CDS Economics · Formula sheet
Microeconomics — Demand, Supply and Market Structure formulas
3 formulas, 7 reference tables and 19 common traps for CDS Economics Microeconomics — Demand, Supply and Market Structure, grouped by subtopic.
Choice, Utility and Demand
Learn this subtopic in the notesTotal utility, marginal utility and indifference curves
Marginal utility
- total utility from n units
- extra utility from the nth unit
Scarcity, opportunity cost and exchange
| Idea | What it means |
|---|---|
| Opportunity cost | The value of the next best alternative given upQ Asked twice: CDS 2020 (I) as a sum with daily wages, and CDS 2021 (II) as a definition. |
| Voluntary exchange | Both parties gain, or they would not tradeQ CDS 2021 (II): a pure voluntary exchange is a win-win situation. |
| Economic model | A simplified picture of a theory, in words, diagrams or equationsQ CDS 2019 (II): the statement that is NOT correct is that models can be expressed only through equations. |
| Scarcity | Limited resources against unlimited wants, which forces choice |
The law of demand: movement and shift
| Change | Effect on the demand curve for the good |
|---|---|
| The good's own price falls | Movement along the curve (more is bought)Q Asked twice: CDS 2020 (II) asked what does NOT shift the curve, CDS 2021 (II) what moves along it. Both answers are the good's own price. |
| Consumers' income rises | The curve shifts (right for a normal good) |
| Population grows | The curve shifts right |
| Price of a substitute or complement changes | The curve shifts |
| Prices of inputs used to make the good change | No effect on demand; supply changes insteadQ CDS 2022 (I): input prices are the one factor that does not influence quantity demanded. |
Common traps
Opportunity cost is what you give up, not what you take
If a worker keeps a job paying ₹500 and turns down one paying ₹800, the opportunity cost is ₹800, the wage given up. Adding the two (₹1,300) or taking the difference (₹300) are the usual distractors.
Trade is not a zero-sum game
An option saying one party's profit must be the other's loss is wrong for a voluntary exchange. Both sides gain, or the trade would not happen.
At maximum total utility, only marginal utility is zero
When TU peaks, MU = 0 but average utility is still positive (a positive total divided by a positive number of units). A statement that MU and average utility are equal there is wrong.
Indifference curves never intersect
If two curves crossed, the crossing point would give two different levels of satisfaction at once. So a statement that two indifference curves cut each other is always false.
Own price moves along, everything else shifts
Only a change in the good's own price gives a movement along its demand curve. Income, tastes, population and the prices of other goods all shift the curve.
Input prices belong to supply
The cost of raw materials or labour changes how much sellers offer, so it acts on supply. It is the odd one out in a list of things that influence demand.
The effect on the other good is often indeterminate
When good X becomes dearer, demand for X falls. For a second normal good Y, switching from X pushes demand up while the loss of real income pulls it down, so the net effect on Y cannot be told without more information.
Supply, Elasticity and Market Price
Learn this subtopic in the notesSupply and price elasticity
Price elasticity
- price elasticity of demand or of supply (demand elasticity is read without its minus sign)
Factors of production and capital
| Input | Examples |
|---|---|
| Fixed capital | Tools, machines, buildings |
| Working capital | Raw materials, money in hand |
| Physical capital | Fixed capital and working capital together |
| Human capital | Knowledge, skill and enterprise of people |
| Land | The input non-farm activities need leastQ CDS 2022 (I): land is required in less quantity in non-farming activities. |
Market equilibrium and price controls
| Case | Result |
|---|---|
| Price floor | Legal minimum, for example MSP for cropsQ CDS 2019 (II): MSP for jowar is a price floor; MRP is a ceiling. |
| Price ceiling | Legal maximum, for example ration shop prices |
| Free-market price mechanism | Price set by the forces of demand and supplyQ CDS 2019 (II): the working of the price mechanism is the interplay of demand and supply. |
| Demand falls, supply perfectly elastic | Quantity falls, price unchangedQ CDS 2024 (I), a HARD question. |
| Demand rises, supply perfectly inelastic | Price rises, quantity unchanged |
Externalities and market failure
| Case | What the free market does |
|---|---|
| Negative externality, such as factory smoke | Over-produces |
| Positive externality, such as vaccination | Under-producesQ CDS 2024 (I): the statement that is NOT correct says the market over-produces a good with a positive externality. |
| Shared pasture with free access | Overuses it: the tragedy of the commons |
| Public good, such as a street light | Supplies too little or none |
Common traps
Physical capital is the whole, not one part
Tools, machines and buildings are fixed capital; raw materials and money in hand are working capital. A list that holds both kinds is physical capital.
