# Economics Primer for MBA Students: [Your name or cohort] > A pre-MBA primer on the economics an MBA core course assumes you already know on day one: opportunity cost and > marginal thinking, supply and demand, elasticity, profit maximisation, market structures, and the four macro > variables every manager reads (GDP, inflation, interest rates and exchange rates). It is for admitted students in > the months before the programme starts, career switchers without an economics degree, and anyone who wants a > computed refresher before the microeconomics and macroeconomics courses. Each topic gives the idea in plain > language, the formula with notation, a fully computed example with the Excel formula, and the link to the deeper > MBA card. Source basis: Marshall (1890), Cournot (1838), Lerner (1934), Hirschman (1945), Fisher (1930), Keynes > (1923) and Cassel (1918), written up in original words with fictional examples. Replace every [bracketed] value > and every row marked *Example*. This is a learning aid, not investment or policy advice. ## Document control | Field | Value | |---|---| | Learner | [Your name] | | Programme and start date | [Programme name], YYYY-MM-DD | | Prior economics | [None / one undergraduate course / economics degree] | | Target finish date | YYYY-MM-DD (at least four weeks before orientation) | | Spreadsheet used | [Excel / Google Sheets / LibreOffice Calc] | | Reviewed by | [Mentor, coach or study partner] | | Version | [0.1] | | Last updated | YYYY-MM-DD | ## Contents - [How to use this primer](#how-to-use-this-primer) - [1. Opportunity cost and marginal thinking](#1-opportunity-cost-and-marginal-thinking) - [2. Supply and demand](#2-supply-and-demand) - [3. Elasticity](#3-elasticity) - [4. Marginal analysis and profit maximisation](#4-marginal-analysis-and-profit-maximisation) - [5. Market structures and concentration](#5-market-structures-and-concentration) - [6. GDP and growth](#6-gdp-and-growth) - [7. Inflation](#7-inflation) - [8. Interest rates](#8-interest-rates) - [9. Exchange rates](#9-exchange-rates) - [Worked example B (half solved)](#worked-example-b-half-solved) - [Exercise C (unsolved)](#exercise-c-unsolved) - [Common mistakes and misconceptions](#common-mistakes-and-misconceptions) - [Self-test questions](#self-test-questions) - [My notes and next steps](#my-notes-and-next-steps) - [Sources and further reading](#sources-and-further-reading) - [Answer key](#answer-key) - [Revision history](#revision-history) ## How to use this primer An MBA economics course is not a theory course. It uses a small set of tools to answer management questions: should we cut the price, will this market stay profitable, what happens to our margins if the currency moves, why did the central bank's decision change our cost of capital. The core courses assume you can already compute an equilibrium, an elasticity, a profit-maximising price, a real interest rate and a forward exchange rate. This primer covers those computations and nothing more; the cards it links to carry the full theory. ```mermaid flowchart TD Q["What is the management question?"] --> A{"About one market or the whole economy?"} A -->|"One market"| B{"Price, quantity or competition?"} A -->|"Whole economy"| C{"Output, prices, rates or currency?"} B -->|"Where will price settle"| S2["2. Supply and demand"] B -->|"What if we change price"| S3["3. Elasticity"] B -->|"How much to produce"| S4["4. Marginal analysis"] B -->|"Who are the rivals"| S5["5. Market structures"] C -->|"Output"| S6["6. GDP"] C -->|"Prices"| S7["7. Inflation"] C -->|"Rates"| S8["8. Interest rates"] C -->|"Currency"| S9["9. Exchange rates"] S1["1. Opportunity cost"] --> Q ``` Section 1 sits above the map because every economic decision starts there. | Week | Sections | Time | Check | |---|---|---|---| | 1 | 1, 2, 3 | about 4.5 hours | Worked example B parts 1 and 2 | | 2 | 4, 5 | about 3 hours | Exercise C | | 3 | 6, 7, 8, 9 | about 6 hours | Self-test, all 10 questions | ## 1. Opportunity cost and marginal thinking **The idea.** The cost of a choice is the value of the best alternative you give up. Accounting records what you pay; economics also counts what you forgo. The difference matters whenever a resource you already control (space, cash, people's time, management attention) has another use. **Marginal thinking.