ECON 101 Study Guide: Exam One Exam # 1: CHAPTERS 1-6 Exam will include approximately 20 multiple-choice questionsSupply & DemandThe Basics:Introduction to the Basics of Supply and DemandThree Questions:- What?- How?- How much?Identify and describe the three major actors. Give examples. What is a market? - An area in which buyers and sellers exchange the goods and serviceso Where do they exist? Give an Example. o Define and describe the different types of markets? Economies: Define the following terms and provide an example to better assist with understanding.1. Market Economy:2. Capitalist Economy:3. Free Market Economy:4. Command Economy:- Circular Flow of EconomyDescribe the circular flow of economy. Be sure to first define land, labor, and capital.Opportunity Cost: Opportunity Cost: Of any economic decision is the foregone value of the next best alternative that is not chosen; a combination of direct and imputed cost.o Imputed Cost -o Direct Cost – Use the example of ‘Going to College’: Identify the opportunity cost (the direct cost and imputed cost)Demand:*Desire is not equal to demand Demand = desire + ability to pay o Taste or preferences o Size of the population o Income of the average householdo Distribution of income among householdo Price of the commodityo Price of other commodities Goodso Substituteso Compliments o Unrelated Normal Good: Inferior Good:Price quantity combination: demand curve (connected)What is a demand curve? Describe and provide the different behaviors of a demand curve.  The demand curve for a good connects points describing how much consumersa. Actually bought at different prices during a particular period.b. Actually bought at different prices in different periods.c. Would have been willing and able to buy at different prices during a particular period.d. Would have been willing and able to buy at different prices in different periods.What happens when there is a change in demand? What happens when there is change in quanity demand? Which of the following will not shift the demand curve for Spam to the left ()?a. increased media attention paid to cholesterol b. increased popularity of vegetarianismc. rise in the price of hamburger d. falling consumer incomesWhat is a necessity? Define and provide and example. Supply:What are the supply determinants? Consumer ChoiceConsumer choice - Marginal Utility:Total Utility: Budget Line:Consumer Theory:  Slope of the indifference curve: The slope of the indifference curve is called the Marginal Rate of Substitution. It represents how many units of one good the consumer is willing to give up in exchange for one unit of the other good while remaining just as satisfied (i.e. having the same total utility.) What is the slope of the household’s budget line (labeled xx’)? Market Demand & ElasticityEquilibrium:Define. Then answer the following essay question. Household Equilibrium:Market Equilibrium:Suppose a "typical" household consumes only 2 goods: (i) "UPS parcel delivery services", and (ii) and index of "all other goods." Show graphically the household's equilibrium consumption of both goods before and after the strike assuming (for this question only) that the price of UPS parcel delivery services rose, all other prices and incomes constant.(a) What happens to the ratio of the two goods consumed? Why? (b) Does the household's purchasing power rise, fall, or stay the same? Why? (illustrate graphically)(c) Does the household's satisfaction rise, fall, or stay the same? Why? (illustrate graphically)Consumption curve:  At each point of the consumption curve, the slope of the budget line =- ( P foodP other good )Market Demand Curve:  Combine the demand curve of two or more householdsPrice Elasticity of Demand: Equals 1 for linear demand curveValues of Price of Elasticity of DemandDefine each value of price of elasticity of demand. Be sure to include equations.o Total Inelastic: o Inelastic:o Unit Elasticity:o Elastic with Respect to its Price:Price of Elasticity:*The arch elasticity is the approximation of the true price of elasticity used onlywhen we don’t know the slope of the demand curve.Formula for Price of Elasticity: Determinants:- Number and closeness of substitutes - Importance in consumer’s budget- How narrowly the commodity is defined- The nature of the good (necessities have low elasticity of demand- luxury has high price of elasticity of demand)- The passage of time- Given time to adjust, people will find substitutes Supply and Demand Elasticity: Define and provide characteristics for each. Be sure to include any significant information associated with each that was mentioned in lecture or section. Income Elasticity of DemandCross-Price Elasticity of DemandElasticity of