Chapter 1 Define economics and understand the concept of scarcity and limited resources.

Distinguish the difference between microeconomics and macroeconomics. Macro: Aggregates Total amounts or quantities; aggregate demand, for example, is total planned expenditures throughout a nation. Understand the importance of rationality in economic analysis. We assume that individuals do not intentionally make decisions that would leave themselves worse off. Explain the importance of models. Understand the role of assumptions in economic models. About how people act Understand the concept of behavioral economics and bounded rationality. Behavioral economics: An approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision-making. Bounded rationality 1. Unbounded selfishness. People are interested only in their own satisfaction. 2. Unbounded willpower. Their choices are always consistent with their long-term goals. 3. Unbounded rationality. They are able to consider every relevant choice. Distinguish the difference between positive and normative economics. Positive: value-free, what is Normative: involve judgments, what ought to be Know how to construct a graph. Distinguish the difference between direct and inverse relationships. Derive the slopes of linear and non-linear lines. Chapter 2 Define and understand of the concept of scarcity. Not a shortage (always exists) There are not enough resources to satisfy unlimited human wants. Explain and distinguish between the factors of production. Land: The natural resources that is available from nature. Land as a resource includes location, original fertility and mineral deposits, topography, climate, water, and vegetation. Labor: Productive contributions of humans who work. Physical capital: All manufactured resources, including buildings, equipment, machines, and improvements to land that are used for production. Human capital: The accumulated training and education of workers. Entrepreneurship: The component of human resources that performs the functions of raising capital, organizing, managing, and assembling other factors of production, making basic business policy decisions, and taking risks. Understand the difference between wants and needs and the concept of economic goods. Goods: All things from which individuals derive satisfaction or happiness. Economic goods: Goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price. From the economist pov, needs are objectively indefinable Explain the idea of opportunity cost. The opportunity cost of any action is the value of what is given upthe next-highest-ranked alternativebecause a choice was made. Graph the production possibilities curves.

Discuss the idea of efficiency and inefficiency Inefficient point: Any point below the production possibilities curve, at which the use of resources is not generating the maximum possible output. Understand the idea of increasing additional cost. When society takes more resources and applies them to the production of any specific good, the opportunity cost increases for each additional unit produced. Discuss economic growth and the trade-off between consumption and capital goods. To have more consumer goods in the future, we must accept fewer consumer goods today, because resources must be used in producing capital goods instead of consumer goods. Explain absolute and comparative advantage. Comparative: ability to perform an activity at a lower opportunity cost. Absolute: ability to produce more units of a good or service using a given quantity of labor or resource inputs. Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs. Discuss specialization, division of labor and trade between nations. Chapter 3 Explain the law of demand. When the price of a good goes up, people buy less of it, other things being equal. Discuss the difference between money prices and relative prices. Relative price: The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity. Money price: The price expressed in todays dollars; also called the absolute or nominal price. List and explain the other determinants of demand besides the price of the good or service. Income: normal (direct) & inferior (inverse) Taste and preferences Price of related goods o Substitute: price and demand direct o Complement: inverse Expectations Market size (potential buyers): direct Explain the law of supply. At higher prices, a larger quantity will generally be supplied than at lower prices, all other things held constant. (direct with price -> + slope) Understand the determinants of supply. Cost of inputs (inverse) Technology and productivity Taxes (decrease supply) and subsidies (increase) Price expectations Number of firms in industry (direct) Distinguish between changes in the quantity supplied and changes in supply. Quantity along curve Understand the process of determining market equilibrium quantity and equilibrium price. Chapter 4

