ECON 101 Review
Principles of Economics: Summer Session I
Disclaimer
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This is not a substitute for going through your notes and textbook
thoroughly in preparation for the final.
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This is a rough outline of what we have done so far.
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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.
Now you can tell people
you know economics!
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Economics is a social science that studies decisionmaking processes of economic agents (firms,
consumers, government, society as a whole) and
how scarce resources are allocated amongst
competing uses.
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Economics is a social science because it applies the
scientific method (develop models, test hypotheses,
revising models) to the study of interaction among
individuals.
Microeconomics
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We spent the first three weeks on microeconomics.
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Microeconomics studies the behavior of the
individual economic agents that make up the
overall economy.
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These decisions include government decisions,
household consumption decisions and also firm
pricing decisions.
Chapter 1: Foundations
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Scarcity – Unlimited wants excess the limited
resources available to fulfill those wants.
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Three Key Economic Ideas
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1) People are rational
2) People respond to economic incentives
3) Optimal decisions are made at the margins
Chapter 1: Foundations
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Cost-Benefit Analysis
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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
Chapter 1: Foundations
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Tradeoffs  Because of scarcity, producing one
good or service means producing less of another
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Measuring tradeoffs is done by using opportunity
costs (the value of the next best alternative to a
particular activity)
Chapter 2: Trade Offs and
Comparative Advantage
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We can use a simple model of production possibility
frontiers (PPFs) to model tradeoffs.
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What is a PPF? Can you draw me a PPF? How do
tradeoffs correspond to the slope of the PPF?
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Can you compute opportunity costs?
Chapter 2: Trade Offs and
Comparative Advantage
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Then we talked about trade, comparative advantage
and absolute advantage.
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Do you know what each of these terms mean?
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Main point: the basis for trade is comparative
advantage, not absolute advantage.
Chapter 3: Supply and
Demand
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We then analyzed what a market is. We broke the
market into the buyer’s side and the seller’s side.
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From the buyer’s point of view, we studied demand.
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Before that, we studied different types of goods
(substitutes, complements, inferior, normal)
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Can you draw me a demand curve? Do you know
what it represents? (buyer’s willingness to pay for a
good)
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Why is demand downward-sloping (Law of Demand)
Chapter 3: Supply and
Demand
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What explains the law of demand? (substitution
effect, income effect)
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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?
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Can you distinguish between a shift of a demand
curve vs. a shift along a demand curve?
Chapter 3: Supply and
Demand
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To analyze the seller’s side of the market, we
introduced supply.
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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.
Chapter 3: Supply and
Demand
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Then, we put supply and demand together to obtain
a market equilibrium, where prices and quantities
exchange are determined.
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Why is the equilibrium exactly where
demand=supply? What would happen otherwise?
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Can you algebraically find this number? (i.e., do you
know how to find the intersection of the two lines?)
Chapter 4: Efficiency, Price
Setting, Taxes
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What is an efficient market?
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What is consumer surplus? Do you know how to compute it? What
is producer surplus? Do you know how to compute it?
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What is a price ceiling and price floor? In which sort of markets
would the government step in to set prices?
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How do taxes affect total surplus? What is deadweight loss? Can you
find deadweight loss on a graph and can you compute it?
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What is a tax burden? When is a tax efficient?
Chapter 5: Externalities
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What is an externality?
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What is a positive/negative externality?
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Graphs that go along with positive/negative externalities
(Marginal Private/Social Benefit, Marginal Costs)
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When does a market fail?
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What causes externalities?
Chapter 5: Externalities
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Private solutions to externalities – The Coase Theorem
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What does this theorem say? Do you know how to find ways for two
people to bargain between them?
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Socially efficient outcomes?
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Now how would the government deal with externalities (public
solutions)?
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Taxes? Subsidies? How does this affect the graphs?
Chapter 5: Externalities
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Four categories of goods
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Constructing market demand for a private good vs. constructing
market demand for a public good
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How would you find the optimal quantity of a public good?
Chapter 6: Elasticities
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What does elasticity mean, intuitively?
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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.
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Do you know what the midpoint method is?
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Do you know how slopes of demand curves roughly correspond to
different price elasticities of demand?
