MBA (HUMAN RESOURCE

DEVELOPMENT) DEPARTMENT
OF COMMERCE
DELHI SCHOOL OF ECONOMICS

Economics is a social science concerned with the production, distribution and consumption of goods and
services. It studies how individuals, businesses, governments and nations make choices on allocating
resources to satisfy their wants and needs, and tries to determine how these groups should organize and
coordinate efforts to achieve maximum output. Economic analysis often progresses through deductive
processes, much like mathematical logic, where the implications of specific human activities are considered
in a "means-ends" framework.

Economics can generally be broken down into macroeconomics, which concentrates on the behavior of the
aggregate economy, and microeconomics, which focuses on individual consumers. ECONOMY is the large set
of interrelated production and consumption activities that aid in determining how scarce resources are
allocated. This is also known as an economic system.

AGGREGATE DEMAND
Aggregate demand is an economic measurement of the sum of all final goods and services produced in an
economy, expressed as the total amount of money exchanged for those goods and services. Since aggregate
demand is measured through market values, it only represents total output at a given price level, and does
not necessarily represent quality or standard of living.
The Keynesian equation for aggregate demand is: AD = C+I+G+(Nx)
Where:
C = Consumer spending
I = Private investment spending for non-final capital goods
G = Government spending
Nx = Net exports

AGGREGATE SUPPLY
Aggregate supply, also known as total output, is the total supply of goods and services produced within an
economy at a given overall price level in a given time period. It is represented by the aggregate supply curve,
which describes the relationship between price levels and the quantity of output that firms are willing to
provide. Normally, there is a positive relationship between aggregate supply and the price level.

BUSINESS CYCLE
The business cycle is the fluctuation in economic activity that an economy experiences over a period of time.
A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the
economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like
employment, industrial production, sales and personal incomes. During recessions, the economy is
contracting, as measured by decreases in the above indicators. Expansion is measured from the trough (or
bottom) of the previous business cycle to the peak of the current cycle, while recession is measured from the
peak to the trough.

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BLACK ECONOMY
The segment of a country's economic activity that is derived from sources that fall outside of the country's
rules and regulations regarding commerce. The activities can be either legal or illegal depending on what
goods and/or services are involved.

CARTEL
An agreement among two or more FIRMS in the same industry to co-operate in fixing PRICES and/or carving
up the market and restricting the amount of OUTPUT they produce. It is particularly common when there is
an OLIGOPOLY. The aim of such collusion is to increase PROFIT by reducing COMPETITION.

CAPITAL
Capital refers to financial assets or the financial value of assets, such as funds held in deposit accounts, as
well as the tangible machinery and production equipment used in environments such as factories and other
manufacturing facilities. Additionally, capital includes facilities, such as the buildings used for the production
and storage of the manufactured goods. Materials used and consumed as part of the manufacturing process
do not qualify

CETERIS PARIBUS
Ceteris paribus, a Latin phrase, roughly means “holding other things constant.” The more common English
translation reads “all other things being equal.” This term is most widely used in economics and finance as a
shorthand indication of the effect of one economic variable on another, keeping all other variables constant
that could render an effect on the second variable.

CHANGE IN DEMAND
Change in demand describes a change or shift in a market's total demand. This change in demand is
represented graphically in a price vs. quantity plane, and it is a result of more or fewer entrants into the
market and changes in consumer preferences. The shift can either be parallel or nonparallel.

CHANGE IN SUPPLY
Change in supply is a term used in economics to describe when the suppliers of a given good or service have
altered production or output. A change in supply can be brought on by new technologies, making production
more efficient and less expensive, or by a change in the number of competitors in the market.

CONSUMER SURPLUS
Consumer surplus is an economic measure of consumer benefit, which is calculated by analyzing the
difference between what consumers are willing and able to pay for a good or service relative to its market

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price, or what they actually do spend on the good or service. A consumer surplus occurs when the consumer
is willing to pay more for a given product than the current market price.

CONSUMPTION FUNCTION
The consumption function, or Keynesian consumption function, is an economic formula representing the
functional relationship between total consumption and gross national income. It was introduced by British
economist John Maynard Keynes, who argued the function could be used to track and predict total
aggregate consumption expenditures.
The consumption function is represented as:

Where:
C = Consumer spending
A = Autonomous consumption
M = Marginal propensity to consume
D = Real disposable income

DEFICIT
A deficit is the amount by which a resource falls short of a mark, most often used to describe a difference
between cash inflows and outflows. Deficit is the opposite of surplus and is synonymous with shortfall or loss

DEMAND
Demand is an economic principle that describes a consumer's desire and willingness to pay a price for
a specific good or service. Holding all other factors constant, an increase in the price of a good or service will
decrease demand, and vice versa.

DEMAND CURVE
The demand curve is a graphical representation of the relationship between the price of a good or service
and the quantity demanded for a given period of time. In a typical representation, the price will appear on
the left vertical axis, the quantity demanded on the horizontal axis.

