How to Get Good Grades in Economics (Co-authored by César de León, M.Ed.)

 

How to Get Good Grades in Economics

Co-authored by César de León, M.Ed.

To do well in economics, you must develop a deep understanding of economic theories, developments in the field, and applied math. Stay current by reading newspapers and magazines like the Financial Times and the Economist. To ace your classes, take good notes, form a study group, and ask for assistance when necessary.

Part1

Being a Diligent Student in Class

1. Prepare before class. 

2. Sit toward the front. 

3. Take good notes. 
4. Participate in class. 
5. Be a smart test-taker. 

 

Part2

Building Smart Study Habits

1.      Review your notes after class.

2.      Analyze graphs thoroughly. 

3.      Complete homework assignments early.

4.      Study for exams gradually. 

5.      Create a study guide.

6.      Visit office hours. 

7.      Keep your goals in mind. 

Part3

Reinforcing Economic Knowledge

1.      Start a study group. 

2.      Apply your economic knowledge to everyday situations. 

3.      Tutor a younger student. 

 

Part4

 

Getting to Know Economics

1.    Develop an understanding of economic theories, history, and practice. 

2.    Watch the news.

3.    Attend on-campus lectures. 

César de León, M.Ed.
Assistant Principal

César de León is an Educational Leadership Consultant and currently serves as an Assistant Principal for the Austin Independent School District in Austin, TX. 

(

THE LAW OF VARIABLE PROPORTION OR LAW OF DIMINISHING MARGINAL PRODUCT

 THE LAW OF VARIABLE PROPORTION OR LAW OF DIMINISHING MARGINAL PRODUCT 

 

The short run production function is called The law of variable proportion or law of diminishing marginal product. In short run, the producer can change the quantity of output only by changing the quantity of only one variable factors i.e. labour. Law of Diminishing marginal product (Law of Variable Proportions) states the relationship between the variable input and the output in the short run. By definition certain factors of production (e.g.-Land, plant, machinery etc.) cannot be changed to increase production. Such factors are called fixed factors. To increase production the producer can change some factors they are known as variable factor. In short-run, In other words, firms can employ varying quantities of variable inputs against given quantity of fixed factors. This kind of change in input combination leads to variation in factor proportions. The Law which brings out the relationship between varying factor proportions and output are there fore known as the Law of variable proportions..The variation in inputs lead to a disproportionate increase in output more and more units of variable factor when applied cause an increase in output but after a point the extra output will grow less and less. The law which brings out this tendency in production is known as‟Law of Diminishing Returns`. This law states that any attempt to increase output by increasing only one factor finally faces diminishing returns. The Law states that when some factor remain constant, more and more units of a variable factor are employed the production may increase initially at an increasing rate; but after a point it increases only at diminishing rate. Land and capital remain fixed in the short-term whereas labour shows a variable nature. The following table explains the operation of the Law of Diminishing Returns.

First Stage: First stage starts from point ‘O’ and ends up to point S (‘ON’ amount of variable input in the graph.) At point S average product is maximum and is equal to marginal product. In this stage, total product increases initially at increasing rate. Similarly marginal product also increases initially and reaches its maximum and Later on, it begins to diminish and becomes equal to average product at point S. In this stage, marginal product exceeds average product (MP > AP).We can see that in the table total product, average product, and marginal product increases but average product and marginal product increases up to 40 units of MP. Later on, both start decreasing because proportion of workers to land was sufficient and land is not properly used. This is the end of the first stage. 

 Second Stage: The second stage starts from where the first stage ends or where AP=MP. In this stage, average product and marginal product start falling. We should note that marginal product falls at a faster rate than the average product. Here, total product increases at a diminishing rate. It is also maximum at 70 units of labour where marginal product becomes zero while average product is never zero or negative. It begins from the point S. In this stage, total product increases at diminishing rate and is at its maximum at point ‘H’ correspondingly marginal product diminishes rapidly and becomes ‘zero’ at point ‘M’. Average product is maximum and thereafter it begins to decrease. In this stage, marginal product is less than average product (MP < AP).