Price system: An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant Evaluate the effects of changes in demand and supply on the market equilibrium price and quantity. Understand the various methods of rationing. Price Nonprice: first come first serve (queue), random assignment, political power, physical force Due to scarcity Explain the effects of price ceilings. Black market shortage Discuss the economics of rent control. The long-run effect of rent control on an area includes less investment into the real estate market in the area. Explain the effects of price floors. surplus Understand agricultural price supports. Understand the economics of minimum wage. Discuss the various types of government-imposed quantity restrictions on markets. Chapter 5 Understand the concept of market failure. A situation in which the market economy leads to too few or too many resources going to a specific economic activity. Explain the concept of positive and negative externalities. A consequence of an economic activity that spills over to affect third parties. Pollution is an externality. Describe the economic functions of government. Correcting externalities (market failures) o -: Special taxes (effluent), regulation o +: Financing & production, subsidies, regulation Legal system Promoting competition Providing public goods Distinguish the difference between public goods and private goods. Public: no additional opportunity cost Describe the free rider problem. Describe the political functions of government and how it affects the economy. Provision and regulation of government-sponsored and government- inhibited goods Income redistribution Discuss the economics of Medicare. Discuss the economic issues involved in public education. Theory of public choice: study of collective decision making Know the similarities and differences between markets and collective decision making (How voters, politicians, and other interested parties act and how these actions influence nonmarket decisions.) Similarities: opportunity cost, competition, similarity of individuals Differences: Zero-price goods/services Use of force

Voting 1. In a political system, one person gets one vote, whereas in the market system, each dollar a person spends counts separately. 2. The political system is run by majority rule, whereas the market system is run by proportional rule. 3. The spending of dollars can indicate intensity of want, whereas because of the all- or-nothing nature of political voting, a vote cannot.

Chapter 19 Elasticity = responsiveness Understand and calculate price elasticity of demand. The responsiveness of the quantity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price. Always negative, use absolute value

Classify price elasticities of demand. Elastic: Ep>1 A demand relationship in which a given percentage change in price will result in a larger percentage change in quantity demanded. Unit: a change in price of 1 percent causes exactly a 1 percent change in the quantity demanded. Inelastic demand, a change in price of 1 percent causes a change of less than 1 percent in the quantity demanded. Perfectly inelastic (vertical) demand: A demand that exhibits zero responsiveness to price changes. No matter what the price is, the quantity demanded remains the same. Perfectly/infinite elastic (horizontal) demand: A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded. Understand the relationship between price elasticity of demand and total revenues. Elastic: price & rev inverse Inelastic: direct Unit: no change in rev Discuss the factors that determine price elasticity of demand. The existence, number, and quality of substitutes The percentage of a consumers total budget devoted to purchases of that commodity The length of time allowed for adjustment to changes in the price of the commodity Describe cross elasticity of demand and how is can be used to indicate whether two goods are substitutes or complements.

+ if substitutes - if complements Explain income elasticity of demand.

Classify price elasticities of supply. Discuss how the time element affects price elasticity of supply. Chapter 20 Define utility and utils.

Distinguish between total utility and marginal utility.

Discuss the concept of diminishing marginal utility. The principle that as more of any good or service is consumed, its extra benefit declines. Otherwise stated, increases in total utility from the consumption of a good or service become smaller and smaller as more is consumed during a given time period. Explain how a consumer optimizes utility by equalizing the marginal utility per dollar spent across all goods and services. Describe the substitution effect of a price change on the quantity demanded. Understand how the real income effect of a price change affects the quantity demanded. Discuss the diamond-water paradox. Marginal utility rather than total utility determines what people are willing to pay for a good. Graph and describe the properties of an indifference curve. A curve composed of a set of consumption alternatives, each of which yields the same total amount of satisfaction. Downward slope Curved, convex to origin Graph and understand a budget constraint. All of the possible combinations of goods that can be purchased (at fixed prices) with a specific budget. Linear, negative Understand consumer optimum within the indifference curve analysis. Tangent to budget constraint Chapter 21 Define what is meant by Economic Rent and explain what role it plays in economic theory. A payment for the use of any resource over and above its opportunity cost. Economic rent allocates resources to their highest-valued use. Otherwise stated, economic rent directs resources to the people who can use them most efficiently. Understand the function of firms and the role that profits/losses play in functioning of business firms. Discuss what a proprietorship is and explain its strengths and weaknesses. A business owned by one individual who makes the business decisions, receives all the profits, and is legally responsible for the debts of the firm. +Profit taxed once -Unlimited liability, limited ability to raise funds Discuss what a partnership is and explain its strengths and weaknesses. Discuss what corporation is, how it differs from proprietorships and partnerships, and explain its strengths and weaknesses. A legal entity that may conduct business in its own name just as an individual does. The owners of a corporation, called shareholders, own shares of the firms profits and have the protection of limited liability. - double taxation: first corporate, then dividends, separation of owner and control Explain what interest is and what the interest rate is, and explain the role it plays in business decision making. in = ir + anticipated rate of inflation Nominal

