ECON 231 Review Topics

DEMAND, SUPPLY, & MARKET EQUILIBRIUM

1. Explain who and what demand and supply represent.

2. Differentiate between demand and quantity demanded; and supply and quantity supplied.

3. Graph demand and supply curves when given demand and supply schedules.

4. State the Law of Demand and the Law of Supply, and explain why price and quantity demanded are inversely related, and why price and quantity supplied are directly related.

5. List the major determinants of demand, and explain how a change in each will affect the demand curve.

6. List the major determinants of supply, and explain how a change in each will affect the supply curve.

7. Explain the concept of equilibrium price and quantity.

8. Illustrate graphically equilibrium price and quantity.

9. Explain the rationing function of prices.

10. Define productive and allocative efficiency, and explain how competitive markets achieve them.

11. Explain and graph the effects of changes in demand and supply on equilibrium price and quantity, including simultaneous changes in demand and supply.

12. Define price ceilings and price floors, and provide examples.

13. Graph and explain the consequences of government-set prices.

14. Define and identify terms and concepts listed at the end of the chapter.

ELASTICITY ANALYSIS, CONSUMER SURPLUS, & PRODUCER SURPLUS

1. Define price elasticity of demand and compute the coefficient of elasticity given appropriate data on prices and quantities.

2. Explain the meaning of elastic, inelastic, and unitary price elasticity of demand.

3. Recognize graphs of perfectly elastic and perfectly inelastic demand.

4. Use the total revenue test to determine whether elasticity of demand is elastic, inelastic, or unitary.

5. List four major determinants of price elasticity of demand.

6. Explain how a change in each of the determinants of price elasticity would affect the elasticity coefficient.

7. Define price elasticity of supply and explain how the producer’s ability to shift resources to alternative uses and time affect price elasticity of supply.

8. Explain cross elasticity of demand and how it is used to determine substitute or complementary products.

9. Define income elasticity and its relationship to normal and inferior goods.

10. Define, measure, and graphically identify consumer surplus.

11. Define, measure, and graphically identify producer surplus.

12. Identify and explain efficiency (or deadweight) losses using consumer and producer surplus.

13. Define and identify the terms and concepts listed at end of the chapter.

(Exam 1)

CONSUMER BEHAVIOR
1. Define marginal utility and state the law of diminishing marginal utility.

2. Explain and graph the relationship between marginal utility and total utility.

3. List four assumptions made in the theory of consumer behavior.

4. State the utility maximizing rule.

5. Use the utility maximizing rule to determine a consumer’s spending (and demand curve) when given income, utility, and price data.

6. Use the theory of consumer behavior to define the market shift from videocassettes to DVDs since their introduction in 1997.

7. Explain the diamond-water paradox.

8. Explain how the value of time fits in the theory of consumer behavior and give two examples of implications that result.

9. Describe how the theory of consumer behavior helps us understand different values placed on time.

10. Explain why a cash gift will give the receiver more utility than a noncash gift costing the same amount.

11. Define and identify terms and concepts listed at the end of the chapter.

12. Define a budget constraint line and explain shifts in a budget constraint line.

13. Explain three characteristics of indifference curves.

14. Identify a consumer’s equilibrium position, given a set of indifference curves and a budget constraint line.

15. Use indifference curve analysis to derive an individual’s demand curve for a product by showing consumption responses to a change in the price of the product.

16. Define and identify terms and concepts listed at the end of the appendix

PRODUCTION COSTS

1. Distinguish between explicit and implicit costs, and between normal and economic profits.

2. Explain why normal profit is an economic cost, but economic profit is not.

3. Explain the law of diminishing returns.

4. Differentiate between the short run and the long run.

5. Compute marginal and average product when given total product data.

6. Explain the relationship between total, marginal, and average product.

7. Distinguish between fixed, variable and total costs.

8. Explain the difference between average and marginal costs.

9. Compute and graph AFC, AVC, ATC, and marginal cost when given total cost data.

10. Explain how AVC, ATC, and marginal cost relate to one another.

11. Relate average product to average variable cost, and marginal product to marginal cost.

12. Explain what can cause cost curves to rise or fall.

13. Explain the difference between short run and long run costs.

14. State why the long run average cost is expected to be U shaped.

15. List causes of economies and diseconomies of scale.

16. Indicate relationship between economies of scale and number of firms in an industry.

17. Define and identify terms and concepts listed at the end of the chapter.

(Exam 2)

PURE COMPETITION
1. List the four basic market models and characteristics of each.

2. Describe characteristics of a purely competitive firm and industry.

3. Explain how a purely competitive firm views demand for its product and marginal revenue from each additional unit sale.

4. Compute average, total, and marginal revenue when given a demand schedule for a purely competitive firm.

5. Use both total-revenue—total-cost and marginal-revenue—marginal-cost approaches to determine short run price and output that maximizes profits (or minimizes losses) for a competitive firm.

6. Find the short run supply curve when given short run cost schedules for a competitive firm.

7. Explain how to construct an industry short run supply curve from information on single competitive firms in the industry.

