Economics
What this domain tests
Economics asks you to use scarcity, choice, and incentives to explain how individuals, firms, and governments allocate resources. Expect supply and demand, market structures, macroeconomic indicators, fiscal and monetary policy, trade, and personal finance.
Core rules and concepts
- Scarcity forces trade-offs. Opportunity cost is the value of the next-best alternative, not the sum of all alternatives.
- Demand is a relationship between price and quantity demanded, other things equal. A price change moves along the curve; a change in income, tastes, expectations, or related-good prices shifts the curve.
- Equilibrium occurs where quantity supplied equals quantity demanded. Price ceilings below equilibrium create shortages; price floors above equilibrium create surpluses.
- GDP measures final goods and services produced within a country in a period. It excludes household production, illegal activity, and transfer payments.
- Unemployment includes frictional, structural, and cyclical types. Inflation is a sustained rise in the general price level; it hurts lenders and people on fixed incomes when unexpected.
- Fiscal policy uses government spending and taxation; monetary policy uses interest rates and money supply, usually through a central bank.
- Comparative advantage explains gains from trade, while tariffs and quotas reduce trade and raise prices.
Worked example: A city sets rent control below the market equilibrium. Predict the effect. At the lower legal price, quantity demanded rises and quantity supplied falls, producing a shortage. Landlords may reduce maintenance or exit the market, and renters may face waiting lists or non-price rationing. The reasoning: compare the ceiling to equilibrium, then trace quantity responses; do not assume the policy makes all renters better off.
Traps that cost marks
Do not shift a demand curve when only price changes. Do not count intermediate goods in GDP. Avoid saying inflation helps everyone or that unemployment is always voluntary. Distinguish fiscal from monetary policy and correlation from causation.