Introduction to Economics and Basic Concepts
What the domain tests
Introduction to Economics and Basic Concepts examines how scarcity forces choice. You must distinguish microeconomics from macroeconomics, positive from normative statements, and explain opportunity cost, the production possibility frontier (PPF), and the three central problems: what, how, and for whom to produce.
Core rules
- Scarcity and choice: wants are unlimited, resources are limited and have alternative uses; every choice has an opportunity cost.
- Opportunity cost: the value of the next best alternative forgone, not the money paid for a good.
- PPF: shows maximum combinations of two goods with given resources and technology. Points on the curve are efficient; inside are inefficient; outside are unattainable.
- Movement along vs shift: a change in resource quantity or technology shifts the PPF; a change in the chosen mix moves along it.
- Positive vs normative: positive statements are testable; normative statements contain value judgements.
Worked example
An economy can produce either 100 units of cloth or 50 units of wheat. Moving from 100 cloth to 80 cloth releases enough resources to produce 10 wheat. The opportunity cost of 10 wheat is 20 cloth, so each unit of wheat costs 2 cloth. If technology improves only wheat production, the wheat intercept moves outward while the cloth intercept stays fixed.
Traps that cost marks
Do not call the money paid for a good its opportunity cost. Do not say a point inside the PPF is unattainable; it is inefficient. Do not confuse a shift of the PPF with a movement along it. Do not label “the government should reduce inequality” as positive. Remember that microeconomics studies individual units, while macroeconomics studies aggregates.