1.

Simple Interest (SI)

Simple interest is calculated only on the original principal, every time period. It doesn't grow on
itself.

Formula:

P×R×T
SI =
100
Where:

 P = Principal (initial amount)

 R = Rate of interest per year (in %)

 T = Time (in years)

Total amount after time T:

A=P+SI
Example:
Find the simple interest on ₹10,000 at 8% per annum for 3 years.

10000 × 8× 3
SI = =₹ 2400 A=10000+2400=₹12,400
100
Notice: interest is the same every year (₹800 × 3 years = ₹2400). It doesn't compound.

2. Compound Interest (CI)

Compound interest is calculated on the principal + accumulated interest — so it grows faster over
time.

General Formula:

( )
n×T
R
A=P 1+ CI =A−P
n× 100
Where:

 P = Principal

 R = Annual rate of interest (%)

 T = Time in years

 n = Number of times interest is compounded per year

The value of n changes based on the compounding frequency:

Compounding Type n (times per year)

Annually 1

Semiannually (half-yearly) 2

Quarterly 4
Compounding Type n (times per year)

Monthly 12

Example — Semiannual Compounding

Find the compound interest on ₹10,000 at 8% per annum for 3 years, compounded semiannually.

Here, n = 2 (compounded twice a year)

( )
2 ×3
8 6 6
A=10000 1+ A=10000 (1+ 0.04 ) A=10000× ( 1.04 )
2× 100
A=10000× 1.2653=₹ 12,653CI =12653−10000=₹ 2653

Example — Monthly Compounding

Same numbers, but compounded monthly.

Here, n = 12

( )
12 ×3
8 36 36
A=10000 1+ A=10000 (1+ 0.006667 ) A=10000× ( 1.006667 )
12× 100
A=10000× 1.2702=₹ 12,702CI =12702−10000=₹ 2702

Key Takeaway (important for exam intuition)

For the same P, R, T:

C I monthly > C I semiannual >C I quarterly >C I annual > SI

The more frequently interest is compounded, the more total interest you earn — because interest
starts earning interest sooner and more often.

Let's cover three concepts: Continuous Compounding, Effective Annual Rate (EAR), and
Depreciation (Straight Line & Reducing Balance methods).

1. Continuous Compounding

This is the "limit" case — interest is compounded an infinite number of times per year (every
instant). It uses the constant e (≈ 2.71828).

Formula:
RT
A=P× e
Where:

 P = Principal

 R = Annual rate (as a decimal, e.g., 8% = 0.08)

  T = Time in years

 e = 2.71828...

Example:
Find the amount on ₹10,000 at 8% per annum for 3 years, compounded continuously.

A=10000× e
0.08 ×3
=10000 × e
0.24
A=10000× 1.2712=₹ 12,712CI =12712−10000=₹ 2712

Notice: this is slightly more than monthly compounding (₹12,702) — continuous compounding gives
the maximum possible interest for a given rate.

2. Effective Annual Rate (EAR)

When interest is compounded more than once a year, the rate you actually "earn" in a year is higher
than the stated (nominal) rate. EAR tells you the true annual rate.

Formula:

( )
n
R
EAR= 1+ −1
n× 100
(Express as a percentage by multiplying by 100)

Where:

 R = Nominal annual rate (%)

 n = Number of compounding periods per year

Example:
Nominal rate = 8% per annum, compounded semiannually (n = 2). Find EAR.

( )
2
8
EAR= 1+ −1 EAR=( 1.04 )2−1=1.0816−1=0.0816 EAR=8.16 %
2 ×100
So even though the "nominal" rate is 8%, you're actually earning 8.16% effectively — because
interest is earned twice a year.

For continuous compounding, EAR formula becomes:

R
EAR=e −1
3. Depreciation

Depreciation is the reduction in value of an asset over time. Two common methods:

A) Straight Line Method (SLM)

The asset loses the same fixed amount of value every year.

Formula:

Cost −Salvage Value

Annual Depreciation=
Useful Life (years)
Book value after T years:
 BV =Cost− ( Annual Depreciation ×T )
Example:
A machine costs ₹50,000, has a salvage value of ₹5,000, and a useful life of 9 years. Find the annual
depreciation and book value after 3 years.

50000−5000
Annual Depreciation= =₹5000
9
Book value after 3 years:

BV =50000− (5000 × 3 )=50000−15000=₹ 35,000

Same ₹5,000 is deducted every single year.

B) Reducing Balance Method (Written Down Value Method)

The asset loses a fixed percentage of its current book value each year — so the depreciation amount
gets smaller over time (unlike SLM).

Formula:

( )
T
R
BV =Cost × 1−
100
Where:

 R = Rate of depreciation (%)

 T = Number of years

Depreciation in a given year = Previous Book Value − Current Book Value

Example:
A machine costs ₹50,000 and depreciates at 10% per annum using the reducing balance method.
Find the book value after 3 years.

( )
3
10 3
BV =50000 × 1− BV =50000 × ( 0.9 ) =50000 ×0.729=₹ 36,450
100
Year-by-year breakdown (to see why it's called "reducing"):

Year Book Value at Start Depreciation (10%) Book Value at End

1 50,000 5,000 45,000

2 45,000 4,500 40,500

3 40,500 4,050 36,450

Notice: the depreciation amount shrinks each year (₹5000 → ₹4500 → ₹4050), because it's a
percentage of a shrinking base — unlike SLM where it's always ₹5,000 flat.
future Value (FV)

( )
n× T
R
FV =PV 1+
n ×100
Example: PV = ₹20,000, R = 10%, T = 5 years, compounded annually (n = 1)
5
FV =20000 ( 1.10 ) =20000× 1.6105=₹ 32,210
Present Value (PV)

FV
PV =
( )
n ×T
R
1+
n ×100
Example: FV = ₹50,000, R = 10%, T = 5 years, compounded annually (n = 1)

50000 50000
PV = = =₹ 31,046
( 1.10 )5 1.6105

Capital Budgeting Techniques (Simple Version)

1. Net Present Value (NPV)

Formula:

NPV =Total PV of Cash Inflows−Initial Investment

Example: Investment = ₹50,000, Rate = 10%. Cash inflows: Year 1 = ₹15,000, Year 2 = ₹20,000, Year
3 = ₹15,000, Year 4 = ₹10,000.

