Review – Midterm Exam ECON 2610
Chapter 1: Think Like an Economist
Explain the principle of scarcity;
Explain the principle of cost and benefit;
What is opportunity cost?;
Define marginal benefit and marginal cost;
Be able to apply the maximization condition: marginal benefit = marginal cost.
Chapter 2: Comparative Advantage
Define labor productivity: #units/hour or #hours/unit;
How to determine whether a person or a country has an absolute advantage in producing
a good?
How to determine whether a person or a country has a comparative advantage in
producing a good?
Calculate the opportunity cost of producing one good in terms of the amount of another
good;
Explain the principle of comparative advantage;
Describe a production possibilities curve for an individual;
Be able to calculate the opportunity cost of producing one good from a PPC;
Determine the comparative advantages based on two persons’ PPCs;
Distinguish unattainable, efficient, and inefficient points on a PPC;
Demonstrate on a PPC how both parties gain from specialization and trade;
Explain why the PPC for an economy has a bowed out shape;
Explain the principle of increasing opportunity cost;
What are the factors that might cause the PPC of an economy to change over time?
Chapter 3: Supply and Demand
What constitutes a market?;
Explain why a demand curve has a negative slope? (substitute effect, income effect, and
marginal buyer’s reservation price);
Explain why a supply curve has a positive slope? (the principle of increasing opportunity
cost and marginal seller’s reservation price);
Describe a market equilibrium and how a free market will automatically achieve its
equilibrium (excess supply vs. excess demand);
What is price ceiling? Explain how to set a price ceiling to make it effective?;
Distinguish a change in quantity demanded (supplied) from a change in demand (supply);
Explain and demonstrate what could shift a demand curve;
Explain and demonstrate what could shift a supply curve;
Demonstrate how equilibrium price and equilibrium quantity would change when the
demand curve or the supply curve shifts, or when both curves shift at the same time;
Describe the difference between market equilibrium and socially optimal level of output.
Chapter 4: Elasticity
Define the price elasticity of demand;
Distinguish elastic, inelastic, and unit elastic demand;
Calculate price elasticity of demand:
ε=
%∆Q ∆Q / Q P
1
=
= ⋅
%∆P ∆P / P Q slope
What factors could affect the price elasticity of demand?;
Show that the price elasticity of demand is different at every point on a straight-line
demand curve: at high prices, quantity demanded is elastic whereas at low prices,
quantity demanded is inelastic;
Compare perfectly elastic demand with perfectly inelastic demand;
Explain when price changes, how price elasticity relates to the change in total revenue? –
When quantity demanded is elastic, total revenue increases (decreases) as price decreases
(increases); when quantity demanded is inelastic, total revenue increases (decreases) as
price increases (decreases);
Define the cross price elasticity of demand;
Explain the signs of cross price elasticity of demand for complements and substitutes;
Define the income elasticity of demand;
Explain the signs of income elasticity of demand for normal and inferior goods;
Calculate the price elasticity of supply;
What factors could affect the price elasticity of supply.
Chapter 5: Demand
Describe, conceptually, what is an individual’s ultimate goal when s/he allocates limited
income in his/her consumption?;
Define utility;
Describe diminishing marginal utility;
Explain the rational spending rule:
MU1 / P1 = MU2 / P2