Economics 101: Kelly
Fall 2000
Review List for Course through Second Midterm
Background:
What is Economics?
Definition and Overview
Positive versus Normative Economics
Plotting functions
Finding the slope and intercept of a linear function
Solving two equations in two unknowns
Data Types
Allocation of Resources:
Scarcity
Opportunity cost
Production possibility frontier
Interpreting the slope of the PPF
The law of increasing opportunity cost (causes and implications)
Things that shift the PPF out
Absolute and comparative advantage
The economic question (resource allocation)
Demand and Supply:
Demand versus quantity demanded
Shifts of the demand curve versus movements along the demand curve
Determinants of demand
The law of demand
Market demand as horizontal summation of the individual demand curves
Normal versus inferior goods
Complements versus substitutes
Supply versus quantity supplied
Shifts of the supply curve versus movements along the supply curve
Determinants of supply
The law of supply
Market supply as horizontal summation of individual supply curves
Equilibrium
Finding the equilibrium
Excess demand: shortage
Excess supply: surplus
Price ceiling
Price floor
Indeterminancy
Agricultural markets
Price support
Price subsidy
Soil bank
Consumer surplus
Producer surplus
Effects of taxes (excise tax)
Consumer tax incidence
Producer tax incidence
Deadweight loss
Elasticity
Elasticity of demand: (%change in the quantity demanded / % change in price)
Arc Elasticity of demand formula
Point elasticity of demand formula
Income elasticity of demand: (% change in the quantity demanded / % change in
income)
Inferior goods: income elasticity less than zero
Normal goods: income elasticity greater than zero
Cross-price elasticity of demand: (% change in the quantity demanded of good A/
% change in the price of good B)
Substitutes: cross-price elasticity greater than zero
Complements: cross-price elasticity less than zero
Elasticity of supply: (% change in the quantity supplied / % change in price)
Total Revenue and elasticity
P increases, TR increases, demand is inelastic
P increases, TR decreases, demand is elastic
P increases, TR remains the same, demand is unit elastic
P decreases, TR decreases, demand is inelastic
P decreases, TR increases, demand is elastic
P decreases, TR remains the same, demand is unit elastic
Consumer Theory
Total utility
Marginal utility
Diamond/water paradox
Cardinal and ordinal utility
MU of good X/price of good X = MU of good Y/price of good Y
Diminishing marginal utility
Goal of consumer: maximize utility subject to the constraint of income and prices
Indifference curves
Properties of indifference curves
Slope of indifference curves = MRS of good X for good Y = MU of good X/MU
Of good Y
Budget Constraint: income = (price of good X)(Quantity of good X) + (price of
Good Y)(quantity of good Y)
y-intercept: income/price of good Y
slope = -price of good X/price of good Y
Maximization of consumer’s utility
Effect of changes in income on consumer’s budget line
Income-consumption line
Effect of changes in prices on consumer’s budget line
Price-consumption line
Income and substitution effects
Normal and inferior goods using indifference curves
Derivation of demand curves