** Decisions are made at the margin: compare the extra benefit of one more unit (one more store, one more hour, one more product) with its extra cost. Costs already incurred and not recoverable (sunk costs) do not enter the comparison, because no choice you make now changes them. $$\text{Economic profit} = \text{Revenue} - \text{Explicit costs} - \text{Opportunity costs}$$ **Worked example A1 (fully solved).** Northfield Outdoor Co. *(Example)* owns the stockroom behind one of its city stores. A manager proposes using it for a gear-rental counter. Rentals would bring a contribution of USD 3,100 a month and need extra staff costing USD 900 a month. A neighbouring business has offered to sublet the room for USD 2,400 a month. | Item | USD per month | |---|---| | Rental contribution | 3,100 | | Extra staff | -900 | | Accounting profit of the rental counter | 2,200 | | Opportunity cost: forgone sublet income | -2,400 | | Economic profit | -200 | Excel: `=3100-900-2400` returns -200. The counter looks profitable in the store's accounts but destroys USD 200 a month compared with the best alternative. The decision may still go ahead for strategic reasons (rentals bring customers who later buy), but the manager should state that benefit and size it, not hide it. **Check yourself.** Northfield paid USD 15,000 two years ago to fit out the stockroom. Does that change the answer? (No: it is sunk, and it is the same under both options.) ## 2. Supply and demand **The idea.** The demand curve shows how much buyers want at each price, holding everything else constant (income, prices of related goods, tastes, expectations). The supply curve shows how much sellers offer at each price, holding costs and technology constant. The market price settles where the two quantities match. Marshall (1890) set out the modern treatment of the two curves and their intersection. | Symbol | Meaning | |---|---| | $P$ | Price per unit | | $Q_d$, $Q_s$ | Quantity demanded and quantity supplied | | $P^*$, $Q^*$ | Equilibrium price and quantity | | $CS$, $PS$ | Consumer surplus and producer surplus | | $t$ | Per-unit tax | With linear curves $Q_d = a - bP$ and $Q_s = c + dP$: $$P^* = \frac{a - c}{b + d}, \qquad Q^* = a - bP^*$$ **Worked example A2 (fully solved).** In the regional market for trail-running socks *(Example)*, monthly demand and supply in thousand pairs are $Q_d = 1200 - 20P$ and $Q_s = -300 + 30P$, with $P$ in USD. 1. Equilibrium: $1200 - 20P = -300 + 30P$, so $50P = 1500$ and $P^* = 30$. Then $Q^* = 1200 - 20 \times 30 = 600$ thousand pairs. 2. Consumer surplus is the triangle between the demand curve and the price. Demand reaches zero at $P = 60$ (the choke price): $CS = \tfrac{1}{2}(60 - 30)(600) = 9000$, so USD 9.0m a month. 3. Producer surplus is the triangle between the price and the supply curve, which starts at $P = 10$: $PS = \tfrac{1}{2}(30 - 10)(600) = 6000$, so USD 6.0m a month. 4. A tax of USD 5 per pair collected from sellers shifts supply to $Q_s = -300 + 30(P_b - 5)$, where $P_b$ is the price buyers pay. Solving gives $P_b = 33$, sellers keep $P_s = 28$, and $Q = 540$. Buyers bear USD 3 of the tax (60%) and sellers USD 2 (40%): the less price-responsive side of the market bears more, here demand (quantity demanded changes by 20 per USD, quantity supplied by 30). Tax revenue is $5 \times 540 = 2700$ (USD 2.7m) and the deadweight loss is $\tfrac{1}{2} \times 5 \times (600 - 540) = 150$ (USD 0.15m). 5. A demand shift (a running boom adds 150 thousand pairs at every price, $Q_d = 1350 - 20P$) moves the equilibrium to $P^* = 33$, $Q^* = 690$. Excel set-up: put $a, b, c, d$ in B1:B4 and use `=(B1-B3)/(B2+B4)` for $P^*$ and `=B1-B2*B5` for $Q^*$ (B5 holds $P^*$). Goal Seek on a cell holding `=B1-B2*B5-(B3+B4*B5)`, set to 0 by changing B5, gives the same answer. