Economics formula sheet.

Where $MR$ = marginal revenue (extra revenue from one more unit), $MC$ = marginal cost (extra cost of one more unit).

Every market structure picks output where the last unit adds as much to revenue as to cost. Under perfect competition MR equals price, so the rule becomes P = MC; a monopolist or monopolistic competitor finds Q from MR = MC and then reads a price above MC off the demand curve.

Exam tip Do not set price equal to MC for a firm with market power: with linear demand $P = a - bQ$, $MR = a - 2bQ$; solve MR = MC for Q, then plug Q into the demand curve.

Lesson: Revenue, economic profit and the MR = MC rule →All The Firm and Market Structures formulas

Where $TR$ = total revenue; explicit costs = cash outlays; implicit opportunity costs = return the owners' own resources could earn elsewhere.

Accounting profit deducts only explicit costs, so economic profit is lower. Zero economic profit means the firm earns a normal profit, exactly covering its opportunity costs, which is the long-run outcome under perfect and monopolistic competition.

Exam tip Zero economic profit is not a loss: owners still earn the return they could get elsewhere, so there is no reason to exit.

Lesson: Revenue, economic profit and the MR = MC rule →All The Firm and Market Structures formulas

Where $TR$ = total revenue, $TC$ = total cost, $P$ = price, $ATC$ = average total cost.

At breakeven the firm covers all costs, including normal profit, so economic profit is zero. For a perfectly competitive firm the breakeven price is the minimum of ATC; above it the firm earns economic profit.

Exam tip Breakeven uses average TOTAL cost; shutdown uses average VARIABLE cost. A price between the two means operate at a loss in the short run.

Lesson: Breakeven, shutdown and exit decisions →All The Firm and Market Structures formulas

Where $TR$ = total revenue, $TVC$ = total variable cost, $P$ = price, $AVC$ = average variable cost.

Fixed costs are owed whether or not the firm produces, so in the short run it keeps operating as long as revenue covers variable cost and part of fixed cost. If it shuts down, its loss is total fixed cost. The shutdown point is the minimum of AVC.

Exam tip Short run: compare revenue with variable cost only. Long run: every cost is avoidable, so the firm exits if $TR < TC$.

Lesson: Breakeven, shutdown and exit decisions →All The Firm and Market Structures formulas

Where $CR_N$ = concentration ratio, $s_i$ = market share of the $i$-th largest firm, $N$ = number of largest firms included.

The share of the market held by the N largest firms: near 0 suggests a competitive market, near 100% a concentrated one. It is simple but ignores how share is split among the top firms and says nothing about barriers to entry.

Exam tip A merger between two of the top firms barely changes the concentration ratio but raises the HHI sharply, which is why the HHI is preferred.

Lesson: Identifying market structure: elasticity, concentration ratios and HHI →All The Firm and Market Structures formulas

Where $HHI_N$ = Herfindahl-Hirschman index, $s_i$ = market share of firm $i$ as a decimal, $N$ = number of firms included.

Squaring gives large firms more weight, so the index reacts to how unequal shares are. A monopoly scores 1 and M equal firms score 1/M, so 1/HHI is the equivalent number of equal-sized firms. Like the concentration ratio, it ignores potential entrants.

Exam tip Keep units consistent: with shares in percent a monopoly scores 10,000, with decimals it scores 1. Square each share before adding, never add then square.

Lesson: Identifying market structure: elasticity, concentration ratios and HHI →All The Firm and Market Structures formulas

Where Actual output = real GDP produced; potential output = the trend level the economy can sustain without rising inflation.

The growth-cycle measure of where the economy stands. A positive gap means output above trend and inflationary pressure; a negative gap means slack. The direction of the gap identifies the phase: negative and narrowing is recovery, positive and narrowing is slowdown.

Exam tip Output can be growing while the gap widens: the gap closes only when actual growth exceeds potential growth (from below) or falls short of it (from above).

Lesson: What a business cycle is: classical, growth and growth rate cycles →All Understanding Business Cycles formulas

Where $c$ = marginal propensity to consume out of disposable income, $t$ = net tax rate on income.

The change in output per unit change in government spending: the first round of spending becomes income, part of which is taxed and part re-spent. A higher MPC or a lower tax rate makes it larger. Change in output = multiplier times change in G.

Exam tip When a tax rate is given, do not use $1/(1 - c)$: with $c = 0.9$ and $t = 0.2$ the multiplier is $1/0.28 \approx 3.57$, not 10.

Lesson: The fiscal multiplier, balanced budgets and Ricardian equivalence →All Fiscal Policy formulas

Where $rr$ = reserve requirement as a decimal.

The maximum amount of money the banking system can create from each unit of new reserves. Raising the reserve requirement shrinks the multiplier and tightens money supply; lowering it does the opposite.

