MATSEC Intermediate Economics - Core Micro and Macro Applications
MATSEC Intermediate Economics (IM) assesses how confidently you apply core microeconomic and macroeconomic models, including to Malta's small open economy. Expect compulsory short-answer calculations, diagram-based reasoning and extended writing on market failure, policy and international trade.
Core rules and concepts
- Scarcity and opportunity cost: every choice sacrifices the next-best alternative; production possibility frontiers illustrate this, and shifting out requires more or better resources.
- Demand and supply: movements along a curve follow own-price changes; shifts follow income, tastes, related prices, expectations, costs, technology, taxes and subsidies.
- Elasticity: PED = %Δquantity demanded ÷ %Δprice. |PED|>1 elastic; <1 inelastic. Elastic demand means a price cut raises total revenue.
- Market failure: externalities, public goods, merit/demerit goods, monopoly power and information gaps justify intervention, but policy has opportunity costs and government failure.
- Macro objectives: growth, price stability, full employment and a sustainable balance of payments; Malta's euro membership means monetary policy is set by the ECB, so fiscal and supply-side policy carry more weight nationally.
- National income: GDP measures output at market prices; distinguish nominal from real, and remember the multiplier: ΔY = k × Δinjection, where k = 1/(1−MPC). Leakages (saving, taxation, imports) reduce the multiplier.
- Trade and integration: comparative advantage explains gains from specialisation; Malta's EU membership (since 2004) and euro adoption (2008) lower trade costs but expose the economy to external shocks and EU fiscal rules.
Worked example
A shop cuts price from €10 to €8; sales rise from 100 to 150 units. %ΔP = (8−10)/10 ×100 = −20%. %ΔQ = (150−100)/100 ×100 = +50%. PED = 50 ÷ (−20) = −2.5. Demand is elastic (|2.5|>1). Revenue rises from €1,000 to €1,200, consistent with elastic demand.
Traps
Forgetting the negative sign and calling demand inelastic; using absolute changes rather than percentages; shifting a curve when the question describes a movement along it; confusing a balance-of-payments deficit with a budget deficit; and asserting that a policy is efficient without weighing its opportunity cost.