SACE Stage 2 Economics cheat sheet

Scarcity: wants are unlimited but resources (land, labour, capital, enterprise) are finite, so choices and opportunity cost are unavoidable.

Opportunity cost = value of the next best alternative forgone; it is not the sum of all alternatives.

Law of demand: ceteris paribus, quantity demanded falls as price rises; movement along the curve is caused by price, a shift by non-price factors.

Demand shifters: income, tastes, price of substitutes and complements, expectations, number of buyers.

Supply shifters: input costs, technology, taxes and subsidies, price of related goods, expectations, number of sellers.

Market equilibrium occurs where quantity demanded equals quantity supplied; a surplus pushes price down, a shortage pushes it up.

Price elasticity of demand = % change in quantity demanded ÷ % change in price; |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic.

GDP measures the market value of final goods and services produced within a country in a period; real GDP adjusts for inflation using a base year.

Midpoint (arc) elasticity formula: (ΔQ ÷ average Q) ÷ (ΔP ÷ average P); use it to avoid direction bias.

Total revenue test: if price and total revenue move in opposite directions, demand is elastic; same direction, inelastic.

A per-unit tax shifts supply up by the tax; incidence falls more on the side of the market that is less elastic.

A binding price ceiling below equilibrium creates a shortage; a binding price floor above equilibrium creates a surplus.

Positive externality: marginal social benefit exceeds marginal private benefit; the free market underproduces relative to the social optimum.

Negative externality: marginal social cost exceeds marginal private cost; the free market overproduces relative to the social optimum.

Output gap = actual GDP − potential GDP; a negative gap is a contractionary (recessionary) gap.

Multiplier = 1 ÷ (1 − MPC) = 1 ÷ MPS; a change in autonomous spending changes equilibrium income by the multiplier times the initial change.

Evaluate by weighing magnitude, time lags, and trade-offs; a policy that raises efficiency may worsen equity.

Fiscal policy: counter-cyclical spending and taxation; strengths include direct injection, weaknesses include recognition and implementation lags and political constraints.

Monetary policy: central bank changes the cash rate to influence aggregate demand; strengths include speed and independence, weaknesses include transmission lag and limited effect on supply-side inflation.

Supply-side policies raise productive capacity; evaluate by cost, time to effect, and whether they worsen inequality.

Market-based remedies for externalities (taxes, tradable permits) are efficient but hard to calibrate; regulation is simpler but less flexible.

Cost-benefit analysis compares present values of benefits and costs; sensitivity of results to the discount rate is a key limitation.

A policy mix (fiscal plus monetary plus supply-side) often outperforms a single instrument because it targets both demand and capacity.

Judgement must be explicit: state criteria (efficiency, equity, sustainability, feasibility) and rank options against them.

Use the chain: assumption → mechanism → prediction → evaluation; each link must be stated, not implied.

Define terms on first use (e.g., 'real GDP per capita, GDP adjusted for inflation and divided by population').

Ceteris paribus must be stated whenever a single cause is isolated from a shift.

Distinguish positive statements (testable) from normative statements (value judgements).

Label diagrams fully: axes, curves, equilibrium price and quantity, and the direction of any shift.

Quantify claims where data allow: 'a 10% price rise with PED of 0.4 implies roughly a 4% fall in quantity demanded'.

Avoid overclaiming: 'may', 'tends to', and 'under these conditions' are more defensible than 'will always'.

Conclude by answering the question asked, restating the judgement and the strongest counterargument in one or two sentences.