NSSCAS Economics (8246) cheat sheet

Scarcity: wants are unlimited but resources (land, labour, capital, enterprise) are finite, so choices must be made; every choice has an opportunity cost.

Opportunity cost is the value of the next best alternative forgone, not the sum of all alternatives.

Production possibility curve (PPC): points on the curve = productive efficiency; inside = unemployment or inefficiency; outside = unattainable at current resources/technology.

PPC is concave to the origin because factors are not perfectly substitutable between goods; a straight-line PPC implies constant opportunity cost.

Outward shift of PPC = economic growth from more/ better resources or improved technology; movement along the curve = reallocation, not growth.

Positive statements are testable (what is); normative statements involve value judgements (what ought to be).

Three basic questions: what to produce, how to produce, for whom to produce.

Market economy allocates via price signals; command economy via central planning; mixed economy combines both, with public and private sectors.

Specialisation and division of labour raise output but create interdependence and risk of disruption.

Law of demand: price up → quantity demanded down (inverse); movement along the curve is caused only by price change.

Demand curve shifts right when income rises (normal good), price of substitute rises, price of complement falls, or tastes/population change.

For inferior goods, a rise in income shifts demand left; for Giffen-type behaviour demand may rise with price (exception to the law of demand).

Supply shifts right when costs fall, technology improves, subsidies are given, or more firms enter; a tax shifts supply left.

Equilibrium: quantity demanded = quantity supplied; a surplus pushes price down, a shortage pushes price up toward equilibrium.

PED = %Δ quantity demanded ÷ %Δ price; |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic.

PES = %Δ quantity supplied ÷ %Δ price; supply is more elastic in the long run and when spare capacity exists.

YED = %Δ quantity demanded ÷ %Δ income; positive for normal goods, negative for inferior goods, > 1 for luxury goods.

XED = %Δ quantity demanded of A ÷ %Δ price of B; positive for substitutes, negative for complements.

Revenue rule: if demand is elastic, a price rise reduces total revenue; if inelastic, a price rise raises total revenue.

Price controls: a maximum price below equilibrium creates shortage and queues/black markets; a minimum price above equilibrium creates surplus and requires buffer stocks or quotas.

Market failure = allocative inefficiency: marginal social cost (MSC) ≠ marginal social benefit (MSB) at the free-market output.

Negative externality of production: MSC > MPC → overproduction; correct with a Pigouvian tax, tradable permits, regulation, or property rights.

Positive externality of consumption: MSB > MPB → underconsumption; correct with subsidy, information provision, or compulsory provision.

Public goods are non-rival and non-excludable → free-rider problem → underprovision; merit goods are excludable but underconsumed due to information failure.

Demerit goods are overconsumed because consumers underestimate private costs or private benefits are overestimated.

Deadweight loss triangle lies between MSB and MSC over the gap between market and socially optimal output.

Common access resources (e.g., fish stocks, clean air) are rival but non-excludable → overuse; remedies include quotas, taxes, and tradable permits.

Government failure: intervention creates worse outcomes through information gaps, administrative cost, unintended incentives, or regulatory capture.

Tax incidence: the burden falls more on the more inelastic side of the market; elasticity determines how much is passed on.

Short run: at least one factor fixed; long run: all factors variable.

TC = TFC + TVC; AC = TC ÷ Q; AVC = TVC ÷ Q; MC = ΔTC ÷ ΔQ.

AC falls while MC < AC and rises when MC > AC; MC crosses AC at minimum AC.

Law of diminishing returns: adding variable factors to fixed factors eventually lowers marginal product and raises marginal cost.

Economies of scale (internal): technical, managerial, financial, marketing, purchasing; diseconomies arise from coordination and control problems.

Perfect competition: many firms, homogeneous product, free entry/exit, price taker, P = MR = AR; long-run equilibrium at minimum AC.

Monopoly: single dominant firm, high barriers to entry, downward-sloping demand, MR < AR; profit maximised where MR = MC.