Define what is meant by present value and be able to do rudimentary calculations of present value. Explain the various ways available to finance corporate activity. Stocks, bonds, and reinvestment of profits. Understand the role markets for stocks and bonds play in the economy and in connection to corporate financing. Define and explain the concept of efficient markets. Chapter 22 Distinguish between the short-run and the long-run In the short run, complete adjustment of all inputs is impossible, while in the long run all inputs can be adjusted. Understand what is meant by a production function and be able construct a table illustrating this concept. The relationship between inputs and maximum physical output. A production function is a technological, not an economic, relationship. Average physical product: Total product divided by the variable input. Marginal physical product: The physical output that is due to the addition of one more unit of a variable factor of production. The change in total product occurring when a variable input is increased and all other inputs are held constant. It is also called marginal product. Define what is meant by diminishing marginal product and illustrate the concept in a table. The observation that after some point, successive equal-sized increases in a variable factor of production, such as labor, added to fixed factors of production will result in smaller increases in output. Differentiate between variable and fixed costs in the short run. Define what is meant by marginal cost, explain how it is related to diminishing marginal product and the other cost curves, and sketch a graph of it in relationship to the other cost curves. As long as marginal physical product rises, marginal cost will fall. When marginal physical product starts to fall (after reaching the point of diminishing marginal product), marginal cost will begin to rise. One practical application of the law of diminishing marginal product is that a firm should hire workers until the point at which an additional worker's returns, in terms of value of the extra output produced, are equal to the additional wages that have to be paid for the worker. Describe the relationship between Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost, and Marginal Cost. Direct AVC (or ATC) & MC Identify and graph AFC, AVC, ATC, and MC curves. Explain how the long-run cost curve is related to short-run average cost curves. Define what is meant by economies of scale/diseconomies of scale and sketch a graph that illustrates these concepts. Economies of scale: Decreases in long-run average costs resulting from increases in output. Specialization Dimensional factor Improvements in productive equipment Diseconomies of scale: Increases in long-run average costs that occur as output increases. Limits to the efficient functioning of management Discuss Minimum Efficient Scale. The lowest rate of output per unit time at which long-run average costs for a particular firm are at a minimum. Chapter 23

Discuss the characteristics of perfectly competitive market structure Large number of buyers and sellers Homogeneous product Buyers and sellers have relevant info No barrier to exit or entry of industry Price taker Understand the Demand curve for a perfectly competitive firm vs. the Demand curve for a perfectly competitive industry. Individual: perfectly elastic demand d = MR Understand the formula for calculating Profits, MR, MC, P and the rule for profit maximization for a perfectly competitive firm. Maximize profits: MR or d = MC Understand the Pricing and Output decisions for perfectly competitive firms based on the desire to maximize profits. Calculate short-run profits/losses given price and cost information or by using a graph. Identify the short-run break-even and shut-down points for a firm on a graph or with the use of price and cost information. Breakeven: MR = MC = ATC Shutdown: MC = AVC Describe the supply curve for a perfectly competitive firm and to identify it using a graph of such a firm's cost curves. individual firms short-run supply curve is the portion of its marginal cost curve at and above the minimum point on the average variable cost curve. Discuss price and profit signals determine entry and exit dynamics in competitive industries. Distinguish between industries that experience long-run decreasing costs, long-run constant costs, and longrun increasing costs. Discuss marginal cost pricing in competitive markets and be able to state how it relates to economic efficiency vs. market failure. Chapter 24 Monopolies Define what it means for a firm to have a monopoly and identify situations that could give rise to a monopoly. The single supplier of a good or service for which there is no close substitute. The monopolist therefore constitutes its entire industry. Barriers to entry No close substitutions Economies of scale Legal or governmental restrictions Identify what a natural monopoly is and list all the ways that government action leads to monopoly. Explain the difference between the demand curve faced by a perfectly competitive firm and a monopoly and difference this makes to their respective marginal revenue curves. Monopoly faces entire industry demand curve MR < P Discuss demand elasticity in relationship to monopoly. Define the profit maximizing rule for a monopolist, explain how it differs from a perfectly competitive firm, and identify the price and output levels of a monopolistic firm on a graph. Price searcher

