New Zealand Scholarship Economics cheat sheet

Consumer surplus is the area below the demand curve and above price; producer surplus is the area above the supply curve and below price; total surplus is maximised at the competitive equilibrium where marginal benefit equals marginal cost.

Deadweight loss equals the surplus lost from trades not made; a binding price floor (above equilibrium) or price ceiling (below equilibrium) creates DWL equal to the triangle between demand and supply curves over the restricted quantity.

Elasticity: price elasticity of demand = (% change in quantity demanded)/(% change in price); use the midpoint formula to avoid direction bias. |Ed|>1 elastic, |Ed|<1 inelastic, |Ed|=1 unit elastic.

Revenue rule: if demand is elastic, a price rise reduces total revenue; if inelastic, a price rise raises total revenue; revenue is maximised at unit elasticity.

Tax incidence: the burden falls more heavily on the less elastic side of the market. A per-unit tax on a good with inelastic demand shifts most of the tax onto consumers.

Externality rule: a negative externality (marginal social cost > marginal private cost) causes overproduction; a positive externality causes underproduction. A Pigouvian tax or subsidy set equal to the marginal external cost or benefit restores social optimum.

Public goods are non-rival and non-excludable, causing free-riding and underprovision; common resources are rival but non-excludable, causing overuse (tragedy of the commons).

Monopoly: profit maximisation where MR = MC; the monopolist prices above MC, producing DWL. The Lerner index (P−MC)/P measures market power and equals 1/|Ed| for a profit-maximising monopolist.

Comparative advantage: a country gains from trade by specialising where its opportunity cost is lowest; the terms of trade must lie between the two countries' domestic opportunity cost ratios for mutual benefit.

GDP identity: Y = C + I + G + (X − M). Real GDP uses constant prices; nominal GDP uses current prices. GDP per capita is the standard living-standards proxy.

Unemployment rate = (unemployed/labour force) × 100; labour force participation rate = (labour force/working-age population) × 100. Discouraged workers leaving the labour force lower the measured unemployment rate.

Inflation measured by the CPI: a weighted basket of goods; core inflation strips volatile food and energy. Real interest rate ≈ nominal interest rate − expected inflation (Fisher approximation).

The Reserve Bank of New Zealand operates monetary policy under a remit targeting inflation (1–3% band, midpoint 2%) using the Official Cash Rate (OCR); raising the OCR tightens credit conditions and dampens demand.

The RBNZ's dual mandate under the 2023 remit includes supporting maximum sustainable employment alongside price stability; monetary policy transmission runs through interest rates, exchange rate, asset prices and expectations.

Fiscal policy: expansionary stance (higher spending, lower taxes) raises aggregate demand; automatic stabilisers (progressive tax, unemployment benefits) dampen cyclical swings without discretionary action.

Phillips curve trade-off: short-run inverse relation between inflation and unemployment; expectations-augmented version implies no long-run trade-off at the natural rate of unemployment.

Balance of payments: current account (goods, services, income, transfers) plus capital and financial account sum to zero; a persistent current account deficit implies net capital inflow or borrowing.

Multiplier: k = 1/(1 − MPC) in a simple closed economy; with tax rate t and import propensity m, k = 1/(1 − MPC(1−t) + m).

Opportunity cost is the value of the next best alternative forgone; it underpins production possibility frontiers (PPF). Points inside the PPF are inefficient; the slope equals the marginal rate of transformation.

Ceteris paribus means holding other variables constant; a movement along a curve reflects a price change, a shift reflects a change in a non-price determinant.

Distinguish correlation from causation: omitted variable bias, reverse causality and selection bias all generate spurious association; randomised controlled trials and natural experiments help identify causal effects.

Real vs nominal values: deflate nominal series using a price index (real = nominal/price index × 100) before comparing across time; use PPP-adjusted figures for cross-country comparisons.

Marginal analysis: optimal decisions equate marginal benefit and marginal cost; sunk costs are irrelevant to forward-looking decisions.

Model evaluation criteria: internal consistency, realistic assumptions, predictive power and policy relevance. Assumptions simplify; the test is whether the simplification preserves the mechanism under study.

Graph interpretation: identify axes, units, scale and direction of causation; note that shifting a curve differs from moving along it, and that equilibrium is where plans are mutually consistent.

Cost curves: MC crosses AVC and ATC at their minimum points; economies of scale (downward-sloping LRAC) arise from specialisation and fixed-cost spreading; diseconomies from coordination problems.

Present value: PV = FV/(1 + r)^n; comparing streams of costs and benefits across time requires discounting, and the choice of discount rate materially affects project appraisal.