Economics
What economics tests
Economics tests microeconomic decision-making and macroeconomic policy: demand and supply, elasticity, production and cost, market structures, national income, inflation, unemployment, money, fiscal policy, and international trade. The exam often asks for the direction of a change and the graph shift behind it.
Core rules
- A movement along a demand curve is caused by price; a shift is caused by non-price factors such as income, tastes, or prices of related goods.
- Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price. Elastic demand means total revenue moves opposite to price.
- In perfect competition, firms are price takers; a monopoly faces the market demand curve and sets output where MR = MC.
- GDP can be measured by expenditure, income, or output; nominal GDP uses current prices, real GDP uses base-year prices.
- Inflation is a sustained rise in the general price level; monetary policy affects money supply and interest rates, while fiscal policy affects government spending and taxes.
Worked example
Price rises by 10% and quantity demanded falls by 20%. Elasticity = −20% ÷ 10% = −2. Demand is elastic because the absolute value is greater than 1. Because quantity falls proportionally more than price rises, total revenue falls. A seller facing elastic demand should generally avoid a price increase unless it reduces costs or improves margin enough to offset the revenue loss.
Traps
Do not confuse a shift with a movement along the curve. Do not use nominal GDP to compare living standards over time. Do not treat all government spending as fiscal policy or all money creation as inflation. Watch inverse versus direct relationships and absolute elasticity values.