Economics
Economics: what this domain tests
Economics questions cover microeconomic fundamentals-scarcity, opportunity cost, supply and demand, elasticity, market structures-and macroeconomic topics: GDP, inflation, unemployment, fiscal and monetary policy, and international trade. The exam favors applied reasoning over formula recall.
Core rules and concepts
- Scarcity and opportunity cost: every choice has a next-best alternative; sunk costs are irrelevant to forward-looking decisions.
- Supply and demand: a change in price causes movement along the curve; changes in income, tastes, input costs, technology, or expectations shift the curve. Equilibrium moves only when a curve shifts.
- Elasticity: demand is more elastic when substitutes are plentiful, the good is a luxury, or buyers have time to adjust.
- Macro measures: GDP counts final goods and services produced domestically in a period; real values adjust for inflation; unemployment includes actively seeking workers, not discouraged ones.
- Policy: fiscal policy uses government spending and taxation; monetary policy uses the money supply and interest rates, typically through a central bank.
- Comparative advantage: trade benefits partners when each specializes where its opportunity cost is lower.
Worked example
A government sets a price ceiling below the market equilibrium for rental housing. What happens? At the lower price, quantity demanded rises and quantity supplied falls, producing a shortage. A price floor above equilibrium-for example, a minimum wage-instead creates a surplus, which in labor markets appears as unemployment. The key reasoning: identify whether the policy is a ceiling or floor and whether it binds relative to equilibrium.
Traps that cost marks
- Shifting versus moving along: a price change does not shift demand or supply.
- Nominal versus real: inflation-adjusted comparisons require real values.
- Confusing fiscal and monetary: taxes and spending are fiscal; interest rates and money supply are monetary.
- Ignoring opportunity cost: "free" goods and programs still use scarce resources.