Third Stage: The third stage begins where second stage ends. This starts from 8th unit of labour. Here, marginal product is negative and total product falls but average product is still positive. At this stage, any additional dose leads to negative marginal product. This stage begins beyond point ‘H’. Here total product starts diminishing. Average product also declines. Marginal product turns negative. In this stage, no firm will produce anything. This happens because marginal product of the labour becomes negative. The employer will suffer losses by employing more units of labourers. However, of the three stages, a firm will like to produce up to any given point in the second stage only

MACRO ECONOMICS Chapter 6 Open Economy

                                            Chapter 6  Open Economy

1. Open Economy It is one in which trading is done with other nations in goods and service and most often in financial assets.

2. Balance of Payment It is a systematic record of all economic transaction between the residents of a country, and the rest of the world during a year.

3. Current Account Transactions relating to trade in goods and services and transfer payment constitute the current account. Components of Current Account
(i) Visible Trade

(ii) Invisible Trade

(iii) Transfer Payment

4. Capital Account It represents international capital transactions which include sale and purchase of assets such as bonds equities, lands, loans, bank account etc. Components of capital account
(i) Foreign Investment

(ii) Loans

(iii) Banking Capital Transaction.

5. Balance of trade It means the systematic records of visible imports and exports in a given year. BOP = Visible Exports – Visible Imports

6. Autonomous Transaction It refers to those international economic transaction which are taken with the motive of profit.

7. Accommodating Items All the items related to the monetary transfers correcting balance of payments dis equilibrium are accommodating items.

8. Foreign Exchange Market The market in which foreign currencies are bought and sold is called the foreign exchange market,

9. Foreign Exchange Rate The rate at which one currency is exchanged for other is known as the rate of exchanges or foreign exchange rate.

10. Fixed Exchanges Rate System It refers to the rate of exchange fixed by the government . It has two important variants

(i) Gold standard system of exchanges rate.

(ii) Bretton woods system of exchanges rate.

11. Determination of Foreign Exchange Rate It is determined by the forces of supply and demand in the foreign exchanges market.

12. Devaluation It is the fall in the value of domestic currency  in relation to foreign currency as planned by the government. In a situation exchanges rate is fixed by government,

13. Depreciation It is the fall in the value of domestic currency in relation to foreign currency in a situation when exchange rate is determined by the forces of demand and supply in the international money market.

14.  Managed Floating It is a system that allows adjustments in exchanges rate according to set of rules and regulation which are officially declared in the foreign exchanges market

MACRO ECONOMICS SHORT NOTE 5

                                      Chapter 5 GOVT. BUDGET

1. Government Budget: A government budget is annual statement showing receipts and expenditures during a fiscal year.  

2. Objectives of Government Budget   (i) Economic growth (ii) Proper allocation of resources (iii) Generation of Employment (iv) Economic stability (v) Economic equality (vi) Management of public enterprises  

3. Public Goods Those goods which cannot be provided through the market mechanism and hence, must be provided by the government are called public goods.  

4. Revenue Receipts  Receipt which neither create liability nor lead to reduction in assets are called revenue receipts. Revenue receipts are further divided under two heads (i) Receipt form Tax (a) Direct Tax (b) Indirect Tax   (ii) Receipts from Non-Tax Revenue

5. Capital Receipts The receipts of government which create liability or reduce financial assets are called capital receipts. These receipts are classified under the following heads
(i) Market borrowings
(ii) Other borrowings and loans
(iii) Small savings
(iv) Provident fund and other deposits

6. Revenue Expenditure It refers to the expenditure that does not result in the creation of assets reduction of liabilities. The revenue expenditure is also of two types
(i) Plan revenue expenditure
(ii) Non-plan revenue expenditure

7. Capital Expenditure It refers to the expenditure which leads to creation of assets or reduction in liabilities. e.g., defence capital, purchasing land, building etc.

8. Plan Expenditure The expenditure to be incurred during the financial year on the development and investment programmes under the current Five Year Plan is termed as plan expenditure.

9. Non-Plan Expenditure All expenditures of government not included in the current Five-Year Plan is termed as non-plan expenditure.