Exam tip It is an upper bound: it assumes banks lend all excess reserves and no cash leaks out of the system. A 10% requirement gives a maximum of 10.

Lesson: The three tools: open market operations, policy rate, reserve requirements →All Monetary Policy formulas

Where Real trend growth = the economy's sustainable real growth rate; inflation target = the central bank's target, standing in for long-run expected inflation.

The nominal policy rate that neither stimulates nor restrains the economy. A policy rate above the neutral rate is contractionary; below it is expansionary. Exam questions give trend growth, the target and the actual policy rate and ask for the stance.

Exam tip Use the inflation target, not the current inflation rate, and add real trend growth so the result is a nominal rate comparable with the policy rate.

Lesson: Expansionary or contractionary? The neutral rate and the source of shocks →All Monetary Policy formulas

Where $A$ = transfer to domestic producers, $B$ = production distortion loss, $C$ = tariff revenue, $D$ = consumption distortion loss.

In a small country a tariff raises the domestic price by the tariff. Consumers lose the most, producers and the government recapture part of it, and the net deadweight loss is B + D. A large country can gain if the tariff pushes down the world price enough.

Exam tip Under an import quota the area C is quota rent: if foreign exporters capture it, as with a voluntary export restraint, the importing country loses B + C + D.

Lesson: Trade restrictions and tariffs →All International Trade formulas

Where $R_{d/f}$ = real exchange rate, $S_{d/f}$ = nominal spot rate in domestic currency per unit of foreign, $P_f$, $P_d$ = foreign and domestic price levels.

Measures the relative cost of foreign goods once price levels are accounted for. A higher real rate means foreign goods are dearer in real terms and domestic purchasing power over them is lower. In changes: $\%\Delta R \approx \%\Delta S + \pi_f - \pi_d$.

Exam tip Quote S as domestic per foreign before using it; with that quote, higher domestic inflation lowers the real exchange rate.

Lesson: Nominal and real exchange rates →All Capital Flows and the FX Market formulas

Where $X$ = exports, $M$ = imports, $S$ = private saving, $I$ = investment, $T$ = taxes net of transfers, $G$ = government spending.

A trade deficit means the country invests more than it saves, private plus government, and finances the gap with an equal capital account surplus (net inflows from abroad). It links fiscal policy and saving behaviour to the external balance.

Exam tip Holding private saving and investment fixed, a larger fiscal deficit (T below G) must show up as a larger trade deficit.

Lesson: Exchange rates, the trade balance and capital flows →All Capital Flows and the FX Market formulas

Where $A/B$ = units of currency A per one unit of B (price/base); $B$ = the common currency shared by both quotes.

Builds the rate between two currencies from their quotes against a third. The multiplication works when the common currency cancels: it is the base in one quote and the price currency in the other.

Exam tip If B sits in the same position in both quotes, invert one first, e.g. JPY/USD = (JPY/EUR) divided by (USD/EUR). Check that the units cancel to the pair asked for.

Lesson: Building a cross-rate from two quotes →All Exchange Rate Calculations formulas

Where $S_0$ = old quote, $S_1$ = new (or expected) quote, both in the same price/base form.

A rising quote means the base currency has appreciated and the price currency has depreciated. To measure the price currency, invert the quote, which is why its change uses $S_0/S_1$.

Exam tip The two changes are not equal and opposite: if USD/EUR (USD per EUR) rises from 1.10 to 1.21, the EUR gains 10% but the USD loses about 9.09%.

Lesson: Triangular arbitrage and reading currency moves →All Exchange Rate Calculations formulas

Where $F$ = forward rate, $S$ = spot rate, both in the same price/base quote.

Dealers quote forwards as points added to spot. Positive points mean the base currency is at a forward premium; negative points mean a forward discount.

Exam tip Scale points back before adding them to spot: spot 1.1050 plus 25.3 points gives 1.1050 + 0.00253 = 1.10753. Yen pairs, quoted to two decimals, use 100.

Lesson: Forward points, premiums and discounts →All Exchange Rate Calculations formulas

Where $F_{f/d}$, $S_{f/d}$ = forward and spot rates in units of $f$ (price currency) per unit of $d$ (base currency); $r_f$, $r_d$ = their annual interest rates, actual/360.

Covered interest rate parity: the forward rate makes hedged returns equal in both currencies, so there is no arbitrage. The base currency trades at a forward premium when its interest rate is lower than the price currency's, and at a discount when it is higher.

Exam tip Put the price currency's rate on top: in USD/EUR, the USD rate goes in the numerator. Scale each annual rate by days/360 before dividing.

Lesson: Forward points, maturity and the rate differential →All Exchange Rate Calculations formulas