Economic Terms – General Awareness & Current Affairs
For the Dadra & Nagar Haveli & Daman & Diu Police Sub‑Inspector (SI) Exam
(MIT‑level, from first principles, rigorous reasoning, edge cases & a challenging problem)
1. What is Economics?
| Definition | Explanation |
|---|---|
| Microeconomics | Study of individual agents (households, firms) and markets for goods/services. |
| Macroeconomics | Aggregate behaviour of the economy – output, inflation, unemployment, fiscal & monetary policy. |
| Economic theory | Uses mathematical models to predict outcomes under assumptions of rationality, market equilibrium, and information. |
Principle: Resources are scarce ⇒ choices must be made.
2. Core Economic Concepts – From First Principles
2.1 Scarcity & Choice
- Scarcity: finite resources (land, labour, capital) vs infinite wants.
- Opportunity Cost: the next best alternative foregone when a decision is made.
[ \text{O.C.} = \frac{\text{Cost of chosen alternative}}{\text{Benefit of the chosen alternative}} ]
2.2 Production & Production Functions
- Production Function: ( Q = f(K, L, R, T) ) where (K)=capital, (L)=labour, (R)=resources, (T)=technology.
- Marginal Productivity (MP): incremental output from an extra unit of input. [ MP_L = \frac{\partial Q}{\partial L} ]
- Returns to Scale:
- Increasing (if scaling inputs > scaling output)
- Constant (if scaling inputs = scaling output)
- Decreasing (if scaling inputs < scaling output)
2.3 Costs – Short‑Run & Long‑Run
| Type | Definition | Key Equation |
|---|---|---|
| Fixed Cost (FC) | Costs that do not vary with output. | ( FC = \text{constant} ) |
| Variable Cost (VC) | Costs that vary with output. | ( VC = \text{variable} ) |
| Total Cost (TC) | Sum of FC & VC. | ( TC = FC + VC ) |
| Average Cost (AC) | Total cost per unit. | ( AC = \frac{TC}{Q} ) |
| Marginal Cost (MC) | Cost of producing one more unit. | ( MC = \frac{\partial TC}{\partial Q} ) |
Edge Case – Zero‑Cost Production: e.g., digital goods. Conventional cost analysis fails; must use opportunity cost instead.
2.4 Supply & Demand
- Demand Curve: ( Q_d = D(P, Y, T, P_s, \dots) )
Downward sloping due to the law of demand. - Supply Curve: ( Q_s = S(P, C, T, P_b, \dots) )
Upward sloping due to the law of supply. - Market Equilibrium: ( Q_d = Q_s \Rightarrow P^* )
Elasticity
- Price Elasticity of Demand:
[ \varepsilon_d = \frac{%\Delta Q_d}{%\Delta P} ] - Income Elasticity:
[ \varepsilon_I = \frac{%\Delta Q_d}{%\Delta I} ] - Cross‑Price Elasticity:
[ \varepsilon_{xy} = \frac{%\Delta Q_x}{%\Delta P_y} ]
Edge Case – Elasticity > 1: high responsiveness; < 1: inelastic.
2.5 Market Structures
| Structure | Key Features | Efficiency |
|---|---|---|
| Perfect Competition | Many firms, homogeneous product, free entry/exit. | Allocative & productive efficiency. |
| Monopolistic Competition | Many firms, differentiated products. | Some inefficiency due to excess capacity. |
| Oligopoly | Few firms, interdependent decisions. | Can lead to collusion, price rigidity. |
| Monopoly | Single seller, barriers to entry. | Deadweight loss, pricing power. |
Game Theory in Oligopoly
- Cournot & Bertrand Models
- Cournot: quantity competition.
- Bertrand: price competition.
- Nash Equilibrium: no firm can improve payoff by unilateral deviation.
2.6 Macroeconomic Aggregates
| Aggregate | Definition | Key Formula |
|---|---|---|
| Gross Domestic Product (GDP) | Total value of final goods/services produced domestically. | ( GDP = C + I + G + (X-M) ) |
| Gross National Product (GNP) | Value of goods/services produced by nationals, regardless of location. | ( GNP = GDP + \text{Net Factor Income from Abroad} ) |
| Inflation | Sustained rise in price level. | ( \text{Inflation Rate} = \frac{P_t - P_{t-1}}{P_{t-1}} ) |
| Unemployment Rate | Share of labour force that is job‑seeking but unemployed. | ( u = \frac{U}{L} ) |
| Current Account Balance | Net trade in goods, services, primary income & secondary income. | ( CA = X - M + |