Economics (Micro and Macro Fundamentals)
What the examiner expects
Microeconomics explains choices under scarcity: opportunity cost, demand and supply, equilibrium, elasticity, utility, production and cost, and market structures from perfect competition to monopoly. Macroeconomics explains aggregates: gross domestic product, inflation, unemployment, the business cycle, fiscal policy, monetary policy and international trade. You must be able to draw and label a demand and supply diagram, shift curves correctly, and explain how a policy affects output, prices and employment.
Traps
- A change in price causes movement along a demand curve; a change in income, tastes or the price of a related good shifts the curve.
- Demand is a schedule or curve; quantity demanded is a single point.
- Nominal GDP can rise because of inflation; real GDP adjusts for it.
- Unanticipated inflation usually helps borrowers and hurts lenders and savers.
- Elastic demand means a price cut raises total revenue; inelastic demand means it lowers revenue.
Worked example
A 10 percent price cut raises quantity sold by 25 percent. Price elasticity of demand = 25 ÷ 10 = 2.5, so demand is elastic. Because the percentage rise in quantity is larger than the percentage fall in price, total revenue rises. A firm with fixed capacity would think twice before cutting price, since it may not be able to supply the extra units.
Rule of thumb
For any shock, trace the chain: determinant changes, curve shifts, new equilibrium, then effect on price, quantity and revenue. Label every axis and curve.