SOCPA Fellowship Business Environment Complete Review Guide 2026–2027

4. Price elasticity of demand (midpoint method) = [(Q2 − Q1) ÷ average Q] ÷ [(P2 − P1) ÷ average P]. An absolute value above 1 is elastic, equal to 1 is unit elastic and below 1 is inelastic.
5. Income elasticity is positive for a normal good, above 1 for a luxury and negative for an inferior good. Cross elasticity is positive for substitutes and negative for complements.
6. The tax burden falls more on the less elastic side (buyers or sellers). The less elastic demand is, the larger the share of the tax the buyer pays.
7. Opportunity cost is the value of the best alternative given up. A sunk cost cannot be recovered, so it should not affect the decision. Comparative advantage belongs to whoever has the lower opportunity cost.
8. Perfect competition: many firms, identical products, free entry and price-taking. Monopoly: one firm and high entry barriers. Oligopoly: a few interdependent firms. Monopolistic competition: many firms selling differentiated products.
9. A firm maximizes profit at the quantity where marginal revenue equals marginal cost (MR = MC). In perfect competition price = MR. In monopoly price is above MR.
10. Expenditure approach: GDP = C + I + G + (X − M). The income approach sums wages, rent, interest and profit (plus depreciation and indirect taxes). The production approach sums value added at each stage.
11. GNP = GDP + net factor income from abroad. Real GDP = nominal GDP ÷ deflator × 100, and the deflator = (nominal ÷ real) × 100.
12. The business cycle has four phases: expansion, peak, contraction and trough. Leading indicators move before the cycle (building permits, for example), coincident ones move with it and lagging ones follow it (the unemployment rate, for example).
13. Unemployment rate = unemployed ÷ labour force × 100. Types: frictional, structural and cyclical. The natural rate includes frictional and structural unemployment but not cyclical.
14. Demand-pull inflation comes from rising aggregate demand and cost-push inflation from rising production costs. The Phillips curve shows a short-run inverse link between inflation and unemployment. Stagflation is high inflation together with high unemployment.
15. Expansionary fiscal policy: more government spending or lower taxes. Simple multiplier = 1 ÷ (1 − MPC). Automatic stabilizers (progressive taxes, unemployment benefits) soften swings without a new decision. Crowding out: government borrowing raises interest rates and reduces private investment.
16. Functions of money: medium of exchange, unit of account and store of value. Simple money multiplier = 1 ÷ reserve requirement ratio. Buying bonds, lowering the reserve ratio and lowering the discount rate are expansionary. The opposites are contractionary.
17. The spot rate is for delivery now. A forward rate is for delivery at a later date at a price agreed today, and it is a hedging tool. A regime can be fixed, floating or managed float. The Saudi riyal is pegged to the US dollar at 3.75 riyals per dollar.
18. Currency value is affected by interest and inflation differentials, purchasing power parity, the current account and political stability. In the balance of payments, the current, capital and financial accounts sum to zero in principle, because every transaction is recorded as a debit and a credit.

Common mistakes in this chapter

• ✕ Read elasticity in absolute value: |Ed| above 1 is elastic and below 1 is inelastic. The negative sign does not make demand inelastic.
• ✕ Raising the price increases total revenue when demand is inelastic and lowers it when demand is elastic. Many candidates swap the two cases.
• ✕ GDP measures output produced inside a country's borders whatever the producer's nationality. GNP measures output by a country's nationals wherever they are. Do not mix them up.
• ✕ Nominal GDP uses current prices and real GDP uses base-year prices. A rise in nominal GDP alone may be inflation, not growth.
• ✕ When the central bank buys bonds in the open market it is expanding, because it adds reserves to banks. Selling is contractionary. The direction of each tool is the most common trap.
• ✕ A sunk cost has no place in today's decision, but opportunity cost always does, including implicit costs such as the owner's forgone wage.
• ✕ A change in the good's own price moves along the same demand curve (quantity demanded). A change in any other factor (income, tastes, another price) shifts the whole curve.
• ✕ In a direct quote one unit of foreign currency is expressed in domestic currency, and in an indirect quote it is the reverse. Check which quote the question uses before deciding whether a currency rose or fell.