econ 101 review principles of economics: summer session i

ECON 101 ReviewPrinciples of Economics: Summer Session I

Disclaimer This is not a substitute for going through your notes

and textbook thoroughly in preparation for the final.

This is a rough outline of what we have done so far.

You are responsible for everything we have covered in classes (quizzes, homeworks, midterm, etc) so anything I missed in these slides that I talked about in class is still fair game.

Now you can tell people you know

economics! Economics is a social science that studies

decision-making processes of economic agents (firms, consumers, government, society as a whole) and how scarce resources are allocated amongst competing uses.

Economics is a social science because it applies the scientific method (develop models, test hypotheses, revising models) to the study of interaction among individuals.

Microeconomics We spent the first three weeks on

microeconomics.

Microeconomics studies the behavior of the individual economic agents that make up the overall economy.

These decisions include government decisions, household consumption decisions and also firm pricing decisions.

Chapter 1: Foundations

Scarcity – Unlimited wants excess the limited resources available to fulfill those wants.

Three Key Economic Ideas 1) People are rational 2) People respond to economic incentives 3) Optimal decisions are made at the margins


Cost-Benefit Analysis Optimal decision is to continue any activity

up to the point where marginal benefit (MB) = marginal cost (MC)

If MB > MC do more of the activity If MB < MC do less of the activity


Tradeoffs Because of scarcity, producing one good or service means producing less of another

Measuring tradeoffs is done by using opportunity costs (the value of the next best alternative to a particular activity)

Chapter 2: Trade Offs and Comparative

Advantage We can use a simple model of production

possibility frontiers (PPFs) to model tradeoffs.

What is a PPF? Can you draw me a PPF? How do tradeoffs correspond to the slope of the PPF?

Can you compute opportunity costs?

Chapter 2: Trade Offs and Comparative

Advantage Then we talked about trade, comparative

advantage and absolute advantage.

Do you know what each of these terms mean?

Main point: the basis for trade is comparative advantage, not absolute advantage.

Chapter 3: Supply and Demand

We then analyzed what a market is. We broke the market into the buyer’s side and the seller’s side.

From the buyer’s point of view, we studied demand.

Before that, we studied different types of goods (substitutes, complements, inferior, normal)

Can you draw me a demand curve? Do you know what it represents? (buyer’s willingness to pay for a good)

Why is demand downward-sloping (Law of Demand)


What explains the law of demand? (substitution effect, income effect)

Then we studied variables that shift the market demand (shifts of the demand curve). What are such variables and how do they shift the demand curve?

Can you distinguish between a shift of a demand curve vs. a shift along a demand curve?


To analyze the seller’s side of the market, we introduced supply.

Again, you need to know what a supply curve represents, why is it upward-sloping, what shifts the supply curve, how to draw it, and how to distinguish between a shift of the supply curve vs a shift along the supply curve.


Then, we put supply and demand together to obtain a market equilibrium, where prices and quantities exchange are determined.

Why is the equilibrium exactly where demand=supply? What would happen otherwise?

Can you algebraically find this number? (i.e., do you know how to find the intersection of the two lines?)

Chapter 4: Efficiency, Price Setting, Taxes

What is an efficient market?

What is consumer surplus? Do you know how to compute it? What is producer surplus? Do you know how to compute it?

What is a price ceiling and price floor? In which sort of markets would the government step in to set prices?

How do taxes affect total surplus? What is deadweight loss? Can you find deadweight loss on a graph and can you compute it?

What is a tax burden? When is a tax efficient?

Chapter 5: Externalities

What is an externality?

What is a positive/negative externality?

Graphs that go along with positive/negative externalities (Marginal Private/Social Benefit, Marginal Costs)

When does a market fail?

What causes externalities?


Private solutions to externalities – The Coase Theorem

What does this theorem say? Do you know how to find ways for two people to bargain between them?

Socially efficient outcomes?

Now how would the government deal with externalities (public solutions)?

Taxes? Subsidies? How does this affect the graphs?


Four categories of goods

Constructing market demand for a private good vs. constructing market demand for a public good

How would you find the optimal quantity of a public good?

Chapter 6: Elasticities What does elasticity mean, intuitively?

Make sure you understand the different types of elasticities that we learned: price elasticity of demand, cross-price elasticity of demand, income elasticity of demand, price elasticity of supply.

Do you know what the midpoint method is?

