Economics for Business
What this domain tests
Economics for Business tests how markets set prices and quantities, how firms behave under different market structures, and how macroeconomic policy and exchange rates affect business decisions.
Core rules
- Demand and supply: a price change moves along the curve; a change in income, tastes, substitute prices or costs shifts the curve.
- Elasticity: PED = %Δ quantity ÷ %Δ price. If |PED| > 1 demand is elastic and a price cut raises total revenue; if |PED| < 1 a price rise raises revenue.
- Market structures: perfect competition (many firms, homogeneous product, price taker), monopolistic competition (differentiated products), oligopoly (few interdependent firms), monopoly (single seller, barriers to entry).
- Macro: interest rates, inflation, fiscal stance and exchange rates feed into demand, costs and margins.
Worked example
A firm cuts price by 10% and quantity demanded rises by 25%. PED = 25 ÷ 10 = 2.5, so demand is elastic. Revenue changes by roughly (0.90 × 1.25) − 1 = +12.5%. The price cut is worthwhile on revenue grounds, although profit depends on whether the extra volume covers variable cost and on available capacity.
Traps that cost marks
- Describing a movement along a curve as a shift of the curve.
- Confusing PED with income elasticity (normal vs inferior goods).
- Assuming a monopolist can charge any price: demand still constrains it.