STUDY GUIDE FOR ECONOMICS EXAM ONE

Now available: Exam One Fall 2007 as Study Guide -- this study guide includes the rational for each correct answer. There is an older exam from Fall 2004 if you want still more practice. (If you click on the word practice, it will open.) However, this older exam does not include explanations and is not as close in content.

STUDY GUIDE FOR OUR FIRST EXAM IN PRINCIPLES OF MICROECONOMICS

Our two midterm exams are each worth 15 percent of your semester grade. Bring two #2 pencils, a good eraser, a ruler (or a straight-edge), a picture ID, and a basic calculator (no calculators that can store text allowed). You will not be allowed to use your cell phones.

There will be 60-68 questions, including ___ matching and ___ multiple-choice questions, from chapters one, two, three, four, five and twenty-one.

Memorize the formulae for the four elasticity concepts we have studied.

Study the vocabulary from the text for the matching questions, and to help you read the multiple-choice questions.

You’re responsible for all of the material in the reading, homework and lecture. I suggest you reread each chapter. You should also review the graded homework assignments to make sure you have learned from any mistakes you may have made.

Here is a list of concepts you should understand:

Chapter 1: Macroeconomics, Microeconomics, The Economic Problem is the consequence of scarce resources and unlimited wants. Scarcity; a scarce good, division of labor, physical capital & other resources, positive and normative statements in economics, basic knowledge of graphs, three questions every economic system must answer, fallacy that association is causation, fallacy of composition.

Chapter 2: Economic systems (capitalism v. command), rules of the game and economic development, Production possibilities frontier (PPF) and the sources of economic growth, the PPF and trade: comparative advantage versus absolute advantage, opportunity cost (definition; also compute it with the appropriate units), gains from trade

Chapter 3: Know key concepts on page 67. Review your Aplia homework too.

Chapter 4: Law of Demand, Demand Curve Determinants (PoINTES), change in quantity demanded versus change in demand, normal and inferior goods, substitutes and complements

Law of Supply, change in quantity supplied versus change in supply, Supply Curve Determinants (TRANES)

Market equilibrium, surplus, shortage, shifts in Supply and Demand -- see PoINTES and TRANES above

Consumer surplus -- the difference between the maximum amount consumers would be willing to pay for a particular quantity of a good (usually the equilibrium quantity) and the amount they actually pay. Thus, consumer surplus is the area underneath the demand curve and above the equilibrium price -- the buyers' gains in our experiment.

Producer surplus -- the difference between the minimum amount producers would be willing to accept for a particular quantity of a good (usually the equilibrium quantity) and the amount they actually receive -- the sellers' gains in our experiment. Thus, producer surplus is the area above the supply curve and below the equilibrium price. In chapter seven, you will learn that producer surplus equals total revenues minus variable costs.

Aggregate gain -- the sum of producer and consumer surpluses.

The demand price is the Marginal Benefit= the extra or added benefit from (consuming) one more unit of a good or service. It is the maximum willingness to pay for that unit.

Marginal Cost is the extra or added cost of (producing) one more unit of a good or service. It is measured by the supply price, the minimum cost of producing that unit.

Price ceilings and their effects

Price floors and their effects

Summing individual demands to get market demand

Role of time in demand

Aplia experiments and related homework. New analysis assignments too.

Chapter Five: (Elasticity) Concepts: In addition to a thorough understanding of basic supply and demand concepts, you should be able to define, apply or perform the following: economic incidence of a tax; graph supply & demand; add a tax and determine its burdens by comparing the gross and net prices to the original equilibrium price; total revenue; elastic; inelastic; unit elastic; price elasticity of demand or supply, cross-price elasticity of demand (complements & substitutes); income elasticity of demand (normal and inferior goods) (know arc formulas and percentage formulas for all elasticity concepts); elasticity of linear demand and supply; consumers’ surplus; producers’ surplus; determinants of the price elasticity of demand, determinants of the price elasticity of supply.

Chapter Twenty-one: developing economies v. transitional economies, social capital, import substitution, export promotion, soft budget constraint, gradualism v. "big bang" in the transition to a market economy, privatization v. nationalization. For this chapter, the multiple-choice questions will be very similar to those on the Chapter 21 practice quiz distributed in class. You must find the answers to these practice questions in the textbook. There will be some matching questions to test your knowledge of the vocabulary from the text.

Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776.

David Ricardo developed the principle of comparative advantage in his book, The Principles of Political Economy. He demonstrated that it is comparative advantage, not absolute advantage, which determines the direction of trade. A country will specialize in and export the good in which it has comparative advantage (lower opportunity cost).