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "title": "Trail-running socks: demand and supply (Example)", "width": 420, "height": 260, "data": { "values": [ {"Q": 900, "P": 15, "curve": "Demand"}, {"Q": 800, "P": 20, "curve": "Demand"}, {"Q": 700, "P": 25, "curve": "Demand"}, {"Q": 600, "P": 30, "curve": "Demand"}, {"Q": 500, "P": 35, "curve": "Demand"}, {"Q": 400, "P": 40, "curve": "Demand"}, {"Q": 300, "P": 45, "curve": "Demand"}, {"Q": 200, "P": 50, "curve": "Demand"}, {"Q": 100, "P": 55, "curve": "Demand"}, {"Q": 0, "P": 60, "curve": "Demand"}, {"Q": 0, "P": 10, "curve": "Supply"}, {"Q": 150, "P": 15, "curve": "Supply"}, {"Q": 300, "P": 20, "curve": "Supply"}, {"Q": 450, "P": 25, "curve": "Supply"}, {"Q": 600, "P": 30, "curve": "Supply"}, {"Q": 750, "P": 35, "curve": "Supply"}, {"Q": 900, "P": 40, "curve": "Supply"} ] }, "mark": {"type": "line", "point": true}, "encoding": { "x": {"field": "Q", "type": "quantitative", "title": "Quantity (thousand pairs per month)"}, "y": {"field": "P", "type": "quantitative", "title": "Price (USD)"}, "color": {"field": "curve", "type": "nominal", "title": "Curve"}, "order": {"field": "Q", "type": "quantitative"} } } ``` Economists put price on the vertical axis even though price is the independent variable in the demand equation; read the chart the same way. The curves cross at USD 30 and 600 thousand pairs. **Check yourself.** A cheaper synthetic yarn lowers production costs. Which curve shifts, in which direction, and what happens to $P^*$ and $Q^*$? (Supply shifts right: price falls, quantity rises.) ## 3. Elasticity **The idea.** Elasticity measures how strongly quantity responds to a change in price (or income, or another price), in percentage terms so that units cancel. Marshall (1890) introduced the concept of the elasticity of demand. | Symbol | Meaning | |---|---| | $\varepsilon$ | Own-price elasticity of demand (negative for normal demand) | | $\varepsilon_{xy}$ | Cross-price elasticity of good x with respect to the price of good y | | $\varepsilon_I$ | Income elasticity | $$\varepsilon = \frac{\%\Delta Q}{\%\Delta P}, \qquad \varepsilon_{\text{point}} = \frac{dQ}{dP}\cdot\frac{P}{Q}, \qquad \varepsilon_{\text{midpoint}} = \frac{(Q_1 - Q_0)/\bar{Q}}{(P_1 - P_0)/\bar{P}}$$ where $\bar{Q}$ and $\bar{P}$ are the averages of the start and end values. Demand is **elastic** when $|\varepsilon| > 1$ (a price cut raises revenue), **inelastic** when $|\varepsilon| < 1$ (a price cut lowers revenue) and **unit elastic** at $|\varepsilon| = 1$, where revenue is at its maximum. **Worked example A3 (fully solved).** Northfield cuts the price of a two-person tent from USD 120 to USD 108 for a month *(Example)*. Units sold rise from 500 to 580. The tent costs Northfield USD 70 a unit. | Measure | Calculation | Result | Excel | |---|---|---|---| | Simple % change ratio | 16.0% / -10.0% | -1.600 | `=((580-500)/500)/((108-120)/120)` | | Midpoint elasticity | (80/540) / (-12/114) | -1.407 | `=((580-500)/AVERAGE(500,580))/((108-120)/AVERAGE(108,120))` | | Revenue before and after | 60,000 and 62,640 | +2,640 | `=108*580-120*500` | | Contribution before and after | 25,000 and 22,040 | -2,960 | `=(108-70)*580-(120-70)*500` | | Volume needed to hold contribution | 25,000 / 38 | 657.9 units | `=(120-70)*500/(108-70)` | Demand is elastic, so revenue rises. But contribution falls by USD 2,960, because each unit now earns USD 38 instead of USD 50 and the extra 80 units do not make up for the 500 units that lost USD 12 each. Northfield would have needed about 658 units to break even on the cut. This is the most common pricing trap in MBA cases: elastic demand is necessary for a profitable price cut, not sufficient. At the sock-market equilibrium of section 2, the point elasticity is $-20 \times 30/600 = -1.0$: the market sits at unit elasticity, where total spending ($P \times Q$) is at its maximum. **Cross-price and income elasticity.** A positive cross-price elasticity means substitutes (a rival's tent), a negative one means complements (tents and sleeping mats). Income elasticity above 1 marks a luxury, between 0 and 1 a necessity, below 0 an inferior good. You will meet these in segmentation and demand forecasting; the card mba/mba-demand-elasticity-card shows how to estimate elasticities from sales data with a log-log regression (academic/stats-linear-regression). **Check yourself.** Why does a midpoint elasticity give the same answer for a price rise from 108 to 120 as for a cut from 120 to 108, while the simple ratio does not? (It uses the same base, the average, in both directions.) ## 4. Marginal analysis and profit maximisation **The idea.