Year Cash Flow PV Factor @10% Present Value

1 15,000 0.909 13,635

2 20,000 0.826 16,520

3 15,000 0.751 11,265

4 10,000 0.683 6,830

Total 48,250
 NPV =48,250−50,000=−₹1,750
Rule: NPV > 0 → Accept. Here NPV is negative → Reject.

2. Internal Rate of Return (IRR)

Formula:

R1 × NP V 2−R2 × NPV 1
IRR=
NP V 2−NPV 1
Example: Investment = ₹40,000, cash inflow = ₹15,000/year for 4 years.

At R₁ = 15% → NPV₁ = +₹2,840

At R₂ = 20% → NPV₂ = −₹1,180

( 15 ×−1180 )−( 20 ×2840 ) −17700−56800

IRR= = =18.53 %
−1180−2840 −4020
Rule: IRR > cost of capital → Accept.

3. Payback Period

Formula:

Unrecovered amount
Payback =Years before recovery +
Cash flow in recovery year
Example: Investment = ₹60,000. Cash inflows: Year 1 = ₹20,000, Year 2 = ₹20,000, Year 3 = ₹15,000,
Year 4 = ₹15,000.

Year Cash Flow Cumulative

1 20,000 20,000

2 20,000 40,000

3 15,000 55,000

4 15,000 70,000

Recovery happens in Year 4. Unrecovered at start of Year 4 = 60,000 − 55,000 = 5,000

5000
Payback =3+ =3.33 years
15000
Rule: Shorter payback = better. Accept if within target.

4. Discounted Payback Period

Formula:

Unrecovered discounted amount

Discounted Payback =Years before recovery+
Discounted CF in recovery year
Example: Investment = ₹45,000, Rate = 8%, cash inflow = ₹15,000/year for 4 years.

Year Cash Flow PV Factor @8% Discounted CF Cumulative

1 15,000 0.926 13,890 13,890

2 15,000 0.857 12,855 26,745

3 15,000 0.794 11,910 38,655

4 15,000 0.735 11,025 49,680

Recovery happens in Year 4. Unrecovered = 45,000 − 38,655 = 6,345

6345
Discounted Payback =3+ =3.58 years
11025
Note: Always longer than simple payback.

5. Benefit-Cost Ratio (BCR)

Formula:

Total PV of Cash Inflows

BCR=
Initial Investment
Example: Investment = ₹80,000, Rate = 12%, cash inflow = ₹35,000/year for 3 years.

Year Cash Flow PV Factor @12% Present Value

1 35,000 0.893 31,255

2 35,000 0.797 27,895

3 35,000 0.712 24,920

Total 84,070

84,070
BCR= =1.05
80,000
Rule: BCR > 1 → Accept.

Straight Lines, Slopes & Quadrants

1. The Four Quadrants

The coordinate plane (x-axis and y-axis) is divided into 4 quadrants based on the signs of x and y.

Quadrant x-value y-value Example Point

I Positive Positive (3, 4)

II Negative Positive (−3, 4)

Quadrant x-value y-value Example Point

III Negative Negative (−3, −4)

IV Positive Negative (3, −4)

Quadrants go counter-clockwise, starting from the top-right.

2. Slope of a Line

Slope measures the steepness/direction of a line — how much y changes for a change in x.

Formula:

Δ y y 2− y 1
m= =
Δ x x 2−x 1

Where ( x 1 , y 1 )and ( x 2 , y 2 )are any two points on the line.

Example: Find the slope of the line passing through (2, 3) and (5, 9).

9−3 6
m= = =2
5−2 3
3. Equation of a Straight Line (Slope-Intercept Form)

Formula:

y=mx+c
Where:

 m = slope of the line

 c = y-intercept (the point where the line crosses the y-axis, i.e., value of y when x = 0)

Example: Find the equation of a line with slope 2, passing through (2, 3).

y=mx+c ⇒ 3= ( 2 )( 2 ) +c ⇒ 3=4+ c ⇒ c=−1Equation: y =2 x−1

Check: at x = 5, y = 2(5) − 1 = 9 ✓ (matches our second point)

4. Types of Slopes

A) Increasing (Positive) Slope

Line rises as it goes left to right. m > 0.

Example: y=2 x +1

xy

01

13

25
xy

As x increases, y increases too. Slope m = 2 (positive).

B) Decreasing (Negative) Slope

Line falls as it goes left to right. m < 0.

Example: y=−2 x +5

xy

05

13

21

As x increases, y decreases. Slope m = −2 (negative).

C) Zero Slope (Horizontal Line)

The line is perfectly flat — y never changes no matter what x is. m = 0.

Example: y=4

x y

0 4

5 4

10 4

Equation form: y=0 x + 4=4 . This is a horizontal line.

D) Infinite (Undefined) Slope (Vertical Line)

The line is perfectly vertical — x never changes, y can be anything. Slope is undefined (you'd be
dividing by zero: Δ x =0).

Example: x=3

xy

30

35

3 10

This cannot be written as y=mx+c because m is undefined (infinite).