10. Deficit Budget If government expenditures exceed the government receipts, it is called deficit budget.

(i) Revenue Deficit (RD) = Total Revenue Expenditure –  Total Revenue Receipts
(ii) Fiscal Deficit (FD) = Total Budget Expenditure – Total Budget Receipts excluding borrowing Or Fiscal Deficit = Borrowing
(iii) Primary Deficit (PD)=Fiscal Deficit Interest Payment

11. Measures to Reduce Fiscal Deficit

(i) Reduce public expenditure
(ii) Increasing revenue from taxation and other measures

12. Discretionary Fiscal Policy If investment falls and government spending can be raised so that autonomous expenditure and equilibrium remain the same. This deliberate action to stabilise  the economy is often referred to as discretionary fiscal policy.

12. Discretionary Fiscal Policy If investment falls and government spending can be raised so that autonomous expenditure and equilibrium remain the same. This deliberate action to stabilise  the economy is often referred to as discretionary fiscal policy.

MACRO ECONOMICS SHORT NOTES CHAPTER 4 INCOME DETERMINATION

                                    CHAPTER 4    INCOME DETERMINATION

1. Aggregate Demand (AD) It refers to the total demand for final goods and services in an economy during a year.
(i) Components ofAggregate Demand
(a) Private consumption demand (C)
(b) Private investment demand (T)
(c)Demand for goods and services by the government or government purchases (G)
(d) Demand for net exports (X·M)
Thus, AD = C + I + G + NE

2. Aggregate Supply (AS) It refers to the total quantity of goods and services produced by all the producers in an economy during a year.
(i) Components ofAggregate Supply
(a) Consumption (C)
(b) Saving (S)
Thus, AS=C+S

3. Consumption Function It means a functional relationship between total consumption and total disposable income.
Thus, C = f (y)
C = Consumption
y= Income

4. Average Propensity to Consume APC = C/Y
C = Total consumption
Y = Total income

5. Marginal Propensity to Consume (MPC)
MPC =Δc/Δy

Here, Δc = Change in consumption
Δy = Change in income

6. Linear Consumption Function If the consumption function is given on the assumption of constant marginal propensity to consume. It is called linear consumption function.
c=‾c+BY; ‾c.0,0,b,1
Here, c = Consumption ,‾c = Auto nomous consumption,B = Marginal propensity to consume, Y = Level of income

7. Saving Function Saving function is a schedule showing a functional relationship between total saving and tot.al income.
Thus, S = F (Y)
Here, S = Total saving ,Y = Total income

8. Average Propensity to Save

APS=S/Y
Here, S = Total saving ,Y = Total income

9. Marginal Propensity to Save  MPS = ΔS/ΔY

Here, ΔS = Change in saving, ΔY = Change in income

10. Equilibrium Level of Output Equilibrium level of output in an economy is determined at a point where planned spending (C+l) equals the planned output or where C+I curve intersects the 45° line.

11. Effective Demand It is that level of aggregate demand which becomes effective in determining equilibrium level of income because it is equal to aggregate supply.

12. Autonomous Consumption It refers to minimum level of consumption even when income is zero, it is indicated by ‘A’ in the consumption function . C=A+B
13. Ex-ante Saving It is what the savers plan to save at different levels of income in the economy.

14. Ex-ante Investment Is what the investors plan or intend to invest at different levels of income in the economy.

15. Ex-post Saving and Investment They refer to realised saving and investment in the economy. Ex-post saving is always equal to ex-post investment.

16. Multiplter Additional investment (ΔI), generates additional income (ΔY), but income generated is many times more than the investment.
Multiplier is the ratio between increase in income (ΔY) and increase in investment (ΔI) .  Multiplier (K) = ΔY/ΔI

17. Full Employment Equilibrium It refers to that situation in the economy when AD = AS along with fuller utilisation of  labour force.

18. Under Employment Equilibrium It refers to that situation in the economy when AS = AD but without the fuller utilisation of labour force.

19. Parodox of Thrift Which states that as people become more thrift they end up saving less or same as before.

MACRO CHAPTER 3 MONEY AND BANKING

                        CHAPTER 3  MONEY AND BANKING

1. Barter System Barter system means the direct exchange of one commodity to another.

2. Barter Economy can be termed as C-C economy i.e., Commodity for Commodity economy.

3. Difficulties of Barter System

(i) Lack of double coincidence
(ii) Lack of divisibility
(iii) Lack of common measure
(iv) Difficulty of storage and transfer of wealth
(v) Difficulty in deferred payment

4. Money Money is anything that is generally acceptable as a means of exchange and at the same time, act as a measure and as a store of value.
According to Walker, “Money is what money does”,