** A firm that can set its price (because its product is differentiated or it has few rivals) faces a downward-sloping demand curve. Selling one more unit requires a slightly lower price on every unit, so marginal revenue (MR) is below price. Profit is highest at the quantity where the revenue from the last unit equals its cost: $MR = MC$. Cournot (1838) first derived this condition for a monopolist. | Symbol | Meaning | |---|---| | $TR = P \times Q$ | Total revenue | | $MR = dTR/dQ$ | Marginal revenue | | $MC$ | Marginal cost, the cost of one more unit | | $FC$ | Fixed cost, unaffected by the quantity decision | | $L$ | Lerner index of market power | For linear inverse demand $P = \alpha - \beta Q$, total revenue is $\alpha Q - \beta Q^2$ and $MR = \alpha - 2\beta Q$: the MR line has the same intercept and twice the slope. The markup rule (Lerner 1934) links the profit-maximising price to elasticity: $$L = \frac{P - MC}{P} = -\frac{1}{\varepsilon}$$ **Worked example A4 (fully solved).** Corvane Robotics *(Example)* sells a proprietary spare-parts kit for its robots. Monthly inverse demand is $P = 200 - 0.5Q$ (USD), marginal cost is a constant USD 40 and the fixed cost of the kit line is USD 6,000 a month. 1. $MR = 200 - Q$. Set $MR = MC$: $200 - Q = 40$, so $Q^* = 160$ kits. 2. Price from the demand curve: $P^* = 200 - 0.5 \times 160 = 120$. 3. Profit: $(120 - 40) \times 160 - 6000 = 6800$, so USD 6,800 a month. 4. Elasticity at the optimum: $dQ/dP = -2$, so $\varepsilon = -2 \times 120/160 = -1.5$. Lerner index $(120 - 40)/120 = 0.6667 = 1/1.5$: the markup rule holds. | Q | P | TR | MR | Profit | |---|---|---|---|---| | 140 | 130 | 18,200 | 60 | 6,600 | | 150 | 125 | 18,750 | 50 | 6,750 | | 160 | 120 | 19,200 | 40 | 6,800 | | 170 | 115 | 19,550 | 30 | 6,750 | | 180 | 110 | 19,800 | 20 | 6,600 | Excel: with Q in column A, `=200-0.5*A2` for P, `=B2*A2` for TR, `=200-A2` for MR and `=(B2-40)*A2-6000` for profit; Solver (maximise the profit cell by changing Q) returns 160. Note that the fixed cost does not change $Q^*$; it only decides whether the line should exist at all (here yes, profit is positive). A profit-maximising firm never operates where demand is inelastic: there, MR is negative, so selling fewer units at a higher price would raise revenue and cut cost. Pricing strategy beyond a single price (segmentation, bundling, versioning) is in mba/mba-pricing-card. ## 5. Market structures and concentration **The idea.** How many rivals a firm has, how similar the products are and how easy entry is decide how much pricing power the firm has and whether profits last. MBA strategy courses build on this through Porter's five forces (mba/mba-five-forces-card). | Structure | Firms | Product | Entry | Pricing power | Long-run economic profit | *Example* | |---|---|---|---|---|---|---| | Perfect competition | Many, small | Identical | Free | None: firms take the market price, $P = MC$ | Zero | Wholesale grain, foreign exchange | | Monopolistic competition | Many | Differentiated | Easy | Some, from brand and location | Tends to zero as entrants copy | Restaurants, outdoor-gear boutiques | | Oligopoly | Few, large | Identical or differentiated | Barriers | Depends on rivals' reactions (game theory) | Can persist | Airlines, cloud computing | | Monopoly | One | No close substitute | Blocked | High, limited by demand elasticity | Can persist while barriers hold | A patented drug before generics | **Measuring concentration.** The Herfindahl-Hirschman Index (HHI) adds the squared market shares of all firms, with shares in percent, so it runs from near 0 to 10,000 (Hirschman 1945; Herfindahl 1950). $$HHI = \sum_{i=1}^{n} s_i^2, \qquad \Delta HHI_{\text{merger of } j,k} = 2 s_j s_k$$ **Worked example A5 (fully solved).