9 Economics MM

Economics
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Mind Map
Micro Economics
Organization, Production,
Markets for factors of
Elasticity Market & Efficiency Market Structure and Competitive Market
Production
Output & Cost

Mind Map
Micro Economics
Production
Output & Cost
Demand curve Supply curve
Downward sloping Upward sloping

Diminishing marginal benefits Increasing marginal costs
Marginal benefit (utility) – Willingness to pay Marginal cost = Minimum price
Supply Curve
Demand Curve
P=Marginal Cost
P=Marginal
Benefit
Quantity
Quantity
Change in independent variables (Change in income, higher raw material availability) causes shifts in demand curve

Mind Map
Micro Economics
Production
Output & Cost
Elasticity of Demand Elasticity of Supply
Price elasticity of Demand = % change in Quantity demanded / %change in Price

%change = change in value / Average Value
▪ If absolute value > 1, demand is elastic;
▪ If absolute value < 1, demand is inelastic
▪ If absolute value = 1, demand is unit elastic.
Income Elasticity
Elastic demand: A small price increase causes a large decrease in quantity demanded.
Inelastic demand: A large price increase causes a small decrease in quantity demanded.
Perfectly elastic demand: A small price increase reduces the quantity demanded to 0.
Perfectly inelastic demand: A price change does not affect the quantity demanded.
Cross Elasticity

Mind Map
Micro Economics
Production
Output & Cost
Price Elasticity
Price
Elasticity of Demand Elasticity of Supply Perfectly Inelastic
Income Elasticity Cross Elasticity

Perfectly Elastic
Relatively Elastic
Income elasticity of Demand = % change in Cross elasticity of Demand = % change quantity Relatively Inelastic
Quantity demanded / % change in income demanded / % change in price of substitute or complement Quantity/Time
Price elasticity has two main determinants:

▪ Availability of substitutes: If substitute goods are available, consumer may switch to a substitute good if price rise. The presence of many substitutes may tend to increase demand elasticity
▪ Share of budget spent on product: goods that occupy relatively small portion of your budget will tend to be price inelastic
▪ An inferior good has -ve income elastic
▪ An normal good has +ve income elastic
Q:
Q:
The cross elasticity of demand for a substitute good and the income elasticity
If the price of an ice cream cone increases from $2.00 to $2.20 and the amount
for an inferior good are:
you buy decreases from 10 to 8 cones, then your elasticity of demand would be
Cross elasticity Income elasticity
calculated as:
A. < 0 > 0, < 1
B. < 0 <0
C. > 0 > 0, < 1
D. > 0 <0
Ans: A

Mind Map
Micro Economics
Production
Output & Cost
Elasticity of Demand Elasticity of Supply
Price elasticity of supply = % change in

Quantity supplied / % change in Price
Two main determinants:

▪ Available substitute for raw materials used to
produce the goods.
▪ Time elapsed since the last price change.

Mind Map
Micro Economics
Production
Output & Cost
Elasticity of Demand, Consumer & Efficient Resource

Market in Action Idea About Fairness
Supply & Tax Incidence Producer Surplus Allocation
Price Elastic Supply Price Inelastic Supply Price Price

Curve Curve Elastic Demand Inelastic Demand
S Curve D Curve
DWL DWL D Sta St
x ax
S
S S
Ptax
Tax revenue P Ptax Ptax
Tax revenue from buyers E Tax revenue from
PE from buyers PE Tax revenue from
Tax revenue Tax revenue PE buyers DWL PE buyers DWL
Ps from sellers from sellers Tax revenue from Tax revenue from
D Pt Ps Ps
D sellers sellers
ax
Dtax
Dt
ax
Qtax QE Quantity Qta QE Quantity