5. Intercepts
Intercept Meaning How to find

y-intercept Where line crosses y-axis Set x = 0, solve for y (this is "c" in y = mx + c)

x-intercept Where line crosses x-axis Set y = 0, solve for x

Example: Find both intercepts of y=2 x−4

y-intercept: Set x = 0 → y=2 ( 0 )−4=−4 → point (0, −4)

x-intercept: Set y = 0 → 0=2 x −4 ⇒ x =2→ point (2, 0)

Quick Summary Table

Slope Type Sign of m Line Behavior Equation Example

Increasing m>0 Rises left to right y = 2x + 1

Decreasing m<0 Falls left to right y = −2x + 5

Zero m=0 Flat, horizontal y=4

x=3

Infinite/Undefined m = undefined Straight up-down, vertical

Demand & Linear Demand Function

1. What is Demand?

Demand is the quantity of a good or service that consumers are willing and able to buy at a given
price, during a given time period. The basic law of demand:

As price increases, quantity demanded decreases (and vice versa) — assuming all other factors
stay constant.

This is why demand curves slope downward — price (P) and quantity (Q) move in opposite
directions.

2. Linear Demand Function

A linear demand function expresses this relationship as a straight-line equation between price and
quantity.

Two common forms:

Form A — Price as a function of Quantity (Inverse Demand Function):

P=a−bQ
Form B — Quantity as a function of Price:

Q=a−bP
Where:

 P = Price of the good

 Q = Quantity demanded

 a = Intercept (maximum value when the other variable is 0)

 b = Slope (how much P/Q changes per unit change in the other) — always negative
relationship, so b is subtracted

Important note on "Demand Function" vs "Inverse Demand Function":

 Demand function: Q=f ( P )→ quantity in terms of price (this is the "ideal"/standard form
since demand is naturally a function of price)

 Inverse demand function: P=f ( Q )→ price in terms of quantity (this is just the same
equation solved for P instead — used often in graphs, since P is usually plotted on the y-
axis)

They describe the same line — just rearranged.

3. Finding the Linear Demand Function from Data

If you're given two price-quantity points, you can find the full equation, just like finding the
equation of any straight line.

Steps:

P 2−P1
1. Find slope: b=
Q 2−Q1
2. Use one point to find the intercept: P=a−bQ, solve for a

3. Write the full equation

Example Problem

Question: When the price of a product is ₹20, the quantity demanded is 100 units. When the price
drops to ₹15, the quantity demanded rises to 150 units. Find the linear demand function (in terms
of P), and find the quantity demanded when price = ₹10.

Step 1: Identify the two points( Q1 , P 1) =( 100 , 20 ) and ( Q2 , P 2 )=( 150 , 15 )

Step 2: Find the slope

 P 2−P1 15−20 −5
b= = = =−0.1
Q 2−Q1 150−100 50
(Negative slope confirms the law of demand — price falls as quantity rises)

Step 3: Write equation in form P=a+bQ , then solve for a

Using point (100, 20):

20=a+ (−0.1 )( 100 ) ⇒ 20=a−10⇒ a=30

Step 4: Final demand equation

P=30−0.1 Q
Step 5: Find Q when P = ₹10

10=30−0.1 Q ⇒0.1 Q=20 ⇒ Q=200 units

Check it makes sense: as price dropped further (₹20 → ₹15 → ₹10), quantity demanded kept rising
(100 → 150 → 200) — consistent with the law of demand. ✓

The line slopes downward from left to right — exactly what the law of demand predicts. As you
move along the line, each ₹5 drop in price corresponds to a 50-unit rise in quantity demanded,
which is what our slope of −0.1 (or equivalently, ΔP/ΔQ = −5/50) tells us.

Quick Summary

Term Meaning Formula

Demand function Q in terms of P Q=a−bP

Inverse demand function P in terms of Q P=a−bQ

Slope Rate of change between P and Q Always negative

a (intercept) Max value when other variable = 0 Found using a known point

One more thing worth knowing for exams: where the demand line crosses the P-axis (Q = 0) gives
you the highest price anyone would pay (choke price). Where it crosses the Q-axis (P = 0) gives you
the quantity demanded if the good were free.

Linear Supply Function

1. What is Supply?

Supply is the quantity of a good that producers/sellers are willing to offer for sale at a given price,
during a given time period. The basic law of supply:

As price increases, quantity supplied also increases (and vice versa) — assuming all other factors
stay constant.

This is why supply curves slope upward — price (P) and quantity (Q) move in the same direction
(opposite of demand).

2. Linear Supply Function

A linear supply function expresses this relationship as a straight-line equation between price and
quantity.

Two common forms:

Form A — Price as a function of Quantity (Inverse Supply Function):

P=a+bQ
Form B — Quantity as a function of Price:

Q=−a+bP or Q=c+ dP
Where:

 P = Price of the good

 Q = Quantity supplied

 a = Intercept

 b = Slope (how much P/Q changes per unit change in the other) — always positive
relationship, so b is added (unlike demand, where it's subtracted)

Key difference from demand function:

Demand Function Supply Function

Slope sign Negative (−b) Positive (+b)

Relationship P and Q move opposite P and Q move together

Curve direction Downward sloping Upward sloping

3. Finding the Linear Supply Function from Data

Same method as demand — treat it like finding the equation of a straight line through two points.

Steps:

P 2−P1
1. Find slope: b=
Q 2−Q1
2. Use one point to find the intercept: P=a+bQ , solve for a

3. Write the full equation

Example Problem

Question: When the price of a product is ₹10, producers supply 50 units. When the price rises to
₹15, producers supply 100 units. Find the linear supply function (in terms of P), and find the
quantity supplied when price = ₹20.