** A regional market for warehouse-robot maintenance *(Example)* has five firms with shares 35, 25, 20, 10 and 10 percent. $HHI = 1225 + 625 + 400 + 100 + 100 = 2450$. If the two smallest merge, the new shares are 35, 25, 20 and 20, and $HHI = 2650$: an increase of $2 \times 10 \times 10 = 200$. Excel: `=SUMSQ(B2:B6)` for the HHI. Competition authorities use the HHI as a first screen. As of October 2026, the US Department of Justice and Federal Trade Commission 2023 Merger Guidelines (issued December 2023; the FTC Chairman and the acting head of the DOJ Antitrust Division told staff on 18 February 2025 that they remain in effect) treat a market with an HHI above 1,800 as highly concentrated. A merger that produces an HHI above 1,800 with an increase of more than 100 is presumed to substantially lessen competition, and so is a merger that creates a firm with a share above 30 percent with an HHI increase of more than 100. The presumption is rebuttable, and market definition comes first. Other authorities (for example the European Commission) use different thresholds. Check the current guidelines at ftc.gov and justice.gov before you rely on these numbers. In Worked example A5 the merger gives an HHI of 2,650 with an increase of 200, so it would fall inside the first presumption. Oligopoly pricing is covered in mba/mba-market-structure-card and mba/mba-game-theory-card. ## 6. GDP and growth **The idea.** Gross domestic product is the market value of all final goods and services produced within a country in a period. The international standard for measuring it is the System of National Accounts published by the United Nations with partner organisations; check the current edition at unstats.un.org. From the spending side: $$Y = C + I + G + (X - M)$$ | Symbol | Meaning | |---|---| | $Y$ | GDP | | $C$ | Household consumption | | $I$ | Investment (business fixed investment, housing, inventories) | | $G$ | Government purchases (not transfers such as pensions) | | $X$, $M$ | Exports and imports | **Nominal and real.** Nominal GDP uses current prices; real GDP values this year's quantities at base-year prices, so it changes only when output changes. The GDP deflator is $100 \times$ nominal / real. **Worked example A6 (fully solved).** An economy *(Example)* reports $C = 1450$, $I = 420$, $G = 380$, $X = 510$ and $M = 560$ (billion). GDP is $1450 + 420 + 380 + 510 - 560 = 2200$. Imports are subtracted because they are already inside C, I and G but were not produced at home. A two-good economy produces 100 units of A at 2.00 and 50 units of B at 10.00 in year 0, then 110 units of A at 2.20 and 52 units of B at 10.50 in year 1. | Measure | Calculation | Result | |---|---|---| | Nominal GDP, year 0 | 100 x 2.00 + 50 x 10.00 | 700 | | Nominal GDP, year 1 | 110 x 2.20 + 52 x 10.50 | 788 | | Real GDP, year 1 at year-0 prices | 110 x 2.00 + 52 x 10.00 | 740 | | Nominal growth | 788 / 700 - 1 | 12.57% | | Real growth | 740 / 700 - 1 | 5.71% | | GDP deflator, year 1 | 100 x 788 / 740 | 106.49 | Excel: `=SUMPRODUCT(B2:B3,C2:C3)` for each GDP figure and `=788/740-1` for deflator inflation (6.49%). Most of the nominal growth is price, not output. Leading indicators, business cycles and the output gap are in mba/mba-macro-indicators-card. ## 7. Inflation **The idea.** Inflation is the rate at which the general price level rises. A consumer price index (CPI) prices a fixed basket of goods over time: $$CPI_t = 100 \times \frac{\text{Cost of basket at } t \text{ prices}}{\text{Cost of basket at base prices}}, \qquad \pi_t = \frac{CPI_t}{CPI_{t-1}} - 1$$ **Worked example A7 (fully solved).** A basket *(Example)* holds 3 units of food at 4.00, 2 units of clothing at 15.00 and 1 unit of transport at 60.00, costing 102.00. A year later the prices are 4.20, 15.30 and 63.00, and the basket costs 106.20. $CPI = 100 \times 106.20/102.00 = 104.12$, so inflation is 4.12%. Excel: `=SUMPRODUCT(B2:B4,D2:D4)/SUMPRODUCT(B2:B4,C2:C4)-1`. A 4% pay rise with 3.2% inflation is a real pay rise of $1.04/1.032 - 1 = 0.775\%$, close to the shortcut $4 - 3.2 = 0.8$ percentage points. **Policy targets.** Many central banks target low, stable inflation. As of October 2026, the US Federal Reserve's Statement on Longer-Run Goals and Monetary Policy Strategy (reaffirmed effective 27 January 2026) names 2 percent inflation measured by the price index for personal consumption expenditures (PCE), and the European Central Bank aims for 2% inflation over the medium term measured by the Harmonised Index of Consumer Prices (HICP), treating deviations in both directions as equally undesirable. Check federalreserve.gov and ecb.europa.eu for the current wording. Why the target matters for interest rates is in section 8. ## 8. Interest rates **The idea.