DUOPOLY
A duopoly is a situation in which two companies own all or nearly all of the market for a given product or
service. A duopoly is the most basic form of oligopoly, a market dominated by a small number of companies.
A duopoly can have the same impact on the market as a monopoly if the two players collude on prices or
output

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ELASTICITY
Elasticity is a measure of a variable's sensitivity to a change in another variable.
In business and economics, elasticity refers the degree to which individuals, consumers or producers change
their demand or the amount supplied in response to price or income changes. It is predominantly used to
assess the change in consumer demand as a result of a change in a good or service's price.

EQUILIBRIUM
Equilibrium is the state in which market supply and demand balance each other and, as a result, prices
become stable. Generally, when there is too much supply for goods or services, the price goes down, which
results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.

GIFFEN GOOD
A Giffen good is a good for which demand increases as the price increases, and falls when the price
decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of
demand which states that quantity demanded for a product falls as the price increases, resulting in a
downward slope for the demand curve. A Giffen good is typically an inferior product that does not have
easily available substitutes, as a result of which the income effect dominates the substitution effect. Giffen
goods are quite rare, to the extent that there is some debate about their actual existence.

GROSS DOMESTIC PRODUCT

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a
country's borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be
calculated on a quarterly basis as well (in the United States, for example, the government releases an
annualized GDP estimate for each quarter and also for an entire year).

GROSS NATIONAL PRODUCT

Gross national product (GNP) is an estimate of total value of all the final products and services produced in a
given period by the means of production owned by a country's residents. GNP is commonly calculated by
taking the sum of personal consumption expenditures, private domestic investment, government
expenditure, net exports, and any income earned by residents from overseas investments, minus income
earned within the domestic economy by foreign residents. Net exports represent the difference between
what a country exports minus any imports of goods and services.

IMPLICIT COST

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An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate
expense. It represents an opportunity cost that arises when a company allocates internal resources toward a
project without any explicit compensation for the utilization of resources. This means that when a company
allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere.

INCOME ELASTICITY OF DEMAND

Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change
in real income of consumers who buy this good, keeping all other things constant. The formula for
calculating income elasticity of demand is the percent change in quantity demanded divided by the percent
change in income. With income elasticity of demand, you can tell if a particular good represents a necessity
or a luxury.

INCOME PER CAPITA

Income per capita is a measure of the amount of money earned per person in a certain area. It can apply to
the average per-person income for a city, region or country, and is used as a means of evaluating the living
conditions and quality of life in different areas. It can be calculated for a country by dividing the country's
national income by its population.

INDIFFERENCE CURVE
An indifference curve represents a series of combinations between two different economic goods, between
which an individual would be theoretically indifferent regardless of which combination he received.

INELASTIC
Inelastic is an economic term used to describe the situation in which the quantity demanded or supplied of a
good or service is unaffected when the price of that good or service changes. Inelastic means that when the
price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’
buying habits also remain unchanged

LAW OF DEMAND
The law of demand is a microeconomic law that states, all other factors being equal, as the price of a good or
service increases, consumer demand for the good or service will decrease, and vice versa. The law of
demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity
cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more
expensive product.

LAW OF SUPPLY

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The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a
good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.
The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits
by increasing the quantity offered for sale.

MARGINAL PROPENSITY TO CONSUME

The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay that a consumer
spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume
is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided
by the change in income. MPC is depicted by a consumption line- a sloped line created by plotting change in
consumption on the vertical y axis and change in income on the horizontal x axis.

MARGINAL RATE OF SUBSTITUTION

The marginal rate of substitution is the amount of a good that a consumer is willing to give up for another
good, as long as the new good is equally satisfying. It's used in indifference theory to analyze consumer
behavior. The marginal rate of substitution (MRS) is calculated between two goods placed on an indifference
curve, displaying a frontier of equal utility for each combination of "good A" and "good B". The marginal rate
of substitution is always changing for a given point on the curve, and mathematically represents the slope of
the curve at that point. MRS is calculated using the following formula:

MARGINAL RATE OF TECHNICAL SUBSTITUTION

The marginal rate of technical substitution (MRTS) is the rate at which one aspect must be decreased so that
the same level of productivity can be maintained when another factor is increased. The MRTS reveals the
give-and-take between factors, such as capital and labor, that firms make out of the necessity to maintain a
constant output. MRTS differs from the marginal rate of substitution (MRS), because MRTS is focused on
producer equilibrium and MRS is focused on consumer equilibrium.

MARGINAL UTILITY
Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or
service. Marginal utility is an important economic concept because economists use it to determine how
much of an item a consumer will buy. Positive marginal utility is when the consumption of an additional item
increases the total utility. Negative marginal utility is when the consumption of an additional item decreases
the total utility.

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MARKET
A market is a medium that allows buyers and sellers of a specific good or service to interact in order to
facilitate an exchange.

MONOPOLIST
A monopolist is a person, group or organization with a monopoly. In other words, an individual or company
that controls all of the market for a particular good or service.

MONOPOLISTIC MARKET
A monopolistic market is a theoretical construct in which only one company may offer products and services
to the public. This is the opposite of a perfectly competitive market, in which an infinite number of firms
operate. In a purely monopolistic model, the monopoly firm is able to restrict output, raise prices and enjoy
super-normal profits in the long run.