Chapter 9: Consumer
Behavior
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How do consumers make consumption decisions?
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What is utility? What is marginal utility? (refer to handouts for
examples)
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Do you know what a budget line is? Given prices, do you know how
to find the exact equation for the budget line?
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What is the optimal consumption rule? (marginal utility per dollar
spend on each good is the same)
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What happens when marginal utility per dollar spent for good X is
higher than that for good Y?
Market Structures:
Chapters 11, 12, 13, 14
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We defined four types of market structures: perfect competition,
monopolistic competition, monopoly and oligopoly. For each of
them, you should know the following:
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What they are
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How are the demand curves faced by each type
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The main characteristics of each
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If I give you an example of a market, can you tell me which structure it
has?
Macroeconomics
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Macroeconomics studies aggregation issues.
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We studied fluctuations within the economy as a whole.
Chapter 20:
Unemployment, Inflation
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Measuring Total Production: GDP
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What is the definition of GDP?
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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?
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What are the components of GDP?
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Given actual numbers, can you calculate GDP?
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Do you know how to calculate GDP by using the “value added
method”? What is “the value added” to a good?
Chapter 20:
Unemployment, Inflation
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What are the shortcomings of GDP as a measure of well-being?
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What is Real GDP? Nominal GDP? Can you compute these
numbers? What is the difference between Real GDP and nominal
GDP?
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What is the price level?
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What is the GDP Deflator? What does it measure? Can you
compute it?
Ch 20: Unemployment
and Inflation
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What is the household survey? What is the unemployment rate?
Labor force participation rate?
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If I give you numbers, can you find these rates?
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Can you classify people into groups of employment if I tell you
their characteristics?
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What are some problems with the unemployment rate?
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Types of unemployment? (frictional, structural, cyclical)
Ch 20: Unemployment
and Inflation
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What is inflation?
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What is the Consumer Price Index (CPI)? Why is it a better measure of
price levels that GDP deflator?
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Can you compute the CPI if I give you a basket of goods?
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How is the CPI computed?
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How do you interpret the CPI?
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Is the CPI accurate? What are some biases?
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How about Producer Price Index (PPI)? What does it measure?
Relationship between CPI and PPI?
Ch 20: Unemployment
and Inflation
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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?)
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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?
Ch 21: Growth and
business cycles
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What is long-run economic growth?
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How do you calculate long-run economic growth? What is the rule
of 70?
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What determines long-run economic growth?
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How is savings and investment determined in a macroeconomy (the
algebra that gets you to S=I)
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What does this actually mean?
Ch 21: Growth and
business cycles
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How does S=I affect the loanable funds market?
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What is the loanable funds market? What happens there (what is
determined)? Who characterizes supply and demand in this market?
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How do you explain shifts in the loanable funds market?
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What is a business cycle? What are different phases in business
cycles? What typically happens to unemployment, inflation in each
phase?
Ch 25: Money, Banks,
Finance
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What is money and why do we need it?
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What was used before money? Why was it so inconvenient?
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What functions must anything that is used as money fulfill?
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What are criteria that make a good suitable for use a medium of
exchange?
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How is money measured in the US today (M1, M2)?
Ch 25: Money, Banks,
Finance
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What is a balance sheet for a bank? What sort of accounting
equation holds there?
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How does a bank create money? You need to know the exact
process!
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What is the simple deposit multiplier? What is the required
reserve ratio? How do you find the total change in checking
deposits?
Ch 21: Money, Banks,
Finance
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What is the Federal Reserve?
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How was the Fed established?
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What are some main roles of the Fed?
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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.
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What is the quantity equation (MV = PY)? What does each part of
this equation mean? How can you use it?
Brief notes on Ch 26, 27
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What is monetary policy? What are the main monetary policy goals
(there are 4 of them)?
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What is fiscal policy?
Macroeconomic Schools
of Thought
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Go through the slides we went through on Wednesday.
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Can you explain to me what a paradigm is?
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How did each school of thought emerge from the preceding one?
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What are the main characteristics of each school of thought?
Final Exam
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50 questions, 4 written questions (with subquestions, of course).
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You have 3 hours.
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8-11 am on Monday, same classroom.
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Bring Scantron and calculator
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50-50 Micro and Macro