Economics
Economics
The exam tests microeconomic and macroeconomic reasoning: scarcity and choice, supply and demand, market structures, national income, inflation and unemployment, fiscal and monetary policy, and international trade. Many items ask you to predict an outcome after a change or to distinguish a shift from a movement along a curve.
Core rules and concepts
- Scarcity and opportunity cost. Every choice has a cost measured by the value of the next-best alternative forgone, including both explicit money costs and forgone income.
- Supply and demand. A change in price causes movement along a curve; a change in a determinant such as income, tastes, input costs, or technology shifts the curve.
- Elasticity. Demand is elastic when quantity responds strongly to price; it is inelastic when quantity responds weakly.
- Price controls. A price ceiling below equilibrium creates shortages; a price floor above equilibrium creates surpluses.
- Market structures. Perfect competition, monopolistic competition, oligopoly, and monopoly differ in number of firms, product differentiation, and barriers to entry.
- Macroeconomic measures. GDP counts final goods and services; inflation is a sustained rise in the price level; unemployment includes frictional, structural, and cyclical types.
- Policy. Fiscal policy uses government spending and taxation; monetary policy uses central-bank tools such as interest rates and reserve requirements.
- Trade. Comparative advantage explains gains from specialization and trade, even when one country is more efficient at everything.
Worked example
A question asks: "Maria earns $20 per hour. She takes an unpaid day off (8 hours) to attend a conference and pays a $100 registration fee. What is her opportunity cost?" Reason it out: forgone wages are 8 × $20 = $160; the explicit fee is $100; total opportunity cost is $260. A choice that counted only the fee ignores the forgone income.
Traps that cost marks
- Confusing a shift of a demand curve with a movement along it.
- Mixing up fiscal policy (government) and monetary policy (central bank).
- Using nominal rather than real values when comparing across years.
- Counting intermediate goods in GDP.
- Omitting forgone wages from opportunity cost.