Step 1: Identify the two points( Q1 , P 1) =( 50 , 10 ) and ( Q2 , P 2 )=( 100 , 15 )

Step 2: Find the slope

P 2−P1 15−10 5
b= = = =0.1
Q 2−Q1 100−50 50
(Positive slope confirms the law of supply — price rises as quantity supplied rises)

Step 3: Write equation in form P=a+bQ , then solve for a

Using point (50, 10):

10=a+ ( 0.1 ) ( 50 ) ⇒ 10=a+5 ⇒ a=5

Step 4: Final supply equation

P=5+ 0.1Q
Step 5: Find Q when P = ₹20

20=5+0.1 Q⇒ 0.1Q=15⇒ Q=150 units

Check it makes sense: as price rose further (₹10 → ₹15 → ₹20), quantity supplied kept rising too
(50 → 100 → 150) — consistent with the law of supply. ✓

Now let's see this visually:

visualize

visualize show_widget

The line slopes upward from left to right — as price rises, sellers are willing to supply more. Each
₹5 rise in price corresponds to a 50-unit increase in quantity supplied, matching our slope of 0.1.

Bonus: Demand vs Supply Together (Market Equilibrium)

Since your exam likely pairs these two topics, it's worth knowing: when you plot demand and
supply on the same graph, they intersect at the equilibrium point — the price and quantity where
what buyers want to buy exactly equals what sellers want to sell.

To find equilibrium: set the demand equation equal to the supply equation and solve.

Example (using our two equations):

Demand: P=30−0.1Q Supply: P=5+0.1 Q30−0.1Q=5+0.1 Q25=0.2QQ=125

Substitute back: P=5+ 0.1 ( 125 )=5+12.5=₹ 17.50

Equilibrium: Q = 125 units, P = ₹17.50

Quick Summary

Term Meaning Formula

Q in terms
Supply function Q=c+ dP
of P

P in terms
Inverse supply function P=a+bQ
of Q

Rate of
change
Slope Always positive
between
P and Q

Demand = Solve equations

Equilibrium
Supply simultaneously

Cost & Revenue Concepts

1. Fixed Cost (FC)

Costs that do not change with the level of output/production — you

pay them even if you produce zero units. (e.g., rent, salaries,
insurance)

Formula:

FC =Constant amount (doesn’t depend on Q)

Example: A factory pays ₹50,000 per month in rent, regardless of how
many units it produces.

FC =₹ 50,000 (same at 0 units or 1000 units)

2. Variable Cost (VC)

Costs that change directly with the level of output — the more you
produce, the more you spend. (e.g., raw materials, labor per unit)

Formula:

VC =v ×Q
Where:

 v = variable cost per unit

 Q = quantity produced
Term Meaning Formula

Example: Each unit costs ₹20 in raw materials. If 100 units are
produced:

VC =20 ×100=₹ 2,000

3. Total Variable Cost (TVC)

This is essentially the same concept as VC — the total of all variable

costs across all units produced. Some books distinguish "VC" (per unit)
from "TVC" (total), so let's be precise:

Formula:

TVC =v ×Q
Where v = variable cost per unit, Q = total quantity

Example: Variable cost per unit = ₹20, Quantity = 100 units

TVC =20 ×100=₹2,000

(Same calculation as above — TVC is just "VC" expressed as a total, not
per-unit)

4. Total Fixed Cost (TFC)

Same idea — TFC is the fixed cost taken as a whole, and it stays exactly
the same no matter how many units you produce.

Formula:

TFC =Constant ( independent of Q )

Example: Rent = ₹50,000/month.

TFC =₹ 50,000 whether you produce 1 unit or 10,000 units

5. Total Cost (TC)

The sum of fixed and variable costs — everything it costs to produce a

given quantity.

Formula:

TC=TFC +TVC =TFC + ( v × Q )

Example: TFC = ₹50,000, variable cost per unit = ₹20. Find TC for
producing 100 units.

TC=50,000+ ( 20 ×100 )=50,000+2,000=₹ 52,000

6. Total Revenue (TR)

The total money earned from selling the output — price per unit
Term Meaning Formula

multiplied by quantity sold.

Formula:

TR=P × Q
Where:

 P = Selling price per unit

 Q = Quantity sold

Example: Each unit sells for ₹35, and 100 units are sold.

TR=35× 100=₹ 3,500

Putting It All Together — Full Example

Question: A company has fixed costs of ₹50,000. Variable cost per unit
is ₹20. Each unit sells for ₹35. If the company produces and sells 100
units, find TFC, TVC, TC, TR, and Profit.

Item Formula Calculation Value

TFC Constant — ₹50,000

TVC v×Q 20 × 100 ₹2,000

TC TFC + TVC 50,000 + 2,000 ₹52,000

TR P×Q 35 × 100 ₹3,500

Profit TR − TC 3,500 − 52,000 −₹48,500 (Loss)

Note: At only 100 units, the company is making a big loss — this is
because fixed costs (₹50,000) are so high they haven't been "spread
out" over enough units yet. This connects directly to the idea of break-
even point (the quantity where TR = TC, i.e., profit = 0) — let me know
if you want that formula too, since it usually comes right after this
topic.

Here's a visual to make the relationship between these clear:

visualize

visualize show_widget

A few things to notice in this diagram:

 TFC (gray, dashed) is completely flat — it never changes

Term Meaning Formula

regardless of quantity.

 TC (coral) starts exactly at the TFC line (because at Q=0, TC =

TFC + 0) and then rises steadily as variable costs accumulate.

 TR (green) starts at ₹0 (sell nothing, earn nothing) and rises

steeper than TC if the price per unit is high enough.

 Where the green line crosses the coral line is the break-even
point — below that quantity, you're in a loss (TC > TR); above
it, you're in profit (TR > TC).

Quick Reference Table

Term Formula Behavior

Fixed Cost (FC/TFC) Constant Doesn't change with Q

Variable Cost (VC/TVC) v ×Q Rises directly with Q

Total Cost (TC) TFC +TVC Rises with Q, starting from TFC

Total Revenue (TR) P ×Q Rises with Q, starting from 0

Profit TR−TC Positive after break-even

Elasticity — Complete Concept

1. Price Elasticity of Demand (PED)

Measures how much quantity demanded changes when price changes — i.e., how "sensitive"
demand is to price.

