ECC01 — Basic Economic Concepts

The four factors of production and their rewards: Land → Rent; Labour → Wages; Capital → Interest; Enterprise/Entrepreneurship → Profit. This classical factor-reward pairing is a foundational concept in economics, directly tested in CDS.

Opportunity Cost = the value of the next best alternative sacrificed when a choice is made. It is the foundation of economic decision-making. Example: If you spend ₹10 lakh on education, the opportunity cost may be the business you could have started with that money.

Mixed Economy = combines features of market economy (private enterprise, price mechanism) and command economy (public sector, government planning). India adopted the Mixed Economy model post-independence. The 1991 reforms shifted India further toward markets, but the mixed character remains.

Money is NOT a factor of production — it is a medium of exchange and store of value. The four factors of production are: Land (all natural resources), Labour (human effort), Capital (man-made productive assets: machinery, tools), and Entrepreneurship/Enterprise (risk-taking and organisation). Money facilitates production but does not directly produce.

Macroeconomics studies the economy as a whole: GDP, inflation, unemployment, monetary policy, fiscal policy, and economic growth. Microeconomics studies individual consumer/firm behaviour, market structures, and price determination. Ragnar Frisch coined the terms macro and micro in 1933.

Law of Demand: inverse relationship between price and quantity demanded, ceteris paribus (all other factors constant). As price rises → quantity demanded falls; as price falls → quantity demanded rises. The demand curve slopes downward from left to right. Exceptions: Giffen goods, Veblen goods, price expectations.

Ceteris Paribus is a Latin phrase meaning 'all other things remaining constant.' It is used in economic analysis to isolate the effect of one variable on another. Example: The law of demand holds ceteris paribus — only price changes, other determinants of demand (income, preferences) are held constant.

Public Good = non-rival (one person's consumption doesn't reduce availability for others) + non-excludable (cannot be prevented from consuming once provided). Examples: national defence, street lighting, public fireworks. Pure private goods are rival and excludable. This leads to the free-rider problem and market failure.

Consumer Surplus = Willingness to Pay − Actual Price Paid. It represents the extra benefit consumers get beyond what they pay. Example: If you're willing to pay ₹100 for a book but pay ₹70, your consumer surplus = ₹30. Total consumer surplus = area above price and below demand curve.

Price Elasticity of Demand (PED) = % change in quantity demanded ÷ % change in price. It measures how sensitive demand is to price changes. Elastic demand (PED > 1): luxury goods. Inelastic demand (PED < 1): necessities (medicines, basic food). Unit elastic (PED = 1).

Inferior Good = as income rises, demand for the good falls (negative income elasticity). Examples: coarse grains (bajra, jawar), public transport, cheap noodles — as people get richer, they switch to better alternatives. Normal Good = as income rises, demand also rises (positive income elasticity).

The Phillips Curve (A.W. Phillips, 1958) shows the inverse relationship between unemployment and inflation: lower unemployment → higher inflation; higher unemployment → lower inflation. The long-run Phillips Curve is vertical (natural rate of unemployment). Stagflation (1970s) challenged the simple trade-off.

Giffen Good = an inferior good where a price rise leads to increased demand (upward-sloping demand curve), violating the law of demand. Example: bread for very poor consumers — if bread's price rises, they can no longer afford meat and buy more bread instead. Named after Robert Giffen.

Market Equilibrium: the price at which quantity demanded = quantity supplied, with no tendency for price to change. At equilibrium, there is no shortage or surplus. Above equilibrium price → surplus (supply > demand) → price falls. Below equilibrium price → shortage (demand > supply) → price rises.

Demand-pull inflation = inflation caused by excessive aggregate demand pulling up prices (too much money chasing too few goods). Contrast: Cost-push inflation = rising input costs (wages, raw materials, energy) pushing prices up from the supply side. Both types are commonly tested in CDS Economics.

Stagflation = simultaneous occurrence of high inflation and stagnant economic growth (high unemployment). It challenged the traditional Phillips Curve trade-off. Associated with the 1970s oil shocks. The US and UK experienced severe stagflation when OPEC dramatically raised oil prices.

Utility = satisfaction, benefit, or pleasure that a consumer derives from consuming a good or service. Total Utility = total satisfaction from consuming all units. Marginal Utility = additional satisfaction from consuming one more unit. Law of Diminishing Marginal Utility: MU falls as consumption increases.

Economies of Scale = as output (production volume) increases, the average cost per unit decreases. Internal economies: specialisation, bulk buying, better machinery. External economies: industry-wide benefits (skilled labour pool, infrastructure). Diseconomies of Scale = average cost rises at very large outputs.

Perfect Competition requires: many buyers and sellers; homogeneous (identical) products; free entry and exit; perfect information; no single buyer/seller can influence price (price takers). Real examples rarely exist but serve as a benchmark. Stock markets approximate perfect competition.

Externality = a cost or benefit that affects a third party not directly involved in a transaction. Negative externality: pollution from a factory affecting nearby residents. Positive externality: vaccination protecting non-vaccinated people (herd immunity). Externalities cause market failure — government intervention may be needed.