Economics Exam Study Guide

Exam Format

• There will be around 35-40 multiple-choice questions.
• There will be around 2 multipart graphing/calculation problems.
• Expect a definitions or fill-in-the-blank question on opportunity cost.
• Bring a #2 pencil and manage your time wisely during the 1 hour and 50 minutes allotted.

Tips for Success

• Expect multiple-choice questions to require problem-solving, graphing, or short answers.
• Draw graphs in the margins to aid in answering questions.
• Practice problems from the textbook, MyLab, and those done in class.
• Take calculator and do not use your phone

Core concepts

• Consumer Surplus (CS), Producer Surplus (PS), and Total Economic Surplus must be understood conceptually and graphically.
• Identify CS and PS areas on graphs.
• Calculate the change in CS or PS resulting from price controls or trade policies.
• Marginal Benefit (MB) and Marginal Cost (MC) must be understood conceptually.
• Calculate MB or MC in simple examples.
• Recognize how supply and demand curves relate to MB and MC.
• Understand how efficiency, CS, PS, Economic Surplus, MB, and MC are linked.
• Recognize the point of maximum economic surplus and understand the logic.
• Understand the Equimarginal Principle.
• Define Dead Weight Loss (DWL) and identify when it occurs.
• Explain why economists dislike DWL and identify DWL areas on a graph.
• Define and graph Price Floors and Price Ceilings, including when they are binding and provide examples.
• Graphically show, and identify changes to CS, PS, and DWL resulting from binding price ceilings or floors.
• Identify "winners and losers" from these policies.
• Distinguish between Statutory and Economic Tax Incidence and graph the economic incidence of a tax.
• Identify which curve to shift vertically to show economic incidence.
• Calculate how the economic burden of a tax is distributed between producers and consumers.
• Identify DWL areas and explain why DWL exists.
• Calculate the total tax revenue for the government.
• Understand the factors determining the distribution of the economic burden of a tax.

Externalities and Market Failures

• Identify when externalities occur in markets for goods and services.
• Understand the relationship between property rights and market failures.
• Know the relationship between externalities and Marginal Private Cost (MPC).
• Know the relationship between externalities and Marginal Social Cost (MSC).
• Know the relationship between externalities and Marginal Private Benefits (MPB).
• Know the relationship between externalities and Marginal Social Benefits (MSB).
• Provide an example of a negative externality in production and be able to graph it.
• Know how MPC, MSC, MPB and MSB are related in the graph (MPC >=< MSC?)
• Understand positive externality in production.
• Understand negative externality in consumption.
• Understand positive externality in consumption.
• Identify DWL areas on graphs with externalities.

Pollution Control and the Coase Theorem

• Label graphs thoroughly when practicing.
• Graphing while studying aids in answering exam questions.
• Recall graphs of the market for pollution control, including the concept of "socially efficient" pollution levels.
• Understand how it can be determined if society has reached "socially efficient" pollution levels.
• Ronald Coase contributed to economics.
• Understand the Coase Theorem, including the role of transaction costs.
• Define what constitutes "transaction costs".
• Coase's theorem states that the assignment of property rights do not matter.

Pigouvian Solutions and Categories of Goods

• Solutions from Pigou address market externalities.
• Use taxes or subsidies to internalize a market externality and graph the correction.
• Determine the appropriate tax or subsidy amount.
• Pigouvian solutions should be compared with relying on Coasian private agreements.
• The four categories of goods are distinguished by rivalry and excludability.
• Rival or non-rival and excludable or non-excludable must be defined.
• Provide examples of each category.
• Free-riding and over-use of resources must be understood.
• How and why each occurs should be clear and provide examples.

Price Elasticity of Demand

• Define Price Elasticity of Demand (PED) and know the standard formula, as well as the midpoint formula.
• Calculate PED using the midpoint formula when given data (table, sentence, or graph).
• Elasticity is not the same as slope.
• Understand why the midpoint formula is used.
• Understand what elastic, inelastic, and unit elastic PED means and provide examples.
• Explain elasticity based on a PED value.
• Given values on a demand curve, identify elastic, inelastic, and unit elastic portions.
• Complete PED sentences like: "If a good has a PED of 0.78 then a 5% decrease in price is expected to cause a ___% (increase/decrease) in (qty demanded/qty supplied)."
• Identify and interpret the meaning of Perfectly Elastic Demand and Perfectly Inelastic Demand.
• Apply the key determinants of PED to predict whether goods exhibit more or less price elastic demand.

Elasticity and Revenue

• Understand how PED relates to Total Revenue (TR).
• Given a PED value, determine whether increasing or decreasing price maximizes TR.
• Understand the graph on slide 20 that relates demand curve and TR.
• Determine the point at which TR is maximized.
• Cross-Price Elasticity of Demand (XPED) must be defined.
• Values of XPED for substitutes, complements, and unrelated goods must be understood.
• Apply XPED to examples.
• Income Elasticity of Demand (YED) must be defined
• YED values must be associated with normal, inferior, necessity, or luxury goods.
• Apply YED to examples.
• Don't confuse the YED concept with PED because the income is changing (price is constant).
• Advertising Elasticity of Demand (AED) must be defined
• The AED formula must be applied to real-life examples.
• Price Elasticity of Supply (PES) must be defined.
• Apply the PES formula to real-life examples.
• Understand how and why the passage of time relates to PES.

Global Trade

• Understand three graphs characterizing the U.S. position in global trade.
• Understand the message of each slide.
• Differentiate between Absolute and Comparative Advantage and calculate both.
• Gains from trade result when nations produce/consume and export/import goods and services in which they have a comparative advantage/comparative disadvantage.
• Key sources of comparative advantage must be understood with examples.
• Numerically (using production data tables) show how countries gain from specialization and international trade.
• Identify winners and losers when countries engage in free trade.
• Determine: do both countries win (overall)? How to measure this change?
• Determine: does everyone within both countries gain?
• Define Autarky.

Free Trade Analysis

• Graph changes in CS and PS following the opening of autarky to free trade.
• Assume a lower World Price (Pw) once a nation moves to free trade.
• Graph changes and gains to trade and indicate areas "A", "B", "C", etc.
• Illustrate import volume and domestic production with and without free trade.
• Graph the effects of a tariff, knowing areas corresponding to CS, PS, government revenue, import volume, and DWL, label areas "A", "B", "C", etc.
• Determine who wins and loses from a tariff and who bears the burden.
• Analyze the imposition of a quota (compared to free trade).
• Understand why quotas (or VERs) are worse for the economy than tariffs.
• Tariffs and quotas on imported goods are bad for the domestic economy.