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ECON 101 Review

ECON 101 Review. Principles of Economics: Summer Session I . Disclaimer. This is not a substitute for going through your notes and textbook thoroughly in preparation for the final. This is a rough outline of what we have done so far.

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ECON 101 Review

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  1. ECON 101 Review Principles of Economics: Summer Session I

  2. Disclaimer • This is not a substitute for going through your notes and textbook thoroughly in preparation for the final. • This is a rough outline of what we have done so far. • You are responsible for everything we have covered in classes (quizzes, homeworks, midterm, etc) so anything I missed in these slides that I talked about in class is still fair game.

  3. Now you can tell people you know economics! • Economics is a social science that studies decision-making processes of economic agents (firms, consumers, government, society as a whole) and how scarce resources are allocated amongst competing uses. • Economics is a social science because it applies the scientific method (develop models, test hypotheses, revising models) to the study of interaction among individuals.

  4. Microeconomics • We spent the first three weeks on microeconomics. • Microeconomics studies the behavior of the individual economic agents that make up the overall economy. • These decisions include government decisions, household consumption decisions and also firm pricing decisions.

  5. Chapter 1: Foundations • Scarcity – Unlimited wants excess the limited resources available to fulfill those wants. • Three Key Economic Ideas • 1) People are rational • 2) People respond to economic incentives • 3) Optimal decisions are made at the margins

  6. Chapter 1: Foundations • Cost-Benefit Analysis • Optimal decision is to continue any activity up to the point where marginal benefit (MB) = marginal cost (MC) • If MB > MC  do more of the activity • If MB < MC  do less of the activity

  7. Chapter 1: Foundations • Tradeoffs  Because of scarcity, producing one good or service means producing less of another • Measuring tradeoffs is done by using opportunity costs (the value of the next best alternative to a particular activity)

  8. Chapter 2: Trade Offs and Comparative Advantage • We can use a simple model of production possibility frontiers (PPFs) to model tradeoffs. • What is a PPF? Can you draw me a PPF? How do tradeoffs correspond to the slope of the PPF? • Can you compute opportunity costs?

  9. Chapter 2: Trade Offs and Comparative Advantage • Then we talked about trade, comparative advantage and absolute advantage. • Do you know what each of these terms mean? • Main point: the basis for trade is comparative advantage, not absolute advantage.

  10. Chapter 3: Supply and Demand • We then analyzed what a market is. We broke the market into the buyer’s side and the seller’s side. • From the buyer’s point of view, we studied demand. • Before that, we studied different types of goods (substitutes, complements, inferior, normal) • Can you draw me a demand curve? Do you know what it represents? (buyer’s willingness to pay for a good) • Why is demand downward-sloping (Law of Demand)

  11. Chapter 3: Supply and Demand • What explains the law of demand? (substitution effect, income effect) • Then we studied variables that shift the market demand (shifts of the demand curve). What are such variables and how do they shift the demand curve? • Can you distinguish between a shift of a demand curve vs. a shift along a demand curve?

  12. Chapter 3: Supply and Demand • To analyze the seller’s side of the market, we introduced supply. • Again, you need to know what a supply curve represents, why is it upward-sloping, what shifts the supply curve, how to draw it, and how to distinguish between a shift of the supply curve vs a shift along the supply curve.

  13. Chapter 3: Supply and Demand • Then, we put supply and demand together to obtain a market equilibrium, where prices and quantities exchange are determined. • Why is the equilibrium exactly where demand=supply? What would happen otherwise? • Can you algebraically find this number? (i.e., do you know how to find the intersection of the two lines?)

  14. Chapter 4: Efficiency, Price Setting, Taxes • What is an efficient market? • What is consumer surplus? Do you know how to compute it? What is producer surplus? Do you know how to compute it? • What is a price ceiling and price floor? In which sort of markets would the government step in to set prices? • How do taxes affect total surplus? What is deadweight loss? Can you find deadweight loss on a graph and can you compute it? • What is a tax burden? When is a tax efficient?

  15. Chapter 5: Externalities • What is an externality? • What is a positive/negative externality? • Graphs that go along with positive/negative externalities (Marginal Private/Social Benefit, Marginal Costs) • When does a market fail? • What causes externalities?

  16. Chapter 5: Externalities • Private solutions to externalities – The Coase Theorem • What does this theorem say? Do you know how to find ways for two people to bargain between them? • Socially efficient outcomes? • Now how would the government deal with externalities (public solutions)? • Taxes? Subsidies? How does this affect the graphs?

  17. Chapter 5: Externalities • Four categories of goods • Constructing market demand for a private good vs. constructing market demand for a public good • How would you find the optimal quantity of a public good?

