econ midterms

Honors Economics: Study Guide

1.  Introduction to Economics:

• Define economics and its fundamental principles.

• Differentiate between microeconomics and macroeconomics.

• Understand the concepts of scarcity, choice, and opportunity cost, marginal cost…

2. Supply and Demand:

• Explain the law of demand and the law of supply.

• Explore factors affecting demand and supply.

• Analyze market equilibrium and its impact on price and quantity.

3. Elasticity:

• Define price elasticity of demand and supply.

• Calculate elasticity using the midpoint formula.

• Interpret elastic and inelastic demand.

4. Consumer Behavior:

• Discuss utility and its role in decision-making.

• Explore the concept of marginal utility.

• Analyze consumer choices and the budget constraint.

5. Production and Costs:

• Understand the production function.

• Explore the short-run and long-run production.

• Analyze costs, including fixed and variable costs.

6. Perfect Competition:

• Define perfect competition.

• Analyze the characteristics of a perfectly competitive market.

• Understand the implications of long-run equilibrium.

7. Monopoly:

• Define monopoly and its characteristics.

• Discuss barriers to entry and monopoly pricing.

• Analyze the welfare implications of monopoly.

8. Oligopoly and Monopolistic Competition (Imperfect competition)

• Define oligopoly and monopolistic competition.

• Analyze the behavior of firms in these market structures.

• GAME THEORY: How to use the matrix

9. Factor Markets:

• Explore the markets for labor and capital.

• Understand wage determination and interest rates.

• Analyze the impact of government policies on factor markets (EX: Lumps sum tax)

10. Market Failure:

• Identify different types of market failures.

• Understand externalities and public goods.

• Discuss the role of the government in correcting market failures.

• Role of GDP, DEFINE

Exam Strategies:

• Review past AP Microeconomics exams and practice questions.

• Focus on time management during the exam.

• Understand the format of multiple-choice questions and free-response questions.

• Utilize diagrams and graphs effectively to support your answers.

Additional Resources:

• Review the textbook notes on all the chapters we covered

• Go over the unit packets that have been provided throughout the course and re-examine the multiple choice/FRQ questions from them

• Supplement your study with online resources, video lectures, and practice exams.

• Use the College Board's official AP Microeconomics course description for additional guidance.Join study groups or online forums to discuss concepts and clarify doubts.

General Microeconomics Terms

• Economics: The study of how individuals and societies allocate scarce resources to satisfy unlimited wants.

• Microeconomics: The branch of economics that deals with the behavior of individuals and firms in making decisions regarding the allocation of resources.

• Scarcity: The condition that arises because resources are limited and cannot satisfy all human wants.

• Opportunity Cost: The next best alternative to forgo when making a decision.

• Incentives: Motivations or rewards that influence people's decisions and behaviors.

• Market Economy: An economic system in which decisions regarding production, investment, and distribution are guided by the price signals created by supply and demand.

• Command Economy: An economic system where the government makes all decisions about the production and distribution of goods and services.

• Mixed Economy: An economic system that combines elements of market economies and command economies.

Demand and Supply

• Demand: The quantity of a good or service that consumers are willing and able to purchase at different prices.

• Law of Demand: The principle that as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises, ceteris paribus.

• Supply: The quantity of a good or service that producers are willing and able to sell at different prices.

• Law of Supply: The principle that as the price of a good rises, the quantity supplied rises, and as the price falls, the quantity supplied falls, ceteris paribus.

• Equilibrium: The point at which the quantity demanded equals the quantity supplied at a certain price.

• Market Clearing Price: The price at which the quantity demanded equals the quantity supplied.

• Price Elasticity of Demand (PED): A measure of how much the quantity demanded of a good responds to a change in its price.

• Price Elasticity of Supply (PES): A measure of how much the quantity supplied of a good responds to a change in its price.

• Cross-Price Elasticity of Demand: A measure of how the quantity demanded of one good responds to a change in the price of another good.

• Income Elasticity of Demand: A measure of how the quantity demanded of a good responds to a change in consumer income.

Consumer Behavior

• Utility: The satisfaction or pleasure derived from consuming a good or service.

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

• Diminishing Marginal Utility: The principle that as more units of a good are consumed, the additional satisfaction from consuming each additional unit decreases.

• Total Utility: The overall satisfaction derived from consuming a given quantity of goods and services.

• Budget Constraint: The limitation on the consumption choices of a consumer based on their income and the prices of goods.

• Indifference Curve: A curve showing combinations of two goods that give the consumer equal satisfaction and utility.

• Substitution Effect: The change in quantity demanded of a good due to a change in its price, making it more or less attractive compared to other goods.

• Income Effect: The change in quantity demanded due to a change in the consumer's real income or purchasing power.

Costs of Production

• Production: The process of combining inputs to make goods and services.

• Factors of Production: The resources used to produce goods and services, including land, labor, capital, and entrepreneurship.

• Fixed Costs: Costs that do not vary with the level of output produced.

• Variable Costs: Costs that change with the level of output.

• Total Costs: The sum of fixed and variable costs.

