Principles Of Economics - Lecture notes - WebPage PDF

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List%of%key%terms%and%references! for$the$final&exam! ! The!Final!Exam!will!consist!of!3!parts:! 1. Part!1:!!Microeconomics:!Principles,!Supply!and!Demand,!Elasticity.!! 2. Part! 2:! Microeconomics:! Production,! Costs,! Perfect! Competition,! Monopoly,! Price!discrimination.!! 3. Part!3:!Macroeconomics.! ! About! 50%! of! questions! will! focus! on! the! 3d! part! of! the! course,! about! 25%! of! questions!will!be!on!the!2nd!part!of!the!course!and!about!another!25%!of!questions! will!be! on!the! 1st!part!of! the!course.!Study! guides!for! part!1! and!2! are!the! same!as! they!used!to!be!for!the!Midterm!Exams!1!and!2.! ! Lecture! slides! and! videos! from! FlipIt! are! the! best! reference.! For! some! topics! I! provide!additional!references!from!an!open!source!book!and!other!video!sources.! ! The!best!way!to!prepare!for!the!exam!is!going!over!the!practice!questions!we!do!in! class!and!going!over!the!exercises!from!the!homework.!

Part%1% Basic%Principles% ! 1. Know! that! economics! is! about! choices! and! people! have! to! make! choices! because! resources! are! scarce! (Know! he! formal! definition! of! what! economic! is);! 2. Know!that!people!respond!to!incentives;! 3. Know!what!is!the!invisible!hand!principle!and!who!came!up!with!it;! 4. Know!what!are!the!opportunity!costs!and!that!everything!has!an!opportunity! costs!because!resources!are!scarce;! ! Reference:!lecture!slides!1!and!2;!

Opportunity%costs%and%Production%Possibility%Frontier%(PPF)% 1. Know!the!definition!of!opportunity!costs!and!how!to!calculate!them;! 2. Know!that!the!opportunity!costs!are!the!slope!of!PPF;! 3. Know! which! points! on! the! graph! with! PPF! are! efficient/not! efficient! and! which!are!feasible/not!feasible;!

4. Know!how!economic!growth!would!affect!PPF;! ! Video!about!PPF:!https://www.youtube.com/watch?v=gbv6TVeCjyg!! Video! about! PPF! and! opportunity! https://www.youtube.com/watch?v=M6gBJU88wHM!! ! References:!Lecture!slides!2.!

costs:!

Gains%From%Trade% 1. Know!that!voluntary!exchange!makes!people!better!off!as!long!as!preferences! differ;! 2. Know!that!there!are gains&from&trade—the!mutual!gains!that!individuals!and! countries! can! achieve! by! specializing! in! doing! different! things! and! trading! with!one!another! 3. Know! that! benefits! from! trade! are! achieved! when! individual! specialize! on! what!is!their!comparative!advantage;! 4. Know!what!is!comparative!advantage!and!how!to!find!it;! 5. Know! how! to! solve! problems! where! there! are! two! individuals! (or! 2! countries)!producing!two!goods:!find!who!should!specialize!on!production!of! which! good.! Specialization! should! be! determined! by! opportunity! costs! and! comparative!advantage.! 6. Know! that! all! countries! (individuals)! can! benefit! from! trade! as! long! as! opportunity!costs!differ.!

!

! Reference:!Lecture!slides!3!

Demand%and%Supply,%Equilibrium% 1. 2. 3. 4. 5. 6.

Know!the!difference!between!demand!and!quantity!demanded;! Know!what!the!law!of!the!demand!is;! Know!what!increases!and!decreases!the!quantity!demanded;! Know!if!demand!curve!describes!behavior!of!producers!or!consumers;! Know!if!the!demand!curve!is!upward!or!downward!sloping;! Know! that! the! demand! curve! shows! (among! other! things)! the! maximum! willingness!to!pay!for!a!given!quantity!of!a!good;! 7. Know! what! the! shift! in! the! demand! curve! means! (change! in! willingness! to! pay! for! every! given! quantity! and! change! in! quantity! demanded! for! every! given!price);! 8. Factors! which! shift! the! demand! curve! and! which! direction! they! shift! the! curve;! 9. Know!what!creates!the!movement!along!the!demand!curve;! 10. Know!what!are!substitutes!and!what!are!complements;! 11. Know!what!is!normal!and!what!is!the!inferior!good;! !