  18. Chapter 6: Elasticities • What does elasticity mean, intuitively? • Make sure you understand the different types of elasticities that we learned: price elasticity of demand, cross-price elasticity of demand, income elasticity of demand, price elasticity of supply. • Do you know what the midpoint method is? • Do you know how slopes of demand curves roughly correspond to different price elasticities of demand?

  19. Chapter 9: Consumer Behavior • How do consumers make consumption decisions? • What is utility? What is marginal utility? (refer to handouts for examples) • Do you know what a budget line is? Given prices, do you know how to find the exact equation for the budget line? • What is the optimal consumption rule? (marginal utility per dollar spend on each good is the same) • What happens when marginal utility per dollar spent for good X is higher than that for good Y?

  20. Market Structures: Chapters 11, 12, 13, 14 • We defined four types of market structures: perfect competition, monopolistic competition, monopoly and oligopoly. For each of them, you should know the following: • What they are • How are the demand curves faced by each type • The main characteristics of each • If I give you an example of a market, can you tell me which structure it has?

  21. Macroeconomics • Macroeconomics studies aggregation issues. • We studied fluctuations within the economy as a whole.

  22. Chapter 20: Unemployment, Inflation • Measuring Total Production: GDP • What is the definition of GDP? • Why is measuring GDP by calculating the total expenditures on final goods and services the same as measuring GDP by calculating total value of income? • What are the components of GDP? • Given actual numbers, can you calculate GDP? • Do you know how to calculate GDP by using the “value added method”? What is “the value added” to a good?

  23. Chapter 20: Unemployment, Inflation • What are the shortcomings of GDP as a measure of well-being? • What is Real GDP? Nominal GDP? Can you compute these numbers? What is the difference between Real GDP and nominal GDP? • What is the price level? • What is the GDP Deflator? What does it measure? Can you compute it?

  24. Ch 20: Unemployment and Inflation • What is the household survey? What is the unemployment rate? Labor force participation rate? • If I give you numbers, can you find these rates? • Can you classify people into groups of employment if I tell you their characteristics? • What are some problems with the unemployment rate? • Types of unemployment? (frictional, structural, cyclical)

  25. Ch 20: Unemployment and Inflation • What is inflation? • What is the Consumer Price Index (CPI)? Why is it a better measure of price levels that GDP deflator? • Can you compute the CPI if I give you a basket of goods? • How is the CPI computed? • How do you interpret the CPI? • Is the CPI accurate? What are some biases? • How about Producer Price Index (PPI)? What does it measure? Relationship between CPI and PPI?

  26. Ch 20: Unemployment and Inflation • How do we use price indexes to adjust for the effects of inflation (if Mom made 20 K in 1980 and the CPI was 104 in 1980 and 215 in 2010, what was the equivalent salary in 2008?) • What is an interest rate? What is the real interest rate? Nominal interest rate? Relationship between the two? How does inflation affect real interest rates?

  27. Ch 21: Growth and business cycles • What is long-run economic growth? • How do you calculate long-run economic growth? What is the rule of 70? • What determines long-run economic growth? • How is savings and investment determined in a macroeconomy (the algebra that gets you to S=I) • What does this actually mean?

  28. Ch 21: Growth and business cycles • How does S=I affect the loanable funds market? • What is the loanable funds market? What happens there (what is determined)? Who characterizes supply and demand in this market? • How do you explain shifts in the loanable funds market? • What is a business cycle? What are different phases in business cycles? What typically happens to unemployment, inflation in each phase?

  29. Ch 25: Money, Banks, Finance • What is money and why do we need it? • What was used before money? Why was it so inconvenient? • What functions must anything that is used as money fulfill? • What are criteria that make a good suitable for use a medium of exchange? • How is money measured in the US today (M1, M2)?

  30. Ch 25: Money, Banks, Finance • What is a balance sheet for a bank? What sort of accounting equation holds there? • How does a bank create money? You need to know the exact process! • What is the simple deposit multiplier? What is the required reserve ratio? How do you find the total change in checking deposits?

  31. Ch 21: Money, Banks, Finance • What is the Federal Reserve? • How was the Fed established? • What are some main roles of the Fed? • How does the Fed manage money supply (OMOs, discount policy, reserve requirements)? You should know how changes in each of the monetary policy tools affects the money supply. • What is the quantity equation (MV = PY)? What does each part of this equation mean? How can you use it?

  32. Brief notes on Ch 26, 27 • What is monetary policy? What are the main monetary policy goals (there are 4 of them)? • What is fiscal policy?

  33. Macroeconomic Schools of Thought • Go through the slides we went through on Wednesday. • Can you explain to me what a paradigm is? • How did each school of thought emerge from the preceding one? • What are the main characteristics of each school of thought?

  34. Final Exam • 50 questions, 4 written questions (with subquestions, of course). • You have 3 hours. • 8-11 am on Monday, same classroom. • Bring Scantron and calculator • 50-50 Micro and Macro

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