Economics and Business Decision-Making
This domain tests how economic forces - scarcity, demand and supply, prices, interest and exchange rates - shape business decisions, and how tools such as elasticity and marginal analysis guide pricing and output choices.
Core rules
- Resources are scarce, so every choice carries an opportunity cost, the value of the next best alternative forgone.
- A change in price causes a movement along the demand curve; a change in income, tastes, population or the price of substitutes shifts the curve.
- Price elasticity of demand = % change in quantity demanded ÷ % change in price. Above 1 is elastic; below 1 inelastic. Ignore the minus sign when classifying.
- Market structures: perfect competition, monopolistic competition, oligopoly, monopoly.
- Costs: fixed do not vary with output; variable do. Marginal cost is the extra cost of one more unit.
- Macro variables: inflation, interest rates, exchange rate, taxation and GDP. The Reserve Bank of Malawi sets monetary policy; the Treasury sets fiscal policy.
Worked example
A firm raises price by 10% and quantity sold falls by 25%. PED = 25 ÷ 10 = 2.5, so demand is elastic. Reasoning: revenue changes by 1.10 × 0.75 = 0.825, a fall of 17.5%. Raising price destroys revenue, so the firm should hold or cut price and compete on quality, distribution or branding instead. Had demand been inelastic (say quantity fell 4%, PED 0.4), the price rise would have increased revenue.
Traps that cost marks
- Reporting PED as negative and misclassifying elasticity.
- Confusing a shift of the demand curve with a movement along it.
- Calling a rise in one product's price "inflation".
- Treating a monopoly as simply any large firm rather than one dominant seller.