Vertical is inelastic, horizontal is elastic
A vertical curve means quantity cannot change at all: elasticity zero, perfectly inelastic. A horizontal curve means any quantity at one price: elasticity infinite, perfectly elastic. Students often swap the two.
A cheaper other good raises this good's supply
If another good the firm could make becomes cheaper, making it pays less, so the firm moves its resources to this good and its supply rises.
Floor is a minimum, ceiling is a maximum
A floor stops the price falling (MSP, minimum wage). A ceiling stops it rising (ration shop prices, MRP). The words describe the limit, not the level of the price.
Flat supply absorbs the shift in quantity
If supply is perfectly elastic (horizontal), a fall in demand cuts the quantity and leaves the price where it was. Options that change the price are wrong.
Positive externality means too little, not too much
A spill-over benefit is not paid for, so buyers buy less than society would want: the market under-produces. Over-production goes with a spill-over cost.
Market Structures and Economic Systems
Learn this subtopic in the notesHow a firm chooses its output
Profit-maximising output
- marginal revenue: extra revenue from one more unit
- marginal cost: extra cost of one more unit
- market price
The four market structures
| Market form | Sellers and product | Example |
|---|---|---|
| Perfect competition | Many sellers, identical product | A vegetable or grain market (close to it) |
| Monopolistic competition | Many sellers, differentiated product | Branded soapsQ Asked directly three times: CDS 2019 (I) defined it, 2021 (II) asked for an example (soaps), 2022 (I) for its features. |
| Oligopoly | Few sellers, similar products | Car makers, telecom companiesQ CDS 2020 (I) matched all four market forms with their features. |
| Monopoly | One seller, no close substitute | Indian Railways |
Firms and economic systems
| Term | Key feature |
|---|---|
| Capitalism | Private ownership and allocation by marketsQ CDS 2022 (II): planning is the feature NOT associated with a capitalist economy. |
| Socialism | State ownership and central planning |
| Social market economy | Free markets with welfare, from West Germany in the 1950sQ CDS 2022 (II): the idea emerged in Germany. |
| Joint-stock company | Legal entity, limited liability, elected management, collective ownershipQ CDS 2019 (I): all four of these features were correct. |
| Unicorn | Privately held start-up valued over US$ 1 billionQ CDS 2022 (I). |
Common traps
Differentiated means monopolistic competition
Many sellers with identical goods is perfect competition; many sellers with similar but not identical (branded) goods is monopolistic competition. Barriers to entry and homogeneous products are not features of monopolistic competition.
Few sellers is oligopoly, not imperfect competition
'Imperfect competition' is the umbrella for every form except perfect competition. When a question describes a few sellers, the precise answer is oligopoly; when it describes many sellers of differentiated goods, it is monopolistic competition.
MR = MC is not enough: MC must be rising
Marginal cost can equal marginal revenue twice, once while MC is falling and once while it is rising. Only the rising point gives the most profit, so a statement that MC falls at equilibrium is wrong.
Monopoly is not efficient
A monopolist sets price above marginal cost and restricts output. 'Monopoly produces an efficient level of output' is a wrong match; it is perfect competition that reaches the socially best output.
Planning belongs to socialism
Allocating resources by a central plan is the mark of a socialist or command economy. A capitalist economy allocates through markets and private ownership.
A unicorn is private, not listed or public sector
The word means a privately held start-up worth over US$ 1 billion. It has nothing to do with merging public sector companies or foreign collaborations.