Fundamentals of Economics
Fundamentals of Economics tests how scarcity shapes choices, how markets set prices, and how aggregate output and prices are measured. Expect numerical elasticity, cost and revenue reasoning, market-structure identification, and national-income definitions.
Core rules
- Scarcity forces trade-offs; opportunity cost is the value of the next-best alternative, not the money spent.
- A change in own price moves quantity demanded along the curve; changes in income, tastes, related-good prices or expectations shift demand.
- Price elasticity of demand = % change in quantity demanded / % change in price. Demand is elastic if |E|>1; a price rise then lowers total revenue.
- In the short run fixed costs do not vary with output; marginal cost crosses average variable and average total cost at their minima.
- Perfect competition has many price-taking firms and free entry; monopoly has one seller and entry barriers; monopolistic competition has differentiated products; oligopoly has few interdependent firms.
- GDP measures final domestic output in a period; it excludes transfers, second-hand sales and intermediate goods. Inflation is a sustained rise in the general price level, measured by a price index.
Worked example
A price fall from INR 20 to INR 18 raises quantity from 100 to 130. Percentage quantity change = 30/100 = 30%; percentage price change = -2/20 = -10%. Elasticity = 30% / -10% = -3, so |E|=3, elastic. Because demand is elastic, the price cut raises total revenue from INR 2,000 to INR 2,340.
Traps
Do not mix a movement along demand with a shift. Use absolute elasticity when judging elastic/inelastic. Do not count intermediate goods in GDP. Distinguish a price-index rise from a one-off price change. Remember fixed costs affect profit but not short-run shutdown if revenue covers variable costs.