Qtax QE Quantity Qtax QE Quantity
x

Mind Map
Micro Economics
Production
Output & Cost

▪ Price ceiling is an upper limit on the price a seller can charge. ▪ Consumer surplus is the difference b/w what a consumer is willing to
▪ Price floor is the lowest limit on the price that a buyer can offer for a good or pay for a good or service & what he actually pays for it.
service. ▪ Producer surplus is the difference b/w the price a producer receives for
▪ A deadweight loss results because less than the efficient quantity is a unit output & minimum supply price for (opportunity cost of) that unit.
produced or consumed. ▪ Marginal social benefit is the sum of all consumers’ marginal benefit
from a good or service. The marginal social benefit curve is the market
demand curve for the good or service.
Q:
Which of the following is least likely to result in DWL? Q:
▪ Indian Railways If a consumer is ready to pay $300 for i-phone, but has to pay only $199, the
▪ Indian Oil difference of $101 is?
▪ MTNL ▪ Consumer deficit
Ans: ▪ Producer surplus
Indian railways operate in monopoly market & Indian Oil sells subsidized good. ▪ Consumer surplus
In both cases DWL are bound to get created, whereas MTNL operates in a Ans:
competitive telecom market Consumer surplus

Mind Map
Micro Economics
Production
Output & Cost

Obstacles to Efficient Resource Utilitarianism is the idea that the value of an economy is
Allocation: maximized when each individual owns an equal amount
▪ Price Controls of the resources.
▪ Taxes, Subsidies & Production quotas
▪ Monopoly
▪ External Benefits The Symmetry Principle implies that when an economy
▪ Public Goods & Common Resources is based on private property & voluntary exchange ,
individual get goods & services that are equal in value to
their contribution to the economy.

Mind Map
Micro Economics
Production
Output & Cost
Organizing Production Types of Business Organizations Types of Cost
Proprietorships
Partnerships Corporations
▪ Single Owner, all debt owners’
▪ Two or more owners, share risk and ▪ Shareholders ownership, limited
liability.
profit proportionately. liability.
▪ ADV: Easy start, simple decision
▪ ADV: Easy start, less risk involved ▪ ADV: Capital raising easy, less
making, single taxation.
than proprietorships, single taxation. person dependency.
▪ DIS: Less scrutiny, owner’s
▪ DIS: Risky, conflict prone, large ▪ DIS: Difficult start, complex
discretion, high risk, capital raising
capital raising difficult. management structure, double tax.
difficult.

Mind Map
Micro Economics
Production
Output & Cost
Organizing Production Types of Business Organizations Types of Cost
▪ Fixed Costs, sometimes called sunk cost, remain unchanged in the short run & are
Costs therefore not considered when making short-run production decisions. They are
related to the passage of time, not the level of production.
▪ Average Fixed Costs are total fixed costs divided
MC = ΔTC ÷ Δq by output. Average fixed cost decline as output increases.
▪ Variable Costs are incurred when the firm produces output. They are related to the
ATC = AFC + AVC level of production, not the passage of time.
▪ Average Variable Cost equals the total variable cost divided by output.
▪ Average Total Cost equals the total
(Fixed + variable) divided by no. of units produced.
AVC = TVC ÷ q ▪ Marginal Cost is the additional cost of producing one more unit of output.
Q:
If total variable costs to produce two units is $100 and total fixed costs is $200, marginal
AFC = TFC ÷ q costs will be equal to.
Ans:
Quantity, q $50 Change in total costs / change in total quantity
(100 / 2).

Mind Map
Micro Economics
Production
Output & Cost
Parameter Perfect Competition Monopoly Monopolistic Market Oligopoly
Well-defined product with Sellers that each produce slightly

Product Type Homogenous Similar or differentiated
no substitute differentiated product
Large number of A large number of A small number

Number of Producers Single firm
independent producers independent sellers of firms
Market Share Very small Near 100% Small High
Barriers to Entry No barriers Very high Low High
Price Commanding
Price takers Price searchers Very low Follow
Power
Downward sloping
Demand Curve Perfectly inelastic Downward sloping Downward sloping
or kinked
Price Discrimination No Yes Low No
Four Firm
Below 40% 100% 40%–60% Greater than 60%
Concentration Ratio
Herfindahl – Hirschman
Less than 1,000 10,000 1,000–1,800 Greater than 1,800
Index