Same as #35 and, in addition, be able to calculate a monopolist's profits from a graph or from price and cost data. Price = Q(P-ATC) Define what is meant by price discrimination, explain why firms like to practice price discrimination, and explain the characteristics of markets where price discrimination takes place. Establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers. (equate MR and MC in each market) 1. The firm must face a downward-sloping demand curve. 2. The firm must be able to readily (and cheaply) identify buyers or groups of buy-ers with predictably different elasticities of demand. 3. The firm must be able to prevent resale of the product or service. Explain the efficiency characteristics of Monopolistic markets compared to Competitive markets. Explain further the inefficiencies of Monopolistic markets and the misallocation of resource that result from them. A monopoly misallocates resources when it restricts output so that the marginal benefit of the last unit sold exceeds the marginal social cost of producing the good. Define what is meant by Consumer Surplus and identify it on a graph.(Appendix) The difference between the total amount that consumers would have been willing to pay for an item and the total amount that they actually pay. Chapter 25 Monopolistic Competition Define what is meant by a monopolistically competitive market structure and explain its characteristics relative to competitive and monopolistic market structures. A market situation in which a large number of firms produce similar but not identical products. Entry into the industry is relatively easy. 1. Significant numbers of sellers in a highly competitive market: lead to small share of market, lack of collusion, independence 2. Similar but differentiated products 3. Sales promotion and advertising 4. Easy entry of new firms in the long run Define the role that product differentiation plays in monopolistically competitive markets. The distinguishing of products by brand name, color, and other minor attributes. Product differentiation occurs in other than perfectly competitive markets in which products are, in theory, homogeneous, such as wheat or corn. Control over price, downward demand Further discuss the characteristics of monopolistically competitive firms and implications these characteristics have on the demand and marginal revenue curves faced by such firms. Compare the equilibrium conditions (and their implied results) between monopolistically competitive and perfectly competitive firms. P > MC Discuss the short-run, profit maximizing, equilibrium position of monopolistically competitive firms using graphs or price, revenue, and cost data. Differentiate the short-run AND LONG RUN equilibrium situations of monopolistically competitive firms from perfectly competitive firms. (This is very similar to #35 above.) Explain the various ways monopolistically competitive firms try to differentiate their product or service from their competitors by establishing brand names and through advertising. Discuss various marketing strategies of monopolistically competitive firms and the types of goods and services that can be most effectively differentiated. Direct marketing: Advertising targeted at specific consumers, typically in the form of postal mailings,

telephone calls, or e-mail messages. Mass marketing: Advertising intended to reach as many consumers as possible, typically through television, newspaper, radio, or magazine ads. Interactive marketing: Advertising that permits a consumer to follow up directly by searching for more information and placing direct product orders. Search good: A product with characteristics that enable an individual to evaluate the products quality in advance of a purchase. (I) Experience good: A product that an individual must consume before the products quality can be established. (P) Credence good: A product with qualities that consumers lack the expertise to assess without assistance. (mix) Informational advertising: Advertising that emphasizes transmitting knowledge about the features of a product. Persuasive advertising: Advertising that is intended to induce a consumer to purchase a particular product and discover a previously unknown taste for the item. Discuss "information product" industries as examples of monopolistically competitive industries. An item that is produced using information- intensive inputs at a relatively high fixed cost but distributed for sale at a relatively low marginal cost. ATC, AFC, MC = AVC Chapter 26 Oligopoly List and explain the characteristics of oligopoly. A market structure in which there are very few sellers. Each seller knows that the other sellers will react to its changes in prices, quantities, and qualities. Small number of firms Interdependence -> strategic dependence Explain why oligopolies exist. Economies of scale Barriers to entry Horizontal merger: The joining of firms that are producing or selling a similar product. Not vertical Discuss Measurements of Industry Concentration. Explain what Game Theory is and define all the basic concepts and terms used in Game Theory. A way of describing the various possible outcomes in any situation involving two or more interacting individuals when those individuals are aware of the interactive nature of their situation and plan accordingly. The plans made by these individuals are known as game strategies. Cooperative game: A game in which the players explicitly cooperate to make themselves jointly better off. As applied to firms, it involves companies colluding in order to make higher than perfectly competitive rates of return. Noncooperative game: A game in which the players neither negotiate nor cooperate in any way. As applied to firms in an industry, this is the common situation in which there are relatively few firms and each has some ability to change price. Zero-sum game: A game in which any gains within the group are exactly offset by equal losses by the end of the game. Negative-sum game: A game in which players as a group lose during the process of the game. Positive-sum game: A game in which players as a group are better off at the end of the game. Tit-for-tat strategic behavior: In game theory, cooperation that continues as long as the other players continue to cooperate.

