, convex to origin (diminishing MRS), higher curve = higher satisfaction, curves never intersect.

Budget line equation: Px·X + Py·Y = M; slope = −Px/Py; a rise in income shifts it outward parallel, a fall in Px rotates it outward on the X-axis.

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

Law of demand: other things equal, quantity demanded falls as price rises; causes are income effect, substitution effect and diminishing marginal utility.

Movement along the demand curve = change in quantity demanded (own price); shift of the curve = change in demand (income, tastes, prices of related goods, expectations).

Elasticity: Ed = (% change in quantity)/(% change in price) = (ΔQ/ΔP)·(P/Q); |Ed|>1 elastic, =1 unitary, <1 inelastic; demand is more elastic for luxuries and in the long run.

Income elasticity Ey = (%ΔQ)/(%ΔY): positive for normal goods, negative for inferior goods; cross elasticity Exy positive for substitutes, negative for complements.

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

Law of variable proportions: MP rises, then falls, then becomes negative; TP is maximum where MP = 0; AP is maximum where AP = MP.

Returns to scale are increasing, constant or decreasing when all inputs are scaled up proportionately (long-run concept).

Total product = sum of marginal products; AP = TP/L; MP = ΔTP/ΔL.

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

MC curve cuts AC and AVC at their minimum points; AFC falls continuously as output rises; the vertical gap between AC and AVC equals AFC.

Law of supply: other things equal, quantity supplied rises with price; movement along the curve is caused by own price, shift by technology, input prices, taxes, subsidies, number of firms.

Elasticity of supply Es = (%ΔQ supplied)/(%ΔP); Es is generally positive; perfectly inelastic supply gives a vertical curve.

Revenue: TR = P·Q; AR = TR/Q = price; MR = ΔTR/ΔQ; under perfect competition P = AR = MR, so the firm's demand curve is horizontal.

Producer equilibrium (MR-MC approach): produce where MR = MC and MC is rising; under perfect competition this reduces to P = MC with rising MC.

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

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

Monopolistic competition: many sellers, differentiated products, selling costs and advertising, free entry; firm faces a downward-sloping but elastic demand curve.

Oligopoly: few large firms, interdependence, price rigidity, kinked demand curve possibility; mutual interdependence is its defining feature.

Equilibrium output rule for every market form: MR = MC with MC rising; equilibrium price is read off the demand (AR) curve at that output.

Under perfect competition long-run equilibrium: P = MR = MC = minimum AC, so firms earn only normal profit.

A monopoly restricts output and charges a higher price than a competitive market; deadweight loss arises because P > MC.

Market supply is the horizontal sum of individual supply curves; market demand is the horizontal sum of individual demand curves.

Equilibrium price clears the market: excess demand pushes price up, excess supply pushes it down, until quantity demanded equals quantity supplied.

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

GDPfc = GDPmp − Indirect taxes + Subsidies; NDP = GDP − Depreciation.

GNP = GDP + Net factor income from abroad (NFIA); NNP = GNP − Depreciation; NNPfc is national income.

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

Value added method: GVAmp = Value of output − Intermediate consumption; sum GVAs plus net factor income from abroad gives national income.

Avoid double counting by counting only final goods or only value added; exclude intermediate goods, second-hand sales and financial transactions.

Income method: NDPfc = Compensation of employees + Operating surplus + Mixed income; add NFIA for national income.

Expenditure method: GDPmp = C + I + G + (X − M); I includes gross domestic capital formation.

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

Precautions: exclude transfer payments, capital gains and illegal income in the income method; exclude intermediate expenditure in the expenditure method.

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment; the first is the primary function.

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

High-powered money (reserve money) = currency held by public + cash reserves of banks with RBI.

Credit creation multiplier = 1/reserve ratio; total deposits = initial deposit × (1/CRR) when there are no leakages.

CRR is the fraction of net demand and time liabilities kept with RBI; SLR is held by banks in approved assets; both are quantitative tools of monetary policy.

Quantitative tools: repo rate, reverse repo, bank rate, open market operations, CRR, SLR. Qualitative tools: margin requirements, moral suasion, credit rationing, selective credit control.