Mind Map
Micro Economics
Production
Output & Cost
Labor Capital Resource Economic Rent vs.Opportunity Cost
Demand for Labor Supply of Labor
Factors affecting demand for labor: Factors:

▪ An increase (decrease) in the price of the firm’s output will increase (decrease) the demand for labor. Elasticity of demand for labor:
▪ Higher the wage rate, the
▪ Price ↑=>MR ↑=> MRP Labor ↑=> Demand for labor at each wage level ↑. ▪ More elastic in the long run
more hours of leisure a
▪ Decrease in the price of computers => decreased demand for labor (e.g., customer service than in the short run.
worker will forego
personnel). ▪ Greater for firms with
(substitution effect). This
▪ Effect of technological improvements production processes that are
effect causes the labor
▪ Change in demand depends on types of labor net increase in the demand for labor. more labor-intensive.
supply curve to slope
▪ As evident by rising real wage rate (wage rate adjusted for inflation). ▪ Degree to which labor & capital
upward.
can be substituted.
▪ As a worker's income
Q: increases, his demand for
Which of the following factor is expected to increase demand elasticity of labor? leisure increases (income
A. Short time period effect). This effect makes
B. High degree of substitution the curve "bend backward"
C. Less labor intensive production process at some (maximum).
Ans: ▪ Size of the adult population,
Labor will be highly elastic if it can be substituted through automation. Capital accumulation.

Mind Map
Micro Economics
Production
Output & Cost
Future MRP Capital: Interest rate the firm must pay to raise the financial
capital in order to maximize profits. Physical capital is a firm’s physical asset
(plant, property & inventory). Financial capital is required to purchase physical
capital.

Mind Map
Micro Economics
Production
Output & Cost
Q: ▪ Renewable resource (e.g.: Water): Supply is perfectly inelastic (vertical) & price is determined
The supply of a non-renewable resource is: by demand.
▪ Perfectly inelastic ▪ Non-renewable resource (e.g.: oil): Supply is perfectly elastic (horizontal), quantity supplied is
▪ Perfectly elastic determined by demand, & current price is the present value of the expected price of next period.
▪ The known stock
Ans:
Perfectly elastic Capital Market Equilibrium Supply curve Non-Renewable Supply curve Non-Renewable
Resourse (Oil well) Resourse (water well)
Interest
Rate Supply of Financial Capital Price Price
S
Q:
The demand for financial capital is least likely to
be influenced by:
▪ Interest rates rC P* S P*
▪ Household income
▪ MRP of physical assets
Ans: Demand Financial D
Capital D
Household income
QC Quantity of Q* Quantity Q* Quantity
Financial Capital

Mind Map
Micro Economics
Production
Output & Cost
▪ Economic Rent is the difference b/w what a worker earns & his opportunity cost.
▪ Opportunity cost of a worker is what he could earn n his next highest paying
employment.
Perfectly Elastic Supply Perfectly Inelastic Supply Upward Sloping Supply Curve
Price Economics Rent to Factor of
Pric Production Pric
e S e S
S Economic
Rent
Economi
c Rent D
D D
Quantity Quantity Quantity

Mind Map
Macro Economics
Aggregate Demand
Inflation Jobs & Price Level Money Monetary & Fiscal Policy
& Supply
▪ Rate of change in price index over a Aggregate Supply Shift in Curve Aggregate Demand
given period of time
▪ i = [current price index - last period price
index] / last period price index
Q:
Which of the following events is least likely to cause a downward
shift in short-run aggregate supply?
GDP Deflator = A. A labor stoppage causes the price of steel to rise.
Value of current year GDP at current year prices * 100 B. Inflation increases from 4% to 7%.
Value of current year GDP at base year prices C. Oil exporting countries reduce their production levels
Ans: B