References:!Lecture!slides!4.! ! 12. !Know!the!differences!between!quantity!supplied!and!supply;! 13. Know!what!increases!and!decreases!quantity!supplied;! 14. Know!if!supply!curve!describes!behavior!of!producers!or!consumers;! 15. Know!what!supply!curve!(among!other!things)!shows!the!minimum!price!at! which! the! sellers! are! willing! and! able! to! supply! a! given! quantity! of! a! good! (costs);! 16. Know!what!increase/decrease!in!supply!means;! 17. Know!what!causes!changes!in!quantity!supplied;! 18. !Know!what!causes!shifts!in!the!supply!curve;! ! References:!Lecture!slides!5.!! ! 19. !Know! that! if! the! price! is! below! or! above! the! equilibrium! (and! is! not! controlled! by! the! government),! the! price! will! eventually! converge! to! the! equilibrium!price;! 20. Know! how! shifts! in! demand! and! supply! affect! equilibrium! price! and! equilibrium! quantity! demanded! of! a! good! (be! able! to! solve! these! questions! graphically);! 21. Know!how!simultaneous!shifts!in!both!demand!and!supply!affect!equilibrium! price! and! equilibrium! quantity! demanded! of! a! good! (be! able! to! solve! these! questions!graphically);! ! References:!Lecture!slides!6.!

Consumer%and%Producer%surplus% 1. 2. 3. 4. 5. 6.

What!is!consumer!surplus!and!how!to!represent!it!graphically;! What!happens!to!consumer!surplus!when!prices!increase/decrease;! What!is!producer!surplus!and!how!to!represent!it!graphically;! What!happens!to!producer!surplus!when!prices!increase/decrease;! Know!what!total!surplus!is!and!how!to!represent!it!graphically;! Know! that! competitive! market! for! private! goods! is! efficient:! maximizes! the! total!surplus!on!the!market;! 7. Know! how! to! calculate! producer! and! consumer! surplus! of! individuals! and! total!consumer!and!producer!surplus!on!the!market;! ! References:!Lecture!slides!7.! Open! source! book! about! producer! and! consumer! surplus! page! 67-68:! http://openstaxcollege.org/files/textbook_version/low_res_pdf/21/principles-ofeconomics-LR.pdf!

Price%ceilings%and%price%floors% ! 1. Know! what! are! the! effects! of! price! ceilings! (is! there! potential! for! illegal! markets,!are!there!wasted!resources,!does!quantity!demanded!equal!quantity! supplied,!etc);! 2. Know!what!are!the!effects!of!price!floors!(is!there!a!surplus!of!the!good,!is!the! quality!of!the!good!efficient.!etc);! 3. Be! able! to! find! quantity! demanded! and! quantity! supplied! under! a! price! ceiling!and!price!floor;!! 4. Distinguish!binding!and!non!binding!price!ceilings;! 5. Distinguish!binding!and!non!binding!price!floors;! 6. Know!what!happens!to!the!quantity!of!the!good!sold/bought!on!the!market!if! price!floors!or!ceilings!are!imposed!by!the!government;! 7. Know!examples!of!price!floors!and!price!ceilings;! 8. Know!what!deadweight!loss!is;! 9. Know!why!deadweight!loss!appears!in!case!of!price!floors!and!ceilings;! 10. Know! that! binding! price! controls! decrease! total! surplus! and! decrease! efficiency.! ! References:!Lecture!slides!8.! Open! source! book! about! price! floors! and! ceilings,! Chapter! 3.4:! page! 64-66:! http://openstaxcollege.org/files/textbook_version/low_res_pdf/21/principles-ofeconomics-LR.pdf! ! Open! source! book! about! inefficiency! of! price! floors! and! ceilings! and! deadweight! loss,!page!67-69:! http://openstaxcollege.org/files/textbook_version/low_res_pdf/21/principles-ofeconomics-LR.pdf!

