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What is Economics?
Economics is basically divided into two main branches: Microeconomics and
Macroeconomics.
Microeconomics deals with the behaviour of individual economic units such as consumers,
workers, investors, owners of the land, business firms—in fact, any individual or entity that
plays a role in the functioning of our economy. Microeconomics explains how and why these
units make economic decisions.
On the other hand, Macroeconomics deals with aggregate economic quantities, such as the
level and growth rate of national output, interest rates, unemployment, and inflation. In
other words, Microeconomics deals with the demand and supply of an individual and a firm,
macroeconomics deals with the aggregate demand and supply of industries and the
economy.

Law of Demand:
Law defines the relationship between the demand and price of a product. The demand for a
product is inversely proportional to its price, when other factors like income, price of
substitutes, consumer taste and preferences, etc. remain the same. As the price of a good
increase, the quantity demanded decreases and vice versa. This is because consumers will
usually be willing to buy more if the price is lower. it is downward sloped as the price and
demand are inversely proportional.

Law of Supply:

It defines the relationship between the supply and price of a product. The supply of a
product is directly proportional to its price, other factors like income, the price of
substitutes, consumer taste and preferences remaining same. It is because, when the price
of a good increases, the suppliers would want to produce more to capture more profits. As
the price of a good decreases, the quantity supplied decreases and vice versa. It is upward
sloped as supply and price are directly proportional.

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Equilibrium
The point of intersection of demand curve and supply curve is called Equilibrium point.
Equilibrium is the point at which the price has reached the level where the quantity supplied
equals the quantity demanded.

Perfect substitutes:
These are the goods or commodities that consumers view as identical and has no
preference in consumption. This is where the utility of the product is identical, and the
consumer is indifferent if he/she must choose between the two.

Perfect complements:
Perfect complements are the goods that can be consumed only along with the other and
that can’t be consumed individually. For instance, the left shoe and the right shoe form
perfect complements as we can’t use one without the other.

Opportunity cost:
The value or benefit that a person forgoes to pursue the current opportunity (or) the value
of the best alternative opportunity an individual would have pursued had it not been the
one he/she is working on is called as Opportunity cost.

Sunk Cost:
The amount of money that has already been spent and that cannot be recovered in the
future is called as Sunk cost. The cost spent in R&D by a pharmaceutical company to develop
a new drug but failed to do can be said to sunk cost as it cannot be recovered (as we are not
selling the drugs)

Price Ceiling and Price floor:

Price ceiling is the price at which a good or service is capped and thus can’t be sold beyond.
On the other hand, the price floor is the minimum purchase cost for a good or service. These
prices are set by the government based on the situation prevailing in the economy.

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Fixed Costs:
These are the costs incurred by a company irrespective of the number of products
produced. The company will have to pay the building rent, salaries to its employees, interest
payments etc. irrespective of the output and hence these are fixed costs.

Variable Costs:
Costs that vary depending on the number of products produced (output) by the company
are called as Variable costs. The manufacturing costs of a shoe-making company would vary
based on its production units and hence these are variable costs.
Total cost is sum of fixed and variable costs. The Average cost is the total cost per number of
units produced.

Utility:
Utility refers to the total satisfaction the consumer experiences by consuming a good or
service. Marginal utility is the added satisfaction that a consumer gets from consuming one
more unit of a good or service. The law of diminishing marginal utility states, as
consumption increases, the marginal utility derived from each additional unit of good
declines.

Elasticity:
The percentage change in demand for one percent change in price is called as price
elasticity of demand. The percentage change in quantity demanded for one percent change
in income is called as income elasticity of demand.

Economies of scale:
It is the cost advantage that firms enjoy due to their scale of operation. The production
becomes efficient and costs less, as the fixed costs can be spread over a larger amount of
goods when companies scale up production. In this case, average cost decreases as we scale
up the production.

Diseconomies of scale:
After a point of increase in output, the firm can no longer enjoy the cost benefits and it
rather costs more to increase the production of single unit (this occurs due to multiple
factors). This is called as Diseconomies of scale. In this case average cost increases as we
scale up the production.

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Here in the graph, the company is enjoying Economies of scale until point Q1, after which
scaling up production can only result in the increased average costs leading to diseconomies
of scale.

Economies of Scope:
It is the situation where the joint output of a single firm is greater than the output that can
be achieved by two different firms when each firm produces a single product. This usually
happens when a company acquires another, wherein now they will be able to leverage
individual synergies and produce better output jointly, than they would have when isolated.
These advantages can result from the joint use of inputs, production facilities, joint
marketing programs, common administration etc.

