Business Basics and the Global Economy
The Business Basics and the Global Economy domain covers how scarce resources are allocated, how businesses are organized, and how national economies connect through trade. Expect questions on economic systems, the business cycle, market structures, forms of ownership, and international trade theory.
Core economic concepts
- Scarcity forces choices; every choice carries an opportunity cost - the value of the next-best alternative given up.
- Demand slopes downward; supply slopes upward. Equilibrium price clears the market. A price ceiling below equilibrium creates a shortage; a price floor above equilibrium creates a surplus.
- The four factors of production are land, labor, capital, and entrepreneurship. Their payments are rent, wages, interest, and profit.
- GDP measures final goods and services produced within a country's borders in a period; real GDP adjusts for inflation.
- The business cycle moves through expansion, peak, contraction or recession, and trough.
Business organization and markets
Sole proprietorships are easy to start but carry unlimited liability. General partners share unlimited liability; limited partners risk only their investment. LLCs combine limited liability with pass-through taxation. Corporations are separate legal entities with limited liability and possible double taxation. Market structures run from perfect competition (many sellers, identical products) through monopolistic competition and oligopoly to monopoly.
International trade
Comparative advantage, not absolute advantage, drives gains from trade: a country should specialize where its opportunity cost is lowest. A trade surplus means exports exceed imports. Tariffs are taxes on imports; quotas cap import quantities; embargoes ban trade. A stronger currency makes exports pricier abroad and imports cheaper at home.
Worked example
Country A can produce 10 units of cloth or 5 units of wine per worker-day; Country B can produce 4 cloth or 4 wine. A's opportunity cost of 1 wine is 2 cloth; B's is 1 cloth. B has comparative advantage in wine, A in cloth. Specialization and trade raise total output even though A is absolutely better at both goods.
Traps that cost marks
Confusing absolute with comparative advantage is the most common error. Do not mix a change in demand (a shift of the curve) with a change in quantity demanded (movement along it). Remember that GDP excludes intermediate goods and transfer payments, and that a tariff is a tax, not a quantity limit.