Business Economics and Managerial Economics
Managerial economics applies microeconomic reasoning to firm decisions. Master elasticity: price elasticity of demand determines whether a price rise raises or lowers revenue (inelastic demand, revenue rises with price; elastic, revenue falls). Income elasticity distinguishes normal and inferior goods; cross-price elasticity identifies substitutes (positive) and complements (negative).
Cost concepts are heavily tested: fixed versus variable, explicit versus implicit (opportunity) cost, accounting versus economic profit, and the short-run versus long-run distinction. Marginal analysis says optimize where marginal revenue equals marginal cost. Know the shapes of average and marginal cost curves and why marginal cost crosses average cost at its minimum. Market structures: perfect competition (price takers, zero long-run economic profit), monopoly (price maker, deadweight loss), monopolistic competition (differentiated products, free entry), and oligopoly (interdependence, game theory, prisoner's dilemma, Nash equilibrium).
Traps: equating accounting profit with economic profit by ignoring implicit costs; confusing a shift in demand with a movement along the curve; and assuming a monopolist charges the highest possible price rather than the profit-maximizing one.
Worked example: a firm earns revenue 500, explicit costs 400, and could earn 130 elsewhere. Accounting profit is 100; economic profit is -30, so the venture destroys value relative to the alternative. Rule of thumb: always subtract opportunity cost before declaring success.