Ch 1
Consumer Equilibrium and Demand
Key Definitions
Marginal Utility (MU): Additional utility from consuming one more unit of a good.
Consumer Equilibrium: The point where a consumer maximises utility given income and prices. Condition: MUx/Px = MUy/Py.
Price Elasticity of Demand: Percentage change in quantity demanded divided by percentage change in price.
Key Points to Remember
- →Law of Diminishing Marginal Utility: as more units consumed, MU falls.
- →MU approach equilibrium: MU/P is equal for all goods consumed.
- →Law of Demand: price and quantity demanded are inversely related (normal goods).
- →Demand curve shifts right (increase) when: income rises (normal good), price of substitute rises, price of complement falls, tastes improve.
- →Ed > 1: elastic demand | Ed < 1: inelastic | Ed = 1: unitary elastic.
- →Perfectly inelastic (Ed = 0): salt, life-saving drugs. Perfectly elastic (Ed = ∞): perfect substitutes.
Formulas & Equations
Ed = (% change in Qd) / (% change in P)
Ed = (ΔQd/ΔP) × (P/Q) [point method]
Consumer equilibrium: MUx/Px = MUy/Py = MUm
Exam Tips
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For 3-mark questions on elasticity: always write formula first, then substitute.
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Distinguish 'movement along' (own price changes) vs 'shift of' demand curve (other factors).
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Giffen goods are an exception to law of demand — income effect > substitution effect.
Ch 2
Production and Costs
Key Definitions
Marginal Product (MP): Change in total product when one more unit of variable input is added. MP = ΔTP/ΔL.
Marginal Cost (MC): Change in total cost when one more unit of output is produced. MC = ΔTC/ΔQ.
Average Variable Cost (AVC): Total variable cost divided by output. AVC = TVC/Q.
Key Points to Remember
- →Law of Variable Proportions: as more variable factor added to fixed factor, MP initially rises then falls (due to diminishing marginal returns).
- →Three phases: Phase I (rising MP) → Phase II (falling but positive MP) → Phase III (negative MP — stop production).
- →AC = AFC + AVC. As output rises, AFC falls continuously. AVC is U-shaped.
- →MC intersects AC and AVC at their minimum points.
- →When MP rises, MC falls. When MP is at maximum, MC is at minimum.
- →Fixed costs (TC − TVC) remain constant regardless of output.
Formulas & Equations
TC = TVC + TFC
AC = TC/Q = AVC + AFC
MC = ΔTC/ΔQ = ΔTVC/ΔQ
MP = ΔTP/ΔL
Exam Tips
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Draw TP, AP, and MP curves on same diagram — AP and MP intersect where AP is maximum.
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AC curve is U-shaped — minimum at the point where MC intersects it.
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Exam shortcut: if MC is below AC, AC is falling. If MC is above AC, AC is rising.
Ch 3
Market Equilibrium
Key Definitions
Equilibrium: The state where market demand equals market supply. No tendency to change.
Price Ceiling: Maximum legal price set below equilibrium — leads to excess demand (shortage).
Price Floor: Minimum legal price set above equilibrium — leads to excess supply (surplus).
Key Points to Remember
- →If market price > equilibrium price → excess supply → price falls back to equilibrium.
- →If market price < equilibrium price → excess demand → price rises to equilibrium.
- →Rightward shift in demand (↑): price rises, quantity rises.
- →Rightward shift in supply (↑): price falls, quantity rises.
- →Both demand and supply increase: quantity definitely rises, price change is ambiguous.
- →Price ceiling (below equilibrium): shortage, rationing, black markets.
- →Price floor (above equilibrium): surplus, government may need to buy excess.
Formulas & Equations
At equilibrium: Qd = Qs
Excess demand: Qd > Qs | Excess supply: Qs > Qd
Exam Tips
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For simultaneous shifts: draw separate supply and demand diagrams.
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Price ceiling example: PDS (public distribution system) for essential commodities.
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Price floor example: MSP (Minimum Support Price) for agricultural produce.
Ch 4
National Income Accounting
Key Definitions
Gross Domestic Product (GDP): Market value of all final goods and services produced within the domestic territory of a country in a year.
