Economics
Economics tests how scarce resources are allocated through choices, markets, and policy. Expect demand and supply, elasticity, market structures, and macro indicators such as GDP, inflation, and unemployment.
Core rules
- Scarcity forces choice; opportunity cost is the value of the next-best alternative forgone.
- Demand curves slope downward, supply curves upward; equilibrium occurs where quantity demanded equals quantity supplied.
- A price change causes movement along a curve; a change in income, tastes, technology, or input costs shifts the curve.
- Price elasticity of demand = percentage change in quantity demanded / percentage change in price. Absolute value below 1 is inelastic; above 1 is elastic.
- GDP measures final output produced within a country in a period; real GDP strips out price changes. Inflation is a sustained rise in the general price level.
Worked example
A product's price rises from 100 to 110, and quantity demanded falls from 500 to 450. Percentage change in price is 10/100 = 10%. Percentage change in quantity is -50/500 = -10%. Price elasticity is -10%/10% = -1, so demand is unit elastic. Total revenue stays near 50,000 because the price rise is exactly offset by the quantity fall.
Traps
Using absolute changes instead of percentage changes for elasticity; confusing a demand shift with a movement along the demand curve; treating nominal GDP growth as real growth when inflation is high; and assuming a price ceiling creates surplus when it is set below equilibrium. A binding price floor creates surplus, not shortage.