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

Commercial bank's balance sheet: liabilities = deposits and borrowings; assets = cash, loans and investments; a bank creates credit on the basis of primary deposits.

Consumption function: C = a + bY, where a is autonomous consumption and b (MPC) is the slope; APC = C/Y falls as income rises when a > 0.

MPC = ΔC/ΔY, ranges from 0 to 1; MPS = 1 − MPC; saving function S = −a + (1 − b)Y.

Equilibrium income: Y = C + I (two-sector) or AD = AS; equivalently S = I at equilibrium.

Investment multiplier k = 1/(1 − MPC) = 1/MPS; a change in autonomous spending raises income by k times the change.

Excess demand causes inflationary gap; deficient demand causes deflationary gap; both are corrected by fiscal and monetary measures.

Classical view: full employment is automatic through flexible wages and interest; Keynes held that equilibrium can occur below full employment because of rigid wages and liquidity preference.

Paradox of thrift: an attempt by all to save more can reduce equilibrium income and leave total saving unchanged.

Government sector: equilibrium Y = C + I + G + (X − M); a lump-sum tax reduces consumption by MPC × tax, lowering equilibrium income.

Budget = annual statement of estimated receipts and expenditure of the government; components are revenue account and capital account.

Revenue receipts are non-debt creating (tax and non-tax revenue); capital receipts create liabilities or reduce assets (borrowings, disinvestment, recoveries of loans).

Revenue expenditure does not create assets or reduce liabilities (salaries, interest, subsidies); capital expenditure creates assets or reduces liabilities.

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

Primary deficit = fiscal deficit − interest payments; it shows current borrowing needs net of past interest obligations.

Fiscal deficit = (Revenue deficit) + (Capital expenditure − Non-debt capital receipts).

Deficit financing is met by borrowing from the public, RBI, or abroad; monetised deficit is RBI lending to the government.

Expansionary fiscal policy raises G or cuts T to close a deflationary gap; contractionary policy does the reverse to fight inflation.

Public debt is a liability of the government and, for internal debt, an internal transfer; external debt involves a real burden of interest and repayment abroad.

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 covers goods, services, income and unilateral transfers; capital account covers loans, investments, banking capital and reserve changes.

Balance of trade = exports of goods − imports of goods; it is a part of the current account, not the whole BOP.

Current account deficit = current receipts − current payments; it must be financed by a capital account surplus or reserve depletion.

Autonomous transactions are independent of BOP position; accommodating transactions (official reserve changes) balance the accounts.

Exchange rate is the price of one currency in terms of another; a depreciation makes exports cheaper and imports dearer.

Demand for foreign exchange comes from imports, tourism abroad, and repayment of external debt; supply from exports, remittances and foreign investment.

Fixed vs flexible exchange rate: fixed is pegged by the central bank; flexible is market-determined; managed float lies between them.

Devaluation is a deliberate official reduction of a fixed parity; depreciation is a market fall. Appreciation/revaluation are the reverse.

Foreign exchange reserves with the RBI act as the residual accommodating item in the BOP.

Planning in India: Five Year Plans from 1951–56; the NITI Aayog replaced the Planning Commission on 1 January 2015.

1956 Industrial Policy Resolution gave the public sector a leading role; the 1991 reforms introduced liberalisation, privatisation and globalisation (LPG).

Green Revolution raised foodgrain output, especially wheat and rice, through HYV seeds, irrigation, fertiliser and credit; it was regionally concentrated in Punjab, Haryana and western UP.

Poverty line in India is based on consumption expenditure; the Tendulkar and Rangarajan committees estimated poverty ratios; official estimates now derive from the NSSO consumption surveys.

Human Development Index (HDI) combines life expectancy, education (mean and expected years of schooling) and GNI per capita; it is published by UNDP.

Occupational structure: the primary sector still employs the largest share of workers while contributing a smaller share of GDP; this gap indicates low productivity.

Infrastructure: physical (roads, power, ports) and social (education, health); infrastructure is a prerequisite for growth and attracts investment.

NITI Aayog and current issues: demographic dividend, skill development, financial inclusion (Jan Dhan–Aadhaar–Mobile), digital payments and sustainable development goals.

Disinvestment is the sale of government equity in public sector undertakings; it is a capital receipt and a tool of privatisation.