• Marginal Cost: The additional cost of producing one more unit of output.

• Average Cost: The total cost divided by the number of units produced.

• Explicit Costs: Direct, out-of-pocket payments for resources.

• Implicit Costs: The opportunity costs of using resources owned by the firm, such as the foregone salary of the business owner.

Market Structures

• Perfect Competition: A market structure characterized by many firms, identical products, no barriers to entry, and perfect information.

• Monopoly: A market structure where a single firm is the sole producer of a good or service with no close substitutes.

• Oligopoly: A market structure dominated by a small number of firms, each of which has some control over price.

• Monopolistic Competition: A market structure where many firms sell similar but not identical products, with some degree of market power.

• Barriers to Entry: Factors that make it difficult for new firms to enter a market (e.g., high startup costs, government regulations).

• Price Maker: A firm that has the power to set its own price due to lack of competition (typically in monopolies or oligopolies).

• Price Taker: A firm in perfect competition that must accept the market price as given.

Market Failures and Government Intervention

• Market Failure: A situation in which the market does not allocate resources efficiently, leading to a loss of economic welfare.

• Externality: A side effect of an economic activity that affects third parties (positive or negative).

• Public Goods: Goods that are non-rivalrous and non-excludable, meaning consumption by one person does not reduce availability to others, and no one can be excluded from using the good.

• Private Goods: Goods that are both rivalrous and excludable.

• Free Rider Problem: When people benefit from a good without paying for it, typically associated with public goods.

• Government Intervention: Actions taken by the government to correct market failures, such as taxes, subsidies, regulations, or providing public goods.

Market Outcomes

• Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.

• Producer Surplus: The difference between the price a producer receives and the minimum price at which they are willing to sell a good.

• Deadweight Loss: A loss of total surplus that occurs when the market is not in equilibrium, often due to taxes, price controls, or monopolies.

• Tax Incidence: The division of the burden of a tax between buyers and sellers, which depends on the price elasticity of demand and supply.

• Price Ceiling: A government-imposed maximum price that can be charged for a good or service (e.g., rent controls).

• Price Floor: A government-imposed minimum price for a good or service (e.g., minimum wage).

Factor Markets

• Labor Market: A market in which workers sell their labor to firms, and firms purchase labor for production.

• Capital Market: A market for the buying and selling of financial instruments, such as bonds, stocks, and loans.

• Marginal Revenue Product (MRP): The additional revenue generated by employing one more unit of a factor of production, such as labor.

• Human Capital: The skills, knowledge, and experience possessed by individuals that can be used for productive activities.

Theory of the Firm

• Short-Run: A period during which at least one factor of production is fixed.

• Long-Run: A period in which all factors of production can be varied, and firms can enter or exit the market.

• Economies of Scale: The cost advantages that firms experience as they increase the scale of production, leading to lower average costs.

• Diseconomies of Scale: The disadvantages that firms experience when they become too large, leading to rising average costs.

Essential Questions

 Market Structure and Welfare: A monopoly can often charge higher prices than a perfectly competitive market, leading to a reduction in consumer surplus and a loss of total welfare. However, some monopolists argue that economies of scale and innovation justify their market power.

Question: Discuss the trade-offs between the potential for increased innovation and lower prices in a perfectly competitive market versus the potential for monopoly power and reduced consumer welfare. Under what conditions, if any, could a monopoly be considered efficient or socially beneficial?

 Price Elasticity of Demand and Tax Incidence: The government imposes a per-unit tax on a good. The price elasticity of demand for this good is relatively inelastic, while the price elasticity of supply is elastic.

Question: Explain how the relative elasticities of supply and demand influence the distribution of the tax burden between consumers and producers. Provide an example to illustrate your reasoning, and analyze the implications for both parties.

 Externalities and Market Failure: Consider a market where a negative externality (e.g., pollution) is present. The government imposes a per-unit tax on firms that cause pollution to reduce the externality's effects.

Question: Analyze the effectiveness of a per-unit tax in addressing the externality. How does this compare to other possible government interventions, such as a cap-and-trade system or direct regulation? Which approach is most efficient, and why?

 Game Theory and Strategic Interaction: Two firms in a competitive industry are considering whether to engage in price competition or to coordinate prices through a tacit understanding (without explicit collusion). Both firms have the option to either lower prices (price war) or maintain prices.

Question: Use the framework of game theory (e.g., the Prisoner’s Dilemma) to explain the strategic decisions of these firms. What factors might lead to a stable outcome, and what are the potential consequences of both firms choosing to engage in a price war?

 Income Distribution and Market Outcomes: A labor market has two distinct groups of workers: skilled and unskilled. Skilled workers earn higher wages due to higher education and experience, while unskilled workers earn lower wages. However, there is also a significant income gap between these groups, which raises concerns about fairness.

Question: Analyze the role of human capital in determining income distribution. How do market forces (supply and demand for labor) interact with policy interventions (e.g., minimum wage laws, education subsidies) to affect income inequality? Should the government intervene to reduce income inequality, and if so, what policies would be most effective?