Price%Elasticity%of%Demand%and%Total%revenue% 1. What!is!price!elasticity!of!demand;! 2. Know! the! formula! of! price! elasticity! of! demand! and! how! to! calculate! elasticity!using!this!formula;!Know!how!to!use!the!same!formula!to!calculate! percentage! change! in! quantity! or! percentage! change! in! price! if! elasticity! is! given;! 3. Know!how!to!calculate!percentage!change!in!quantity!and!percentage!change! in!price;! 4. Know!that!price!elasticity!of!demand!is!always!negative!and!why;! 5. Know!when!demand!is!elastic,!inelastic!and!unit-elastic;! 6. Know!examples!of!the!goods!for!which!demand!is!elastic!and!inelastic;! 7. Know!which!factors!affect!whether!demand!is!elastic!or!inelastic!(availability! of!substitutes,!etc.);! 8. Be!able!to!draw!a!graph!of!elastic!and!inelastic!demand;!

9. Know! how! the! graphs! of! perfectly! elastic! and! perfectly! inelastic! demand! look;! 10. Know! whether! the! firm! should! increase! or! decrease! the! price! if! it! wants! to! increase!the!total!revenue!and!the!demand!is!elastic/inelastic/unit-elastic;! ! References:!Lecture!slides!9!

Elasticity%of%Supply%and%other%Elasticities%of%Demand% ! 11. Know!what!is!elasticity!of!supply;! 12. Know!the!formula!for!elasticity!of!supply;! 13. Know!when!supply!is!elastic/inelastic/unit-elastic;! 14. Know!if!elasticity!of!supply!is!usually!above!or!below!zero;! 15. Be!able!to!draw!a!graph!of!elastic!and!inelastic!supply;! 16. Know!which!factors!affect!elasticity!of!supply;! 17. Be!able!to!draw!a!graph!of!elastic!and!inelastic!supply;! 18. !Know!what!cross!price!elasticity!of!demand!is!and!the!formula!to!calculate!it;! 19. Know!how!to!tell!if!two!goods!are!substitutes!or!complements!based!on!cross! price!elasticity;! ! References:!Lecture!slides!10.!

Part%2% Production%and%Costs% ! 1. Marginal!product!definition;! 2. How!to!calculate!marginal!product;! 3. What!is!classified!as!short!run!period;! 4. What!is!classified!as!long!run!period;! 5. What!is!a!fixed!input!(be!able!to!provide!examples!of!a!fixed!input);! 6. What!is!a!variable!input!(be!able!to!provide!examples!of!a!variable!input);! 7. The!law!of!diminishing!returns!to!an!input;! 8. Total!costs;! 9. Fixed!costs!(be!able!to!provide!examples);! 10. Variable!costs!(be!able!to!provide!examples);! 11. What!are!average!total!costs!and!how!to!calculate!them;! 12. What!are!average!fixed!costs!and!how!to!calculate!them;! 13. What!are!average!variable!costs!and!how!to!calculate!them;! 14. Graph!of!average!costs!in!the!short!run;! 15. Know!why!average!costs!in!the!short!run! at!first!decreases!with!output!and! later!increases!with!output!(why!the!graph!has!U-shape);!!

16. Know! how! average! fixed! costs! change! with! output! (graph! of! average! fixed! costs);! 17. What!are!marginal!costs!and!how!to!calculate!them;! 18. Graph!of!marginal!costs;! 19. Know!why!marginal!costs!have!a!J-shape! 20. A! graph! of! average! and! marginal! costs! together;! Using! this! graph! to! determine! whether! ATC! increase! or! decrease! with! output! depending! on! whether!ATC!are!smaller!or!lager!then!MC;! 21. Know!whether!Long! Run!Average! Total!Costs! (LRATC)!is!greater! or!smaller! than!Short!Run!Average!Total!Costs!(ATC).! 22. !What!increasing!returns!to!scale!are;! 23. What!decreasing!returns!to!scale!are;! ! Lecture!Slides!12,!13.! References!in!the!open!source!book!page!150-159:! http://openstaxcollege.org/files/textbook_version/low_res_pdf/21/principles-ofeconomics-LR.pdf!