Formula (Percentage Method):

 % change in Quantity Demanded Δ Q /Q
ϵ d= =
% change in Price Δ P /P
Formula (Point/Arc Method — often used in exams):

ΔQ P
ϵ d= ×
ΔP Q
Where:

 Δ Q = change in quantity, Δ P = change in price

 P, Q = original price and quantity

Note: PED is technically negative (since P and Q move opposite ways for demand), but we usually
take the absolute value when discussing it.

Example:

Price rises from ₹10 to ₹12. Quantity demanded falls from 100 to 80 units. Find PED.

−20 10
Δ Q=80−100=−20 , Δ P=12−10=2ϵ d = × =−10 × 0.1=−1
2 100
Taking absolute value: ∣ ϵ d ∣=1 (this is called unit elastic — see table below)

2. Range of Values & Types (Very Important for Exam)

Value of ϵ d Type Meaning

Perfectly Quantity doesn't change at all, no matter the price (e.g., life-saving
ϵ d =0
Inelastic medicine)

0< ϵ d <1 Inelastic Quantity changes less than price (% change in Q < % change in P)

ϵ d =1 Unit Elastic Quantity changes exactly proportional to price

1<ϵ d < ∞ Elastic Quantity changes more than price (% change in Q > % change in P)

Even a tiny price change causes infinite change in quantity (flat

ϵ d =∞ Perfectly Elastic
demand line)

(Always use the absolute value of ϵ d when comparing to this table)

3. Price Elasticity of Supply

Measures how much quantity supplied changes when price changes. Since supply and price move in
the same direction, this value is normally positive.

Formula:

% change in Quantity Supplied Δ Q P

ϵs= = ×
% change in Price ΔP Q
Same range logic applies (0 = perfectly inelastic, ∞ = perfectly elastic), but here it's naturally positive
since supply rises with price.
Example:

Price rises from ₹20 to ₹25. Quantity supplied rises from 200 to 220 units. Find ϵ s .

20 20
Δ Q=220−200=20 , Δ P=25−20=5ϵ s = × =4 ×0.1=0.4
5 200
Since 0< 0.4<1→ Inelastic supply

4. Cross Elasticity of Demand

Measures how the quantity demanded of one good (A) responds to a price change in another good
(B).

Formula:

% change in Quantity Demanded of A Δ Q A PB

ϵ xy = = ×
% change in Price of B Δ PB QA
Sign tells you the relationship:

Sign of ϵ xy Relationship Example

Positive Substitutes (goods compete) Tea and Coffee

Negative Complements (goods used together) Car and Petrol

Zero Unrelated goods Rice and Shoes

Example:

Price of tea rises from ₹100 to ₹120 per kg. Quantity demanded of coffee rises from 50 to 60 units.
Find cross elasticity.

10 100
Δ Q coffee=60−50=10 , Δ P tea=120−100=20ϵ xy = × =0.5 × 2=1
20 50
Positive value → tea and coffee are substitutes.

5. Income Elasticity of Demand (bonus — often grouped with the above)

Measures how quantity demanded responds to a change in consumer income.

Formula:

% change in Quantity Demanded Δ Q Y

ϵ y= = ×
% change in Income ΔY Q

Sign of ϵ y Type of Good

Positive Normal good (demand rises with income)

Negative Inferior good (demand falls as income rises)

Quick Formula Reference Table

Type Symbol Formula Relates

ΔQ P
Price Elasticity of Demand ϵd × Own price ↔ own quantity demanded
ΔP Q
ΔQ P
Price Elasticity of Supply ϵs × Own price ↔ own quantity supplied
ΔP Q
Δ QA PB
Cross Elasticity ϵ xy × Price of B ↔ quantity of A
Δ PB Q A

ΔQ Y
Income Elasticity ϵy × Income ↔ quantity demanded
ΔY Q
Practice Problems for You to Solve

Try these yourself using the formulas above — I'll check your answers if you share your working:

1. PED: Price of a good falls from ₹50 to ₹45. Quantity demanded rises from 200 to 230 units.
Find ϵ d and identify its type (elastic/inelastic/unit elastic).

2. Elasticity of Supply: Price rises from ₹30 to ₹33. Quantity supplied rises from 500 to 550
units. Find ϵ s and identify its type.

3. Cross Elasticity: Price of butter rises from ₹200 to ₹220 per kg. Quantity demanded of bread
falls from 100 to 90 units. Find ϵ xyand state whether butter and bread are substitutes or
complements.

4. Income Elasticity: Consumer income rises from ₹30,000 to ₹36,000. Quantity demanded of a
good falls from 40 to 35 units. Find ϵ y and identify whether the good is normal or inferior.

Quadratic, Cubic & Polynomial Functions

Part 1: Quadratic Functions

General Form
2
y=a x +bx +c ( a ≠ 0 )
The graph of a quadratic function is always a parabola (U-shaped, opening up or down).

Finding Roots — The Quadratic Formula

−b ± √ b2−4 ac
x=
2a
The term b 2−4 ac is called the discriminant (D). It tells you how many real roots (x-intercepts) the
equation has — this is the "types" you're asking about.

