Introduction to Economics and Basic Concepts
What this domain tests
This domain checks whether you can explain the economic problem as a problem of scarcity and choice, distinguish microeconomics from macroeconomics, and use the production possibility frontier (PPF) to show opportunity cost and growth.
Core rules
- Scarcity and choice: wants are unlimited, resources are limited and have alternative uses, so every choice has a cost.
- Opportunity cost: the value of the next best alternative forgone, not the money paid.
- PPF: shows maximum combinations of two goods with given resources and technology. Points inside are inefficient, points on the curve are efficient, and points outside are unattainable. A rightward shift means growth.
- Micro vs macro: micro studies individual units such as a consumer, firm or market; macro studies aggregates such as national income, the general price level and employment.
- Central problems: what to produce, how to produce and for whom to produce.
Worked example
An economy can produce 100 tonnes of rice or 50 machines. To produce 10 more machines it gives up 20 tonnes of rice. The opportunity cost of one machine is therefore 20 ÷ 10 = 2 tonnes of rice. If the next 10 machines cost 30 tonnes of rice, the PPF is concave because opportunity cost is rising.
Traps that cost marks
Do not call opportunity cost the total cost of the chosen good. Do not confuse a movement along the PPF, which is reallocation, with a shift of the PPF, which needs new technology or resources. Do not use “macro” for a single market. Keep positive statements about what is separate from normative statements about what ought to be.