Midterm 1 HON 202

HON 102, Prof. Irwin Midterm 1 Review Sheet

Overview

• The first midterm will cover everything discussed in class to date, specifically Chapter 1 through Chapter 7.

• The exam structure will include three types of questions: multiple-choice, short answer, and empirical problems.

• Reviewing the listed topics and practicing problems from quizzes and homework is essential for success on the exam.

Potential Exam Topics

Chapter 1

• What is Economics?

  • Definition: Economics is the study of how individuals, businesses, and governments make choices on allocating resources.

• Subsets of Economics:

  • Microeconomics: The study of individual parts of the economy, like businesses and households.

  • Macroeconomics: The study of the economy as a whole, focusing on national and global economies.

• Two Big Economic Questions:

  • What to produce?

  • How to produce?

  • For whom to produce?

• Factors of Production:

  • Land: Natural resources used to produce goods.

  • Labor: Human effort used in production.

  • Capital: Man-made resources used for production.

  • Entrepreneurship: The ability to combine the other factors to create goods and services.

• Key Ideas Underlying the Economic Way of Thinking:

  • Rational behavior: Individuals make decisions based on maximizing their utility.

  • Trade-offs and opportunity costs are inherent in every decision.

Chapter 2

• Production Possibility Frontier (PPF):

  • A graphical representation showing the maximum attainable combinations of two goods that can be produced with available resources and technology.

  • What the PPF Measures:

  • It illustrates trade-offs and opportunity costs.

  • Attainability: Points inside the curve are attainable but inefficient; points on the curve are efficient; points outside the curve are unattainable.

  • Efficiency: Maximizing output with given resources reflects productive efficiency.

• Marginal Costs:

  • The additional cost incurred by producing one more unit of a good or service.

• Allocative Efficiency:

  • Achieved when the production matches consumer preferences, leading to the maximization of total welfare.

• Technological Shifts: Changes in technology can expand the PPF outward.

• Opportunity Cost:

  • The value of the next best alternative that must be forgone when making a decision.

  • Students should explain opportunity cost beyond the PPF context as well.

• Gains from Trade:

  • Trade allows for specialization and increased efficiency, leading to mutual benefits.

• Comparative Advantage:

  • The ability of a party to produce a good or service at a lower opportunity cost than another.

• Marginal Benefit:

  • The additional satisfaction or utility gained from consuming one more unit of a good or service.

Chapter 3

• Demand & Supply Curves:

  • Demand Curve: A graph showing the relationship between the price of a good and the quantity demanded.

  • Supply Curve: A graph showing the relationship between the price of a good and the quantity supplied.

• Law of Demand:

  • As the price of a good decreases, the quantity demanded increases, with all else equal.

• Law of Supply:

  • As the price of a good increases, the quantity supplied increases, with all else equal.

• Shift vs. Movement:

  • Shifts occur due to external factors (e.g., income change), while movements occur due to price changes within the current curve.

• Market Equilibrium:

  • The point where the quantity demanded equals the quantity supplied, determining the market price.

• Graph Interpretation:

  • Ability to draw, interpret, and manipulate supply and demand curves to find equilibrium.

• Algebraic Equilibrium Solution:

  • Ability to calculate equilibrium using mathematical equations without graphical representation.

Chapter 4

• Elasticity Types:

  • Price Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in price.

  • Formula: ( rac{∆Q/Q{0}}{∆P/P{0}}) or ( rac{∆Q imes P{0}}{∆P imes Q{0}})

  • Income Elasticity: Measures responsiveness of quantity demanded to a change in consumer income.

  • Formula: ( rac{∆Q/Q{0}}{∆I/I{0}})

  • Cross-Price Elasticity: Measures the responsiveness of quantity demanded for one good to changes in the price of another good.

  • Formula: ( rac{∆Q/Q{0}}{∆P{other}/P_{other}})

• Elastic vs. Inelastic:

  • Elastic: Demand is sensitive to price changes.

  • Inelastic: Demand is insensitive to price changes.

• Normal vs. Inferior Goods:

  • Normal goods: Demand increases with an increase in income.

  • Inferior goods: Demand decreases with an increase in income.

• Substitutes vs. Complements:

  • Substitutes: Goods that can replace each other.

  • Complements: Goods that are consumed together.

Chapter 5

• Resource Allocation Methods:

  • Various methods include market-based, command-based, and mixed systems.

• Relationship between Demand and Value:

  • Willingness to pay reflects value; higher willingness indicates higher perceived value.

• Market Demand and Consumer Surplus Calculation:

  • Market demand is the sum of individual demands; consumer surplus is the area between the demand curve and the price level.

• Relationship between Supply and Cost:

  • Supply price reflects the minimum price at which producers are willing to sell.

• Producer Surplus Calculation:

  • Area between the supply curve and the market price.

• Deadweight Loss Calculation:

  • The loss of economic efficiency when the equilibrium outcome is not achievable or achievable.

• Market Failures:

  • Causes include externalities, incomplete information, and market power, leading to inefficient outcomes.

Chapter 6

• Price Controls:

  • Price Floor: A legally established minimum price; it can lead to surplus.

  • Price Ceiling: A legally established maximum price; it can lead to shortages.

• Effects of Taxes:

  • Taxes can create a wedge between the price consumers pay and the price producers receive.

• Calculating Outcomes:

  • Understanding how to compute consumer surplus (CS), producer surplus (PS), deadweight loss (DWL), and tax revenue under various price controls.

• Tax Incidence:

  • The distribution of tax burden between buyers and sellers based on elasticity of demand and supply.

• Black Market:

  • An illegal market that arises when there are price controls, with search costs involved in finding goods.

• Government's Role in Markets:

  • Governments intervene to correct market failures, redistribute resources, or stabilize the economy.

Chapter 7

• International Trade Benefits and Costs:

  • Benefits include increased varieties of goods and economies of scale; costs may include job losses in certain sectors.

  • Goods exchanged in international trade are often labeled as imports and exports.

• Arguments for and Against International Trade:

  • Pros include consumer surplus (CS) gains and producer surplus (PS) maximization.

  • Cons involve potential deadweight loss (DWL) due to trade barriers.

• Effect of Trade Restrictions:

  • Import or export restrictions typically result in increased prices and reduced availability of goods.

• Protectionism:

  • Pros: Protects domestic industries.

  • Cons: Leads to inefficiencies and higher prices for consumers.

Important Formulas

• Price Elasticity of Demand:

  • ( rac{∆Q}{Q{0}}) / ( rac{∆P}{P{0}}) or ( rac{∆Q imes P{0}}{∆P imes Q{0}})

• Income Elasticity:

  • ( rac{∆Q}{Q{0}}) / ( rac{∆I}{I{0}})

• Cross-price Elasticity:

  • ( rac{∆Q}{Q{0}}) / ( rac{∆P{other}}{P_{other}})

• Area of a Triangle:

  • A = rac{1}{2}bh