Mind Map
Macro Economics
Aggregate Demand
& Supply
Aggregate Supply Shift in Curve Aggregate Demand
▪ Aggregate supply – amount of goods and services produced by an economy. The SAS and LAS curves will both shift when:
▪ Function of the price level – higher prices bring about a greater amount of supply ▪ The full-employment quantity of labor changes
in the short run. ▪ The amt of available capital in the economy changes
▪ As technology improves the productivity capital, labor, or both./
Aggregate Supply in Long-run and Shot-run There are some factors that will shift SAS, but not affect LAS.
Price Level ▪ If the wage rate or prices of other productive inputs increase, the SAS curve will
Long-run shift to the left, a decrease in short-run aggregate supply.
Aggregate Supply (LAS) ▪ When businesses observe a rise in resource prices, they will decrease their
Short-run output as the profit maximizing level of output declines.
Aggregate Supply (SAS)
Q:
Which of the following events is least likely to cause a downward shift in short-run
aggregate supply?
Full Employment A. A labor stoppage causes the price of steel to rise.
Real O/P B. Inflation increases from 4% to 7%.
C. Oil exporting countries reduce their production levels
Real O/P (GDP) Ans: B

Mind Map
Macro Economics
Aggregate Demand
& Supply
▪ Decrease in AD from AD0 to AD1 will lead to a new short-run equilibrium ▪ From an initial state of long-run equilibrium at the intersection of AD0 with
with the price level at PSR & real GDP at GDP1 which is less than full- LAS, assume that aggregate demand increases to AD1. The new short-run
employment GDP (a recession) equilibrium will be at over full employment with real GDP at GDP1
Adjustment to a decrease in aggregate Resulting increase in aggregate demand

demand Price Level
Price Level
S LAS SAS1
A S
L SAS0
S A
A P2
0 S
P S P1
1
0 P0 AD1
P A
S D AD0
R A
0
P D
L 1
R GDP1 GDP* Real O/P GDP Real GDP

Mind Map
Macro Economics
Aggregate Demand
& Supply
Components of aggregate demand:

▪ Consumption (C)
▪ Investment (I)
▪ Government spending (G)
▪ Net exports (X), which is exports minus imports
▪ Aggregate demand = C + I + G + X
Q:
Increase in money supply will cause GDP to:
1. Increase in both short run and long run. Factors affecting Aggregate Demand:
2. Increase at higher rate in short run and temporarily increase in ▪ Expectations about future incomes (C↑), inflation (C↑), and profits (I↑)
long run. ▪ Fiscal policy
3. Increase in short run and temporarily increase in long run. ▪ Spending ↑ ⇒ G ↑
Ans. ▪ Taxes ↓ or Transfer Payment (Social Security) ↑ ⇒ C ↑
Increase in money supply will cause GDP to increase at higher rate in ▪ Monetary policy
short run due to multiplier effect and temporarily increase in long run ▪ Money supply ↑ ⇒ Interest rate ↓ ⇒ C ↑ and I ↓ ⇒ AD ↑
which reverses and GDP returns to full employment GDP level. ▪ World economy: If country's exchange rate ↓ ⇒ AD ↓

Mind Map
Macro Economics
Aggregate Demand
& Supply
Jobs Unemployment & Inflation Price Level
Key Labor Market Indicators Types of Unemployment
▪ Rate of unemployment: No. of unemployed / no. of people in labor force.

▪ Labor-force participation rate: Civilian labor force / civilian population age 16 or older.
▪ Employment-to-population ratio: %age of working-age population who are employed
▪ Aggregate hours: Total hours worked in a year by all employed people.
▪ Real wage rate: Money wages adjusted for changes in the price level

Mind Map
Macro Economics
Aggregate Demand
& Supply
Key Labor Market Indicators Types of Unemployment
▪ Frictional unemployment arises from constant changes in the economy that prevent qualified workers from being matched with existing job openings in a
timely manner.
▪ Structural unemployment is caused by structural changes in the economy that eliminate some jobs while generating job openings for which unemployed
workers are not qualified.
▪ Cyclical unemployment is caused by a change in the general level of economic productivity. When the economy is operating at less than full capacity,
positive levels of cyclical unemployment will be present.
Q:
Which of the following is most likely to be an example of structural unemployment?
A. Jack was unable to find new job with a lucrative salary, though he was offered a salary hike of 15% by another employer
B. Demand for the actuarial candidates are quite high compared to insurance agent
C. John is searching for a new job as he don’t have expertise in handling new high rise crane, which his employer has installed recently
Ans: C

