Here's a last-minute summary of the Micro Economics and Macro Economics

 Here's a last-minute summary of the Micro Economics and Macro Economics

🔹 MICROECONOMICS OVERVIEW

1. Basics of Microeconomics

• Scarcity, Choice, Opportunity Cost: Limited resources vs. unlimited wants; trade-offs must be made.

• PPF (Production Possibility Frontier): Demonstrates opportunity cost and efficiency.

• Economic Systems:

  • Market Capitalism: Private ownership, minimal government.

  • Planned Economy: Government controls everything.

  • Mixed Economy: Both private and public sectors co-exist.

2. Demand and Supply

• Law of Demand: Inverse relationship between price and quantity demanded.

• Law of Supply: Direct relationship between price and quantity supplied.

• Market Equilibrium: Point where demand = supply.

3. Elasticity

• Price Elasticity of Demand/Supply: Sensitivity of quantity to price changes.

• Income Elasticity: Quantity demanded vs. income.

• Cross Elasticity: Quantity demanded vs. price of related goods.

4. Consumer Demand and Forecasting

• Consumer Equilibrium: Utility maximization given budget.

• Forecasting Methods: Trend projection, surveys, statistical techniques.

5. Production and Costs

• Short-run and Long-run Production Functions: TP, AP, MP.

• Law of Variable Proportions and Returns to Scale.

• Costs: Fixed, variable, total, marginal, and average costs.

• Producer’s Equilibrium: MR = MC.

6 & 7. Market Structures

• Perfect Competition: Many sellers, identical products.

• Monopoly: One seller, price maker.

• Monopolistic Competition: Many sellers, product differentiation.

• Oligopoly: Few sellers, strategic decisions (e.g., price wars, collusion).

• Market Failure: Externalities, public goods, asymmetric info.

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🔹 MACROECONOMICS OVERVIEW

8. Introduction & Circular Flow

• Circular Flow Models:

  • 2-sector: Households & firms.

  • 3-sector: + Government.

  • 4-sector: + Foreign sector.

• Key Concepts: GDP, GNP, unemployment, inflation.

9. Measuring National Income

• Methods:

  • Income Method,

  • Expenditure Method,

  • Production Method.

• Real vs. Nominal GDP, GDP Deflator.

10. AD-AS Model

• Aggregate Demand (AD): Total demand for goods/services.

• Aggregate Supply (AS): Total output producers are willing to supply.

• Equilibrium: Intersection of AD and AS.

11. Keynesian Theory

• Focus: Short-run economic fluctuations, government role.

• Components: Consumption (C), Investment (I), Government Spending (G), Net Exports (NX).

• Multiplier Effect: ΔIncome > ΔSpending.

12. Monetary and Fiscal Policy

• Monetary Policy: Central bank controls money supply (tools: repo rate, CRR, etc.).

• Fiscal Policy: Government spending & taxation decisions.

• Objectives: Control inflation, promote growth & employment.

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🔹 KEY FORMULAS & CONCEPTS

• Elasticity (Ep) = %ΔQ / %ΔP

• Total Revenue (TR) = Price × Quantity

• GDP = C + I + G + (X - M)

• Multiplier = 1 / (1 - MPC)

• Opportunity Cost = Value of Next Best Alternative

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📘 Multiplier = 1 / (1 – MPC) — Explained

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🔹 What is the Multiplier?

The multiplier tells us how much total income (GDP) will increase when there's an initial increase in spending (like investment or government expenditure).

💡 If the government spends ₹100 crores, and the multiplier is 4, then total income increases by ₹400 crores!

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🔹 Formula:

$$\text{Multiplier (k)} = \frac{1}{1 - \text{MPC}}$$

Where:

• MPC = Marginal Propensity to Consume
  = How much extra consumption happens from an additional ₹1 of income.

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🔹 Meaning of MPC

MPC Value	Meaning
0.8	For every extra ₹1 earned, ₹0.80 is spent, ₹0.20 is saved
1	All income is spent
0	All income is saved

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🔹 How it Works (Example)

Let’s say:

• Government spends ₹100 crores

• MPC = 0.8

Then:

$$\text{Multiplier} = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5$$

So, total increase in income:

$$₹100 \times 5 = ₹500 \text{ crores}$$

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🔹 Logic Behind It:

1. Government spends ₹100 → Someone earns that ₹100.

2. If MPC = 0.8 → That person spends ₹80 → Someone else earns ₹80.

3. That person spends 80% of ₹80 → ₹64 → And so on...

4. This continues in a chain — total income keeps increasing until it stabilizes.

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🔹 Higher MPC = Bigger Multiplier

MPC	Multiplier (k)
0.5	2
0.8	5
0.9	10

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🔹 Conclusion:

• The multiplier effect shows how small changes in spending can lead to larger changes in national income.

• The more people spend (high MPC), the stronger the multiplier effect.

Absolutely! Let's break down the AD-AS Model (Aggregate Demand – Aggregate Supply Model) in the simplest possible way:

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📊 What is the AD-AS Model?

It’s a macroeconomic tool that shows how:

• Total demand (AD) and

• Total supply (AS)
  interact to determine a country’s price level and national output (real GDP).

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🔴 1. Aggregate Demand (AD) – Think of Total Spending

It shows the total quantity of goods and services that people in an economy want to buy at different price levels.

$$\text{AD} = C + I + G + (X - M)$$

Where:

• C = Consumption

• I = Investment

• G = Government Spending

• X - M = Net Exports

📉 AD Slope is Downward:

• Because at lower prices, people buy more.

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🟢 2. Aggregate Supply (AS) – Think of Total Production

It shows the total quantity of goods and services that producers are willing to produce/sell at different price levels.

Types:

Type	Shape	Time Frame
SRAS	Upward	Short Run
LRAS	Vertical	Long Run (Full Output)

• In Short Run: Higher prices = higher profits → firms produce more.

• In Long Run: Supply is limited by real factors like land, labor, tech.

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⚖️ 3. Equilibrium (AD = AS)

Where AD and AS intersect is where the economy is balanced.

At this point, we get:

• Equilibrium Price Level (like inflation)

• Equilibrium Output (GDP)

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🧠 Example (Real-Life Analogy):

Imagine a big bazaar (the economy):

• AD is like all the buyers coming with money.

• AS is like all the sellers with goods.

• Prices adjust depending on how much buyers want vs how much sellers provide.

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📈 What Happens When Things Change?

Situation	What Shifts	Result
Govt increases spending	AD shifts right → ⬆️ price, ⬆️ output
Oil prices rise	AS shifts left → ⬆️ price, ⬇️ output (stagflation)
New tech boosts productivity	AS shifts right → ⬇️ price, ⬆️ output

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📝 Exam Tip:

Remember:
AD = Demand side = Spending
AS = Supply side = Production
Equilibrium = Price level + Real GDP

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Would you like me to draw a simple AD-AS diagram or make flashcards to revise this quickly?