Econ 222: Midterm 1 Review(You may bring only a non graphical calculator to the exam)In this review sheet I have tried to include the main concepts that we have discussed in class and that you need to know for the exam. However, keep in mind that the exam can consist of any material covered in class, regardless of whether it appears on this sheet, so read and understand the material covered during the lectures. Review all your homework questions. On the exam there will be some true false questions; in order receive full credit you need to explain the reason for your choice. The exam will also include some definitions that you need to explain. Lastly, there will be questions regarding the PPF and the supply and demand material, asking you to analyze the shifts in the supply and demand curve based on different scenarios, calculation of Nominal and real GDP and your understanding of the definition of GDP and its measurement using expenditure approach.Definitions and conceptsChapter 1 and 2 Chapter 2, Page 25, 39 – 42, Chapter 1, Page 10 – 13, Page 14 (Stability)1) Scarcity2) Inputs (Factors of Production) Land, labor and capital3) Outputs4) Economic good5) Free good6) Efficiency7) The 3 fundamental problems faced by a society8) Command, Market and mixed economies. 9) Define Market10) How the three fundamental problems are resolved in a Free market economy, Command economy and mixed economy.11) Scientific approach.12) Economic Theory13) Economic model14) Role of assumptions15) The three fallacies: Post Hoc Fallacy, Fallacy of Composition, failing to hold things constant (ceteris paribus)16) StabilityChapter 1, Appendix Pages 17 – 22 1) Slope: Know the definition and the formula to calculate it. 2) What does a positive slope imply? What does a negative slope imply?3) Understand the difference between a movement along a curve versus a shift of thecurve.4) Understand what the 45o degree line means.5) Negative Slope implies opportunity cost. Chapter 2, Page 25, 26, 27, Pages 32 – 38 1) PPF along with its constraints.2) How scarcity is implied by the downward (negative) slope of the PPF. Constrained Choice.3) Opportunity cost4) Feasible, infeasible points with regard to the PPF.5) Production Efficiency6) Efficient and inefficient points with regard to the PPF7) Idle capital/ labor results in unemployment. This happens when we are inefficient(not making full use of our resources).8) Reasons for inefficient use of resources. A) unemployed resources (Business Cycles)B) Markets fail to reflect true scarcities. ( Environmental Degradation) 28) Efficient Mix of OUtput. What does that mean? 9) When we are producing efficiently, we face a sacrifice or a tradeoff (what does this mean?) Does a tradeoff apply when the society is producing inside the PPF?10) Opportunity costs of moving from one point to another on the PPF graph. (Slope)11) Difference between a capital good and a consumption good. (Future versus Current Consumption.)12) Investment13) Tradeoff between a capital good and a consumer good. 14) Economic Growth15) What causes shifts in the PPF.Chapter 3 Page 47 – 491) Market: 2 decision making units2) Price3) Role of prices in a market economy4) Circular Flow ModelC) The two types of markets.D) Who are the sellers and who are the buyers in the Product Market?E) Who are the sellers and who are the buyers in the Factor Markets?F) Who owns the factors of production?G) What prices are determined in the Factor Markets?H) What prices are determined in Product Markets?I) Know how dollars flow from households through product markets to the firms and then back from the firms through factor markets to the households. 5) Market Price and price as opportunity cost.Chapter 3 Pages 50 – 54, Pages 59 – 63, Pages 66 – 71 1) Quantity Demanded2) Demand Curve3) Law of (Downward Sloping) Demand4) Be able to identify quantity demanded on the demand curve for a specific price.5) Movement along a demand curve versus shift in a demand curve6) Factors that shift the demand curve 7) Why is the demand curve downward sloping (or reason for negative slope)? 8) Distinguish between Movements along the demand curve versus shifts of the demand curve.9) Normal good10) Inferior good11) Substitutes12) Complements13) Market Demand curve is the horizontal sum of all individual demand curves in the market at each price.14) Supply curve15) Why might the shape of the supply curve differ between short run and long run?16) Be able to identify quantity supplied on the supply curve at a specific price level.17) Firms motivated by Profit maximization.18) Understand what factors impact a firm’s cost of production and the link between costs of production and profit. 19) Factors that shift supply curve. 20) Market Supply curve is the horizontal sum of all individual firm supply curves in the market at each price.21) Market Equilibrium22) Market Clearing price. Be able to identify the equilibrium price and quantity in a market. 23) Surplus24) Be able to calculate the surplus at a particular price level.25) Shortage26) Be able to calculate the shortage at a given price level.27) Be able to compare initial equilibrium in a market with the final equilibrium after either a demand or supply shift and identify whether at the final equilibrium the new equilibrium Price and quantity have increased or decreased relative to the initial equilibrium.28) Who determines the price in a market economy?29) What is the rationing mechanism in a market economy? Chapter 6 Pages111 – 112, Chapter 5 Pages 100 – 102, Chapter 6 Pages 112 – 117, Page 120 – 125 (GDP Deflator and Problem of Fixed Weights on Page 122, 123 not included on midterm 1, we will cover it after the midterm.)1) Define GDP (Gross Domestic Product). Be also able to explain what each word inthe definition captures/implies.2) How do we add different kinds of goods like apples and oranges in the GDP?3) Difference between intermediate and final goods.4) Value added.5) Problem of double counting6) GNP7) The two approaches to calculating GDP. i) Income Approach (you do not need to know the details of this approach) ii) Expenditure Approach8) Equivalence of these two approaches. They both provide us with the same measure of the GDP.9) Total Expenditure Approach: Y = C + G + I + NX10) Be able to define each component of the expenditure approach.11) Define what the term Investment