** A nominal interest rate is the return in money; a real rate is the return in purchasing power. Fisher (1930) set out the relationship: $$(1 + i) = (1 + r)(1 + \pi^e), \qquad r = \frac{1 + i}{1 + \pi^e} - 1 \approx i - \pi^e$$ | Symbol | Meaning | |---|---| | $i$ | Nominal interest rate | | $r$ | Real interest rate | | $\pi^e$ | Expected inflation | | $y$ | Yield to maturity of a bond | Central banks set a short-term policy rate; longer rates reflect expected future short rates plus a term premium. Corporate borrowing costs add a credit spread on top. That chain is why a central-bank decision changes a company's cost of capital (mba/mba-capm-wacc-card). **Worked example A8 (fully solved).** A deposit pays 6% with expected inflation of 2.5% *(Example)*. The exact real rate is $1.06/1.025 - 1 = 3.415\%$; the shortcut gives 3.5%. A five-year bond with face value 1,000 pays an annual coupon of 50 (5%). Its price is the present value of the coupons and the face value at the market yield: | Market yield | Price | Excel | |---|---|---| | 4% | 1,044.52 | `=PV(4%,5,50,1000)` returns -1,044.52 | | 5% | 1,000.00 | `=PV(5%,5,50,1000)` returns -1,000.00 | | 6% | 957.88 | `=PV(6%,5,50,1000)` returns -957.88 | Excel's `PV` returns a negative number because it shows the cash you pay to receive the inflows; flip the sign. When rates rise, existing bonds lose value; the deeper treatment of discounting is in mba/pre-mba-finance-primer and mba/mba-npv-irr-card. ## 9. Exchange rates **The idea.** An exchange rate is the price of one currency in another. Always write the units: EUR/USD 1.08 in market convention means 1.08 US dollars per euro. A rise in that number means the euro **appreciates** and the dollar **depreciates**. | Symbol | Meaning | |---|---| | $S$ | Spot rate, domestic currency per unit of foreign currency | | $F$ | Forward rate for delivery in one year | | $i_d$, $i_f$ | Domestic and foreign one-year interest rates | | $\pi_d$, $\pi_f$ | Domestic and foreign inflation | Two parity conditions anchor the MBA treatment. **Covered interest parity**, set out by Keynes (1923), says a forward rate must offset the interest differential, otherwise riskless arbitrage is possible. **Relative purchasing power parity**, associated with Cassel (1918), says that over long horizons the currency of the higher-inflation country tends to depreciate by about the inflation differential. $$F = S \times \frac{1 + i_d}{1 + i_f}, \qquad E[S_1] \approx S_0 \times \frac{1 + \pi_d}{1 + \pi_f}$$ **Worked example A9 (fully solved).** Spot is 1.08 USD per EUR, the one-year USD rate is 4.5% and the EUR rate is 2.5% *(Example)*. Treating USD as domestic: 1. Forward: $F = 1.08 \times 1.045/1.025 = 1.1011$ USD per EUR. The euro trades at a forward premium of 1.951%, because the dollar earns more interest. Excel: `=1.08*(1+4.5%)/(1+2.5%)`. 2. Translation: Northfield's European subsidiary sells EUR 20m a year. At 1.08 that is USD 21.6m; if the rate falls to 1.00, it is USD 20.0m, a drop of USD 1.6m (7.41%) with no change in the business. 3. Direction: from 1.08 to 1.00 USD per EUR, the euro depreciates by 7.41% against the dollar, while the dollar appreciates by 8.00% against the euro (`=1.08/1.00-1`). The two percentages differ because the base differs. 4. Relative PPP with US inflation of 3% and euro-area inflation of 2%: expected spot in one year $\approx 1.08 \times 1.03/1.02 = 1.0906$. PPP is a weak guide over months and a better one over decades; interest parity holds closely for major currencies because traders enforce it. Hedging decisions and uncovered parity are in mba/mba-fx-interest-parity-card and finance/fx-interest-rate-hedging-policy. ## Worked example B (half solved) Northfield's analytics team *(Example)* reports three findings. 1. When Northfield cuts tent prices by 10%, sales of its headlamps rise by 6%. Cross-price elasticity of headlamps with respect to tent prices: $\varepsilon_{xy} = 6\% / (-10\%) = [\ ]$. Are tents and headlamps substitutes or complements? [ ] 2. When household income in Northfield's regions rises by 3%, premium jacket sales rise by 9%. Income elasticity: $\varepsilon_I = [\ ]$. Classify the good: [ ] 3. In the sock market of section 2, the tax of USD 5 per pair is replaced by a tax of USD 10. Using $Q_s = -300 + 30(P_b - 10)$: buyers pay $P_b = [\ ]$, sellers keep $P_s = [\ ]$, quantity $Q = [\ ]$, tax revenue $= [\ ]$ (USD thousand), deadweight loss $= [\ ]$. Doubling the tax multiplies the deadweight loss by [ ]. ## Exercise C (unsolved) 1. A market for robot batteries *(Example)* has four firms with shares 30, 30, 20 and 20 percent. Compute the HHI. The two firms with 20% propose to merge: compute the post-merger HHI and the change. Would the change exceed the US 2023 screening thresholds described in section 5? 