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Study Guide 1
This study guide can be used as an aid in your study process for Principles of Microeconomics. Each part listed below indicates a potential area of questioning on the exam and may or may not be on the actual exam. Your best line of offense on these questions is to write out a complete answer for each question listed below. Your answer should concentrate on WHY the answer is correct. Good luck!
1. There are three factors of production.
a. Natural Resources
b. Labor
c. Capital
Write a definition for each of the factors listed above and give two examples for each factor.
2. Given the list of factors of production stated in review question #1, be able to place that resource in the appropriate factor of
production category. For example, under which category would a tree be classified? A 21-year old college graduate? A high-school drop out? The Kirby building at Illinois College?, Etc…..
3. Define the term opportunity cost.
a. What is increasing opportunity cost?
b. What is constant opportunity cost?
c. When will increasing opportunity cost occur? Why?
d. When will constant opportunity cost occur? Why?
4. Draw a production possibility curve (PPC).
a. How are production possibility curves shaped assuming increasing opportunity costs? Draw such a PPC
5. Make a list of factors that will cause the PPC to shift outward? Draw several production possibility curves and demonstrate how they will shift given changes in the factors you have listed.
6. Can these same factors result in shifting the PPC inward? Explain your answer.
7. Explain why changes in these factors will shift the PPC.
8. Given a production possibility schedule or curve, such as the one presented in the text, calculate opportunity cost. For example, assume an economy moves from point A to point B on a production possibility curve, and that move represents a change in potential production from 1000 units of X and 400 units of Y to a production level of 800 units of X and 500 units of Y. What is the opportunity cost of the extra 100 units of good Y? What does this translate to for 1 unit of good Y?
9. State the law of demand.
10. Based upon the law of demand, do price and quantity have an inverse or direct relationship? Explain what this means.
11. Draw a demand curve.
12. Draw a demand curve and demonstrate an increase and a decrease in demand (Two changes).
13. Explain what the difference is between the terms demand and quantity demanded?
14. Draw a graph and show the difference between a change in demand and a change in quantity demanded.
15. Draw a graph and demonstrate both an increase and a decrease in quantity demanded (two changes)
16. Draw a graph and demonstrate both an increase and a decrease in supply (two changes).
Check out this link for a graphical analysis of these changes
17. Demonstrate graphically an increase and a decrease in quantity supplied (two changes).
18. Define the term equilibrium. Show this on a graph.
19. Explain how markets arrive at this equilibrium, i.e., if prices are too high or too low, shortages or surpluses will exist. Why do these drive markets tend to move toward an equilibrium?
20. Draw a graph containing both a supply and demand curve. Identify the initial equilibrium price and quantity. Using the list of determinants of supply and demand provided in the Dolan and Klein text, take each determinant separately and demonstrate how a change in the determinant will shift supply or demand. (NOTE: THIS IS AT LEAST A TEN PART QUESTION BECAUSE THERE ARE AT LEAST FIVE DETERMINANTS FOR BOTH SUPPLY AND DEMAND) For example, assume the determinant of demand that changes in Tastes, and tastes improve for the product. Show on your graph what will happen to the demand or supply curve. Also show what will happen to the equilibrium price and quantity.
21. Draw a graph containing both a supply and a demand curve. Using the list of determinants of supply and demand, take each determinant and shift the supply or demand curve. Indicate what will be the likely effect on the equilibrium price and quantity resulting from the change in the determinant. What are price ceilings and price floors?
22. Show on a supply and demand graph where the price ceilings and price floors are suppose to be located if they are established correctly?
23. Explain what problems will be created in a market if price ceilings or floors are established correctly.
Study Guide #2
1. What is the profit motive?
2. Define implicit and explicit costs.
3. Explain the difference between economic profit and accounting profit. What is a normal profit?
4. Define fixed, variable, and sunk costs.
5. Define the terms total product and marginal product?
6. How is marginal product calculated?
7. What is the law of diminishing marginal returns and why does it take place in a normal production situation?
8. What is the relationship between marginal product and marginal costs?
9. Given cost numbers, be able to calculate all costs of production including average and marginal costs. This means you should be able to calculate total cost, variable cost, fixed cost, marginal cost, average total cost, average variable cost, and average fixed cost.
10. Complete this table
11. Be able to classify different costs into fixed or variable costs. For example, would rent be a fixed or variable cost? What would labor be? How about materials used in the production process such as lumber for building houses?
12. Why does AFC fall continuously?
13. Why does MC eventually rise?
14. Why does AVC eventually rise?
15. Define the time periods short-run and long-run. How do they differ?
16. What are economies and diseconomies of scale?
17. List and explain the two short-run profit-maximizing decision rules for a firm operating under perfect competition? I.e., the profit maximizing rule and the shut-down rule. (note that for this exam you need not know the shut-down rule)
18. List the characteristics of perfect competition? Write a brief definition of each characteristic.
19. What constitutes short-run equilibrium and long-run equilibrium? To help get you started, ask at what point in the short-run will a firm have no tendency to change its behavior, i.e. keep output constant. At what point in the long-run will the number of firms and the level of output in an industry remain constant?
20. The short-run supply curve for a firm is said to be its MC curve above the minimum point of the firm's AVC curve. Explain why this is true.
21. Draw the D, MR, AR, AVC, ATC and MC for individual firms in perfect competition.
22. What is the difference between economic and accounting profits? For example, assume the Klein weed company has $200,000 in revenue, $100,000 in explicit expenses and $150,000 in implicit expenses. What are the accounting profits? What are the economic profits?
