APEC3001 – First Review Session Marc F. Bellemare Fall 2015

Structure of the Exam Four multi-part questions No huge surprises: Everything on the exam (save for bonus question) is stuff I discussed in lecture/similar to book problems. 60 points -> 75 minutes. Budget your time wisely, and you’ll have an extra 15 minutes at the end. Don’t leave anything blank.

Structure of the Exam Non-scientific, non-graphing calculator OK. Everything else (scientific, graphing calculator, phones) is NOT OK. Mixture of more technical and essay-type questions. Maybe some true-false questions with justifications, maybe some definitions—I want to reward all types of learner. Don’t leave anything blank.

Structure of the Exam For the love of God and all that is holy, don’t leave anything blank!

Chapter 1 The definition of economics The definition of scarcity Know and understand the first seven (i.e., micro) principles of economics and know when to recognize their application Understand the efficiency versus equity tradeoff

Chapter 1 Know the definition of and understand the notion of opportunity cost Understand what rationality means and economics Understand the notion of choice at the margin Understand what incentives are Know the definition of market

Chapter 1 Understand the notion of market failure and give examples: externality, market power, etc. Efficiency versus equity in public policy making

Chapter 2 Examples of opportunity cost Understand the process by which we gain scientific knowledge, and how economists employ the scientific method Understand what a model is Know what factors of production are, as well as goods and services Understand the many relationships between households and firms in an economy

Chapter 2 Know what a production possibilities frontier (PPF) is, and know how to graph one Understand how the PPF illustrates an important tradeoff Know why economic growth displaces the PPF outward Make sure you think about why a PPF might be bow-shaped

Chapter 2 Know the difference between positive and normative statements

Chapter 3 Understand the notion that trade can (this does not mean will) make everyone better off – recall our trinkets experiment Know how to graph a PPF if you haven’t learned in chapter 2 Know the definition of export Know the definition of imports Understand absolute versus comparative advantage

Chapter 4 Understand what a market is Understand what a competitive market is, and what a perfectly competitive market looks like Understand what was so great about our market experiment with playing cards Know the Law of Demand Know the difference between demand (i.e., the demand curve) and quantity demanded

Chapter 4 Know how to graph a demand schedule Know how to add up demand curves so as to obtain market demand Know what makes us move along the demand curve and what shifts the demand curve around Know the Law of Supply Know the difference between supply (i.e., the supply curve) and quantity supplied

Chapter 4 Know how to graph a supply schedule Know how to add up supply curves so as to obtain market supply Know what makes us move along the supply curve and what shifts the supply curve around Supply and demand put together – understand the notion of market equilibrium Equilibrium prices and quantity

Chapter 4 Shortage or excess demand Surplus or excess supply Understand how market forces push price and quantity toward equilibrium Also understand the distortionary (i.e., shortage or surplus) of certain policies (e.g., rent control) Know how to analyze changes in equilibrium (i.e., the three-step method).

Chapter 4 Think about how prices allocate resources, and how the price did that in our playing- cards experiment

Chapter 5 The formula for elasticity:  Q  P/  P  Q Why we use the midpoint method What determines price elasticity The variety of demand curves (perfectly inelastic, inelastic, unit elastic, elastic, perfectly elastic) Why a linear demand curve does not have constant elasticity

Chapter 5 Price elasticity of demand and the maximization of total revenue Price elasticity of supply The variety of supply curves (perfectly inelastic, inelastic, unit elastic, elastic, perfectly elastic) The determinants of supply elasticity Other elasticities

Chapter 6 Government policies that distort market equilibrium: price ceilings and price floors, taxes Shortages and rationing Evaluating price controls Taxes Taxes on buyers, taxes on sellers – what’s the difference?

Chapter 6 The incidence of a tax No matter who you tax, the incidence is the same Elasticity and tax incidence – the incidence largely falls on the side of the market who can least avoid the tax (i.e., who has the lowest price elasticity).

Chapter 7 Welfare Economics How is welfare measured in the context of our supply and demand graphs? Willingness to pay and the D curve Consumer surplus Willingness to sell (or cost) and the S curve Producer surplus

Chapter 7 Total surplus Efficiency Evaluating different equilibria Who consumes the good? Who sells it? How is total surplus maximized? Adam Smith and the Invisible Hand Free market versus government intervention