Dear readers, boost up your general awareness preparation for SSC CPO and SSC cgl 2016 by this well designed set of notes of economics.
- The budget set is the collection of all bundles of goods that a consumer can buy
with her income at the prevailing market prices.
- The budget line represents all bundles which cost the consumer her entire income.
The budget line is negatively sloping.
• The budget set changes if either of the two prices or the income changes.
• The consumer has well-defined preferences over the collection of all possible
bundles. She can rank the available bundles according to her preferences
• The consumer’s preferences are assumed to be monotonic.
• An indifference curve is a locus of all points representing bundles among which
the consumer is indifferent.
• Monotonicity of preferences implies that the indifference curve is downward
• A consumer’s preferences, in general, can be represented by an indifference map.
• A consumer’s preferences, in general, can also be represented by a utility function.
• A rational consumer always chooses her most preferred bundle from the budget set.
• The consumer’s optimum bundle is located at the point of tangency between the
budget line and an indifference curve.
• The consumer’s demand curve gives the amount of the good that a consumer
chooses at different levels of its price when the price of other goods, the consumer’s
income and her tastes and preferences remain unchanged.
• The demand curve is generally downward sloping.
• The demand for a normal good increases (decreases) with increase (decrease) in
the consumer’s income.
• The demand for an inferior good decreases (increases) as the income of the
consumer increases (decreases)
- The market demand curve represents the demand of all consumers in the market
taken together at different levels of the price of the good.
• The price elasticity of demand for a good is defined as the percentage change in
demand for the good divided by the percentage change in its price.
• The elasticity of demand is a pure number.
• Elasticity of demand for a good and total expenditure on the good are closely
Economics Topic Production and Cost
For different combinations of inputs, the production function shows the maximum quantity of output that can be produced.
• In the short run, some inputs cannot be varied. In the long run, all inputs can be
• Total product is the relationship between a variable input and output when all
other inputs are held constant.
• For any level of employment of an input, the sum of marginal products of every
unit of that input up to that level gives the total product of that input at that
• Both the marginal product and the average product curves are inverse ‘U’-shaped.
The marginal product curve cuts the average product curve from above at the
maximum point of average product curve.
• In order to produce output, the firm chooses least cost input combinations.
• Total cost is the sum of total variable cost and the total fixed cost.
• Average cost is the sum of average variable cost and average fixed cost.
• Average fixed cost curve is downward sloping.
• Short run marginal cost, average variable cost and short run average cost curves
• SMC curve cuts the AVC curve from below at the minimum point of AVC.
• SMC curve cuts the SAC curve from below at the minimum point of SAC.
• In the short run, for any level of output, sum of marginal costs up to that level
gives us the total variable cost. The area under the SMC curve up to any level of
output gives us the total variable cost up to that level.
• Both LRAC and LRMC curves are ‘U’ shaped.
• LRMC curve cuts the LRAC curve from below at the minimum point of LRAC.
Economics : The Theory of the Firm under Perfect Competition
- In a perfectly competitive market, firms are price-takers.
- The total revenue of a firm is the market price of the good multiplied by the firm’s
output of the good.
- For a price-taking firm, average revenue is equal to market price.
- For a price-taking firm, marginal revenue is equal to market price.
- The demand curve that a firm faces in a perfectly competitive market is perfectly
elastic; it is a horizontal straight line at the market price.
- The profit of a firm is the difference between total revenue earned and total cost
- If there is a positive level of output at which a firm’s profit is maximised in the
short run, three conditions must hold at that output level
(i) p = SMC
(ii) SMC is non-decreasing
(iii) p ≥ AV C.
If there is a positive level of output at which a firm’s profit is maximised in the
long run, three conditions must hold at that output level
(i) p = LRMC
(ii) LRMC is non-decreasing
(iii) p ≥ LRAC.
