Review Sheet – Midterm Exam 1 – Study Guide | ECON 101, Exams of Microeconomics

Download Review Sheet – Midterm Exam 1 – Study Guide | ECON 101 and more Exams Microeconomics in PDF only on Docsity! Review Sheet – Midterm Exam 1 This is not meant to be a complete list, but is instead a guideline of many of the topics that will be tested on the exam. Professor Kelly reserves the right to question material that is not listed. Please review your notes carefully and work the practice questions. If you need additional questions, remember to check the website for help: http://www.ssc.wisc.edu/~ekelly/econ101/. Good luck! Background: - What is Economics? - Principles of economics - Definition and Overview - Macroeconomics vs. Microeconomics - Positive versus Normative Economics Positive statements can be shown to be true or proven to be false while normative statements are not testable. - Plotting functions - Finding the slope and intercept of a linear function - Solving two equations in two unknowns - Data Types Allocation of Resources: - Scarcity - Opportunity cost Opportunity cost is the production or consumption forgone when we make decisions to produce or consume something else. - Production possibility frontier - Feasible, unfeasible, inefficient and efficient zones - Interpreting the slope of the PPF The absolute value of the slope of the PPF is the opportunity cost of the good represented on the x–axis in terms of the good on the y–axis - The law of increasing opportunity cost (causes and implications) - Bowed outward PPF - Things that shift the PPF out - Absolute and comparative advantage Absolute advantage is related to who can produce more of a good while comparative advantage is related to opportunity cost. - The economic question (resource allocation) - Specialization and Trade Specialization is related to the opportunity cost of production for each country. - Economics systems (command economies vs. market economies) Page 1 Demand and Supply: - Demand versus quantity demanded - Determinants of demand income, prices of related goods, expectations, tastes, number of buyers - Shifts of the demand curve versus movements along the demand curve Only changes in the own price of the good cause movements along the demand curve. - The law of demand - Market demand as horizontal summation of the individual demand curves - Normal versus inferior goods Normal goods are consumed at greater quantities as income rises. Demand for inferior goods decreases as income increases. - Complements versus substitutes These concepts are related to cross elasticity. When two goods are complements (substitutes) the demand of one the goods shifts to the left (right) if the price of the other good rises. - Supply versus quantity supplied - Shifts of the supply curve versus movements along the supply curve -Determinants of supply (input prices, technology, number of sellers, expectations) - The law of supply - Market supply as horizontal summation of individual supply curves Market Equilibrium - Finding the equilibrium (solving from P, Q from two equations) At the equilibrium price the amount producers want to supply is just equal to the amount the consumers want to purchase. - Excess demand (shortage) - Excess supply (surplus) - Consumer surplus and producer surplus (calculate + identify graphically) Consumer surplus corresponds to the area between the demand curve, and the equilibrium price, while producer surplus corresponds to the area above the supply curve, and below the equilibrium price. Intervention in Markets The government may choose to intervene in markets in order to produce some desired outcome. The government often institutes programs to keep prices artificially above or below what they would be in equilibrium. These programs often result in outcomes other than that which was intended. Below is a brief description of some of the ways the government might intervene in markets. The majority of these programs are applied to agricultural markets. -Price ceiling – a price set by the government that cannot be exceeded. If the price ceiling is set above the equilibrium price then the program has no effect on the market. If Page 2