Net Factor Income from Abroad (NFIA): Factor income earned by residents from abroad minus factor income paid to non-residents. GNP = GDP + NFIA.
Depreciation: Wear and tear of capital assets. NNP = GNP − Depreciation.
Key Points to Remember
- →GDP_MP = C + I + G + (X − M) [Expenditure method]
- →NDP_MP = GDP_MP − Depreciation
- →GNP_MP = GDP_MP + NFIA
- →NNP_FC = GNP_MP − Depreciation − Net Indirect Taxes (NNP_FC = National Income)
- →Final goods: for final use — included in GDP. Intermediate goods: used in production — excluded to avoid double counting.
- →Value added method: sum of value added at each stage = GDP.
Formulas & Equations
GDP_MP = C + I + G + (X − M)
NNP_FC = GNP_MP − Depreciation − NIT
National Income = NNP_FC
NIT = Indirect Taxes − Subsidies
Exam Tips
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Most CBSE numericals ask for NNP_FC from GDP_MP: subtract Depreciation and NIT, add NFIA.
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NFIA can be positive (if residents earn more abroad) or negative.
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Always define each term before substituting in numericals.
Ch 5
Money, Banking and Income Determination
Key Definitions
Money Multiplier: The ratio of total money supply to high-powered money. = 1/LRR.
Marginal Propensity to Consume (MPC): Change in consumption per unit change in income. MPC = ΔC/ΔY.
Investment Multiplier: Ratio of change in income to change in investment. K = 1/(1−MPC) = 1/MPS.
Key Points to Remember
- →Functions of money: medium of exchange, store of value, unit of account, standard of deferred payment.
- →MPC + MPS = 1. APC + APS = 1.
- →If MPC = 0.8 → MPS = 0.2 → K = 1/0.2 = 5 → ₹1 lakh new investment → ₹5 lakh increase in income.
- →Keynesian equilibrium: AD = AS (or S = I).
- →Deflationary gap: AD < AS at full employment — government increases expenditure/reduces taxes.
- →Inflationary gap: AD > AS at full employment — government reduces expenditure/increases taxes.
- →Money multiplier = 1/LRR. If LRR = 10%, ₹1,000 deposit → total deposits = ₹10,000.
Formulas & Equations
MPC + MPS = 1
K = 1/(1−MPC) = 1/MPS
Money multiplier = 1/LRR
AD = C + I | Equilibrium: Y = C + I
Exam Tips
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Never confuse K = 1/MPS with K = 1/MPC — multiplier uses MPS.
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Draw IS diagram for deflationary/inflationary gap — show gap clearly.
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Corrective fiscal measures: for deflationary gap — expansionary policy (↑G or ↓T). For inflationary — contractionary.
Ch 6
Government Budget and Balance of Payments
Key Definitions
Fiscal Deficit: Total expenditure minus total receipts excluding borrowings. Indicates govt borrowing requirement.
Revenue Deficit: Revenue expenditure minus revenue receipts. When current spending exceeds current income.
Primary Deficit: Fiscal deficit minus interest payments.
Key Points to Remember
- →Revenue receipts: tax + non-tax. Capital receipts: borrowings, disinvestment, recovery of loans.
- →Revenue expenditure: day-to-day spending (salaries, subsidies, interest). Capital expenditure: asset creation.
- →Revenue Deficit = Revenue Expenditure − Revenue Receipts.
- →Fiscal Deficit = Total Expenditure − (Revenue Receipts + Capital Receipts excluding borrowings).
- →Primary Deficit = Fiscal Deficit − Interest Payments.
- →Balance of Payments: Current Account (trade in goods, services, transfers) + Capital Account (FDI, FII, loans).
- →Exchange rate in free market: demand for forex = demand for imports; supply = export earnings.
Formulas & Equations
Revenue Deficit = RE − RR
Fiscal Deficit = TE − (RR + Non-debt Capital Receipts)
Primary Deficit = Fiscal Deficit − Interest Payments
Exam Tips
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Learn the hierarchy: Revenue Deficit < Fiscal Deficit. Primary Deficit < Fiscal Deficit.
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If Fiscal Deficit = Primary Deficit, interest payments = 0.
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BoP: current account surplus = capital account deficit (and vice versa, if BoP is zero).