Review Sheet for Exam 1

1. What is economics? What is microeconomics?
2. What are the different factors of production? What is included in each of the 5 categories?
3. What is scarcity? Why do we say that resources are scarce?
4. What are the major types of choices all economies must make?
5. State the principle of opportunity cost. Define opportunity cost. Be able to identify the opportunity cost in situation described to you. Be able to calculate it.
6. What is the production possibilities curve (PPC)?
7. Explain the significance of points inside, on, and to the right of the production possibilities curve.
8. List the factors that can change the PPC. Explain each one and illustrate the change graphically.
9. Illustrate the concept of opportunity cost using the production possibilities curve.
10. State the law of increasing cost, explain why costs increase, and illustrate the law using the PPC.
11. Explain what a movement along the PPC means When is it a good idea?
12. Explain the marginal principle. What do we mean when we use the term marginal?
13. What is meant by comparative advantage? How is comparative advantage different from absolute advantage? Be able to determine which person or country has a comparative advantage in the production of a good.
14. Describe what is meant by specialization. What are its advantages and disadvantages? What must accompany it?
15. Explain how trade can benefit both parties (individuals or countries). Can a country benefit from trade if it has an absolute advantage in all goods? Explain. What are the limits on the terms of trade?
16. State the reality principle.
17. What is a market? Why do markets develop? Describe the product market. Describe the factor market.
18. Define the following terms: household, firm, corporation.
19. Draw a circular flow diagram of a market economy. Explain each of the parts. What is the role of the government in a market economy?
20. State the law of demand, illustrate it with a graph, and explain why it holds.
21. Describe some of things consumers do in reaction to a price increase, a price decrease.
22. Describe what is meant by the income and substitution effects of a price increase. Explain the principle of diminishing marginal utility and how it relates to consumer behavior.
23. State the law of supply, illustrate it with a graph, and explain why it holds.
24. Explain what the phrase "other things being equal" (or all other things unchanged) means and why it is used.
25. Explain what is meant by the term "equilibrium".
26. When is a market in equilibrium? Explain how this equilibrium is reached. Be able to find the equilibrium price.
27. Define the terms shortage and surplus. Illustrate each on a supply-demand graph. Explain how the market eliminates each.
28. What shifts the demand curve? For each factor, describe the direction of the effect on demand and explain why it has this effect? What is the resulting effect on price and quantity.
29. What changes supply and how does it change supply? What effect does this have on price and quantity?
30. Explain the difference between a change in demand and a change in quantity demanded. Show each on a graph. What causes each?
31. Explain the difference between a change in supply and a change in quantity supplied? What causes each? Show a graph?
32. What could cause the equilibrium price to rise? to fall? What could cause the equilibrium quantity to rise? to fall?
33. Define the following terms: normal good, substitute, complement
34. Be able to use supply-demand graphs to illustrate the effects of an event of a market.
35. Explain, using supply-demand graphs, how a market economy reallocated resouces in response to a shift in consumer preferences.
36. Explain what is an individual demand curve. Explain how a market demand curve can be derived from individual demand curves.
37. What is utility? What is marginal utility? What do you understand from diminishing marginal utility?
38. What is the utility maximizing rule? What should a consumer do if marginal utility per dollar spent on one good exceeds the marginal utility per dollar spent on another good?