Economics: scarcity, markets and government intervention
What the Economics domain tests
Economics tests scarcity, choice and how markets allocate resources. You must use demand and supply, opportunity cost and the circular flow to explain prices, output and government action in New Zealand.
Core rules
- Scarcity and opportunity cost. Limited resources force choices; the opportunity cost is the next best alternative forgone, not always money.
- Factors of production. Land, labour, capital and entrepreneurship; rewards are rent, wages, interest and profit.
- Demand and supply. A movement along a curve is caused by price; a shift is caused by a non-price factor such as income, tastes, input costs, technology, expectations, or the number of buyers and sellers.
- Equilibrium. Where quantity demanded equals quantity supplied. A surplus pushes price down; a shortage pushes it up.
- Circular flow. Households supply factors and buy goods; firms produce and pay incomes. Taxes, saving and imports are leakages; investment, government spending and exports are injections.
- Government. Taxes, subsidies, price controls and public goods address market failure but create trade-offs.
Worked example
A city rent ceiling is set below the equilibrium rent. At the lower price, quantity demanded rises and quantity supplied falls, so a shortage appears. Landlords may ration by queues, require key money or let quality fall. The ceiling helps existing tenants who keep a lease but harms those who cannot find one. Removing the ceiling would raise rents but increase supply over time.
Traps
Do not say a price change shifts demand - it changes quantity demanded. Do not confuse a price floor, which creates a surplus, with a ceiling, which creates a shortage. Opportunity cost is not always the price paid. Do not call taxes an injection; they are a leakage.