23. What is the role of economic profits in long-run equilibrium adjustments in a competitive market?
24. Graphically and in words demonstrate what short-run equilibrium adjustments (i.e., what are the changes in price, output and profits) will take place for an individual firm in a competitive market structure if these items change.
a. Increases in demand
b. Decreases in demand
c. Increases in variable costs
d. Decreases in variable costs.
e. Increases in fixed costs.
f. Decreases in fixed costs.
25. Graphically and in words demonstrate what long-run equilibrium adjustments (i.e., changes in long run market price, output, profits and number of firms in the industry) will take place for an individual firm and the industry as a whole given these changes.
a. Increases in demand
b. Decreases in demand
c. Decreases in variable costs.
d. Increases in fixed costs.
e. Decreases in fixed costs.
26. What is a normal profit?
27. What are economic profits and what is the role of economic profits in determining long-run equilibrium in the market?
28. What are the profit-maximizing decision rules for a firm operating under each of the monopoly market structure compare to the perfectly competitive market structure?
29. What constitutes short-run equilibrium and long-run equilibrium in a monopoly market structure?
30. What is the difference, if any, between the short-run equilibrium and the long-run equilibrium for a monopoly firm and industry?
32. Graphically and in words show what short-run and long-run equilibrium adjustments will take place for an individual monopolist given these changes?
a. Increases in demand
b. Decreases in demand
c. Increases in variable costs
d. Decreases in variable costs.
e. Increases in fixed costs.
f. Decreases in fixed costs.
32. Draw the D, MR, AR, AVC, ATC and MC for a typical in a monopoly market structure.
33. What is price discrimination?
34. What conditions are necessary for price discrimination?
35. Compare market prices and output in perfect competition and monopoly.
Study Guide #3
1. Define the difference between real and nominal output.
2. What are the sources of economic growth in an economy?
3. List some of the benefits and costs of economic growth.
4. Define the Natural level of real output.
5. What is a business cycle?
6. What are the stages of a business cycle?
7. What is a recession and how long does it take to determine in an economy is in a recession?
8. How is the unemployment rate calculated?
9. True or False. A father who stays at home and takes care of the children but earns no income is considered to be unemployed. Explain.
10. Define the participants of the labor force.
11. True or False. The existence of a discouraged worker raises the unemployment rate. Explain.
12. What is the natural rate of unemployment?
13. Define frictional, structural, and cyclical unemployment.
14. Define the term inflation.
15. What is price stability?
16. What is the difference between the nominal and real GDP?
17. When calculating a price index, one must chose a base year. What is a base year?
18. What is the consumer price index? The produce price index?
19. Draw an economies circular flow. Label each box and arrow.
20. Define each of the following. Consumption, Investment, Government Spending, Net Exports.
21. Define Gross Domestic Product.
22. What are the components of GDP?
23. What is Aggregate Demand? Draw the curve.
24. What is Aggregate Supply? Draw the curve.
25. What are the components of Aggregate Demand?
26. How do the assumptions of flexible wages and prices differ between the classical and Keynesian schools of economic thought?
27. Watch the video rap, Keynes Vs. Hayek, to refresh your memory. There is a Keynes VS. Hayek, and Keynes VS. Hayek II. Both would be useful to refresh your memory.
28. If an economy is in a recession, how do classical economists assume the economy will adjust to long-run equilibrium?
29. If an economy is in a recession, how do Keynesian economists assume the economy will adjust to long-run equilibrium?
Exam 4
Chapters 15, 18, 19, and 20
- What is the Marginal propensity to consume?
- Explain the multiplier process and how this changes given differing MPCs.
- What are the functions of money?
- What is meant when an asset is considered to be liquid?
- What are the components of M1? Define each.
- Are credit cards considered to be money?
- What is the difference between the M1 and M2 definitions of money?
- In a banks balance sheet, there are assets and liabilities. Define each and explain how they are used to calculate net worth.
- What is a central bank? What is the U.S.’s central bank.
- What is the function of the Fed’s Board of Governors? It is said the Fed is designed to be outside the political election process. How?
- What is the role of the Federal Open Market Committee?
- What are the functions of the Fed?
- How do banks create money?
- All banks hold reserves. Why?
- If the Fed were to sell U.S. government securities (bonds) through open market operations, would that increase or decrease the money supply? Why?
- What is the deposit expansion multiplier?
- What is meant by the term ‘velocity of money’?
- How do changes in the supply or demand of money affect interest rates?
- Interest rates are said to be the transmission mechanism of monetary policy. Explain.
- What are the three primary instruments of monetary policy?
- What is meant by the term 'Fractional Reserve System'?
- What is fiscal policy?
- When constructing the Aggregate Supply curve, input prices can be considered to be either fully flexible or gradually adjusting. How will these two assumption result in differing aggregate supply curves?
- If Aggregate Demand were to increase, what impact will there be on the average price level in the short-run? In the long-run?
- If Aggregate Demand were to decrease, what impact will there be on the average price level in the short-run? In the long-run?
- How might government use fiscal policy to affect short-run equilibrium output in a nation?
- What fiscal policy tools are available to governments? Explain each.
- Assume the government wants to stimulate the economy. How would they do so using fiscal policy?
- What are automatic stabilizers?
- What is demand-side inflation?
- What is supply-side inflation?
- What is a supply shock? List some examples of supply shocks.
- What are inflationary expectations and how might this lead to a recession?
- Define deflation.
- When is deflation most likely to occur?
- Explain why credibility of the government is the most effective and powerful tool to promote price stability.
- Why is it important to coordinate monetary and fiscal policy?
- What is the crowding out effect?
- How might fiscal policy lead to crowding out?
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