Do you know how slopes of demand curves roughly correspond to different price elasticities of demand?

Chapter 9: Consumer Behavior

How do consumers make consumption decisions?

What is utility? What is marginal utility? (refer to handouts for examples)

Do you know what a budget line is? Given prices, do you know how to find the exact equation for the budget line?

What is the optimal consumption rule? (marginal utility per dollar spend on each good is the same)

What happens when marginal utility per dollar spent for good X is higher than that for good Y?

Market Structures: Chapters 11, 12, 13,

14 We defined four types of market structures: perfect

competition, monopolistic competition, monopoly and oligopoly. For each of them, you should know the following: What they are How are the demand curves faced by each type The main characteristics of each If I give you an example of a market, can you tell me which

structure it has?

Macroeconomics Macroeconomics studies aggregation issues.

We studied fluctuations within the economy as a whole.

Chapter 20: Unemployment,

Inflation Measuring Total Production: GDP

What is the definition of GDP?

Why is measuring GDP by calculating the total expenditures on final goods and services the same as measuring GDP by calculating total value of income?

What are the components of GDP?

Given actual numbers, can you calculate GDP?

Do you know how to calculate GDP by using the “value added method”? What is “the value added” to a good?

Chapter 20: Unemployment,

Inflation What are the shortcomings of GDP as a measure of well-

being?

What is Real GDP? Nominal GDP? Can you compute these numbers? What is the difference between Real GDP and nominal GDP?

What is the price level?

What is the GDP Deflator? What does it measure? Can you compute it?

Ch 20: Unemployment and Inflation

What is the household survey? What is the unemployment rate? Labor force participation rate?

If I give you numbers, can you find these rates?

Can you classify people into groups of employment if I tell you their characteristics?

What are some problems with the unemployment rate?

Types of unemployment? (frictional, structural, cyclical)


What is inflation?

What is the Consumer Price Index (CPI)? Why is it a better measure of price levels that GDP deflator?

Can you compute the CPI if I give you a basket of goods?

How is the CPI computed?

How do you interpret the CPI?

Is the CPI accurate? What are some biases?

How about Producer Price Index (PPI)? What does it measure? Relationship between CPI and PPI?


How do we use price indexes to adjust for the effects of inflation (if Mom made 20 K in 1980 and the CPI was 104 in 1980 and 215 in 2010, what was the equivalent salary in 2008?)

What is an interest rate? What is the real interest rate? Nominal interest rate? Relationship between the two? How does inflation affect real interest rates?

Ch 21: Growth and business cycles

What is long-run economic growth?

How do you calculate long-run economic growth? What is the rule of 70?

What determines long-run economic growth?

How is savings and investment determined in a macroeconomy (the algebra that gets you to S=I)

What does this actually mean?

Ch 21: Growth and business cycles

How does S=I affect the loanable funds market?

What is the loanable funds market? What happens there (what is determined)? Who characterizes supply and demand in this market?

How do you explain shifts in the loanable funds market?

What is a business cycle? What are different phases in business cycles? What typically happens to unemployment, inflation in each phase?

Ch 25: Money, Banks, Finance

What is money and why do we need it?

What was used before money? Why was it so inconvenient?

What functions must anything that is used as money fulfill?

What are criteria that make a good suitable for use a medium of exchange?

How is money measured in the US today (M1, M2)?


What is a balance sheet for a bank? What sort of accounting equation holds there?

How does a bank create money? You need to know the exact process!

What is the simple deposit multiplier? What is the required reserve ratio? How do you find the total change in checking deposits?


What is the Federal Reserve?

How was the Fed established?

What are some main roles of the Fed?

How does the Fed manage money supply (OMOs, discount policy, reserve requirements)? You should know how changes in each of the monetary policy tools affects the money supply.

What is the quantity equation (MV = PY)? What does each part of this equation mean? How can you use it?

Brief notes on Ch 26, 27

What is monetary policy? What are the main monetary policy goals (there are 4 of them)?

What is fiscal policy?

Macroeconomic Schools of Thought

Go through the slides we went through on Wednesday.

Can you explain to me what a paradigm is?

How did each school of thought emerge from the preceding one?

What are the main characteristics of each school of thought?

Final Exam 50 questions, 4 written questions (with subquestions, of

course).

You have 3 hours.

8-11 am on Monday, same classroom.

Bring Scantron and calculator

50-50 Micro and Macro

econ 101 review principles of economics: summer session i

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