MIDTERM 1 LIST OF TOPICS Intro Definition and purpose of economics, scientific method, theory model, micro vs macro, positive vs normative Definition and IMPORTANCE of resource, marginal, utility, rational, short run vs long run, opportunity cost, allocative efficienct, productive efficiency, economic efficieny (aka efficiency, aka pareto optimality). Efficiency versus equality vs fairness vs whatever else society cares about Know the facts and assumptions of economics. Law of diminishing marginal utility Society s problems Society problem 1: How many resources to employ? full employment. Why? Society problem 2: How to allocate resources to production? Specialization according to comparative advantage (in usual case). Why? THESE TWO ANSWERS TOGETHER ARE THE NECESSARY AND SUFFICIENT CONDITIONS FOR PRODUCTIVE EFFICIENCY IN THE NORMAL CASE. Absolute advantage vs comparative advantage: definitions, know how to calculate, terms of trade (feasible vs possible). Max output table, cost in terms of resources table, comparative advantage tables, PPFs as graph or table Production possibility frontier: graph, relationship to problems 1 and 2 above, relationship to production efficiency, concave vs linear LAW OF INCREASING OPPORTUNITY COST, relationship to PPF Society problem 3: what to produce? How much to produce? Markets decide. Definition of market, competitive market. Price is indepdendent! Competitive equilibrium: definition, know how to calculate, why important? (solution to competitive market model). Efficiency of markets, CE and PO, CS, PS, TS: definitions, calculations, and graphs Relationship between markets and PPF Society problem 4: how to distribute output to consumers? Markets decide. How?
Society 5: who owns resources? Consumers do, in capitalism. Economics system: market capitalism. What are some others? Competitive Markets Demand schedule and curve. Supply schedule and curve. Law of Demand, Law of Supply MOVEMENT ALONG CURVES vs SHIFTS OF CURVES Competitive market graphs, indicate CE, CS, PS, TS. Aggregation of individual S and D into market S and D: horizontal adding. Aggregation and the laws of demand and supply Non-competitive prices: excess supply (surplus) excess demand (shortage). Be able to graph, indicate trades, and calculate CS, PS, TS. Factors shifting demand? what are they? Factors shifting supply? What are they? What happens to CE when there is a shift? Draw, indicate new and old CE. normal vs inferior goods, substitutes vs complements Construct demand curve, prove law of demand definition of consumer, consumer s goal, consumer s problem preferences and indifference curves: be able to graph using 7 features (do not need to list assumptions, just know what they mean for graphs). Graphs of substitutes and complements. Marginal rate of substitution Marginal utility Budgets: definition, math formula, graph. Indicate affordable, unaffordable, just affordable Know how income and price changes affects budgets, draw these. Price ratio Consumer s optimal bundle rule: in words, graphically, formula, why are these rules true? Construct demand: describe how to do it
Giffen goods: law of demand fails for some range of prices Revealed preferences MIDTERM 2 LIST OF TOPICS Firm s decision and constructing supply Production function Total product: know definition, formula, graph Short run / long run Revenue, marginal revenue, relationship to output price Profit Technology Costs: total, variable, fixed, average, marginal: definitions, formulas, graphs. Know relationships between them. Firms SR output rule: what is it, be able to use it, prove why it is true, relationship to other decision rules Construct a supply curve: S=MC above AVC. WHY? Firm s shutdown rule: In SR, in LR LR CE, number of firms that exist Zero profit condition: what is it? Why is it needed? What does zero profit mean? Factor markets Firms SR input rule: what is it, be able to use it, prove why it is true, relationship to other decision rules Construct firms demand for SR Labor: D=MRP on the right hand side. WHY? Firms LR input rule: isoquants, isocosts, formula Consumer s supply: land (vertical), labor (discrete or continuous), reservations wage, compensating wage, Law of Supply failure Labor market equilibrium Income inequality, relationship to efficiency, ways to measure (poverty, Lorenz curve. Gini coefficient), discriminations, prejudice, international wages and marginal products differences Know data about income inequality past and present
Government in complete markets Know why government gets involved with complete markets Excise tax: graph, TDCE (definition and solve for it), tax incidence, irrelevancy of whom tax is levied against, DWL, GOV revenue. Pros and cons of these policies. Price setting: floors, ceilings, binding vs nonbinding, graph, DWL, efficiency. Pros and cons of these policies. Efficiency vs Equality tradeoff. What is it? Why does it exist? Price Elasticity Price elasticity if both demand and supply Defintion in words and math, perfectly elastic, unit elastic, perfectly ineslatic Midpoint formula Calculations and interpretation of results Be able to graph elastic vs inelastic curves Elasticity and linear demand curves: elastic at high prices, inelastic at low prices Relationship between elasticity and total revenue or total expenditure Determinants of price elasticity: price, income, and availability of substitutes, tastes Relationship to excise taxes and tax incidence POST-MIDTERM 2 LIST OF TOPICS Market Failures-Externality We only mentioned other failures like public goods and asymmetric information, so these will not be on the final. Externalities definition, relationship to pareto optimality and competitive equilibrium, and property rights Graph beneficial, negative. Indicate CE, PO. Gov solution to failure: excise tax, TDCE is PO, practical issues with this policy?
Market soluton to failure: create new market for nontrade thing of value (or anti-value if negative) Coase theorem, property rights, and distribution effects Market Structure Know competition, monopolistic competition, oligopy, and monopoly. What are the definitions of each? (Abilities to set price) What are the typical characteristics of each? (1 firm, many firms, etc) Monopoly Barriers to entry Monopolist s goal and problem Relationship between price and marginal revenue, and comparison with p and MR for firms in competition. Be able to graph and use equations. Monopolist s optimal output rule How does monopolist choose Q and set P? Solve for monopoly equilibrium and indicate on graph. CS, PS, TS, GOV compared to competition if costs are the same. What would be the competitive equilibrium with the same costs? Savings to consumers from consolidation. Huge changes in costs can lead monopolist to have lower price than old CE. But monopolist is inefficient compared to the CE with the same costs. Gov regulation: anti-trust, mergers, and consolidation. Why do these laws exist? How does Gov decide whether or not to allow a merger or break up a monopoly (Ex AT&T, Microsoft). Pros and cons of these policies. Gov regulation: legal monopolies, patents, copyrights. Why do these laws exist? Pros and cons of these policies. Gov regulation: price setting. Pros and cons of marginal pricing laws and fair-pricing laws. Relationship of these laws to profit. Gov regulation: subsidy to monopolist. Economic pros and cons, political pros and cons. Single price versus price discriminating monopolist, relationship of market demand, demand facing firm, marginal revenue, and price. Graph.
Conditions for price discrimination CS, PS, GOV, efficiency Monopolistic Competition Mix of competition and monopoly: market demand vs demand facing an individual firm. Graph these. Price Elasticity of demand facing firm compared to monopoly or competitor Optimal output rule, how price is picked. How common are these? Ability to set price? Non-price competition Efficieny vs variety Oligopoly: normal form games Definition of oligopoly, strategic interdependence Need for a whole new method of analysis. Rules of normal form games Draw and solve normal form games. Nash equilibrium: definition and be able to find collusion Oligopoly: extensive form games Turn taking Draw game trees Subgame perfect equilibrium: be able to find Trent Smith: Brand & Habit formation Student Choice Lectures: Subprime mortgages, financial sector, and recession