Economics: free practice, theory and problems

1. Supply and demand

What is it about?

In a market, price and quantity are determined by supply and demand. Where the curves cross, the market is in equilibrium.

Concepts and formulas

• The demand curve slopes downwards: a higher price gives a lower quantity demanded.
• The supply curve slopes upwards: a higher price makes it profitable to produce more.
• Equilibrium: quantity supplied = quantity demanded. Solve $x_S(p) = x_D(p)$.
• Shifts: higher income or popular trends shift demand out; cheaper inputs shift supply out.
• Consumer surplus: the difference between what customers are willing to pay and what they pay. Producer surplus likewise for sellers.
• A price ceiling below equilibrium gives shortage (queues). A price floor above equilibrium gives surplus.

Example

$x_D = 100 - 2p$ and $x_S = 20 + 2p$. Equilibrium: $100 - 2p = 20 + 2p$ gives $p = 20$ and $x = 60$.

Practise supply and demand in the app →

2. Market structures and competition

What is it about?

How many firms compete decides how high a price they can charge. Economists distinguish between perfect competition, monopoly and everything in between.

Concepts and formulas

• Perfect competition: many small firms, identical goods. Price = marginal cost. Nobody can influence the price.
• Monopoly: one seller. Chooses the quantity where marginal revenue = marginal cost and charges a higher price. Causes a deadweight loss to society.
• Oligopoly: a few large players (for example the grocery chains). Strategic interaction.
• Monopolistic competition: many firms with slightly different goods (hairdressers, cafés).
• The Competition Authority makes sure firms do not collude on prices (cartels).

Practise market structures and competition in the app →

3. Macroeconomics: GDP, inflation and interest rates

What is it about?

Macroeconomics looks at the whole economy: how much is produced (GDP), how fast prices rise (inflation), and how the central bank uses the interest rate to steer.

Concepts and formulas

• GDP (gross domestic product): the value of everything produced in the country in a year.
• Real growth accounts for price increases: $\text{real growth} \approx \text{nominal growth} - \text{inflation}$.
• Inflation is measured with the consumer price index (CPI): $\text{inflation} = \dfrac{\text{CPI}_{\text{new}} - \text{CPI}_{\text{old}}}{\text{CPI}_{\text{old}}}$.
• Real wage: wage growth minus price growth.
• Monetary policy: Norges Bank sets the policy rate. A higher rate dampens demand and inflation. The inflation target is 2 %.
• Fiscal policy: the state's use of taxes and spending (the national budget, the fiscal rule for the oil fund).
• Unemployment: the share of the labour force who want work but do not have it.

Practise macroeconomics: GDP, inflation and interest rates in the app →

4. Trade and exchange rates

What is it about?

Norway is a small open economy that exports oil, gas and fish and imports much of what we use. The krone exchange rate affects both prices and how competitive businesses are.

Concepts and formulas

• Comparative advantage: countries gain from specialising in what they are *relatively* best at and trading for the rest.
• Exchange rate: the price of one foreign unit in kroner, for example 11.50 NOK per euro.
• Weak krone (more kroner per euro): imports become more expensive, exports cheaper for foreigners. Can cause higher inflation.
• Strong krone: cheaper imports, harder for exporters.
• Trade balance: exports minus imports of goods.
• Conversion: amount in euros $\cdot$ rate = amount in kroner.

Practise trade and exchange rates in the app →