Economics Notes for Govt Job Exam (Paper 2)
i. Meaning, Scope and Methodology of General Economics
Meaning: Economics is the study of how scarce resources are allocated to satisfy unlimited human
wants.
Scope:
- Microeconomics: Studies individual units like consumers, firms, markets.
- Macroeconomics: Deals with the economy as a whole – national income, employment, inflation,
monetary and fiscal policies.
Methodology:
- Deductive method: Starts with assumptions/theories and derives conclusions (top-down).
- Inductive method: Collects data, observes trends, and builds theories (bottom-up).
Importance: Provides basis for policymaking, production, consumption, and distribution decisions.
ii. Theory of Consumer’s Demand (Indifference Curve Technique)
Indifference Curve (IC): A curve showing combinations of two goods giving equal satisfaction to
the consumer.
Properties: Downward sloping, convex to the origin, do not intersect.
Budget Line: Represents all possible combinations of two goods given consumer’s income and
prices.
Consumer’s Equilibrium: Point where IC is tangent to the budget line (MRS = Price ratio).
MRS (Marginal Rate of Substitution): Rate at which a consumer is willing to give up one good for
another while maintaining utility.
Law of Diminishing MRS: As more of one good is consumed, willingness to sacrifice decreases.
iii. Consumer Surplus
Definition: The excess of what a consumer is willing to pay over what they actually pay.
Marshall’s Utility Analysis: Consumer surplus = Total utility – Total expenditure.
Hicks’ Indifference Curve Approach: More accurate; considers substitution effects.
Importance: Measures consumer welfare, helps in taxation policy and pricing strategies.
iv. Pricing under Various Forms of Market
Perfect Competition: Many sellers, homogeneous product, free entry/exit, firms are price takers.
Price = MC.
Monopoly: Single seller, no close substitutes, entry barriers, firm is price maker, MR = MC for
equilibrium.
Monopolistic Competition: Many sellers, product differentiation, non-price competition, demand
curve is downward sloping.
Oligopoly: Few large firms, interdependence, collusion/cartels, kinked demand curve theory
explains price rigidity.
v. Characteristics and Problems of Developing Economy
Features: Low per capita income, poverty, unemployment, dependence on agriculture,
technological backwardness.
Demographic Issues: High population growth leads to disguised unemployment, pressure on
resources, low capital formation.
Challenges: Inequality, poor infrastructure, lack of healthcare and education, underemployment.
vi. Rationale of Planning in Developing Countries
Need for Planning:
- Mobilization of resources.
- Balanced regional development.
- Reduction of poverty and unemployment.
- Human resource development.
- Accelerating industrialization.
Example: Five-Year Plans in India (till 2017) focused on self-sufficiency and inclusive growth.
vii. Unemployment – Concepts and Measurement
Types of Unemployment:
- Seasonal: Linked with seasonal industries like agriculture.
- Disguised: More workers than needed, marginal productivity = 0.
- Structural: Mismatch of skills.
- Frictional: Temporary unemployment between jobs.
- Cyclical: Due to business cycle recessions.
Measurement Methods:
- Usual Status: Long-term (1 year reference).
- Current Weekly Status: Work status during last 7 days.
- Current Daily Status: Activity on each day of the week (NSSO data).
viii. Decentralization and Role of PRIs
73rd Constitutional Amendment (1992): Gave constitutional status to Panchayati Raj Institutions.
Functions of PRIs: Local governance, rural infrastructure, poverty alleviation, agricultural
development.
Importance: Ensures participatory democracy, decentralization of power, promotes local
development.
ix. Planning for Inclusive Growth and Development Schemes
Inclusive Growth: Economic growth that includes all sections of society, reduces inequality.
Major Schemes:
- MGNREGA: Employment guarantee for rural households.
- PMAY: Affordable housing.
- NRLM: Rural livelihood promotion.
- PMJDY: Financial inclusion through bank accounts.
- Ayushman Bharat: Healthcare for poor families.
x. Fiscal and Monetary Policy
Fiscal Policy: Government expenditure and taxation policy.
- Expansionary fiscal policy: Increased spending/reduced taxes.
- Contractionary fiscal policy: Reduced spending/increased taxes.
Monetary Policy (RBI): Controls money supply and credit.
- Instruments: Repo Rate, Reverse Repo, CRR, SLR, OMO.
Objectives: Price stability, economic growth, employment generation.
xi. Inflation and Deflation
Inflation: Persistent rise in general price level.
- Types: Demand-pull (excess demand), Cost-push (rising costs).
- Effects: Reduces purchasing power, discourages savings, redistributes income.
Deflation: Persistent fall in price level.
- Effects: Lowers investment, increases unemployment, reduces output.
Stagflation: Combination of stagnation + inflation.
xii. National Income (GDP/SGDP Concept)
National Income: Total value of goods & services produced in a country.
GDP: Value of all final goods and services produced within the domestic territory in a year.
GNP: GDP + Net factor income from abroad.
NNP: GNP – Depreciation.
Methods of Measurement: Income method, Expenditure method, Production method.
SGDP: State-level GDP – measures economic performance of states.
Importance: Indicator of economic development, policy formulation, international comparison.