Final_Review_Guide_detail_

Final Review Guide

Introduction to Microeconomics 103

General notes:

This review guide is not complete (I can ask questions not mentioned on this sheet).

Any homework question or any permutation of homework question is fair game.

Any practice question or permutation of practice question is fair game.

You should also look over the questions at the end of the chapters.

The exam format will be multiple choice questions and short answer problems (it will look a lot

like old exams).

For sample exam questions, I would look over the homework, the study guide and the practice

questions (the in-class work).

Chapter 1:

• You should know the principles and their meanings.

1) Resources are scarce

2) The real cost of something is what you must give up to get it.

3) People make decisions at the marginMarginal Analysis

4) People usually exploit opportunities to make themselves better offPeople respond to

incentives

5) There are gains from trade

6) Market move toward equilibrium

7) Resources should be used as efficiently as possible.

8) Market usually leads to efficiencyNot the same at equity.

9) Market failure can be helped by government intervention.

Recommended text questions: 1, 4, 9, 11, 12

Chapter 2:

Given tables of inputs required or goods produced, you should be able to construct PPF’s,

calculate opportunity cost, comparative advantage, and absolute advantage.

Tell whether people gain or do not gain from trade in our models.

Comparative Advantage = when someone can produce more of the good than the other person.

Absolute advantage = when someone can produce more output with a given amount of time.

Gain from trade can be maximized when specialization is based on comparative advantage.

↘ Refer to the example in your lecture notes.

Recommended textbook questions: 1, 3, 8, 12

Chapter 3:

•Know the assumptions about perfect competition that we use in this chapter.

A market in which there are many buyers and sellers of the same good – not just one supplier.

•Describe what changes (shifts) demand and supply.

With the exception of price, changes in everything else will shift the supply and demand curve.

•Know what moves along each curve.

Changes in prices will lead to a movement along the supply and demand curve.

•How to find equilibrium in market diagrams.

The intersection between the supply and the demand curves determines the market equilibrium.

•Why is that the equilibrium (what happens at a price above or below equilibrium price?)

Because at that points (at P*) the quantity supplied = quantity demanded.

At a price above the equilibrium price, surplus occurs.

At a price below the equilibrium price, shortage occurs.

•You should be able to translate a word problem into the graphical effects on a supply and

demand diagram.

↘Refer to chapter 3 practice question number 1, 2 and 3.

•You should know when quantity/price move up, down, or are ambiguous.

↘Refer to chapter 3 practice question number 4.

Recommended textbook questions 2, 5, 8 and 16

Chapter 4:

•Graphically represent the effects of price ceilings and price floors, including quantities supplied

and demanded.

•Know who is helped and who is hurt by:

1) Rent controls

Winner: Those who can get rental apartments at the rent control price.

Loser: Those who cannot find rental apartments especially poor people.

2)Minimum wage laws

Winner: Those who are still employed.

Loser: Those who got laid off. (Most probably teenagers)

3)Farm price supports (subsidies or price floors)

Winner: farmers because they get a guaranteed price

Loser: consumers and tax payers

•Graphically show the effects of taxing sellers. Can the government determine who bears the tax

burden? Why or why not?

The government can determine who bears the tax burden based on the supply and demand

elasticity.

•How does elasticity help determine who bears the tax burden?

The key here is that whoever is more inelastic pays more.

Example: Consider the market for gasoline. Suppose the market equilibrium price of gasoline is

$1.25/gallon and the equilibrium quantity is 100,000 gallons. Now suppose the government

levies a tax of $.35 on each gallon of gasoline sold. Assume that supply is more elastic than

demand in the market for gasoline. Graphically illustrate the effects of this tax. Who bears more

of the tax burden?