Perfect%Competition%% ! 1. Main!features!of!perfectly!competitive! industry!(no!barriers!to!entry,! all!the! firms!are!price!takers!etc.);! 2. Know!what!a!price-taker!is;! 3. What!is!the!goal!of!the!firm;! 4. Difference! between! accounting! and! economic! profit,! know! how! to! calculate! them;! 5. What!is!marginal!revenue!and!how!to!calculate!it;! 6. Rule! of! determining! optimal! quantity! of! output:! MR=MC;! Know! whether! a! firm!should!increase/decrease!output!if!MC!is!below/above!MR;! 7. Know! how! the! demand! curve! for! an! individual! perfectly! competitive! firm! looks!like;! 8. Know!that!in!case!of!perfect!competition!MR=Price;!know!why!it!is!so;!! 9. Know!whether!a!firm!should!increase/decrease!output!if!MC!is!below/above! Price;! 10. A! graph! of! marginal! costs! and! marginal! revenue! for! perfect! competition.! Using! this! graph! to! determine! the! optimal! output;! Using! this! graph! to! determine!whether!a!firm!should!increase!or!decrease!output!depending!on! whether!marginal!costs!are!above!or!below!the!marginal!revenue;! 11. Know! what! determines! whether! a! firm! is! making! profits,! losses! or! is! breaking!even!(how!it!is!related!to!the!minimum!of!ATC).! 12. Rule!determining!whether!the!firm!should!keep!operating!or!shut!down!in!a! short!run!(how!it!is!related!to!the!minimum!of!AVC);! 13. Rule! determining! whether! the! firm! should! keep! operating! or! shut! down! in! the!long!run;!

14. Know!that!perfectly!competitive!firms!are!making!zero!profits!in!the!long!run! and!why!it!happens;! 15. Know!when!firms!will!enter!or!exit!a!perfectly!competitive!industry;! 16. Know! what! happens! to! the! market! price! when! new! firms! enter! or! exit! an! industry;! 17. Know!that!MC!curve!above!the!min!of!AVC!represents!the!supply!curve!in!the! short!run;! 18. Know! that! perfect! competition! stimulates! firms! to! decrease! their! costs! and! innovate.! ! Lecture!slides!14,!15.! ! References!in!the!open!source!book!page!147-150,!page!167-178,!page!181-185:! http://openstaxcollege.org/files/textbook_version/low_res_pdf/21/principles-ofeconomics-LR.pdf! ! ! Video!resources:! 1.!The!following!link!goes!through!MC,!ATC,!explains!why!MC=MR!maximizes!profit! and!specifies!when!production!is!profitable!and!when!the!firm!should!operate/shut! down.! It! explains! most! of! the! things! you! need! to! know! about! costs! and! production/profitability!in!perfect!competition.! https://www.khanacademy.org/economics-finance-domain/microeconomics/firmeconomic-profit/average-costs-margin-rev! ! 2.! Economic! vs.! accounting! profit:! https://www.khanacademy.org/economicsfinance-domain/microeconomics/firm-economic-profit/economic-profittutorial/v/economic-profit-vs-accounting-profit! !

Monopoly% 1. Know! what! creates! monopoly! (technological! advantage,! patents,! increasing! returns!to!scale!etc.)! 2. Rule! of! determining! optimal! quantity! of! output:! MR=MC;! Know! whether! a! firm!should!increase/decrease!output!if!MR!is!below/above!MC;! 3. Know! that! for! a! monopolist! MR! doesn’t! equal! price;! know! that! that! for! a! monopolist!MR!is!decreasing!with!output!and!is!below!the!price!(know!why!it! is!so:!because!to!increase!output!the!monopolist!has!to!charge!lower!price!to! all!consumers);! 4. What! determines! whether! a! monopolist! is! making! profits,! losses! or! is! breaking!even!(it!depending!on!whether!the!price!is!above,!below!or!equal!to! the!minimum!of!ATC,!the!same!as!in!case!of!perfect!competition).! 5. Know!how!the!quantity!produced,!price!charged!and!profit!of!the!monopolist! compares!to!the!perfectly!competitive!firm;!