Mind Map
Macro Economics
Aggregate Demand
& Supply
Unanticipated & Demand Pull &

Anticipated Inflation Cost Push Inflation
▪ Unanticipated inflation: An unexpected decrease in the purchasing power of Price

Demand Pull Inflation
SRAS2 Price
Cost Pull Inflation
SRAS2
(real value of) currency. Level Level
LRAS LRAS
▪ Effects:
▪ Long-term contracts of fixed future payments decrease in value. SRAS1 SRAS1
▪ Decreases the value of a fixed-payment mortgage held by a bank, P3 P3
▪ Gains and losses in the labor market: P2 P2
• Real value of the wages decreases P1 P1
• Gain for employers at the expense of employees AD2 AD2
▪ Even when inflation rates are correctly anticipated, it has adverse effects AD1 AD1
▪ Higher transaction costs: Time & effects diverted from producing activity
reduces real GDP
▪ Tax effects: Real after tax returns on investment are distorted by inflation GDP1 GDP2 Real GDP GDP2 GDP1 Real GDP

Mind Map
Macro Economics
Aggregate Demand
& Supply
▪ CPI measures the average price for a defined "basket" of goods and
services that represents the purchasing patterns of a typical urban
household.
▪ CPI = [(cost of basket at current prices) /
(cost of basket at base period prices)] x 100
Q.
Price of common salt was 5 cents in year 1990 and is presently sold at 20
cents. During the same period CPI has increased from 154.5 to 365.8. What
has been the change in real price of salt over this period?
Ans:
CPI Multiplier = 365.8/154.5 = 2.36, CPI Adjusted Salt Price = 5*2.36 = 11.8,
Real Increase = 20/11.8 => 69.5%

Mind Map
Macro Economics
Aggregate Demand
& Supply
Demand & Federal Reserve &

Function of Money Quantity of Money Theory Depository Institution
Supply for Money Supply of Money
▪ Medium of Exchange Increase in Money Supply Increase in Money Supply

▪ Unit of Account Interest Rate Price Level
▪ Store of Value
LAS SAS1
MS0 MS1
SAS0
P2
(SR)
P1
5%
AD1
(SR) P0
4%
Demand for AD0
Money
(LR)
Real Real GDP

Money

Mind Map
Macro Economics
Aggregate Demand
& Supply

What determines the demand for money: Money supply measures: Money Multiplier: The money multiplier for a
▪ Interest rates: Most critical. ▪ M1 refers to all currency in the form of traveler's change in the monetary base thus depends on
▪ Inflation: Increase the demand for nominal checking account deposits of individuals & firms both the required reserve ratio and the currency
money. and currency not held in banks. drain:
▪ Real GDP growth: Also increases the demand ▪ M2 refers to M1 plus time deposits, savings ▪ Money multiplier = (1+ c) /(r + c)
for money (nominal & real). deposits, & money-market mutual fund
balances.
Q:
What is the maximum increase in the money supply on Fed decision if (a) Fed buys $2billion in securities in the open market
(b)required reserve ratio is 10% and (c)Currency drain is 2%?
A. $20 bn
B. $17 bn
C. $16 bn
Ans:
Change in quantity of money = (1.02)/(.12) = 8.5; 2 X 8.5 = 17

Mind Map
Macro Economics
Aggregate Demand
& Supply

▪ Discount rate is a rate at which ▪ Reserve Requirement: Higher ▪ Opening market operations: Fed’s balance sheet
banks can borrow reserves from %age reduces the money supply Fed buying & selling of treasury ▪ Assets: Gold, deposit with other
the fed. & increases interest rates; lower securities. Fed purchases central banks, IMF special
▪ Lower Discount rate => increased %age increase the money supply increase cash available for drawing rights; Treasury
money supply, decreased interest & decreases interest rates. lending, decreasing interest rates. securities; loans to bank at the
rates; Fed sales remove cash, discount rate.
▪ Higher rates => decreased money increasing interest rates ▪ Liabilities: U.S. currency in
supply & increase interest rate. circulation; banks reserve
deposits.