Oligopoly: few firms, interdependence, kinked demand curve explains price rigidity; collusion and cartels raise prices above competitive levels.

Profit maximisation: MR = MC; revenue maximisation: MR = 0; sales maximisation: AR = AC (normal profit constraint).

Productive efficiency: P = minimum AC; allocative efficiency: P = MC; dynamic efficiency: innovation over time.

Contestable markets: threat of entry disciplines incumbents even with few firms; depends on sunk costs and entry/exit barriers.

GDP = total output/expenditure/income within borders; GNP = GDP + net factor income from abroad.

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

Real vs nominal: real values are adjusted for inflation using a price index; nominal uses current prices.

GDP deflator = (nominal GDP ÷ real GDP) × 100.

Macroeconomic objectives: price stability, full employment, economic growth, balance of payments equilibrium, redistribution of income.

Unemployment types: frictional, structural, seasonal, cyclical (demand-deficient); only cyclical responds strongly to demand stimulus.

Unemployment rate = unemployed ÷ labour force × 100; labour force = employed + unemployed.

Inflation measured by CPI (consumer basket) or RPI; causes: demand-pull, cost-push, imported inflation, monetary expansion.

Phillips curve: short-run trade-off between inflation and unemployment; long-run curve vertical at the natural rate.

Multiplier = 1 ÷ (1 − MPC) = 1 ÷ MPS + MPT + MPM; a change in injections changes income by multiplier × injection.

Output gap = actual GDP − potential GDP; negative gap means spare capacity and cyclical unemployment.

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

Money supply measures: narrow money (cash + current accounts) and broad money (plus savings/time deposits).

Commercial banks create credit through the money multiplier: total deposits = initial deposit × (1 ÷ reserve ratio).

Central bank functions: monetary policy, lender of last resort, banker to government, issuing currency, supervising banks.

Demand-pull inflation: AD rises faster than productive capacity; cost-push: rising input costs shift SRAS left.

Monetary policy instruments: policy interest rate, reserve requirements, open market operations, quantitative easing, forward guidance.

Transmission: policy rate → market rates → borrowing/investment/consumption → AD → output and price level.

Higher interest rates raise the exchange rate (hot money inflows) and reduce net exports, reinforcing contraction.

Inflation targeting: central bank sets a target (e.g., 2%) and adjusts the policy rate to steer CPI toward it.

Costs of inflation: menu costs, shoe-leather costs, uncertainty, redistribution from savers/lenders to borrowers; deflation risks debt deflation.

Fiscal policy uses government spending (G) and taxation (T) to influence AD and redistribute income.

Expansionary fiscal policy: raise G or cut T → AD rises via multiplier; contractionary: cut G or raise T.

Budget position = T − G; surplus when T > G, deficit when G > T.

Structural (cyclical-adjusted) deficit vs cyclical deficit: structural reflects underlying policy, cyclical reflects the economic cycle.

Automatic stabilisers: progressive taxes and welfare spending dampen the cycle without discretionary action.

Crowding out: government borrowing raises interest rates and may reduce private investment.

Direct taxes (income, corporation) vs indirect taxes (VAT, excise); progressive, proportional, and regressive tax structures.

Laffer curve: tax revenue may fall beyond an optimal rate because incentives to work and invest weaken.

Supply-side policies: education/training, labour market reform, deregulation, infrastructure, tax incentives, privatisation.

Supply-side policies shift LRAS right, raising potential output and reducing inflationary pressure without demand stimulus.

Comparative advantage: a country gains by specialising where its opportunity cost of production is lower, even if it has an absolute disadvantage.

Terms of trade = (index of export prices ÷ index of import prices) × 100; a rise means exports buy more imports.

Current account = trade in goods + services + primary income + secondary income; capital and financial accounts offset it.

Balance of payments always balances in accounting terms; a current account deficit must be financed by inflows on the financial account.

Tariffs raise domestic prices, cut imports, and create deadweight loss; quotas limit quantity directly.

