Economics
Economics tests microeconomic reasoning (scarcity, choice, markets, market failure) and macroeconomic analysis (measuring output, inflation, unemployment, and stabilization policy), plus international trade and personal finance concepts.
Core rules and concepts
- Scarcity forces choice; every choice has an opportunity cost - the value of the best forgone alternative, not the sum of all alternatives.
- Marginal analysis: decisions turn on the next unit, not the average. Rational actors continue while marginal benefit exceeds marginal cost.
- Demand and supply: a change in price causes movement along a curve; a change in a determinant (income, tastes, input costs, technology, expectations, number of buyers or sellers) shifts the curve.
- Elasticity measures responsiveness; demand is more elastic when close substitutes exist or the good is a large share of income.
- Market structures range from perfect competition to monopoly, with monopolistic competition and oligopoly between.
- Macro measures: GDP counts final goods and domestic production; real values are adjusted for inflation. Unemployment includes frictional, structural, and cyclical types. Inflation is measured by price indices.
- Policy: fiscal policy uses government spending and taxation; monetary policy uses central-bank tools (open-market operations, discount rate, reserve requirements).
Worked example
Alpha produces 10 units of cloth or 5 of wine per worker-day; Beta produces 6 cloth or 6 wine. Alpha's opportunity cost of one wine is 2 cloth; Beta's is 1 cloth. Beta holds the comparative advantage in wine. Alpha's cost of one cloth is 0.5 wine versus Beta's 1 wine, so Alpha has the comparative advantage in cloth. Each should specialize accordingly and trade; absolute productivity does not determine the answer - relative cost does.
Traps that cost marks
- Drawing a shifted curve when the prompt changes only the price.
- Confusing nominal with real, or GDP with GNP.
- Swapping fiscal (government) and monetary (central bank) tools.
- Reporting absolute advantage when the question asks about comparative advantage.