ECON 103 01 2015 Fall Exam 1 Study Guide The first exam will be from 7 00 9 00 p m on Wednesday October 7th in multiple locations see Exam 1 Logistics for the details This exam will include short answer questions and problem solving Short answer questions will be drawn from the list provided and the problem solving component will follow the themes identified below Bring a photo ID and a calculator to the exam but do not bring your cell phone Cell phone use during the exam will not be allowed You will be expected to show picture identification when you hand in your exam Don t neglect the reading Miller chapters 1 2 3 4 5 as well as the Bowles and the Pollin pdf files available on Moodle Short Answer Topics Characteristics that define capitalism 1 Wage labor workers earn wages workers don t own the things they produce 2 Production for profit capitalists make profits the purpose of production is for profit not for use Compare contrast international inequality of income before and after taxes Gini coefficient an index for comparing inequality Before tax your total income After tax your disposable income Theory of the Invisible Hand Prerequisite 1 Self interest people seek self interest Prerequisite 2 Competitive market huge amount of buyers huge amount of sellers individual buyer seller cannot influence the market Conclusion Total welfare of the society will be maximized discuss later with efficiency Opportunity Cost including constant vs increasing Shift of supply curve the curve changes position Absolute advantage vs comparative advantage Supply Demand determinants contrasting movement vs shift Law of supply when price goes up quantity supplied goes up Supply curve upward sloping curve Movement along supply curve from one point to another point on the same curve USE GRAPH to SHOW Technology Productivity improvement of tech more efficient and easier to produce supply curve shifts to right Cost of Inputs cost of input goes up more costly to produce decrease production supply curve shifts to left Price Expectations future price goes up increase production supply curve shifts to right Taxes per unit governments impose tax on each unit of goods higher cost supply curve shifts to left Subsidies per unit government gives money to each unit of goods lower cost production increases supply curve shifts to right Number of Firms more firms sellers more supply supply curve shifts to right Law of demand when price goes up quantity demanded goes down Demand curve downward sloping curve Movement along demand curve from one point to another point on the same curve Shift of demand fcurve the curve changes position Determinants of demand USE GRAPH to SHOW Income income goes up buy more demand curve shifts to right Tastes and Preferences people like something buy more demand curve shifts to right Prices of substitutes bigmac and whopper are substitutes price of whopper goes up people buy fewer whoppers people buy more bigmac demand curve of bigmac shifts to right Prices of complements gas and cars are complements people need both at the same time to drive price of gas goes up people buy fewer gas people drive less demand for cars goes down demand curve of cars shifts to left Expectations people expect future price to go down e g an end of the year sales event today s demand will go down today s demand curve shifts to left Market Size more buyers bargaining power decreases demand curve shifts to right Determinants of demand USE GRAPH to SHOW Income income goes down Tastes and Preferences people hate something Prices of substitutes bigmac and whopper are substitutes no much difference between bigmac and whopper price of whopper goes down Prices of complements gas and cars are complements people need both Expectations people expect future price to go up Market Size fewer buyers at the same timeto drive price of gas goes down Price ceilings and price floor Government sets a price below the equilibrium level E g the equilibrium price for milk is 3 gallon The government in order to help the poor people imposes a price ceiling of 2 gallon So milk is sold below the equilibrium price Results 1 improves welfare of poor low income people 2 leads to a shortage quantity demand for milk quantity supplied of milk using graph to show Price floors Government sets a price above the equilibrium level E g the equilibrium price for milk is 3 gallon The government in order to help the milk farmers imposes a price floor of 5 gallon So milk is sold above the equilibrium price Results 1 improves welfare of producers 2 leads to a surplus quantity demand for milk quantity supplied of milk using graph to show Minimum wage controversies Minimum wage required by law the minimum hourly wage an employer can pay an employee for work E g in MA now minimum hourly wage 9 starting 1 1 16 minimum hourly wage 10 starting 1 1 17 minimum hourly wage 11 Results 1 improves welfare of low income workers 2 better for all employees society is less unequal 3 theoretically minimum wage leads to unemployment of low wage workers quantity of labor demand quantity of labor supply use graph to show But this theoretical argument lacks empirical evidence This is where controversies are focused Efficiency especially methods for identifying efficient outcomes Two criterion 1 market efficiency supply demand market equilibrium leads to maximum total welfare no deadweight loss i e maximum consumer and producer surplus 2 Pareto efficiency a situation in which it s impossible to improve anyone s welfare without harming someone Think Is the Emancipation a Pareto efficient process Are Pareto efficiency always good Market failures and externalities pollution Invisible hand produces disappointing or embarrassing results for society other people In seeking economic benefits people neglect the environment Holding parties neighbors are unhappy about noise and trash To prepare for the short answer section of the exam focus on three aspects of each topic 1 Can you define explain the concept including the use of appropriate graphs 2 Can you apply the concept to a specific set of circumstances 3 Can you evaluate the concept s importance and or its relationship to other material in the course Problem Solving Themes Constructing and working with production possibilities graphs Calculating and working with opportunity cost data including abs Working with consumer surplus producer surplus and deadweight comp adv loss Consumer surplus the price the consumers are willing to