Principles of Economics

Price Elasticity of Demand (PED) = % change in quantity demanded / % change in price. Types: (1) Perfectly elastic (PED = ∞) — horizontal demand curve; (2) Elastic (PED > 1) — quantity responds more than proportionately to price change (luxury goods); (3) Unit elastic (PED = 1) — proportionate response; (4) Inelastic (PED < 1) — quantity responds less than price change (necessities like staple food); (5) Perfectly inelastic (PED = 0) — vertical demand curve. Agricultural commodities generally have inelastic demand — a key justification for MSP support.

Perfect competition: many buyers/sellers, homogeneous product, free entry/exit, price takers — e.g., wheat market. Monopolistic competition: many firms, differentiated products, free entry — e.g., branded processed foods. Oligopoly: few large firms, interdependence, strategic behaviour (game theory) — e.g., fertilizer industry. Monopoly: single seller, no close substitutes, barriers to entry, price maker — e.g., patented agrochemicals. Market power increases from perfect competition to monopoly; consumer surplus decreases.

GDP (Gross Domestic Product) = total value of goods and services produced within India's geographical boundaries, regardless of whether production is by residents or foreigners. GNP (Gross National Product) = GDP + Net Factor Income from Abroad (NFIA) = income earned by Indian residents both domestically and abroad minus income earned by foreigners within India. NNP = GNP − Depreciation. National Income = NNP at factor cost. For India, NFIA is positive (large diaspora remittances), so GNP > GDP.

Types of inflation by cause: demand-pull (excess demand), cost-push (rising input costs), structural (supply bottlenecks), imported inflation. Types by rate: creeping (<3%), trotting (3–10%), galloping (10–50%), hyperinflation (>50%). Measurement: CPI (Consumer Price Index) measures retail price level for households; WPI (Wholesale Price Index) measures prices at wholesale/producer level. India adopted CPI as the headline inflation measure for monetary policy in 2014. RBI targets CPI inflation at 4% (±2% band).

Fiscal policy tools (Government): taxation (direct and indirect), government expenditure, public debt, subsidies. Expansionary fiscal policy: increase expenditure/reduce taxes to stimulate growth; contractionary: reverse. Monetary policy tools (RBI): Repo rate (rate at which RBI lends to banks — key policy rate), Reverse Repo rate, CRR (Cash Reserve Ratio — % of deposits banks must keep with RBI), SLR (Statutory Liquidity Ratio), OMO (Open Market Operations — buying/selling government securities). RBI uses repo rate as the primary instrument for inflation control.

Principles of Economics is tested in IBPS AFO (Professional Knowledge — market structures, elasticity — 5–8 questions), NABARD Grade A/B (Economics paper — national income, WTO), ICAR JRF (Agricultural Economics — entire macro section), SBI PO/Clerk (General Awareness — GDP, inflation), and state PSC Agriculture Officer exams. GDP/GNP distinction, elasticity types, and RBI policy tools are the most frequently tested items.