Three Cases Based on Discriminant

Discriminant Type Number of Real Roots Graph Behavior

2 2 different real
D=b −4 ac >0Two distinct roots solutions
Parabola crosses x-axis at 2 points

2 One (repeated/unique) 1 real solution (touches, Parabola just touches the x-axis at
D=b −4 ac=0
root doesn't cross) 1 point (vertex sits on x-axis)

2 0 real solutions (roots

D=b −4 ac <0No real roots are imaginary)
Parabola never touches the x-axis

Example — Case 1: Two Roots

Solve x 2−5 x+ 6=0

2 5 ± √ 1 5± 1
D= (−5 ) −4 ( 1 )( 6 )=25−24=1>0 x= = ⇒ x =3 or x=2
2 2
Two distinct real roots: x = 2, 3

Example — Case 2: One (Repeated) Root

Solve x 2−6 x +9=0

6±0
2
D= (−6 ) −4 ( 1 ) ( 9 )=36−36=0 x= =3
2
One repeated root: x = 3 (parabola's lowest point touches the x-axis exactly here)

Example — Case 3: No Real Roots

Solve x 2+ 2 x +5=0
2
D= ( 2 ) −4 (1 )( 5 ) =4−20=−16<0
Since D is negative, no real roots exist — the parabola stays entirely above (or below) the x-axis.

Properties of Quadratic Functions

1. Shape: Always a parabola

2. Direction: Opens upward if a> 0(minimum point); opens downward if a< 0(maximum point)

3. Only ONE turning point (the vertex) — this is the key property you mentioned

4. Vertex formula (turning point):

2
−b b
x= , y=c−
2a 4a
−b
5. Axis of symmetry: the vertical line x= — the parabola is a mirror image on either side
2a
Let's visualize all three discriminant cases together:

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You can see the three cases clearly: the blue parabola cuts the x-axis at two spots, the amber one
just kisses it at exactly one spot (the vertex sitting right on the axis), and the coral one never touches
the axis at all since it's always above it.

The Monopolist Application (Important for exams)

A monopolist is a single seller who controls the market price. Since a monopolist's inverse demand
function is P=a−bQ(like our earlier demand example), their Total Revenue becomes:
2
TR=P × Q=( a−bQ ) ×Q=aQ−bQ
This is a quadratic function (in terms of Q) — and since the coefficient of Q 2is negative (−b ), the
parabola opens downward. That means it has a maximum point — this is exactly where the
monopolist earns maximum revenue.

Finding the max revenue quantity (vertex):

¿ −a a
Q= =
2 (−b ) 2 b
Example (Monopolist Revenue Maximization)

A monopolist's demand function is P=100−2 Q. Find the quantity that maximizes total revenue,
and the maximum revenue.

Step 1: Write TR

TR=PQ =( 100−2 Q ) Q=100 Q−2 Q2

Step 2: Find vertex (max point)

¿ −100 −100
Q= = =25
2 (−2 ) −4
Step 3: Find max TR
2
TR=100 (25 )−2 ( 25 ) =2500−1250=₹ 1,250
Interpretation: The monopolist should sell exactly 25 units to earn the maximum possible revenue
of ₹1,250 — selling more or fewer units than 25 gives lower revenue (because TR is a downward
parabola, and 25 is its peak).

visualize

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Notice the shape — revenue starts at 0 (no units sold, no revenue), climbs to a single peak, then falls
back down (because past a point, pushing more units into the market forces the price down so much
that total revenue actually drops). This "one turning point" property is exactly the quadratic property
we discussed earlier.

Part 2: Cubic Functions

General Form
3 2
y=a x +b x +cx + d ( a ≠ 0 )
Properties

1. Degree 3 — the highest power of x is 3

2. Up to TWO turning points (unlike quadratic's exactly one) — it can have 0 or 2 turning points

3. S-shaped curve — rises then dips then rises again (or the mirror image)

4. As x →+ ∞: if a> 0, y →+ ∞ ; if a< 0, y →−∞

5. Can have 1, 2, or 3 real roots

Example

Consider y=x 3−6 x2 +9 x

Factor: y=x ( x 2−6 x +9 ) =x ( x−3 )

2

Roots: x=0 and x=3 (repeated)

dy 2 2
Finding turning points: using calculus, =3 x −12 x +9=0 ⇒ x −4 x+3=0 ⇒ x=1 , x=3
dx
So there are two turning points: at x=1 (local maximum) and x=3 (local minimum).

visualize

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This S-shaped curve is the signature look of a cubic — unlike the parabola's single smooth arc, it has
a rise, then a dip, then a rise again (or vice versa if a< 0), giving it two turning points instead of one.

Part 3: General Polynomial Functions

General Form
n n−1
y=an x + an−1 x +⋯+a 1 x +a0
Where n = degree of the polynomial (highest power of x)

Properties (Exam-Important Rule)

Maximum number of turning points=n−1Maximum number of real roots=n

Degree (n) Name Max Turning Points Max Real Roots

1 Linear 0 1

2 Quadratic 1 2

3 Cubic 2 3

4 Quartic 3 4

Example: y=x 4−5 x 2+ 4 (degree 4 polynomial)

Factor: let u=x2 , so u2−5 u+ 4=0 ⇒ ( u−1 )( u−4 )=0 ⇒u=1 , 4

So x 2=1 ⇒ x=± 1and x 2=4 ⇒ x=± 2

Four real roots: x = −2, −1, 1, 2 — and since degree = 4, this fits the maximum possible (n roots), with
up to 3 turning points (a "W" shaped curve).

Quick Summary Table

Function Formula Turning Points Shape

2
Quadratic y=a x +bx +c Exactly 1 Parabola (U or ∩)
3 2
Cubic y=a x +b x +cx + d Up to 2 S-curve
n
Polynomial (degree n) y=an x +⋯+ a0 Up to n−1 Wavy curve with n−1 bends

Nonlinear Functions: Exponential & Growth/Decay Curves

1. Exponential Function

Unlike linear functions (constant rate of change), exponential functions grow or shrink by a constant
percentage each period — so the change gets faster over time.

General Formula:
x kx
y=a b or y=a e
Where:

 a = initial value (when x=0)

  b = growth/decay factor (b>1 = growth, 0<b<1 = decay)

 k = growth rate constant (k > 0 = growth, k < 0= decay)

 e = 2.71828...

