Common Economic terms used in MBA entrance exams

MBA Entrance examinations like CAT and GMAT commonly refer to the following economic concepts and terminology. PROFIT: A financial gain, particularly the difference between the amount earned and the...
Common Economic terms used in GMAT

MBA Entrance examinations like CAT and GMAT commonly refer to the following economic concepts and terminology.

PROFIT: A financial gain, particularly the difference between the amount earned and the amount spent to produce, operate, or buy something. Reducing costs can increase profit, but only if revenue rises or stays the same; likewise, higher revenue does not guarantee increased profit unless costs fall or remain steady.

Supply-Demand-Price Relationship: Demand refers to the quantity of a good or service desired by buyers. Supply refers to how much of that good or service the market can give. In general, demand decreases as price goes up; the more expensive a good/service is, the less people will want it. Conversely, in general, supply increases as price goes up; producers provide more goods/services at a higher price because selling high quantities at high prices increases their revenue.

If, relatively speaking, supply is low but demand is high, prices will increase (think of how much people pay for popular artist’s concert ticket). If supply is high but demand is low, prices will decrease, because producers won’t be selling enough of what they produce (picture last season’s cloths going on sale).

Proportions: This is not strictly an economics term, but understanding proportions or ratios is sometimes necessary to answer a question. These terms refer to the relationships between two amounts:

2/3 of the students in the class are boys (describes how much of the class is made up of boys)

There are 4 chickens for every cow on Sunnyside Farm (describes a 4:1 ration of chickens to cows)

It’s important to remember that you need to know about both sides of the ratio or proportion before you can be sure whether a ration or proportion has changed. For example, a question or answer choice might state that in the last two years Sunnyside Farm has doubled its number of chickens, but we can’t draw conclusions about the ratio of chickens to cows from that information, since the farm could have also doubled its number of cows, or gotten rid of the cows altogether.

Risks and Benefits: Occasionally, solving a Critical Reasoning problem requires taking risk and reward into account. If a decision has the know potential to be disastrous, a business must weigh the probability of disaster against the potential reward (if the decision’s outcome is, instead, favorable). The test’s averse to unknown risks, but it’s not realistic to avoid all risk, so calculated (low-risk, high reward) risks are acceptable.

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