Lecture #6 - Exam 1 Review Session 1 The Exam Exam covers...

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Unformatted text preview: Exam 1 Review Session 1 The Exam Exam covers chapters 1­3 and chapter 4 up to and including price floors (slide 12) 34 multiple choice questions Each question is worth 3 points You get 1 point just for taking it You can miss 1 and still get 100 It is possible to get over 100 The exam will be taken at Assessment Services in University Center C­Suite 1200 (To the left of the Sportsmanship Statue) between 8:30 AM – 7:00 PM 2 How to study 1. 2. 3. 4. Go through your class notes Study the old extra credit and online quizzes and the activities (don’t just memorize the answers to questions, but understand how to answer the question). Do the questions in your coursebook (at least the multiple choice ones). Consult your textbook or come see me if there is anything you do not understand. 3 Chapter 1 Know the definition for scarcity Scarcity – The concept that there is less of a good freely available from nature than people would like. 4 Chapter 1 Know the 8 guideposts to economic thinking 1. Resources are scarce (no such thing as a free lunch). the concept of opportunity cost 2. Individuals are rational (most benefit at the least cost) 5 Chapter 1 3. Incentives matter 4. Individuals make decisions at the margin Marginal: effect of change in current situation (benefits and costs of one more). ex. Drive or fly ex. Supersizing your extra value meal *Cost­benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs* 6 Chapter 1 5. Information helps us make better choices, but is costly. 6. Beware of secondary effects: economic actions generate both direct and indirect effects 7. The value of a good or service is subjective 8. The test of a theory is its ability to predict 7 Chapter 1 Know the difference between a normative economic statement and a positive economic statement. Ex. Positive: When the price of peanut butter increases, people tend to buy less peanut butter. Normative: Peanut butter is way too expensive. 8 Chapter 1 Know the 4 pitfalls to avoid in economic thinking 1. Violation of ceteris paribus principle ceteris paribus: other things constant 2. Good intentions do not guarantee desirable outcomes ex. Endangered species act / Safety caps on medicine ex. Nirvana Fallacy and Child Labor / Sweatshops 3. Association is not causation 4. Fallacy of composition: belief that what is true for one is true for all ex. Standing at a football game 9 Chapter 2 Know how trade creates value Know that middlemen support trade by reducing transaction costs Understand the process of wealth creation through voluntary transactions 10 Chapter 2 Know the 4 incentives of private property rights 1. Use the resource in ways that benefit others ex. Empty Lot 2. Care for and manage what they own ex. Driving rental car vs. driving own car 11 Chapter 2 3. Private owners have an incentive to conserve for the future ex. Tragedy of the commons 4. Private owners have an incentive to make sure their property does not damage your property ex. Keeping your dog on leash 12 Chapter 2 What is the Production Possibilities Curve (PPC) Be able to identify and describe points on a production possibilities curve (PPC) inefficient: point inside of curve efficient: point on the curve unattainable: point outside of the curve 13 Chapter 2 Know shifters of PPC curve: 1. Change in the economy’s resource base 2. Changes in technology technology: the knowledge available in an economy at any given time. 3. A change in the rules under which the economy functions 4. A change in work habits. 14 Chapter 2 Know the Law of Comparative Advantage and how it works: The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost. 15 Chapter 2 3 questions every economy answers: 1. What will be produced? 2. How will it be produced? 3. For whom will it be produced? Know the difference between capitalism and socialism, and why capitalism works 16 Chapter 3 The law of demand: inverse relationship between price and quantity Demand curve is downward sloping 17 Chapter 3 Consumer surplus: The difference between the maximum amount consumers would be willing to pay and the amount that they actually pay. Consumer surplus is the area below the demand curve but above the price. (be able to find it on a graph, and calculate it) 18 Chapter 3 Know difference between change in demand and quantity demanded Change in quantity demanded: caused by a change in the current price of the good. (shift along the curve) Change in demand: caused by a change in anything else that affects demand (shifts the demand curve) 19 Chapter 3 Shifters of Demand: 1. Change in consumer income A. Normal goods B. Inferior goods 2. Change in number of consumers 3. Change in the price of a related good A. Substitutes B. Compliments 4. Change in expectations A. Expected price B. Expected income 5. Change in consumer tastes and preferences 20 Chapter 3 The law of supply: direct relationship between price and quantity. Supply curve is upward sloping 21 Chapter 3 Producer surplus: The difference between the minimum price suppliers are willing to accept and the price they actually receive. Producer surplus is the area above the supply curve but below price. (be able to find it on a graph, and calculate it) 22 Chapter 3 Know difference between change in supply and quantity supplied Change in quantity supplied: caused by a change in the current price of the good. (shift along the curve) Change in supply: caused by a change in anything else that affects supply (shifts the supply curve) 23 Chapter 3 Shifters of supply: 1. A change in resource price 2. A change in technology 3. Changes in nature and politics 4. Changes in taxes 24 Chapter 3 Be familiar with the idea of elasticity 1. Elastic: Change in quantity is sensitive to a change in price (flatter curves) 2. Inelastic: Change in quantity is not sensitive to a change in price (steeper curves) 25 Chapter 3 Know characteristics of market equilibrium, and how the market gets there: Equilibrium occurs where quantity demanded equals quantity supplied No excess supply or excess demand Consumer and producer surplus is maximized Gives you efficient price and quantity 26 Chapter 3 Be able to do single and double shift problems! (must know shifters of supply and demand to do them!) Demand changes: Price: moves in same direction Quantity: moves in same direction Supply changes: Price: moves in opposite direction Quantity: moves in same direction 27 Chapter 3 Know the concept of the invisible hand principle: The tendency for people, while pursuing their own interests, to promote the economic well­being of society. (achieved through market prices) 28 Chapter 4 Labor market: Price = wage Quantity = employment Labor demand is downward sloping (firms demand labor). Labor supply is upward sloping (people supply labor). 29 Chapter 4 Understand the concepts of price floors and know when and how they affect market equilibrium. 30 Good Luck! Any other questions? 31 ...
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