Example: A population starts at 1,000 and grows at a rate given by y=1000 ( 1.05 )x , where x is years.
Find the population after 4 years.
4
y=1000 ( 1.05 ) =1000 ×1.2155=1,215.5 ≈ 1,216
2. Growth Curves — Three Types (Very Important for Exam)

A) Unlimited (Exponential) Growth Curve

Growth continues forever without any upper limit — the classic "explosive" growth pattern. This is
the same as the exponential function above.

Formula:
kt
y= y 0 e ( k >0 )
Where:

 y 0= initial value (at t=0)

 k = growth rate (positive)

 t = time

Example: A bacteria culture starts with 500 cells and grows at rate k = 0.2 per hour. Find the
population after 5 hours.
0.2 × 5 1
y=500 e =500 e =500× 2.71828=1,359
Shape: Curve keeps rising faster and faster, with no ceiling — grows without bound.

B) Limited (Restricted) Growth Curve

Growth slows down as it approaches a maximum ceiling (M), but never quite reaches it. Common in
situations with a natural limit (e.g., market saturation with no competition effects yet).

Formula:
−kt
y=M −( M − y 0 ) e

Where:

 M = maximum possible value (ceiling/carrying capacity)

 y 0= initial value

 k = growth rate constant

Example: A new product's sales are modeled with a ceiling of M = 10,000 units, starting at
y 0=1,000 , with growth constant k = 0.3. Find sales after 3 months.
 −0.3 ×3 −0.9
y=10000−( 10000−1000 ) e y=10000−9000 × e =10000−9000 ( 0.4066 )
y=10000−3,659=6,341 units
Shape: Rises quickly at first, then flattens out as it nears the ceiling M — never crosses it.

C) Logistic (S-shaped) Growth Curve

Combines both patterns — starts slow, then grows rapidly (like unlimited growth), then slows down
again as it approaches a ceiling (like limited growth). This creates the famous S-shape.

Formula:

M
y= −kt
1+ A e
Where:

 M = maximum ceiling (carrying capacity)

M − y0
 A = constant determined by initial conditions: A=
y0
 k = growth rate constant

Example: A disease spreads in a population with ceiling M = 5,000 people. Initially y 0=100 are
infected, and k=0.4. Find the number infected after t=10 days.

Step 1: Find A

5000−100 4900
A= = =49
100 100
Step 2: Apply formula

5000 5000 5000 5000 5000

y= = y= = = =2,636 people
1+49 e
−0.4 ×10
1+ 49 e
−4
1+49 ( 0.0183 ) 1+0.897 1.897

Shape: S-shaped (sigmoid) — slow start, rapid middle growth, then flattens near the ceiling.

Let's visualize all three growth curve shapes together:

visualize

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Notice the key visual difference: unlimited growth (coral) keeps curving upward forever, faster and
faster, with no ceiling in sight. Limited growth (blue) rises quickly but then bends and flattens as it
approaches the ceiling M. Logistic growth (green) is the most distinctive — it starts flat (slow), then
shoots up steeply through the middle, then flattens again near M, creating that characteristic S-
shape.

3. Decay Curves (opposite of growth)

Since you mentioned "delay curves" — this likely refers to decay curves, which model quantities that
decrease over time (like radioactive decay or depreciation).

Formula:
−kt
y= y 0 e ( k >0 )
Note the negative exponent — this is what makes the curve fall instead of rise.

Example: A radioactive substance starts at 200g and decays at rate k=0.1 per year. Find the amount
remaining after 5 years.
−0.1× 5 −0.5
y=200 e =200 e =200 ×0.6065=121.3 g
Shape: Starts high, falls rapidly at first, then levels off as it approaches (but never quite reaches) zero.

Quick Reference Table for Exam

Curve Type Formula Key Feature

kt
Unlimited Growth y= y 0 e No ceiling, keeps accelerating
−kt
Limited Growth y=M −( M − y 0 ) e Approaches ceiling M, never crosses it

M
Logistic Growth y= −kt S-shaped: slow → fast → slow, approaches M
1+ A e
−kt
Decay y= y 0 e Falls rapidly, levels off near 0

Exam tip: If a question says "grows without bound" → unlimited growth. If it mentions a "maximum
capacity," "saturation point," or "carrying capacity" → limited or logistic growth (logistic if it also
mentions an S-shaped/slow-start pattern, like disease spread or product adoption).

Logarithms, Equations & Market Analysis

This is a lot of ground — let's go through each piece systematically.

1. Logarithmic Functions

A logarithm answers: "To what power must I raise the base to get this number?"

Basic Definition:
x
log b y =x ⟺ b = y
Common types:
  log 10 y (common log, base 10) — often written just log y

 log e y=ln y (natural log, base e) — used with exponential/growth functions

Basic Log Formulas (Laws of Logarithms) — Must Memorize

Rule Formula

Product Rule log ⁡( mn) =log m+ log n

Quotient Rule log ( mn )=log m−log n

Power Rule log ⁡( mn ) =n log m

Log of 1 log b 1=0

Log of base itself log b b=1

log a m
Change of Base log b m=
log a b

Important Log Values (memorize for exam)

Value Result

log 1 0
log 10 1
log 100 2

ln 1 0
ln e 1
log 2 8 3

Converting Between Log and Exponential Form

Example: Convert log 2 32=5 to exponential form.

5
2 =32
Example (solving with log rules): Solve log x +log 5=log100

log ⁡( 5 x )=log 100 ⇒ 5 x=100 ⇒ x=20

2. Simultaneous Equations

Two (or more) equations solved together to find values that satisfy all equations at once.

Example: Solve:

2 x+ y=10 ( 1 ) x− y =2 ( 2 )
Add equations (1)+(2): 3 x=12 ⇒ x=4

Substitute into (2): 4− y=2 ⇒ y=2

Solution: x=4, y=2

3. Market Equilibrium (Demand = Supply)

Already touched on this, but let's do a clean standalone example.