Learning Curve:
A learning curve is graphical representation of the relationship between how proficient an
individual is at a task and how it changes with the amount of experience he/she has.
Similarly, the firm learns over time as its cumulative output increases.

Tariff:
It is the tax imposed by the government of a country on the goods and services that are
imported from another country. More tariffs discourage consumption of foreign goods as
the prices increases and consumers will be forced to consume domestic goods.

Quota:
The quota is a type of trade restriction wherein the government imposes a limit on the
quantity of goods or the value of a good that can be imported from another country.

What is Gross Domestic Product (GDP)?

• The total market value of all final goods and services produced in the country within
a given period.
• GDP is very important economic indicator; it gives information about the economy
how it is performing and provides government with important information about
areas that needs to be looked after or areas that need Government Assistance and is
a key guide for the various fiscal and monetary policy undertaken by the
government.

Methods to Measure GDP: There are three methods to measure the GDP which are as
follows:

1) Expenditure Method: This is the most popular method of the three and widely used. It
calculates the expenditure done by all different actors like domestic consumers, private
firms, Government, the sum of all gives us GDP.
Y= C + I + G + NX
C: Domestic Consumption on goods and services
I: Private Investment on capital goods
G: Government Expenditure
NX: Net Exports = Exports of Goods and Services – Imports of Goods and Services

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2) Income Method: The national income is calculated using the income method by summing
the pretax income earned by people and businesses in the economy. In a given accounting
year, it includes income from workers, rent of buildings and land, interest on capital, profits,
and so on. The income method depicts the distribution of national income among various
earning categories in the economy.

3) Value Added Method: The product approach, also known as the value-added method, is
based on the net value added to the product at each stage of manufacturing. The economy
is frequently separated into distinct industry sectors in the product technique, such as
fishing, agriculture, and transportation.
The total production of the enterprises in the economy is added to calculate the national
income. The approach displays the contribution of each sector to national income,
indicating
the relative importance of different sectors.

What is Gross National Product (GNP)?

Gross Domestic Product calculates the market value of total produced Goods and Services
within the country, whereas Gross National Product value is total value of all product and
services produced in a year at the means of production owned by citizens of the country.

GNP = GDP +Net Income

Net Income: Income Earned by Citizens from Foreign Investments – Income Earned by
foreigners via own domestically owned means of production.

Inflation: Inflation is the gradual loss of a currency's buying value over time. The increase
in the average price level of a basket of selected goods and services in an economy over
time can be used to calculate a quantitative estimate of the rate at which buying power
declines.

Consumer Price Index (CPI): The Consumer price index (CPI) measures the cost of buying
a fixed basket of goods and services representative of the purchases of the urban consumer.

Wholesale Price Index (WPI): Like CPI it is also measure of cost of given basket of goods,
however, the goods price that they track is at wholesaler level and not at retail level, it is
more sensitive as compared to CPI.

Unemployment Rate: Fraction of work force that is out of work and looking for a job or
expecting a recall from layoff is the unemployment rate.

Inflation vs Unemployment: The relation between Inflation and Unemployment is

inversely related meaning Higher the Inflation lower is the unemployment which is generally
observed under normal conditions and vice versa, this relation was first studied by Mr.
A.W.Phillips, it is also known as Phillips Curve. This relation creates a policy tradeoff as
ideally the government and the central bank would want both to be low to ensure long term
stability, however there is tradeoff.

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Fiscal Policy: The policy decisions taken by the government taken to influence the behaviour
of the economy by changing Taxes, Government Transfers and Government Expenditure all
fall under the term of Fiscal Policy.

Monetary Policy: As the Fiscal Policy decisions is taken by Government whereas the
Monetary Policy decisions are taken by the Central bank of the country. The Central bank
does by controlling the money supply in the market by varying it they vary the interest rates
and promotes or creates resistance for business to take loans and make investments in the
economy.

REPO Rate: The repo rate is the rate at which a country's central bank (in India, the Reserve
Bank of India) loans money to commercial banks in the event of a cash shortage. Monetary
authorities use the repo rate to limit inflation.

Reverse REPO Rate: The reverse repo rate is the rate at which a country's central bank (in
this case, the Reserve Bank of India) borrows money from domestic commercial banks. It is
a monetary policy tool that can be used to control a country's money supply.

Statutory Liquidity Ratio: Minimum %of the total deposits that the bank is supposed to
keep in the form of gold, cash and other forms of approved securities. The current SLR rate
is 18%, the RBI has the power to increase this rate up to 40%. By varying this RBI can vary
the money supply in the economy.

