Exam Review

Overview of Key Topics

• International Trade
• Elasticity
• Consumer Theory
• Production and Cost Theory

Trade Elasticity

• Elasticity in the context of trade refers to how responsive the quantity supplied or demanded is to changes in price.
• Important for understanding consumer behavior and producer responsiveness in the market.

Worksheets and Quizzes

• Students should have completed four worksheets covering:
  • Trade
  • Elasticity
  • Consumer Theory
  • Production Theory
• Additionally, students are expected to complete four quizzes (three standard and one on Carmen).
• Review resources include top hat questions and navigation links to the connect home page.

Connect Home Page Details

• On the connect home page, students can:
  • View completed assignments (marked with a blue marker).
  • Check assignments yet to be completed.
  • Access LearnSmart assignments for additional practice; marked as recharge.
  • Students can spend varying amounts of time on these assignments for practice (recommendation of 10-15 minutes).

Test Preparation

• Major topics of the upcoming test include:
  • Absolute advantage vs. comparative advantage.
  • Calculation of comparative and absolute costs.

Absolute vs. Comparative Advantage

• Absolute Advantage: The ability of one country to produce more of a good with the same resources than another country.
  • Example: The United States produces more vegetables but gives up more beans than Mexico.
• Comparative Advantage: The opportunity cost of a production choice that determines which country should specialize.
  • Mexico's lower opportunity cost for vegetables indicates it has a comparative advantage in this good.

Example Scenarios

• Before Trade:

  • United States produces:
  • Beef: 12
  • Vegetables: 26
  • Mexico produces:
  • Beef: 8
  • Vegetables: 4
  • Total Production Before Trade: 26 beef and 16 vegetables.

• After Specialization and Trade:

  • Combined production:
  • Beef: 30
  • Vegetables: 20
  • Gain of 4 beef and 4 vegetables; evenly split results in 2 extra beef and 2 extra vegetables for each.

Calculating Opportunity Costs in Trade

• Example: Honduras:
  • Choices:
  • Bananas: 32
  • Mangoes: 40
  • Calculation of opportunity cost for producing 1 banana:
  • $ext{Opportunity cost of 1 banana} = \frac{40}{32} = 1.25 ext{ mangoes}$
  • In terms of decimals, this is equivalent to 0.6 mangoes for each banana when considering other countries' trade dynamics.

Gains from Trade

• Before trade, Honduras has:
  • 10 bananas and 6 mangoes.
• After trade:
  • 10 bananas and 10 mangoes (a gain of 4 mangoes).

Elasticity of Demand

• The elasticity of demand measures how much the quantity demanded responds to a change in price:
  • Example calculation:
  • Price of tires decreases from 120 to 100.
  • Quantity sold increases from 50 to 80.

Percentage Change Calculation

1. Calculate percentage change in quantity:
   • $ext{Percentage change in quantity} = \frac{ ext{New Quantity} - ext{Old Quantity}}{ ext{Old Quantity}} imes 100$
2. Calculate percentage change in price:
   • $ext{Percentage change in price} = \frac{ ext{New Price} - ext{Old Price}}{ ext{Old Price}} imes 100$
3. Use the midpoint formula for calculations on the test:
   • $E_d = \frac{ ext{Percentage change in quantity}}{ ext{Percentage change in price}}$

• In this example, correct calculations yield an elasticity of -2.5 (noting that elasticity is often expressed in absolute terms).

Understanding Demand Curves

• On a linear demand curve:
  • The top of the curve represents elastic demand.
  • The bottom represents inelastic demand.
• Moving down the demand curve shows a decreasing elasticity as quantity demanded changes.

Final Notes

• Practice problems on the test will require the use of the midpoint formula.
• Make sure to clarify any calculations or formulations during review sessions.
• Keep track of your progress using the study resources outlined in this guide to ensure comprehensive understanding before the test.