Formula: Set demand equation = supply equation, solve simultaneously.

Example:

Demand: P=40−2 QSupply: P=10+Q40−2 Q=10+Q ⇒30=3 Q⇒ Q¿=10

¿
P =10+10=₹ 20
Equilibrium: Q=10, P=₹20

4. Government Interventions

A) Price Ceiling (Maximum Price)

A legal maximum price set below equilibrium price (to protect buyers, e.g. rent control). Since it's
below equilibrium, it causes a shortage (Quantity Demanded > Quantity Supplied).

Example (using our equilibrium above): Government sets a price ceiling at P=₹15 (below equilibrium
₹20).

Quantity demanded at P=15: 15=40−2Q ⇒ Qd =12.5

Quantity supplied at P=15: 15=10+Q⇒ Q s=5

Shortage=Q d−Q s=12.5−5=7.5 units

This shortage often creates a black market, where desperate buyers pay above the ceiling price
illegally to get the good.

B) Price Floor (Minimum Price)

A legal minimum price set above equilibrium (to protect sellers, e.g. minimum wage, agricultural
price supports). This causes a surplus (Quantity Supplied > Quantity Demanded).

Example: Government sets a price floor at P=₹25 (above equilibrium ₹20).

Quantity demanded at P=25: 25=40−2Q ⇒ Q d=7.5

Quantity supplied at P=25: 25=10+Q⇒ Q s=15

Surplus=Q s−Qd =15−7.5=7.5 units

Governments often deal with this surplus by buying up excess supply (subsidy) or storage programs.

visualize
visualize show_widget

Look at where each dashed price line crosses the demand (blue) and supply (green) lines: at the
ceiling (coral, ₹15), the demand line is far to the right of the supply line — buyers want more than
sellers offer, hence shortage. At the floor (purple, ₹25), it's reversed — supply is far right of demand,
hence surplus.

C) Taxes and Subsidies

Tax (per unit): Shifts the supply curve upward/left by the tax amount t. New supply: P=10+ Q+ t

Subsidy (per unit): Shifts the supply curve downward/right by the subsidy amount s. New supply:
P=10+ Q−s
Example (Tax): Government imposes a ₹5 tax per unit on our earlier supply ( P=10+ Q). New
supply: P=15+ Q

New equilibrium: 40−2 Q=15+Q ⇒25=3 Q⇒ Q=8.33

New price: P=15+ 8.33=₹ 23.33 (buyers now pay more, quantity traded falls)

5. Break-Even Analysis

Already covered TR/TC formulas earlier — here's the Break-Even Point (BEP) formula directly.

Formula:

TFC
TR=TC ⇒ PQ=TFC + vQQ BEP =
P−v
Where ( P−v )is called the contribution margin per unit.

Example: TFC = ₹50,000, Price per unit P=₹35, Variable cost per unit v=₹20. Find break-even quantity.

50,000 50,000
Q BEP = = =3,333.3 units
35−20 15
Interpretation: The company needs to sell at least 3,334 units to cover all costs (below this, it's a
loss; above, it's a profit) — this matches the diagram from our earlier cost/revenue topic where the
TR and TC lines crossed.

6. Consumer Surplus, Producer Surplus & Total Surplus

Consumer Surplus (CS)

The benefit consumers get from paying less than what they were willing to pay. Geometrically, it's
the area above the equilibrium price line, below the demand curve.

Formula (when demand is linear):

1 ¿ ¿
CS= × Q × ( P max−P )
2
¿ ¿
Where Pmax is the demand curve's price-intercept (Q=0), and P , Q are equilibrium values.

Producer Surplus (PS)

The benefit producers get from selling at a higher price than the minimum they'd accept.
Geometrically, it's the area below the equilibrium price line, above the supply curve.

Formula (when supply is linear):

1 ¿ ¿
PS= × Q × ( P −Pmin )
2
Where Pminis the supply curve's price-intercept (Q=0).

Total Surplus

Total Surplus=CS+ PS
Example (using our equilibrium: Demand P=40−2Q , Supply P=10+ Q, equilibrium Q*=10,
P*=₹20)

Find Pmax (demand intercept, Q=0): P=40−2 ( 0 )=₹ 40

Find Pmin(supply intercept, Q=0): P=10+ 0=₹ 10

Consumer Surplus:

1 1
CS= × 10 × ( 40−20 ) = × 10 ×20=₹ 100
2 2
Producer Surplus:

1 1
PS= × 10 × ( 20−10 )= ×10 ×10=₹ 50
2 2
Total Surplus:

TS=100+50=₹150
V

visualize

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The blue triangle is consumer surplus — it's the gap between what people were willing to pay (the
high points on the demand curve) and what they actually paid (the equilibrium price). The green
triangle is producer surplus — the gap between what sellers actually received and the lower price
they'd have accepted. Together, these two triangles represent the total gains from trade in the
market.

Quick Reference Summary

Concept Formula

Log Product Rule log ⁡( mn) =log m+ log n

Log Power Rule log ⁡( mn ) =n log m

Concept Formula

Market Equilibrium Demand = Supply, solve for P, Q

Shortage (ceiling) Qd −Qs at ceiling price

Surplus (floor) Qs −Qdat floor price

TFC
Break-even quantity QBEP =
P−v
1 ¿ ¿
Consumer Surplus Q ( Pmax −P )
2
1 ¿ ¿
Producer Surplus Q ( P −Pmin )
2
Exam tip: These topics chain together — a typical exam question gives you demand/supply
equations, asks for equilibrium, then adds a twist (ceiling, floor, tax) and asks you to recompute
quantities and surplus. Practice going through that full sequence with one set of numbers so the flow
feels automatic.