Cash Reserve Ratio (CRR): Minimum % of the total deposits that the bank is supposed to
keep in form of cash with RBI. The lower the CRR, the more money bank will have to lend.
RBI varies the CRR to vary the liquidity level in the banking system. Currently the
CRR is 4%

Marginal Standing Facility: In an emergency, when inter-bank liquidity is fully depleted,

banks can borrow from the Reserve Bank of India using the marginal standing facility (MSF).

Government Budget: There are three types of scenarios possible in case of Government
Budget which are as follows:

1) Deficit Budget: When the budget spending planned is more than what the Government
will earn in revenues it is called the budget is in deficit and to finance that the Government
has to go for deficit financing. This scenario is mostly there as Government has many areas
to spend but have limited resources hence budget deficit.

2) Surplus Budget: It is when the planned spending is less than the revenues, that is the
surplus budget situation.

3) Balanced Budget: It is when the spending of Government is equal to the revenues of the
Government then that budget is called Balanced Budget
.Budget of India is presented every year on 1st February by the Finance Minister, it gives the
areas government will do the spending and how much will it support, what will be the tax
structure if there are changes if any, it gives idea about the fiscal policy taken up by Govt.

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Aggregate Demand:
• The total demand at a price level of the finished goods and services produced in the
economy is the aggregate demand. It consists of all the demand like consumer
demand, Private firm demand, Government Demand, exports and imports.
• Over long-term Aggregate Demand and GDP becomes equal.
• The Aggregate Demand Curve shows the combination of the price level and level of
output at which the goods and money markets are simultaneously in equilibrium.

Aggregate Supply:

• Aggregate Supply curve describes, for each given price level the quantity of output
firms is willing to supply.
• It is upward sloping because firms are willing to supply more output at higher prices.
• When there is external changes like change in oil prices the Supply Curve shifts left
or right depending on the change in Oil Price, if it increases the supply curve will shift
left and vice versa.

Figure-(a) shows the aggregate supply curve which is in normal case and Figure-(b) shows
the aggregate supply curve which is vertical which is long run supply curve, the GDP is at the
potential output.

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The intersection of the Aggregate Demand Curve and Aggregate Supply curve will determine
the equilibrium point it will give the Price Level and the Real GDP value at which Economy
currently is at (when at equilibrium).

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ECONOMICS

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Economics is the social science that deals with the prioritization of options available to
individuals, society, and government for using scarce resources to meet the various
needs of life.
In short, Economics is the study of people and choices.

Terms to be Known
Microeconomics: The branch of economics that deals with decisions made by individuals
to use the resources, interactions between the individuals for utilization, and distribution
of scarce resources.

Macroeconomics: The branch of economics that deals with the aggregate behaviour of
the economy (regional, national or global) in terms of performance parameters such as
inflation, GDP, national income, price levels, etc.

Capitalist Economy: It is the economy where the decisions about what to produce, how
much to produce, and the price at which to sell is solely taken by the market or the
private enterprises in the system and the state has no economical role. This concept
originated in the famous work of Adan Smith-Wealth of Nations (1776).

State Economy: It is the economy where the decision on production, distribution, supply,
and price is solely taken by the state.

Mixed Economy: It is a combination of a capitalist economy and a state economy, where

some elements of the economy are controlled by the state, and the rest of the elements
are regulated by the market.

Well, all these economies seem fine. But let’s look at the fundamental reason and
mechanism by which economies are created.

‘Where there is a demand, there will be a supply

Law of Demand –
The law of demand states that the quantity purchased varies inversely with the price. In
other words, the higher the price, the lower the quantity demanded. This occurs because
of diminishing marginal utility.
Law of Supply –
The law of supply says that as the price of an item goes up, suppliers will attempt to
maximize their profits by increasing the number of items for sale.

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Is there an equilibrium point?

Market Equilibrium
The point of intersection of the demand curve and
supply curve is called the Equilibrium point. It gives
the price at which the market supply meets the
market demand. Equilibrium is the point at which
the price has reached the level where the quantity
supplied equals the quantity demanded.

Perfect substitutes - commodities that consumers view as identical and have no

preference in consumption.
Perfect complements - goods that can be consumed only along with the other and
cannot be consumed individually. Shoes.
Price Ceiling and Price floor - The price ceiling is the price at which a good or service is
capped and thus cannot be sold at a higher price, set by govt.

