HKDSE Economics cheat sheet

Opportunity cost of a choice = value of the next best alternative forgone; it exists even when no money is paid, and sunk costs are excluded from it.

Law of demand: price rises, quantity demanded falls, ceteris paribus. A change in own price moves along the demand curve; changes in income, tastes, prices of related goods, expectations or number of buyers shift the curve.

Price elasticity of demand Ed = %ΔQd ÷ %ΔP (absolute value). |Ed|>1 elastic, <1 inelastic, =1 unit elastic; Ed=0 perfectly inelastic, Ed=∞ perfectly elastic.

Total revenue test: if price cut raises total revenue, demand is elastic; if it lowers total revenue, demand is inelastic; unchanged revenue means unit elastic.

Income elasticity Ey = %ΔQd ÷ %ΔY: positive for normal goods, negative for inferior goods; greater than 1 indicates a luxury good. Cross elasticity Exy = %ΔQd of X ÷ %ΔP of Y: positive for substitutes, negative for complements.

A per-unit tax on sellers shifts supply up by the tax; incidence falls more on the side of the market that is less elastic. A subsidy has the mirror effect.

Price ceiling set below equilibrium creates a shortage and non-price rationing; price floor set above equilibrium creates a surplus. Binding only when set on the restricting side of equilibrium.

Perfect competition: price taker, P = MR = AR; profit maximised where MC = MR, provided P ≥ AVC in the short run; long-run equilibrium at minimum LRAC with zero economic profit.

Monopoly: downward-sloping demand, MR below price, profit maximised at MC = MR; compared with competition, output is lower and price higher, generating deadweight loss.

GDP = C + I + G + (X − M) by expenditure approach; measures market value of final goods and services produced within a territory in a period. Excludes transfers, second-hand sales and intermediate goods.

Real GDP removes price effects using a price index: Real GDP = Nominal GDP ÷ (Price index ÷ 100). Nominal GDP growth = real growth + inflation approximately.

GDP deflator = (Nominal GDP ÷ Real GDP) × 100. CPI measures a fixed basket's cost relative to base year; it overstates true inflation if quality improves or substitution occurs.

Unemployment rate = unemployed ÷ labour force × 100, where labour force = employed + unemployed. Discouraged workers leaving the labour force lower the measured rate.

Demand-pull inflation arises from rising C, I, G or X; cost-push from rising input costs or wages. Anticipated inflation creates menu costs and bracket creep; unanticipated inflation redistributes from lenders to borrowers.

Quantity theory: MV = PY. If velocity is stable, money growth above real output growth produces inflation.

Fiscal policy: expansionary = higher G or lower T, raising aggregate demand and the budget deficit. Contractionary = lower G or higher T. Automatic stabilisers dampen the cycle without new legislation.

Money multiplier = 1 ÷ reserve ratio. An initial deposit of D can create total deposits of D × multiplier in a simple banking system.

Balance of payments: current account (goods, services, income, transfers) plus capital and financial account must sum to zero. A current account deficit is financed by a net capital inflow.

Comparative advantage: a country gains from trade by specialising where its opportunity cost of production is lower, even if it has an absolute disadvantage in both goods.