Mind Map
Macro Economics
Aggregate Demand
& Supply

Equation of exchange ▪ Banks

Money supply x velocity = price x real o/p= GDP ▪ Thrift institutions
▪ Velocity: average number of times per year each ▪ Mutual Funds
dollar is used to buy goods and services (velocity Their Functions
= GDP / money supply). ▪ Create liquidity: Use short-term deposits to make long-term loans.
▪ Act as financial intermediaries: Lend at lower cost than borrowers
could achieve by seeking out individual lenders.
▪ Pool default risks: Hold a portfolio of loans & monitor their risks.
▪ Deposit expansion multiplier = 1 / required Risk management by Depository:

reserve ratio. ▪ Proportion of various types of loans
▪ Potential increase in money supply = Deposit ▪ Percentage of deposits
expansion multiplier * Increase in excess ▪ Types of deposits
reserves. ▪ Share of owner’s capital

Mind Map
Macro Economics
Aggregate Demand
& Supply
Fiscal Policy refers to Government's use of

spending and taxation, referred as supply Automatic Stabilizer Monetary Policy
side effects.
Taxes I Savings I Investment Capital I Real GDP I

Ricardo Barro effect refers to increase in fiscal Investment
deficit shall cause higher taxes in future
Sources of investment financing

▪ National savings
▪ Borrowing from foreigners
▪ Government savings
The crowding-out effect occurs when budget
deficits (negative Govt. saving) caused by
expansionary fiscal policy lead to higher interest
rates & lower private investment.

Mind Map
Macro Economics
Aggregate Demand
& Supply

side effects.
Importance of Timing in Fiscal Policy:

▪ Recognition Delay: Time it takes policy to recognize that a policy change is necessary.
▪ Administrative or law making delay: Time lag b/w recognition & final passage of law or policy change.
▪ Impact delay: Time lag b/w passage of the law or policy & when its impact is felt in the economy.
Fiscal Multiplier &

factor affecting fiscal Multiplier ▪ Government purchases multiplier: A dollar of
government spending causes more than a $1
increase in aggregate demand.
▪ Balanced budget multiplier:
▪ When government expenditures increases,
Combined program of government
aggregate demand & GDP increases by some
▪ Tax multiplier: Tax cuts also have magnified purchases & taxes, an increase in
multiple, as wages & payments received by
effects on aggregate demand, less than spending and equal increase in taxes
workers & capital owners lead to future increases
government purchases as some of the tax is will have a stronger positive effect on
in aggregate expenditures. This is referred to as
saved. aggregate demand.
the expenditures (Govt. purchases) multiplier.

Mind Map
Macro Economics
Aggregate Demand
& Supply

side effects.
Business Cycle Automatic Stabilizer
▪ Automatic stabilizers are built-in fiscal devices that ensures

▪ A business cycle is characterized by fluctuations surplus in a recession & deficits during booms. Automatic
in economics activity & has 2 phases (contraction stabilizers minimize the problem of proper timing. There are
Business Cycle & expansion) & 2 turning points (through & peak) 2 main stabilizers:
Real
GDP Average
Business
Peak ▪ Needs-tested spending: ▪ Induced Taxes: People
More money is paid out as drop from the tax rolls
Key determinants of business cycle:
more people become during downturns & are
▪ Real GDP added to tax rolls (or enter
Expansion ▪ Real income unemployed
higher brackets) during
Contraction Recessionary ▪ Employment booms. Corporate tax
(Recession) Trough ▪ Industrial Production collection is lower during
▪ Wholesale-retail sales economic downturns
Time