2. Corvane faces inverse demand $P = 300 - 2Q$ for a maintenance contract and marginal cost of USD 60. Find the profit-maximising quantity and price, the elasticity at that point, and confirm the markup rule. 3. A loan carries a nominal rate of 8% and expected inflation is 5%. Compute the exact real rate. ## Common mistakes and misconceptions 1. **Ignoring opportunity cost.** Treating owned space, idle cash or managers' time as free. Always name the best alternative use. 2. **Letting sunk costs drive decisions.** Past spending that cannot be recovered is the same under every option. 3. **Movement along versus shift.** A price change moves you along a demand curve; a change in income, tastes or rival prices shifts it. 4. **Revenue instead of profit.** Elastic demand means a price cut raises revenue, not profit (Worked example A3). 5. **Slope is not elasticity.** A straight-line demand curve has a constant slope but its elasticity changes at every point (elastic at high prices, inelastic at low ones). 6. **Pricing from average cost.** The profit-maximising price comes from MR = MC and demand, not from a markup on average cost; fixed costs do not change the optimal quantity. 7. **Nominal growth read as real growth.** Strip out inflation with real figures or a deflator before comparing years. 8. **Confusing disinflation with deflation.** Inflation falling from 5% to 2% means prices still rise, more slowly. 9. **Adding instead of compounding.** $i - \pi$ is a shortcut; use the Fisher formula when rates or inflation are high. 10. **Exchange-rate direction.** Writing a quote without units, or assuming the percentage appreciation of one currency equals the depreciation of the other. ## Self-test questions 1. A team owns a car worth USD 18,000 that it could sell today. It plans to use it for a two-year project. What is the opportunity cost of using the car, and what information would you still need? 2. Demand is $Q_d = 900 - 30P$ and supply is $Q_s = -100 + 20P$. Find the equilibrium price and quantity. 3. At that equilibrium, compute the point price elasticity of demand. Is demand elastic or inelastic there? 4. A retailer raises a price from USD 40 to USD 44 and unit sales fall from 1,000 to 920. Compute the midpoint elasticity and the change in revenue. 5. Why does marginal revenue fall faster than price on a linear demand curve? 6. A firm's optimal markup over marginal cost is 25% of price. What is the elasticity of demand it faces? 7. Two firms with shares of 15% and 5% merge. By how much does the HHI rise? 8. Why are imports subtracted in the GDP expenditure identity? 9. Nominal GDP grows 7% and the GDP deflator rises 4%. What is real growth, exactly? 10. The spot rate is 150 JPY per USD, the one-year yen rate is 0.5% and the dollar rate is 4.0%. What is the one-year forward rate in JPY per USD, and is the dollar at a forward premium or discount? ## My notes and next steps | Topic | Confidence (1 to 5) | What I still find hard | Next step and template | Date | |---|---|---|---|---| | Elasticity and pricing *(Example)* | 3 | Choosing between point and midpoint elasticity | Exercises in mba/mba-demand-elasticity-card | YYYY-MM-DD | | Exchange rates *(Example)* | 2 | Direction of quotes | Three quote drills a day for a week, then mba/mba-fx-interest-parity-card | YYYY-MM-DD | | [Topic] | [1 to 5] | [Difficulty] | [Next step] | YYYY-MM-DD | After this primer, continue with mba/pre-mba-finance-primer and mba/pre-mba-accounting-primer, and keep mba/mba-formula-sheet open while you work. ## Sources and further reading Primary works: - Cassel, G. (1918). Abnormal deviations in international exchanges. *The Economic Journal*, 28(112), 413-415. - Cournot, A. (1838). *Recherches sur les principes mathématiques de la théorie des richesses*. Hachette. - Fisher, I. (1930). *The