PIPFA Business Economics Syllabus

What are the categories of price elasticity of demand based on the coefficient?

Perfectly inelastic (Ed=0), Inelastic (Ed<1), Unitary elastic (Ed=1), Elastic (Ed>1), and Perfectly elastic (Ed=infinity).

Give the formula for Income Elasticity of Demand and its significance.

Yed = (% change in quantity demanded) / (% change in income). Positive for normal goods, negative for inferior goods.

What is Cross Elasticity of Demand and what do its signs indicate?

Xed = (% change in quantity demanded of good X) / (% change in price of good Y). Positive sign indicates substitutes; negative sign indicates complements; zero indicates unrelated goods.

Give the formula for Price Elasticity of Supply.

Pes = (% change in quantity supplied) / (% change in price).

Name the four Factors of Production and their respective rewards.

Land (reward: rent), Labour (reward: wages), Capital (reward: interest), and Entrepreneur/Enterprise (reward: profit).

State the Law of Diminishing Returns (Variable Proportions).

As more units of a variable factor are added to a fixed factor, total output increases at first at an increasing rate, then at a diminishing rate, and eventually total output may fall — marginal product ultimately declines.

What are the three stages of the Law of Returns?

Stage I: Increasing returns (MP rises then falls but is above AP). Stage II: Diminishing returns (both AP and MP fall, MP positive) — the rational stage of production. Stage III: Negative returns (MP becomes negative, TP falls).

Distinguish between Fixed Cost and Variable Cost.

Fixed costs do not vary with the level of output (e.g., rent, salaries) and exist even at zero output. Variable costs change directly with output (e.g., raw materials, wages of casual labour).

Give the formulas for Average Fixed Cost, Average Variable Cost, Average Total Cost, and Marginal Cost.

AFC = TFC/Q; AVC = TVC/Q; ATC = TC/Q = AFC + AVC; MC = change in TC / change in Q.

Why is the short-run Average Cost curve U-shaped?

Due to the law of variable proportions — initially increasing returns lower average cost, then diminishing returns raise it, producing a U-shape.

What is the difference between the short run and the long run in cost theory?

In the short run at least one factor is fixed, so there are fixed and variable costs. In the long run all factors are variable, there are no fixed costs, and the firm can change its scale of plant.

What does the Long-Run Average Cost (LRAC) curve represent and what is its shape?

It is the envelope of short-run average cost curves showing the lowest cost of producing each output when all factors are variable. It is U-shaped due to economies and diseconomies of scale.

List the four main market structures from most to least competitive.

Perfect competition, Monopolistic competition, Oligopoly, and Monopoly.

What are the main features of Perfect Competition?

Large number of buyers and sellers, homogeneous product, free entry and exit, perfect knowledge, and perfect mobility of factors. The firm is a price taker and demand curve is perfectly elastic (horizontal).

What is the profit-maximizing condition (equilibrium condition) for a firm?

A firm maximizes profit where Marginal Cost equals Marginal Revenue (MC = MR), with MC rising/cutting MR from below.

How is the firm's demand curve and price related to MR and AR in perfect competition?

In perfect competition Price = AR = MR, and the demand curve is horizontal (perfectly elastic) at the market price.

Define Monopoly and state its main features.

A market with a single seller of a product with no close substitutes and high barriers to entry. The monopolist is a price maker, faces a downward-sloping demand curve, and MR is below AR/price.

What are the main sources/barriers to entry that create a monopoly?

Legal barriers (patents, licenses, copyrights), control over a key raw material, economies of scale (natural monopoly), and government franchise/ownership.

What is Price Discrimination under monopoly?

Charging different prices to different buyers for the same product, not justified by cost differences. It requires market power, ability to separate markets, and no resale between markets.

What are the main features of Monopolistic Competition?

Many sellers, differentiated (similar but not identical) products, freedom of entry and exit, and non-price competition through advertising and branding. Firms have some price-setting power and face a downward-sloping demand curve.

Define Oligopoly and its key characteristics.

A market dominated by a few large sellers whose decisions are interdependent. Features include barriers to entry, possibility of collusion or price rigidity, non-price competition, and products that may be homogeneous or differentiated.

What is the Circular Flow of Income (two-sector model)?

A model showing the flow of money and goods/services between households and firms: households supply factors of production and receive income; firms produce goods, pay incomes, and receive consumption expenditure in return.

In national income accounting, what are the leakages and injections?

Leakages (withdrawals): savings, taxes, and imports. Injections: investment, government spending, and exports. Equilibrium requires total leakages = total injections (S+T+M = I+G+X).

Define Gross Domestic Product (GDP).

The total market value of all final goods and services produced within the geographical boundaries of a country during a given period (usually one year), regardless of who owns the resources.

Define Gross National Product (GNP) and its relation to GDP.

GNP is the total market value of final goods and services produced by the residents/nationals of a country in a year, wherever located. GNP = GDP + Net Factor Income from Abroad.

What are the three methods of measuring national income?

The Product (output/value-added) method, the Income method (sum of factor incomes — rent, wages, interest, profit), and the Expenditure method (C + I + G + (X − M)).

Distinguish between Nominal GDP and Real GDP.

Nominal GDP is measured at current market prices; Real GDP is measured at constant (base-year) prices, removing the effect of price changes. Real GDP = (Nominal GDP / GDP Deflator) × 100.

What are the four main functions of money?

Medium of exchange, Measure/unit of value (unit of account), Store of value, and Standard of deferred payments.

List the main functions of the State Bank of Pakistan (central bank).

Sole issuer of currency notes, banker to the government, banker's bank and lender of last resort, custodian of foreign exchange reserves, controller of credit/monetary policy, and regulator/supervisor of the banking system.

Define Inflation and name its two main causes/types.

Inflation is a sustained rise in the general price level (and fall in the purchasing power of money). Main types: Demand-pull inflation (excess aggregate demand) and Cost-push inflation (rising production costs).

Define Unemployment and distinguish frictional, structural, and cyclical unemployment.

Unemployment exists when people willing and able to work at the prevailing wage cannot find jobs. Frictional: temporary, between jobs. Structural: mismatch of skills/location with available jobs. Cyclical: due to a downturn in the business cycle/deficient demand.