MONOPOLY
A monopoly refers to a sector or industry dominated by one corporation, firm or entity.

MONOPSONY
A monopsony, sometimes referred to as a buyer's monopoly, is a market condition similar to a monopoly
except that a large buyer, not a seller, controls a large proportion of the market and drives prices down. A
monopsony occurs when a single firm has market power in employing its factors of production. It acts as a
sole purchaser for multiple sellers, driving down the price of seller inputs through the amount of quantity
that it demands.

NET DOMESTIC PRODUCT

The net domestic product (NDP) is an annual measure of the economic output of a nation that is
adjusted to account for depreciation, calculated by subtracting depreciation from the gross domestic
product (GDP).

NET FOREIGN FACTOR INCOME

The net foreign factor income (NFFI) is the difference between a nation’s gross national product (GNP) and
gross domestic product (GDP). Net foreign factor income (NFFI) is the difference between the aggregate
amount that a country’s citizens and companies earn abroad, and the aggregate amount that foreign citizens
and overseas companies earn in that country. In mathematical terms, NFFI = GNP - GDP.

NET NATIONAL PRODUCT

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The net national product (NNP) is the monetary value of finished goods and services produced by a country's
citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or
GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e.,
depreciation). Alternatively, the NNP can be calculated as total payroll compensation plus net indirect tax on
current production plus operating surpluses.

OLIGOPOLY
Oligopoly is a market structure in which a small number of firms has the large majority of market share. An
oligopoly is similar to a monopoly, except that rather than one firm, two or more firms dominate the market.
There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough
that the actions of one firm significantly impact and influence the others.

PERFECT COMPETITION
Perfect competition is a market structure in which the following five criteria are met: 1) All firms sell an
identical product; 2) All firms are price takers - they cannot control the market price of their product; 3) All
firms have a relatively small market share; 4) Buyers have complete information about the product being
sold and the prices charged by each firm; and 5) The industry is characterized by freedom of entry and exit.
Perfect competition is sometimes referred to as "pure competition".

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a
particular good and a change in its price. Price elasticity of demand is a term in economics often used when
discussing price sensitivity. The formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price. If a small change in price is
accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to
price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount
of change in quantity demanded.

PRICE LEADERSHIP
Price leadership is when a firm that is the leader in its sector determines the price of goods or services. This
approach can leave the leader's rivals with little choice but to follow its lead and match these prices if they
are to hold onto their market share. Alternatively, competitors may also choose to lower their prices in the
hope of gaining market share as discounters.

PRODUCER SURPLUS
Producer surplus is an economic measure of the difference between the amount a producer of a good

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receives and the minimum amount the producer is willing to accept for the good. The difference, or surplus
amount, is the benefit the producer receives for selling the good in the market. Producer surplus is
generated by market prices in excess of the lowest price producers would otherwise be willing to accept for
their goods.

PRODUCTION POSSIBILITY CURVE

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods,
given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used
efficiently. Factors such as labor, capital and technology, among others, will affect the resources available,
which will dictate where the production possibility frontier lies. The PPF is also known as the production
possibility curve or the transformation curve.

PURCHASING POWER
Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one
unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the
amount of goods or services you would be able to purchase. In investment terms, purchasing power is the
dollar amount of credit available to a customer to buy additional securities against the existing marginable
securities in the brokerage account.

SCARCITY
Scarcity refers to the basic economic problem, the gap between limited – that is, scarce – resources and
theoretically limitless wants. This situation requires people to make decisions about how to allocate
resources efficiently, in order to satisfy basic needs and as many additional wants as possible. Any resource
that has a non-zero cost to consume is scarce to some degree, but what matters in practice is relative
scarcity. Also referred to as "paucity."

SHORT RUN
The short run, in economics, expresses the concept that an economy behaves differently depending on the
length of time it has to react to certain stimuli. The short run does not refer to a specific duration of time but
rather is unique to the firm, industry or economic variable being studied. A key principle guiding the concept
of short run and long run is that in the short run, firms face both variable and fixed costs, which means that
output, wages and prices do not have full freedom to reach a new equilibrium.

SUBSTITUTION EFFECT
The substitution effect is the economic understanding that as prices rise — or income decreases —
consumers will replace more expensive items with less costly alternatives. Conversely, as the wealth of

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individuals increases, the opposite tends to be true, as lower-priced or inferior commodities are eschewed
for more expensive, higher-quality goods and services, known as the income effect. Although beneficial to
some companies like discount retailers, the substitution effect is generally very negative within an economy,
as it limits consumer and producer choice.

SUPPLY CURVE
The supply curve is a graphical representation of the relationship between the price of a good or service and
the quantity supplied for a given period of time. In a typical representation, the price will appear on the left
vertical axis, the quantity supplied on the horizontal axis.

UNEMPLOYMENT
Unemployment is a phenomenon that occurs when a person who is actively searching for employment is
unable to find work. Unemployment is often used as a measure of the health of the economy. The most
frequently measure of unemployment is the unemployment rate, which is the number of unemployed
people divided by the number of people in the labor force.

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