Economics: Scarcity, Markets, and Policy
What the Economics domain tests
Economics tests how scarce resources are allocated and how markets and governments coordinate. Expect opportunity cost, demand and supply, elasticity, market structures, national income, inflation, unemployment, fiscal and monetary policy, trade, and development.
Core rules and concepts
- Scarcity and choice: every choice has an opportunity cost-the value of the next-best alternative.
- Demand and supply: a change in price moves along the curve; a change in income, tastes, expectations, or related prices shifts the curve.
- Elasticity: price elasticity measures responsiveness; necessities tend to be inelastic, luxuries elastic.
- Macroeconomic goals: growth, price stability, full employment, and balance of payments can conflict.
- Policy: fiscal policy uses government spending and taxation; monetary policy uses interest rates and money supply.
- Trade: comparative advantage explains gains from specialization, but distributional effects matter.
Worked example
Question: A government increases spending on roads during a recession. Reason: this is expansionary fiscal policy. It raises aggregate demand, which can reduce unemployment but may increase inflation if the economy is near capacity. Distinguish this from monetary policy, which would lower interest rates. A full answer names the instrument, transmission, and trade-off.
Traps that cost marks
Confusing a shift of demand with a movement along it; ignoring ceteris paribus; mixing nominal and real values; calling any government action monetary policy; and assuming GDP growth equals well-being.