Mind Map
Macro Economics
Aggregate Demand
& Supply

side effects.
Effects of change in Monetary Policy
Impact of expansionary monetary

policy on:
Inflation rate Small Increase
Real GDP o/p & employment Increase
Impact of restrictive monetary policy on:
Inflation rate Small Decrease
Real GDP o/p & employment Decrease

Mind Map( Addition)
Economics in Global Context

Geoplolitics
Trade Bloc Balance Of Payment Currency Exchange

International Trade Trade Restriction
And Motivation Account Rates
interactions among nations, including State Actors

and Non- State Actors
Geopolitical risk refers to the possibility of events disrupting peaceful international relations:-
1. Event risk refers to events, such as national elections, about which we know the timing but not
the outcome.
Globalization refers to the long-term trend of 2. Exogenous risk refers to unexpected events such as wars or rebellions.
worldwide economic and cultural integration. 3. Thematic risk refers to known factors with long-term effects, such as human migration patterns
or cyber risks.
• Autarky (non-cooperation and nationalism

• Hegemony (non-cooperation and globalization
• Bilateralism (cooperation and nationalism)
• Multilateralism (cooperation and globalization)
Tools of Geopolitics:
• Armed conflict, espionage, and bilateral or multilateral agreements designed to
reinforce or prevent armed conflict are all examples of National Security tools.
• Economic tools can be cooperative or antagonistic. Free trade zones, common
markets, and economic and monetary unions are examples of cooperative
economic tools.
• Financial tools include foreign investment and currency exchange.

Mind Map

Geoplolitics

GDP vs GNP
Benefits of international trade Income of citizens working abroad is included in Comparative And Absolute Advantage
GNP but not in GDP
Better Quality of Goods

Production Possibility Frontier : A curve depicting
Lower Prices Due to Economies of Scale Absolute advantage : A country is said to have an
all maximum output possibilities for two or more
Better Institutions and Government Policies absolute advantage in the production of a good if it
goods given a set of inputs (resources, labor, etc.).
can produce the good at lower cost in terms of
The PPF assumes that all inputs are used
resources relative to another country
efficiently
Comparative advantage : A country is said to have
Models of trade
a comparative advantage in the production of a
good if its opportunity cost in terms of other goods
that could be produced instead is lower than that of
another country
The Ricardian model assumes that labor is the only primary input to production
Heckscher-ohlin Model Assumption:
Labor and capital flow freely between sectors
The amount of labor and capital in two countries differ (difference in endowments)
Free trade
Technology is the same among countries (a long-term assumption)
Taste and preferences are the same.

Mind Map

Geoplolitics

Trade Restriction Not Supported by

Trade Restriction Supported by Economists Type of Trade Restriction
Economists
Infant Industry Protecting domestic jobs Tariffs

National Security Protecting domestic industries Quotas
Export subsidies
Minimum domestic content
Reltaliation against trade restrictions imposed Voluntary Export Restraints (VERs)
by other countries

Mind Map

Geoplolitics

Trade Bloc Motivation
Common Market Remove all barriers to the movement of labor and capital goods among members.
Economic Union Member countries establish common institutions and economic policy for the union.
Monetary Union Member countries also adopt a single currency. Example : EU
Customs Union Member countries adopt a common set of trade restriction with non-member
Free Trade Area All barrier to the import and export of goods and services among member countries are removed . Example : NAFTA

Mind Map

Geoplolitics

Accounts in BOP
Current account imports and exports of merchandise and services, foreign income from dividends on stock holdings and interest on debt
securities, and unilateral transfers such as money received from those working abroad and direct foreign aid
Capital account (financial account) assets that migrants bring to or take away from a country, transfer of funds for the purchase or sale of fixed assets, and
purchases of non-financial assets, including rights to natural resources, patents, copyrights, trademarks, franchises,
and leases.
Financial Account government-owned assets abroad such as gold, foreign currencies and securities, and direct foreign investment and
claims against foreign banks. The financial account also includes foreign-owned assets in the country, domestic
government and corporate securities, direct investment in the domestic country, and domestic country currency.
Official settlement account (Net Records changes in official reserves which are gold, foreign currency
reserves) Current A/c + Capital A/c + Financial A/c + net reserves = 0

