EC202 – Macroeconomics, Spring 2012 Study Guide for Exam 1 MULTIPLE CHOICE (50 @2 pts each) Chapter 1 Define economics Three important assumptions: know what they are and what they mean Budget constraint: Attainable and unattainable combinations Positive vs. normative statements; macroeconomics vs. microeconomics Scarcity: what it is and what impacts does it have? Opportunity costs (define, recognize, and calculate) Factors of production (four of them) Also know the payment for each factor Production possibilities curve o What is it? What does it show? Why is it shaped the way it is? What is the law governing it? o Identify points on, under, and beyond PPC (attainable, unattainable, optimum, non-optimum) o Can the curve move/shift outward? Under which conditions? Chapter 2 Characteristics of market economies (focus on the role of the market and the government) Characteristics of competition in the market economy Command vs. market system Five fundamental questions and how the market economy answers them Chapter 3 Law of demand; Law of supply Demand determinants: know them; be able to identify them o Including: Substitute vs. complement, normal vs. inferior goods Supply curve (S): shape, direction, significance Supply determinants: know them; be able to identify them Equilibrium: know what it is and be able to identify it Know what shortage/surplus is Shifts in Demand; Shifts in Supply More on equilibrium and how policies could affect it (price ceiling/price floor) Chapter 4 The advantages and disadvantages of the corporation as a form of business The roles of government in a market economy (in correcting market failures) Chapter 5 Comparative advantage, specialization, and terms of trade (ch.5, p. 96-98) o Be able to identify absolute and comparative advantages and calculate opportunity cost o How do we know who has the absolute advantage? How do we know who has the comparative advantage o Combined output if two trade partners specialize then trade for what they don’t produce Chapter 6 Price elasticity of demand: what does it measure and short run vs. long run Calculate price elasticity and cross-price elasticity [*math] Relationship between price elasticity of demand, price change and total revenue Income elasticity for normal goods, inferior goods, necessity, and luxury goods [*math] Price elasticity of supply; the effect of time (short-run, intermediate, long-run) Consumer surplus defined and producer surplus (understand, define and identify on graph) Chapter 7 & Handout on Biases Define total utility, marginal utility, and marginal utility per dollar & why they matter Utility maximizing combination: when does it happen, what happens if things are not at equilibrium? The law of diminishing marginal utility: o How does it help explain the substitution and income effects of Demand? o How is it related to the Law of Demand? Biases: two cognitive systems and how they affect our decision-making. ‘Rules of thumbs’: know them and be able to analyze examples (e.g., anchoring, overconfidence, loss aversion, etc.). Optimism, status quo, and framing: examples.