Trading blocs: free trade area, customs union (common external tariff), common market (factor mobility), monetary union.

Appreciation raises export prices and lowers import prices → worsens net exports for price-elastic demand; depreciation does the reverse.

Marshall–Lerner condition: depreciation improves the current account only if |PED exports| + |PED imports| > 1.

J-curve: the trade balance worsens before improving after depreciation due to contract rigidities.

Fixed vs floating exchange rates: fixed gives certainty but requires reserves and loses monetary independence; floating adjusts automatically.

Globalisation: rising trade, FDI, migration and information flows; benefits include efficiency and growth, costs include inequality and vulnerability to shocks.

AD = C + I + G + (X − M); AD slopes downward due to wealth, interest rate, and exchange rate effects.

SRAS slopes upward due to sticky wages and prices; LRAS is vertical at potential output (classical) or kinked (Keynesian).

Equilibrium output where AD = AS; inflationary gap when equilibrium exceeds potential output.

Keynesian multiplier works when there is spare capacity; at full employment, demand stimulus mainly raises prices.

Deflationary gap: equilibrium below potential output → unemployment; closed by expansionary policy or falling wages.

Crowding out reduces the multiplier effect of fiscal expansion when the economy is near full capacity.

Economic growth: actual vs potential; determinants include investment, productivity, and institutions.

Sustainable development: growth meeting present needs without compromising future generations; externalities must be internalised.

Income and wealth distribution measured by the Lorenz curve and Gini coefficient (0 = perfect equality, 1 = perfect inequality).

Development is broader than growth: includes HDI (income, education, life expectancy), poverty reduction, and sustainability.

HDI components: GNI per capita (PPP), mean and expected years of schooling, life expectancy at birth.

Absolute poverty vs relative poverty; poverty traps arise from low saving, low investment, and low productivity.

Policies for development: investment in education and health, infrastructure, trade openness, microfinance, and institutional reform.

Globalisation increases interdependence; benefits include technology transfer and market access; risks include contagion and structural adjustment costs.

Aid vs trade debate: aid can fill savings gaps but may create dependency; trade requires market access and competitiveness.

Policy evaluation criteria: effectiveness, efficiency, equity, sustainability, and unintended consequences (government failure).

Macro policy conflicts: inflation vs unemployment, growth vs environment, equity vs incentives.

Exchange rate policy affects competitiveness, inflation, and external balance; the choice of regime constrains domestic policy.

Tax revenue maximised where demand is price inelastic; heavy taxes on inelastic goods (tobacco, fuel) raise revenue but are regressive.

Subsidy incidence: consumers gain more when demand is inelastic and supply is elastic.

Buffer stock schemes stabilise prices by buying at a floor and selling at a ceiling; require storage and finance.

Minimum wage above equilibrium creates surplus labour (unemployment) when demand for labour is elastic.

Price elasticity of demand determines whether a firm should raise or lower price to increase revenue.

Cross elasticity helps define market boundaries: high positive XED implies close substitutes and a broader market.

Income elasticity guides firms: high YED goods grow with income; inferior goods decline as income rises.

Elasticity of supply determines how quickly markets adjust to demand shocks and how much price volatility occurs.

Policy mix: monetary and fiscal policy can reinforce or offset each other; supply-side policy raises capacity.

Time lags: recognition, decision, and implementation lags mean policy may act pro-cyclically.

Rules vs discretion: rules provide credibility; discretion allows response to shocks but risks time inconsistency.

Evaluate with a chain of reasoning: policy → intermediate variable → target variable → outcome, considering elasticity and time horizon.

Use diagrams: AD/AS, PPC, supply and demand, and externality diagrams; label axes and equilibrium points.

Data response: identify trend, compare rates of change, and distinguish correlation from causation.

Conclusion should weigh magnitude, time frame, and trade-offs, not simply list advantages and disadvantages.

Definitions must be precise: e.g., inflation is a sustained rise in the general price level, not a rise in one price.