Economics
What the exam tests
Scarcity and choice, market functioning, macroeconomic indicators, and policy tools.
Core rules and concepts
- Opportunity cost is the value of the next-best alternative, not the sum of every alternative.
- Demand shifts versus movements along the curve: price changes cause movement; income, tastes, substitute and complement prices, and expectations shift the curve.
- Elasticity = percent change in quantity divided by percent change in price; elastic when the absolute value exceeds 1. Necessities and short-run goods tend to be inelastic.
- Market structures: perfect competition, monopolistic competition, oligopoly, monopoly - ranked by concentration and entry barriers.
- GDP counts final goods produced within borders; it excludes transfers and used sales.
- Unemployment types: frictional, structural, cyclical; full employment is not zero unemployment.
- Inflation may be demand-pull or cost-push; CPI tracks a fixed basket.
- Fiscal policy uses spending and taxes; monetary policy uses central-bank interest rates and targets employment and prices.
Worked example
Bakery A can make 40 loaves or 20 cakes daily; Bakery B can make 30 loaves or 30 cakes. The opportunity cost of a loaf is 0.5 cake for A and 1 cake for B. Bakery A therefore specializes in bread, Bakery B in cakes. Trade benefits both even though B is not absolutely better at anything. Reasoning turns on relative, not absolute, advantage.
Traps
Calling a price change a demand shift; equating GDP growth with well-being; confusing the deficit (annual) with the debt (cumulative).