Mind Map

Geoplolitics

Nominal exchange rate

Exchange Rate Quotes Currency Cross Rates
Real Exchange Rate
Example, let Rs/$ = 46 and $/GBP = 1.67

then Rs/GBP = ( Rs/$ ) * ( $/GBP) = 46 *
1.67 = 76.82
Hence, Rupee - Pound cross rate is 76.82
Rs/GBP
Indirect quote : , in the U.S., an indirect quote for Direct quote: in the U.S., a direct quote for the
the Canadian dollar would be C$1.17 = US$1 Canadian dollar would be US$0.85 = C$1

Mind Map

Geoplolitics

Forward Discount And Premium Interest Rate Parity No arbitrage forward price
If one currency is in premium then other is in where F = forward rate; S = Spot rate; R = risk
discount free interest in both countries
Use mid points of bid ask to calculate
annualized forward premium/discount if bid
ask spot and forward quotes are given in
exam

Mind Map

Geoplolitics

Forward Discount And Premium Interest Rate Parity No arbitrage forward price
If the spot exchange rate for the euro is 1.40

USD/EUR, the euro interest rate is 3% per
year, and the dollar interest rate is 2.5% per
year, the no-arbitrage one-year forward rate
can be calculated as:
1.40 × (1.025 / 1.03) = 1.3932 USD/EUR

Mind Map

Geoplolitics

Impact Of Exchange Rate On International

Trade And Capital Flows
Export - Import = (Private Saving - Investment in

physical capital) +
Economic Welfare (Tax revenue - Govt. Spending)
The J curve :
Import and Export quantities may be relatively
insensitive to currency depreciation in the short
run
Currency depreciation may worsen a trade
deficit
The short term increase in the deficit followed by
a decrease when the Marshall- Lerner condition
is met is referred to as the J- curve.
Time

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9 Economics MM

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9 Economics MM

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Economics

© EduPristine For [CFA-I – Economics-MM] (Confidential)

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Demand curve Supply curve

Downward sloping Upward sloping

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Elasticity of Demand Elasticity of Supply

Price elasticity of Demand = % change in Quantity demanded / %change in Price

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Income Elasticity Cross Elasticity

Price elasticity has two main determinants:

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Elasticity of Demand Elasticity of Supply

Price elasticity of supply = % change in

Two main determinants:

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Elasticity of Demand, Consumer & Efficient Resource

Price Elastic Supply Price Inelastic Supply Price Price

Qtax QE Quantity Qta QE Quantity

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Elasticity of Demand, Consumer & Efficient Resource

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Elasticity of Demand, Consumer & Efficient Resource

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Organizing Production Types of Business Organizations Types of Cost

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Organizing Production Types of Business Organizations Types of Cost

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Parameter Perfect Competition Monopoly Monopolistic Market Oligopoly

Well-defined product with Sellers that each produce slightly

Large number of A large number of A small number

Market Share Very small Near 100% Small High

Barriers to Entry No barriers Very high Low High

Price Discrimination No Yes Low No

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Labor Capital Resource Economic Rent vs.Opportunity Cost

Demand for Labor Supply of Labor

Factors affecting demand for labor: Factors:

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Labor Capital Resource Economic Rent vs.Opportunity Cost

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Labor Capital Resource Economic Rent vs.Opportunity Cost

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Labor Capital Resource Economic Rent vs.Opportunity Cost

© EduPristine For [CFA-I – Economics-MM] (Confidential)

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Aggregate Supply Shift in Curve Aggregate Demand

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Aggregate Supply Shift in Curve Aggregate Demand

Adjustment to a decrease in aggregate Resulting increase in aggregate demand

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Aggregate Supply Shift in Curve Aggregate Demand

Components of aggregate demand:

© EduPristine For [CFA-I – Economics-MM] (Confidential)

Jobs Unemployment & Inflation Price Level

Key Labor Market Indicators Types of Unemployment

▪ Rate of unemployment: No. of unemployed / no. of people in labor force.

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