Sunk cost - A sunk cost is an expense that typically offers no return, meaning a company
can't recover the funds it puts into the investment.
For instance, if you invest in research for a less successful product than expected, the
investment may become a sunk cost.
Examples – Advertising, Market research, Product Development

Opportunity cost - Opportunity cost is the loss of potential profit when you make a
decision. Management often considers various possibilities with individual incomes and
expenses during decision-making for optimal results.
Resources are always limited. We need to make a choice the choice we didn’t make is
opportunity cost.
For example, as a financial adviser, you may consider the potential profit of two
opportunities and choose the one that seems best for the company.

Comparative Advantage – Let’s say that the US can’t produce 2 tons of shoes if they
produce 1 plane. China gives up 8 tonnes of shoes when they produce 1 plane. So, the US
can produce planes quickly and China the shoes. Hence individuals and companies
should produce things that they specialize in and trade.

Financial systems – anything that brings together borrowers and lenders – bonds, banks,
stocks.

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Capital goods – It consists of those durable produced goods that are in turn used as
productive inputs for further production of goods and services. Capital stock includes
buildings, equipment, software, and inventories during a given year.

Do we need government involved in the market?

Granted, the efficiency of the government is appalling. But until we find the right
incentive for the profit-based companies to provide basic subsidized needs, we need
government. Also, we can’t give regulation rights to multiple companies. If we provide
regulation power to one company and let people choose it, it’s democracy!

National Income: The aggregate income of the Nation can be calculated in four ways:
GDP, NDP, GNP, and NNP, which is also a subject in ‘National Income Accounting’.

GDP: Gross Domestic Product is the value of all the final goods and services produced
within the nation's boundary during one year. It is the summation of national private
consumption, gross investment, government spending, and trade balance.

Expenditure Method to calculate GDP:

NDP: Net Domestic Product (NDP) is the GDP minus the depreciation of the goods and
services produced.

GNP: Gross National Product is the summation of the GDP of a nation and the income of
the nation from outside of the nation. GNP indicates both the quantitative and qualitative
aspects of the economy.

NNP: Net National Product (NNP) is the GNP minus the depreciation of the economy.
Inflation: Inflation is the quantitative measure of the increase in the general price level of
goods and services which results in the decrease of the purchasing power per unit of a
currency.

Terms that should be known in depth

Inflation - It is a decrease in the purchasing power of money, reflected in a general
increase in the prices of goods and services in an economy.

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Causes of Inflation
Demand-Pull Effect
When supply cost is constant, if there is an increase in the supply of money and credit, it
stimulates more demand for goods and services. But production capacity can’t be
increased overnight. When demand exceeds production capacity, price increases.

Cost-Push Effect
When the demand is constant, Bottleneck supply or an increase in supply cost increases
the price of the product.

Built-in Inflation
As the price of goods and services rises, people expect that they will continue to rise in
the future and demand more wages to maintain their standard of living. Their increased
wages result in a higher cost of goods and services.

Measuring inflation
To measure the average consumer’s cost of living, government agencies conduct
household surveys to identify a basket of commonly purchased items and track over time
the cost of buying this basket.

The problem with CPI is that we don’t often update the consumer basket with new items
or better-quality prices. Even if they do, maintaining accuracy is a problem.

Pros and Cons of Inflation

Inflation can be construed as either a good or a bad thing, depending upon which side
one takes, and how rapidly the change occurs. For example, individuals with assets like
property or stocks, like to see some inflation as that raises the price of their assets. On
the other hand, people holding assets such as cash or bonds, may not like inflation, as it
erodes the real value of their holdings.

If the purchasing power of money falls over time, then there may be a greater incentive to
spend now instead of saving. Hence the optimum level of inflation increases spending,
which may boost economic activities in a country.
Inflation and unemployment are inversely related.

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Deflation - The opposite of inflation, when the general level of prices falls.
The deflation might seem a good thing, but it’s not. If people could buy more stuff for the
same amount next year, they just wouldn’t spend it. People not spending money would
cause the economy to a grinding halt. It is much harder to encourage people to spend
more than encourage people to spend less. Hence deflation could be more devastating
than inflation in the long run.

Stagflation - It is the situation of an economy when inflation and unemployment both are
at higher levels that are opposite to the conventional situation. The conventional belief is
that a trade-off exists between inflation and the unemployment rate according to Phillips
Curve.

Unemployment
Frictional unemployment – Temporarily unemployed or switching jobs
Structural unemployment – No demand for that specific type of labour
Cyclical unemployment – Due to the recession
Frictional and structural unemployment always exist

GDP Deflator - It is the measure of price behaviour. It is the ratio of Nominal GDP and
Real GDP.