- The short run supply curve of a firm is the rising part of the SMC curve from and
above minimum AVC together with 0 output for all prices less than the minimum
- The long run supply curve of a firm is the rising part of the LRMC curve from and
above minimum LRAC together with 0 output for all prices less than the minimum
- Technological progress is expected to shift the supply curve of a firm to the right.
- An increase (decrease) in input prices is expected to shift the supply curve of a
firm to the left (right).
- The imposition of a unit tax shifts the supply curve of a firm to the left.
- The market supply curve is obtained by the horizontal summation of the supply
curves of individual firms.
- The price elasticity of supply of a good is the percentage change in quantity
supplied due to one per cent change in the market price of the good.
Economics : Market Equilibrium
- In a perfectly competitive market, equilibrium occurs where market demand
equals market supply.
• The equilibrium price and quantity are determined at the intersection of the
market demand and market supply curves when there is fixed number of firms.
• Each firm employs labour upto the point where the marginal revenue product
of labour equals the wage rate.
• With supply curve remaining unchanged when demand curve shifts rightward (leftward), the equilibrium quantity increases (decreases) and equilibrium price increases (decreases) with fixed number of firms.
- With demand curve remaining unchanged when supply curve shifts rightward (leftward), the equilibrium quantity increases (decreases) and equilibrium price decreases (increases) with fixed number of firms.
• When both demand and supply curves shift in the same direction, the effect
on equilibrium quantity can be unambiguously determined whereas the
effect on equilibrium price depends on the magnitude of the shifts.
• When demand and supply curves shift in opposite directions, the effect on equilibrium price can be unambiguously determined whereas the effect on equilibrium quantity depends on the magnitude of the shifts.
- In a perfectly competitive market with identical firms if the firms can enter and exit the market freely, the equilibrium price is always equal to minimum average cost of the firms.
• With free entry and exit, the shift in demand has no impact on equilibrium price but changes the equilibrium quantity and number of firms in the same direction as the change in demand.
• In comparison to a market with fixed number of firms, the impact of a shift in demand curve on equilibrium quantity is more pronounced in a market with free entry and exit.
• Imposition of price ceiling below the equilibrium price leads to an excess demand.
• Imposition of price floor above the equilibrium price leads to an excess supply
Economics : Non-competitive Markets
- The market structure called monopoly exists where there is exactly one seller
in any market.
• A commodity market has a monopoly structure, if there is one seller of the
commodity, the commodity has no substitute, and entry into the industry
by another firm is prevented.
• The market price of the commodity depends on the amount supplied by the
monopoly firm. The market demand curve is the average revenue curve for
the monopoly firm.
• The shape of the total revenue curve depends on the shape of the average
revenue curve. In the case of a negatively sloping straight line demand curve,
the total revenue curve is an inverted vertical parabola.
• Average revenue for any quantity level can be measured by the slope of the
line from the origin to the relevant point on the total revenue curve.
-Marginal revenue for any quantity level can be measured by the slope of the
tangent at the relevant point on the total revenue curve.
- The average revenue is a declining curve if and only if the value of the marginal
revenue is lesser than the average revenue.
• The steeper is the negatively sloped demand curve, the further below is the
marginal revenue curve.
• The demand curve is elastic when marginal revenue has a positive value, and
inelastic when the marginal revenue has a negative value.
• If the monopoly firm has zero costs or only has fixed cost, the quantity supplied
in equilibrium is given by the point where marginal revenue is zero. In
contrast, perfect competition would supply an equilibrium quantity given by
the point where average revenue is zero.
• Equilibrium of a monopoly firm is defined as the point where MR = MC
and MC is rising. This point provides the equilibrium quantity produced.
The equilibrium price is provided by the demand curve given the
• Positive short run profit to a monopoly firm continue in the long run.
• Monopolistic competition in a commodity market arises due to the commodity
• In monopolistic competition, the short run equilibrium results in quantity
produced being lesser and prices being higher compared to perfect
competition. This situation persists in the long run, but long run profits
• Oligopoly in a commodity market occurs when there are a small number of
firms producing a homogenous commodity.