Chapter 1 11 15a Review Thursday December 17 2015 5 29 PM Ch 1 a know the difference between a positive and normative statement economics explains how the economy works Positive Normative economics prescribes solutions to economic problems Ch 2 Ch 3 a understand the difference between opportunity cost and direct costs The opportunity cost of any choice is what we must forego when we make that choice The opportunity cost of a choice includes both explicit costs and implicit costs explicit costs The dollars sacrificed and actually paid out for a choice The explicit direct money cost of a choice may only be a part and sometimes a small part of the opportunity cost of a choice b know whether a point in a PPF diagram is attainable and efficient for society or not production possibilities frontier PPF A curve showing all combinations of two goods that can be produced with the resources and technology currently available Points outside the frontier are unattainable with the technology and resources at the economy s disposal Society s choices are limited to points on or inside the PPF c understand in words the difference between comparative and absolute advantage no math A nation has a comparative advantage in producing a good if it can produce it at a lower opportunity cost than some other nation A country has an absolute advantage in a good when it can produce it using fewer resources than another country a know some examples of variables e g income that are associated with a shift in demand or supply a change in the price of a good causes a movement the demand curve along for a normal good and decrease the demand for a change in any variable that affects demand except for the good s price causes the demand curve to shift A rise in income will increase the demand an inferior good b know what a surplus excess supply and a shortage excess demand mean surplus An excess supply not eliminated by a fall in price so that quantity supplied continues to exceed quantity demanded shortage An excess demand not eliminated by a rise in price so that quantity demanded continues to exceed quantity supplied Ch 4 Ch 5 Ch 6 c know the meaning of substitute and complement goods in words no math A substitute is a good that can be used in place of another good and that fulfills more or less the same purpose A complement is the opposite of a substitute It s used together with the good we are interested in a identify the effect of a price ceiling or price floor on a firm s output level q price ceiling A government imposed maximum price in a market A price ceiling creates a shortage and increases the time and trouble required to buy the good While the price decreases the opportunity cost may rise price floor A government imposed minimum price in a market The result is a surplus continuing extra production of nonfat dry milk that no one wants to buy at the going price b understand why the imposition of an excise tax leads to a shift in the supply or demand curve excise tax A tax on a specific good or service A tax collected from sellers shifts the supply curve upward by the amount of the tax A tax collected from buyers shifts the demand curve downward by the amount of the tax a know the concepts of price and income elasticities in words be able to recognize these formulas but no calculations will be necessary a price elasticity measures the sensitivity of demand to price as we move along the demand curve income elasticity tells us the relative shift in the demand curve at a given price Income elasticity change in QD change in income b know the difference between normal and inferior goods normal goods A good that people demand more of as their income rises inferior goods A good that people demand less of as their income rises a know the basic concepts of marginal utility MU and diminishing marginal utility Marginal utility The change in total utility an individual obtains from consuming an additional unit of a good or service law of diminishing marginal utility As consumption of a good or service increases marginal utility decreases b know how the budget constraint is affected by a change in a price or income budget constraint The different combinations of goods a consumer can afford with a limited budget at given prices Px Py the relative price of good X the opportunity cost of one more unit The absolute value of the slope c recognize that consumers should increase their purchases of goods for which MU divided by price is high relative to other goods biggest bang for your buck Ch 7 Ch 8 Ch 9 a know the concept of marginal product MP and diminishing marginal product marginal product of labor The additional output produced when one more worker is hired The law of diminishing marginal returns states that as we continue to add more of any one input holding the other inputs constant its marginal product will eventually decline b know the difference between marginal and average costs Marginal cost The increase in total cost from producing one more unit of output Average total cost Total cost divided by the quantity of output produced Average variable cost Total variable cost divided by the quantity of output produced average fixed cost Total fixed cost divided by the quantity of output produced c know what a sunk cost is sunk cost A cost that has been paid or must be paid regardless of any future action being considered a know the definition of total revenue and marginal revenue total revenue The total inflow of receipts from selling a given amount of output b understand why profit maximization requires MR MC c understand how to find optimal output q to maximize a firm s profit a recognize the three conditions for a market to be competitive in lecture notes b be able to find optimal q p and profit level for a competitive firm c understand why the firm s demand curve is horizontal under perfect competition Ch 10 a be able to find optimal q p and profit level for a single price monopoly b understand why the marginal revenue curve MR lies below the demand curve for a single price monopolist c know the definition of price discrimination Ch 11 a be able to distinguish between perfect competition monopoly monopolistic competition and a cartel b know the definition of a Nash equilibrium c be able to find the Nash equilibrium for a 2 by 2 matrix of player payoffs Ch 15 a from prior to the third exam know the definition of a public good and be able to recognize some examples b learn any material covered after the third exam
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