ECO 101-830     Principles of Microeconomics      Review   Exam 1      Spring 2006

Format:   20 multiple choice (60 points), 4 problem (40 points); Chapters 1-3         Bring:  pencil, basic calculator (optional)

 

To prepare:

  • come to class regularly and pay attention; follow up on any of the lecture slides that you do not understand
  • keep up with the reading  (reading all of the chapters the night before the exam will be of very little help)
  • go through this study guide carefully, understanding all the terms and being ready to answer any of the questions without referring to your notes or the book
    • some students make flash cards from index cards
  • try the Explorations in Supply and Demand quiz
  • try the Testing System on Amosweb.com: http://www.amosweb.com/tst/
    • topics:  Demand, Market, Market Shocks, Production Possibilities, Scarcity, Supply
    • some of these questions are more applicable to our class than others

1.  The Economic Way of Thinking

  • What is scarcity?  why is it the central economic problem?  what is opportunity cost?
    • What is the relationship between scarcity, choice, and opportunity costs?
  • What three questions relating to scarcity must every society answer?
    • who decides these questions in the U.S. economy?
    • who decides in pure capitalism?  a mixed system?  a command economy?
  • What are the factors of production?  Describe each of these categories.
  • What is specialization?  what is comparative advantage?  how do the two relate?
  • What does the production possibilities frontier show?
    • how to interpret points on, inside or outside the PPF
    • how does the PPF demonstrate scarcity and tradeoffs?
    • why is the PPF concave? (BOTH a negative and increasing slope)
      • why are opportunity costs increasing?
        • why aren’t resources easily substitutable between two uses?
    • what causes the PPF to shift out over time?
  • What is the difference between micro and macroeconomics?
  • Distinguishing  between normative and positive statements
  • Relationships between variables
    • positive correlation vs. negative correlation
    • correlation vs. causation!
  • Fallacy of composition
  • Secondary effects

Appendix:  Making and Using Graphs

  • interpreting graphs
  • understanding the difference between time series, cross section and scatterplot graphs
  • recognizing negative, positive, nonlinear relationships in graphs
  • calculating the slope of a line
  • the behavior of the slope of linear vs. nonlinear curves

2.  Demand and  Supply

  • Demand--a model of buyer behavior
    • the law of demand
    • other factors affecting demand:
      • income (normal and inferior goods), prices of substitutes/complements, changes in preferences/tastes, expectations, population and demographic changes
      • how does each of these factors affect the demand curve?
    • change in quantity demanded vs. a change in demand
      • which shifts the demand curve?  which is due to a change in the price of that good?
  • Supply--a model of seller behavior
    • the law of supply
    • other factors affecting supply:
      • costs of production,  prices of complements/substitutes in production, expectations, number of suppliers, productivity
      • how does each of these factors affect the supply curve?
    • change in quantity supplied vs. a change in supply
      • which shifts the supply curve?  which is due to a change in the price of that good?
  • Equilibrium
    • quantity demanded= quantity supplied;   why is this an equilibrium?
    • how do shifts in the demand curve and/or supply curve affect equilibrium price and quantity?
    • application: 
      • given and market and an event, be able to recognize what curves shift, what direction, and what happens to price and quantity
      • given a price change in a market, explain how a change in demand and/or supply could lead to that price change

3.  Supply, Demand and Elasticity

  • Price Elasticity of Demand
    • what does it tell us? (If demand elasticity is -3, what does that mean?)
    • how do you calculate it?
      • is elasticity the same for all points on the demand curve?
    • what does it mean when elasticity is =1, <1, >1 (in absolute value)?
    • what do demand curves look like when they are
      • elastic, inelastic, perfectly elastic, perfectly inelastic
    • how does demand elasticity affect total revenue?
    • what factors influence the elasticity of demand?
  • Price Elasticity of Supply
    • what does it tell us?  (If supply elasticity is 0.5, what does that mean?)
    • how do you calculate it?
      • is elasticity the same for all points on the supply curve?
    • what does it mean when elasticity is =1, <1, >1?
    • what do supply curves look like when they are
      • elastic, inelastic, perfectly elastic, perfectly inelastic
    • what factors influence the elasticity of supply?
  • Cross Elasticity of Demand
    • what does it tell us? how do you calculate it?
    • how does cross elasticity differ for substitutes and complements?
  • Income Elasticity of Demand
    • what does it tell us? how do you calculate it?
    • how does income elasticity differ for normal and inferior goods?