Knowledge and Understanding: The Core Toolkit
What you must know cold
Knowledge and Understanding rewards precise command of definitions, models and the assumptions behind them. For microeconomics, be able to define scarcity, opportunity cost, the production possibility frontier, demand and supply, price elasticity of demand and supply, market equilibrium, consumer and producer surplus, and the four market structures (perfect competition, monopolistic competition, oligopoly, monopoly). For macroeconomics, know the circular flow of income, the components of aggregate demand (C + I + G + NX), the business cycle, unemployment types, inflation measures (CPI, headline versus underlying), and the policy instruments of fiscal and monetary policy. Australia's institutional setting matters: the Reserve Bank's cash rate target, the three-year medium-term inflation target of 2–3 per cent, and the distinction between budget outcomes and the structural position.
Traps to watch
Questions frequently test the difference between a movement along a curve and a shift of it, between a change in demand and a change in quantity demanded, and between nominal and real values. Elasticity is often confused with slope. 'Unemployment' is not the same as 'not in the labour force'. Students also blur cost-push and demand-pull inflation, and describe monetary policy as setting the interest rate banks charge rather than the cash rate target.
Worked example
If a question asks what happens to the price of a good when input costs rise and consumer incomes rise simultaneously, do not guess. State direction of each shift: supply shifts left, demand shifts right, so price unambiguously rises while quantity is indeterminate. Naming the ambiguity earns marks; asserting a quantity change without justification loses them.