Economics and Business Environment
This section covers Economics and Business Environment. The exam tests how markets, policy and macroeconomic conditions affect pricing, demand and investment decisions.
Core rules and concepts
- Price elasticity measures responsiveness of quantity demanded to price. Elastic demand means revenue falls when price rises; inelastic demand means revenue rises. Elasticity changes along a demand curve.
- Market structure ranges from perfect competition to monopoly. Concentration and barriers to entry affect pricing power. Externalities create social costs or benefits not reflected in market prices.
- Macro analysis links GDP, inflation, interest rates and exchange rates. Monetary and fiscal policy affect demand and costs with lags.
Worked example
A firm raises price by 10% and estimates elasticity of −1.5. Quantity falls by about 15%. New revenue index = 1.10 × 0.85 = 0.935, a 6.5% decline. Reason: even though the price is higher, the volume loss dominates. If marginal cost is low and capacity is idle, the firm may still compare contribution, not revenue alone.
Traps
Confusing a movement along a demand curve with a shift; using nominal rather than real values; ignoring opportunity cost; assuming elasticity is constant; treating accounting profit as economic profit.