Theory of Interest*. Macmillan. - Herfindahl, O. C. (1950). *Concentration in the Steel Industry*. Doctoral dissertation, Columbia University. - Hirschman, A. O. (1945). *National Power and the Structure of Foreign Trade*. University of California Press. - Keynes, J. M. (1923). *A Tract on Monetary Reform*. Macmillan. - Lerner, A. P. (1934). The concept of monopoly and the measurement of monopoly power. *The Review of Economic Studies*, 1(3), 157-175. - Marshall, A. (1890). *Principles of Economics*. Macmillan. Textbooks (further reading, any recent edition): Mankiw, *Principles of Economics*; Besanko and Braeutigam, *Microeconomics*; Blanchard, *Macroeconomics*. Open resource: OpenStax, *Principles of Economics* (3rd edition, CC BY-NC-SA 4.0), openstax.org. Official pages checked October 2026: Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy (federalreserve.gov); European Central Bank, monetary policy strategy (ecb.europa.eu); US DOJ and FTC 2023 Merger Guidelines (justice.gov, ftc.gov). ## Answer key **Worked example B.** (1) $\varepsilon_{xy} = -0.60$: negative, so complements (cheaper tents, more camping, more headlamps). (2) $\varepsilon_I = 9/3 = 3.0$: above 1, a luxury good. (3) $P_b = (1500 + 300)/50 = 36$, $P_s = 26$, $Q = 1200 - 20 \times 36 = 480$, tax revenue $10 \times 480 = 4800$, deadweight loss $\tfrac{1}{2} \times 10 \times (600 - 480) = 600$. Doubling the tax multiplies the deadweight loss by 4, because both the height (the tax) and the base (the lost quantity) of the triangle double. **Exercise C.** (1) $HHI = 900 + 900 + 400 + 400 = 2600$; after the merger the shares are 30, 30 and 40 and $HHI = 3400$, a change of $2 \times 20 \times 20 = 800$: well above both 1,800 and an increase of 100. The merged firm's 40% share is also above 30 percent with an increase above 100, so both presumptions would apply. (2) $MR = 300 - 4Q = 60$, so $Q^* = 60$ and $P^* = 300 - 120 = 180$. $dQ/dP = -0.5$, so $\varepsilon = -0.5 \times 180/60 = -1.5$; Lerner $(180 - 60)/180 = 0.667 = 1/1.5$. (3) $r = 1.08/1.05 - 1 = 2.857\%$. **Self-test.** 1. The opportunity cost is what the car could earn in its best alternative use: the USD 18,000 sale value today compared with its value at the end of the project (plus any rental income forgone). You still need the expected resale value in two years and the discount rate. 2. $900 - 30P = -100 + 20P$, so $P^* = 20$ and $Q^* = 300$. 3. $\varepsilon = -30 \times 20/300 = -2.0$: elastic. 4. Midpoint: $(-80/960)/(4/42) = -0.875$; revenue goes from 40,000 to 40,480, up 480. Demand is inelastic over this range, so the price rise raises revenue. 5. To sell one more unit the firm must lower the price on all units, not only the last one, so MR equals the new price minus the revenue lost on earlier units. For $P = \alpha - \beta Q$, MR has twice the slope. 6. $L = 0.25 = -1/\varepsilon$, so $\varepsilon = -4$. 7. $\Delta HHI = 2 \times 15 \times 5 = 150$. 8. Imports are already counted in C, I and G (and sometimes in exports) but were produced abroad; subtracting them leaves only domestic production. 9. $1.07/1.04 - 1 = 2.885\%$ (the shortcut gives 3%). 10. With JPY as the domestic currency, $F = 150 \times 1.005/1.040 = 144.95$ JPY per USD. The dollar buys fewer yen forward than spot, so it trades at a forward discount (about 3.37%), offsetting its higher interest rate. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | First pass through sections 1 to 9 | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Self-test 9 of 10, redid section 9 quote drills | ## Standard and licence note Based on the standard treatment of introductory microeconomics and macroeconomics found in the primary works listed above (Marshall 1890, Cournot 1838, Lerner 1934, Hirschman 1945, Fisher 1930, Keynes 1923, Cassel 1918) and on the official central-bank and competition-authority pages named in the text, checked in October 2026. The text, the examples and the questions are original; no textbook text is copied or paraphrased, and the fictional companies are not real businesses. The template is independent and not affiliated with or endorsed by any business school, central bank or authority. Check the current official versions of every dated fact before you rely on it. Template licence: MIT.