Describe the Prisoners' Dilemma with the use of Game Theory and a Game Theory payoff matrix. Apply game theory to pricing strategies of oligopolistic firms using payoff matricies. Apply Game Theory analysis to the strategic behavior of firms (and countries) participating in cartels. Small number of firms Relatively undifferentiated products Easily observable prices Little variation in prices Illustrate how Network Effects and Market Feedback can explain why some industries are oligopolies. Network effect: A situation in which a consumers willingness to purchase a good or service is influenced by how many others also buy or have bought the item. Positive market feedback: A tendency for a good or service to come into favor with additional consumers because other consumers have chosen to buy the item. Negative market feedback: A tendency for a good or service to fall out of favor with more consumers because other consumers have stopped purchasing the item. Explain why multiproduct firms selling complementary sets of products may or may not want their product to be compatible with the products of their competitors. Tweedle dee tweedle dum incompatible Battle of the sexes compatible Identify and explain the major characteristics of the four types of market structure discussed by economists.

Chapter 28 Understand Marginal Revenue Product and labor demand Explain Derived Demand Define and calculate demand elasticity for labor Understand Labor Market Equilibrium Discuss shifts in market demand for labor Discuss Labor outsourcing benefits Discuss the net effects of labor outsourcing Discuss the benefits of labor outsourcing Discuss a monopoly in the product market Discuss the utilization of other factors of production

Chapter 32 Worldwide Importance of International Trade Define comparative advantage. How important is international trade in the U.S.? in other countries? Comparative Advantage and Mutual Gains from Exchange Given production figures for two goods from two countries, be able to calculate opportunity cost and recognize a mutually beneficial exchange rate. Be able to determine comparative advantage and the direction of trade. Understand how comparative advantage leads to specialization and what the gains from trade are. Relationship Between Imports and Exports International Competitiveness How do we really pay for imports? Is the U.S. losing competitiveness in world trade? Arguments Against Free Trade Explain the reasoning behind the infant industry and foreign subsidies arguments for protectionism, as well as the weaknesses of these arguments. Explain the reasoning behind the dumping, protecting domestic jobs, environment and national security arguments for protectionism, as well as the weaknesses of these arguments. Ways to Restrict Foreign Trade Define: quota, VRAs, VIEs and understand how they change international trade and domestic markets. How do tariffs and quotas compare? Who specifically gains or loses from them? International Trade Organizations Be familiar with the history and activities of GATT, WTO and regional trade agreements. and how have they influenced international trade? What are trade diversion and trade deflection? Chapter 33 Balance of Payments and International Monetary Fund Know the difference between the balance of trade and the Balance of Payments. Define accounting identity and recognize surplus and deficit items. What kinds of transactions are contained in the Current and Capital accounts? What are Official Reserves? What impact will differing inflation rates have on trade? What is capital flight? Determining Foreign Exchange Rates Know how a foreign exchange market functions and what is meant by the exchange rate, appreciation and depreciation. Be able to do exchange rate math, converting one currency into another or determining what the exchange rate is. What are the determinants of supply and demand and their slopes in foreign exchange markets? What causes the curves to shift? Put it all together and work with changes in equilibrium in the foreign exchange markets. Gold Standard and the International Monetary Fund Be familiar with the two historical fixed exchange rate systems, the gold standard and the Bretton Woods Monetary System and IMF, and how the fixed rates were maintained. Fixed Versus Floating Exchange Rates What are a hedge and foreign exchange risk? What must a country do to fix its exchange rate? Know the reasons why countries desire fixed rates and how fixed rates can be harmful.

Know how and why countries use the dirty float, crawling peg and target zones to keep their exchange rates stable. How effective are the policies?