5. Functions of Money

(i) Primary Function
(a) Medium of exchange
(b) Measure of value

(ii) Secondary Function of Money
(a) Standard of deferred payments
(b) Store of value
(c) Transfer of value

(iii) Contingent Functions
(a) Distribution of national income
(b) Maximum satisfaction to the consurncrs
(c) Maximum profit to the producers
(d) Basis ofcredit
(e) Liquidity

6. Fiat Money It refers to money by order/authority of the government. It includes notes and coins.

7. Fiduciary Money it refers to money backed up by trust between the payer and the payee.

8. Money Supplier In the modern times.the sources of supply of money are government, central bunk of the country and commercial banks.

9. High powered Money It includes currency (R) with the public and cash (c) reserves with banks. High powered money =R+ C

10 Banking Banking implies accepting deposits of money from the public for the purpose of lending or investment which is repayable on demand and can be withdrawn by means of cheques, draft order etc.

11. Commercial Bank A commercial bank is a financial institution engaged in the business of accepting deposits and making loans to the people.

12. Central Bank A central bank is an apex institution of a country that controls and regulates the monetary and financial system of the country.

13. Functions of commercial Banks

(i) Acceptance of deposits from the public
(ii) Advancing of loans
(iii) Investment of funds
Agency Functions
(a) Remittance of funds
(b) Collection and payment of fund
(c) Sale and purchase of security
(d) Representation and correspondence
(e) Trusteeship
(v) General utility functions
(vi) Credit creation

14. Factors Affecting Credit Creation

(i) Primary cash deposits
(ii) Cash reserve ratio
(iii) Banking habits of the people
(iv) Policy of the central

15. Functions of Central Banks (RBI)

(i) Bank of issue
(ii) Banker, agent and advisor to the government
(iii) Custodian of the cash reserves of commercial banks
(iv) Custodian of nation’s reserves of international currency
(v) Lender ‘ofthe last resort
(vi) Bank of central clearance
(vii) Controller ofmoney supply and credit

16. Instruments of Monetary Policy or Credit Control Measures

(j) Quantitative Instruments
(a) Bank rate
(b) Open market operation
(c) Cash Reserve Ratio (CRR)
(d) Statutory Liquidity Ratio (SLR)
(ii) Qualitative Instruments
(a) Margin requirement
(b) Rationing of credit
(c) Direct action
(d) Moral suasion

17. Cash Reserve Ratio (CRR) It refers to the minimum percentage of a bank’s total deposits required to be kept with the central bank.

18. Statutory Liquidity Ratio (SLR) Every bank is required to maintain a fixed percentage of its assets in the form of cash 0r other liquid assets.

MACRO ECONOMICS SHORT NOTE CHAPTER 2

                                    CHAPTER 2 NATIONAL INCOME ACCOUNTING

1.      Final Goods These are those goods which have crossed the boundary line of production and are ready for use by their final users.
Final goods are often classified as

(i) Final consumer goods.
(ii) Final producer goods.

2.      2. Intermediate Goods These are those goods which have yet not crossed the boundary line of production. Example Shirts purchased by firm x from firm y for resale are intermediate goods.

3.      3. Consumption Goods These are those goods which are directly used for the satisfaction of human wants. These are not used in the production of other goods. Example Ice cream and milk used by the households.

4.      Consumption goods are classified into four categories.

5.      (i) Durable Consumer Goods: TV, radio, car etc.
(ii) Semi-Durable Consumer Goods: Clothes, furniture’s etc.
(iii) Non-Durable Consumer Goods: Bread.
(iv) Services: Doctor, lawyer etc.

6.      4. Capital Goods These are those goods which are used in the process of production for several years and which are of high value. Example Plant and machinery

7.      5. Investment Investment is a process of capital formation, or a process of increase in the stock of capital. Investment has two Components
(i) Fixed investment (ii) Inventory investment

8.      6. Gross Investment :  Expenditure on the purchase of fixed assets during the accounting year + Expenditure on the inventory stock during the accounting year.

7. Net Investment Gross investment – Depreciation (Consumption of fixed capital)

8. Stock A stock is a quantity of any economic variable which is measured at a particular point of time. e.g., 100 crores population of India in 2001.