Fiscal Policy - The policy in which the nation’s economy is regulated and monitored by
the government’s adjustment in spending and taxation.

Monetary Policy - The policy in which price stability and money supply and inflation rate
regulation are taken by the central bank of a country to achieve the macroeconomic
objectives.

Foreign Direct Investment (FDI) – It implies investment by foreign investors directly in

the productive assets of another nation.
In this kind of investment, the foreigner has significant control over the affair of that
company. This gives the country an uneasy feeling.
In 2020, 35% of the foreign investments were FDI, and it was made in the mining industry,
which is a crucial part of Australian exports. So, the more the companies exploit the
resources, the less is available for the country’s people.

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Foreign portfolio investment (FPI) – It means investing in financial assets, such as stocks
and bonds of entities located in another country.

Cash Reserve Ratio - Cash Reserve Ratio is the mandatory percentage of shares a bank
has to keep with the Reserve Bank of India in liquid cash to combat inflation and keep the
liquidity in check.

SLR - Statutory Liquidity Ratio is the share of a bank’s deposits kept with RBI in the form
of Liquid assets to ensure the bank’s solvency and money flow in the economy.

Bank Rate - Based on monetary policies, commercial banks can borrow loans from banks
from the central bank. The interest rate the RBI charges on these types of loans and
advances to the banks is known as the bank rate.

Repo Rate - Repo rate is the interest rate at which RBI lends money to the banks for a
short term. With the help of the Repo Rate, RBI can regulate the inflation and liquidity of
the country’s economy.
Reverse Repo Rate: Reverse Repo Rate is the rate at which commercial banks give loans
to the RBI. Reverse Repo Rate helps to regulate the money supply in the economy.

Direct Taxes - The tax amount levied directly on an individual or organization’s income or
property by the imposing body. It is based on the principle of ability-to-pay, which means
the entity with more resources has to pay more amount of tax. Examples of Direct Taxes
are income tax, wealth tax, property tax, corporate tax, etc.

Indirect tax - It is the tax collected by an intermediary and paid to the government by
passing the tax burden on the consumer buying that good or service. It is the tax imposed
on goods and services instead of on a person or organization’s income, earnings, or
property. Examples of Indirect tax: are Value Added Tax, Customs Duty, and Service Tax.

Remittance - A remittance is money sent to another party, usually one in another

country. The sender is typically a foreign worker and the recipient is a relative back home.
Remittances represent one of the largest sources of income for people in low-income and
developing nations, often exceeding direct investment and international development
assistance.

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Goods and Services Tax (GST) -It is a destination-based indirect tax that is imposed on
the value addition at each stage till the final sale to the consumer. It has replaced many
indirect taxes in India. The Goods and Services are divided into five tax slabs for
collecting the tax: 0%, 5%, 12%, 18%, and 28%.

Tariffs - A tax imposed by one country on the goods and services imported from another
country. They increase the price of goods and services purchased from another country,
making them less attractive to domestic consumers. Govts may impose tariffs to raise
revenue or to protect domestic industries from foreign competition.

Types of Market –

Observation/ Perfect Competition Oligopolistic Monopolistic

Parameters Market Market Market

Number of Firms Too many A small group Just one

Similar but No Close

Product Portfolio Identical
differentiated substitute

Entry & Exit

No barriers Few barriers Complete barriers
Barriers

Control of Market
None Substantial control Total control
price

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Economies of scale:
It is the cost advantage that firms enjoy due to their scale of operation. The production
becomes efficient and costs less, as the fixed costs can be spread over
a more considerable amount of goods when companies scale up production. In this case,
the average cost decreases as we scale up the production.

Diseconomies of scale:
After a point of increase in output, the firm can no longer enjoy the cost benefits, and it
costs more to increase the production of a single unit (this occurs due to multiple factors).
This is called Diseconomies of scale. In this case, the average cost increases as we scale up
the production.

Sample topics to build your argument

Trade War – Beneficial or Detrimental?
Recession in World and/or India
Definition of Utility
Law of diminishing marginal utility
GST – Success or Failure?
Functioning of RBI; Who is the current governor of RBI?
What are CRR, Repo Rate, Reverse Repo Rate, and Bank Rate? How are they used by RBI?
What are direct and indirect taxes?
Budget – What should India focus on?
Centre's role and the state's role in planning
Export data and Import data – Accurate?
Keynesian theory
Economic forecasts of different countries
The essential features of Liberalization, Privatization, and Globalization?
What do you mean by a normal good?
Bank mergers in India
Your opinion on the Public policies of India

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