8. Explain the long run equilibrium position for a competitive firm using entry and exit of firms to explain adjustments from nonequilibrium positions.

9. Explain the shape of long run industry supply curves in constant cost and increasing cost industries.

10. Differentiate between productive and allocative efficiency.

11. Explain why allocative efficiency and productive efficiency are achieved where P = minimum AC = MC.

12. Explain why allocative efficiency and productive efficiency are consistent with maximizing consumer and producer surplus.

13. Define and identify terms and concepts listed at the end of the chapter.

PURE MONOPOLY
1. List the five characteristics of pure monopoly.

2. Explain the difference between a “pure” monopoly and a “near” monopoly.

3. List and give examples of the four barriers to entry.

4. Describe the demand curve facing a pure monopoly and how it differs from that facing a firm in a purely competitive market.

5. Compute marginal revenue when given a monopoly demand schedule.

6. Explain why the marginal revenue is equal to the price in pure competition but not in monopoly.

7. Determine the price and output level the monopoly will choose given demand and cost information in both table and graphic form.

8. Discuss the economic effects of pure monopoly on price, quantity of product produced, allocation of resources, distribution of income, and technological progress.

9. Give examples of how new technology has lessened monopoly power.

10. List three conditions necessary for price discrimination.

11. Explain why profits and output will be higher for a discriminating monopoly as compared to non-discriminating monopoly.

12. Identify two pricing strategies of monopoly regulation and explain the dilemma the regulators face in utilizing these strategies.

13. Define and identify terms and concepts listed at the end of the chapter.

(Exam 3)

MONOPOLISTIC COMPETITION & OLIGOPOLY

1. List the characteristics of monopolistic competition.

2. Explain how product differentiation occurs in similar products.

3. Determine the profit maximizing price and output level for a monopolistic competitor in the short run when given cost and demand data.

4. Explain why a monopolistic competitor will realize only normal profit in the long run.

5. Identify the reasons for excess capacity in monopolistic competition.

6. Explain how product differentiation may offset these inefficiencies.

7. Describe the characteristics of an oligopolistic industry.

8. Differentiate between homogeneous and differentiated oligopolies.

9. Identify and explain the most important causes of oligopoly.

10. Describe and compare the concentration ratio and the Herfindahl index as ways to measure market dominance in an industry.

11. Use a profit-payoffs matrix (from game theory) to explain the mutual interdependence of two rival firms and why oligopolists might tempt to cheat on a collusive agreement.

12. Identify three possible models of oligopolistic price-output behavior.

13. Use the kinked demand curve theory to explain why prices tend to be inflexible.

14. Explain the major advantages of collusion for oligopolistic producers.

15. List the obstacles to collusion behavior.

16. Explain price leadership as a form of tacit collusion.

17. Explain why oligopolies may prefer nonprice competition over price competition.

18. List the positive and negative effects of advertising.

19. Explain why some economists assert that oligopoly is less desirable than pure monopoly.

20. Explain the three ways that the power of oligopolists may be diminished.

21. Define and explain the terms and concepts listed at the end of the chapter.

(Exam 4)

PUBLIC GOODS, EXTERNALITIES, & INFORMATION ASYMMETRIES

1. Identify the characteristics of public goods and explain how they differ from private goods.

2. Describe graphically the collective demand curve for a particular public good and explain this curve.

3. Explain why the supply curve for public goods is upward sloping and explain how the optimal quantity of a public good is determined.

4. Identify the purpose of cost-benefit analysis and explain the major difficulty in applying this analysis.

5. Explain what is meant by externalities.

6. Describe graphically and verbally how an overallocation of resources results when negative externalities costs are present and how this can be corrected by government action.

7. Describe graphically and verbally how an underallocation of resources occurs when positive externalities are present and how this can be corrected by government action.

8. Explain the Coase theorem, its significance, and the three conditions necessary for it to work.

9. Describe three policies that would reduce negative externalities.

10. Use an example to explain a market for pollution rights and how this market would lead to a better allocation of resources.

11. Discuss the predicted effects of global warming and how cost-benefit could be used to determine international policies and goals

12. Give two examples of how inadequate information about sellers can create a market failure.

13. Explain the moral hazard and adverse selection problems faced by sellers.

14. Define and identify terms and concepts listed at the end of the chapter.

PUBLIC CHOICE THEORY & THE ECONOMICS OF TAXATION

1. Explain the problems created with majority voting and the median-voter outcome.

2. State four reasons given by public choice theorists for government’s inefficiency in providing public goods and services.

3. Differentiate between the benefits-received and ability-to-pay principles of taxation.

4. Identify which taxes are progressive, proportional, and regressive.

5. Describe how elasticities of demand and supply are related to the incidence of a sales or excise tax.

6. Explain the relationship between the elasticities of demand and supply and the efficiency loss of a particular tax.

7. Describe the probable incidence of the personal income tax, corporate income tax, sales and excise taxes, and property tax.

8. Explain the U.S. structure relative to the progressivity or regressivity of Federal, state, and local taxes.

9. Define and identify the terms and concepts listed at end of the chapter.

(Exam 5/Final Exam)