9. Flow A flow is a quantity of any economic variable which is measured during a period of time. e.g., Monthly wages of a worker.

10. Depreciation Depreciation refers to loss of value of fixed assets in use on account of

(i) Normal wear tear
(ii) Normal rate of accidental changes
(iii) Expected or foreseen obsolesencene.

Annual amount of depreciation = Original value of the machine /Number of years of the life of the machine

11. Circular Flow of Income It refers to the unending flow of the activities of production, income generation and expenditure involving different sectors of the economy.
There are three phases of circular.flow
(i) Production (ii) Income generation (iii) Expenditure

12. Money Flow It refers to the flow of money across different sectors of the economy.

13. Real Flow It refers to the flow of goods and services across different sectors of the economy.

14. Condition for Equilibrium. in Four Sector Economy
C + S + T = C + I + G + (X – M)

Here, C = Consumption
S = Saving
I = Investment
T= Tax revenue
G = Government expenditure
X = Exports
M=Import
(X- M) = Net Exports

15. Injection It refers to the additions to the circular flow injections causes expension of the circular flow. Example Government expenditure, export and investment.
16. Leakages It refers to the withdrawl’s from the circular flow leakages cause contraction of the circular’ now.

17, Normal Residents of a Country These are the people who (i) normally reside in the country concerned and (ii) whose centre of economic interest lies in the country concerned.

18. Domestic Territory of a Country It refers to that area of economic activity which generates domestic income.

19. Factor Incomes These are the income received by the owners of factors of production for rendering their factor services to the producer.

20. Transfer Payment These arc all those unilateral payments corresponding to which there is no value-addition in the economy. Example Gifts, donations etc.

21. Methods of Measurement of National Income

§  Product or Value Added Method

§  Income Method

§  Expenditure Method

22. Value Added Value of output – Intermediate consumption

§  Value of output = sales + change in stock

§  Change in stock = closing stock – opening stock

23. Planned Change in Inventories It means that the actual change in inventories is just equal to what was planned.

24. Unplanned Change in Inventories Unexpected rise in inventories during a year is termed as unplanned change in inventories.

25. Components of Domestic Factor Income

§  Compensation to Employees it includes following components-wages and salaries in cash, compensation in kind, employer’s contributions to social security scheme.

§  Operating Surplus It has two main components
(a) Income from Property
(b) Income from entrepreneurship

§  Mixed income of the self employed

26. Final Expenditure The main components of final expenditure are

§  Private final consumption expenditure

§  Gross domestic capital formation

§  Government final consumption expenditure

§  Net export (X-M)

27. National Income It is sum total of factor incomes accruing to the normal residents of a country.

28. Domestic Income It is the sum total of factor income generated with in the domestic territory of the country no matter it is the income accruing to residents 0r non-residents of the country. National Income at Current Price It is the money value of all final goods and services measured at current prices.

29.National Income at Current Price It is the money value of all final goods and services measured at current prices.

30.GDP It is the sum total of

(i) Compensation of employees
(ii) Operating surplus
(iii) Mixed income
(iv) Consumption of fixed capital with in the domestic territory of the country during the period of one year.

31. NNP at Market Price It refers to the market value of final goods and services produced during the year inclusive of net factor income from abroad but exclusive of depreciation.

32. NNP at Factor Cost It is the sum total of factor incomes earned by normal residents of a country during the period of one year.

33. Private Income It is the total income from all sources that accrues to the private sector during the period of one year.

34.Personal Income It is the income actually received by the individuals and households from all sources in the form of current transfer payment and factor incomes.
35. Personal Disposable Income It is the personal income remaining with individuals after deduction of all taxes levied
against their income and their property as well as payment miscellaneous fees and fines.

36.National Disposable Income It is the income from all sources available to residents of a country for consumption expenditure or for saving during a year.

37. Nominal GDP It refers to GDP at current price.

38. Real GDP It.refers to GDP at constant price.

39. GNP Deflator The GNP deflator measures the average level of the prices of all goods and services that make-up GNP. GNP deflator is measured as the ratio of nominal GNP to real GNP.

40. Consumer Price Index (CPI) This is the index of prices of a given basket of commodities which are bought by the representative consumer. CPI is generally expressed inpercentage terms.

41. Externalities It refers to the benefits a firm or an individual causes to another for which they are not paid.