6. Know! that! monopoly! creates! deadweight! loss! in! comparison! to! perfect! competition!and!why!it!does!so.! 7. Know!that!deadweight!loss!is!a!loss!in!efficiency!(another!way!to!say!it:!loss! in!market!surplus,!loss!in!total!surplus,!some!mutually!beneficial!transactions! don’t!take!place);! 8. Know!what!is!price!discrimination!and!why!firms!use!it;! 9. Know!that! when! engaging!in! price! discrimination!a! firm! tries!to! distinguish! consumers! with! different! elasticity! of! demand.! The! firm! tries! to! charge! higher! prices! to! consumers! with! low! price! elasticity! of! demand! and! lower! prices!to!consumers!with!high!price!elasticity!of!demand;! 10. Know!what!is!perfect!and!imperfect!price!discrimination;! 11. Know! whether! price! discrimination! increases! or! decreases! quantity! sold! in! comparison!to!non!discriminating!monopoly.! 12. Know! that! if! price! discrimination! increases! or! decreases! profit! (producer! surplus)!of!a!firm!and!if!it!decreases!or!increases!deadweight!loss!(increases! or!decreases!efficiency).!! 13. Know! that! perfect! price! discrimination! decreases! deadweight! loss! from! monopoly!to!zero;! 14. Know! whether! perfect! or! imperfect! price! discrimination! results! in! higher! efficiency!(smaller!deadweight!loss).! ! Lecture!slides!17,!18.! ! Chapter!7!of!Survey!of!Economics.!Principles,!Applications,!and!Tools.!!By!O’Sullivan,! ! Sheffrin!and!Perez.!6th Edition,!Pearson.! ! Or! pages! 189-202! in! an! open! source! book! http://openstaxcollege.org/files/textbook_version/low_res_pdf/21/principles-ofeconomics-LR.pdf!

Part%3% GDP% 1. Know!the!definition!of!GDP;! 2. Know! the! differences! between! intermediate! and! final! goods! +! examples! of! both!types!of!goods;! 3. Know!that! there! are!3! methods! of!calculating! GDP! and!what! those! methods! are;! 4. Know!what! are!components! of!GDP! (know!the!formula! GDP=C+I+G+NE!and! what! is! included! in! each! component! of! the! GDP,! for! example! know! if! transfers,! taxes! or! investment! in! gold,! resale! of! used! stuff! etc.! should! be! included!in!the!GDP!or!not);! 5. Know!what!is!real!GDP!and!what!is!nominal!GDP!and!how!to!calculate!them,! know!why!real!GDP!is!a!useful!measure;!

6. Know!what!is!GDP!per!capita!and!why!it!is!a!useful!measure;! 7. Know!how!GDP!is!linked!with!happiness;! ! Reference:!Lecture!slides!18;! !

Unemployment% 1. Know! who! is! considered! employed! (for! example,! what! about! part! time! workers?);! 2. Know!who!is!considered!a!part!of!the!labor!force;! 3. Know! who! is! considered! out! of! the! labor! force! (for! example,! what! about! retired!or!discouraged!workers);! 4. Know!who!is!considered!unemployed;! 5. Know!how!to!calculate!labor!force!participation!rate;! 6. Know!how!to!calculate!unemployment!rate;! 7. Know! that! unemployment! rate! can! underestimate! and! overestimate! the! number!of!unemployed!individuals!and!why;! 8. Know! what! is! the! link! between! unemployment! and! recession! (Economic! Growth);! 9. Structural!unemployment!definition!and!examples,!why!it!appears;! 10. Frictional!unemployment!definition!and!examples,!why!it!appears;! 11. Cyclical!unemployment!definition!and!examples,!why!it!appears;! 12. Natural!unemployment!definition!and!how!to!calculate!it!knowing!structural! and!cyclical!unemployment;! ! Reference:!Lecture!slides!19;!

Inflation% 1. 2. 3. 4. 5. 6. 7.

Consumer!Price!Index!(CPI)!definition!and!how!it!is!calculated;! Inflation!rate!definition!and!how!to!calculate;! Know!what!is!real!wage!and!real!income;! Know! the! costs! of! inflation! and! examples/definitions! of! each! type! of! costs! (shoe-leather!costs,!menu!costs,!unit!of!account!costs);! Know! what! is! real! and! nominal! interest! rate! and! how! calculate! them! if! inflation!rate!is!known;! Know! whether! lenders! or! borrowers! win/lose! from! inflation! depending! on! whether!inflation!is!bigger!or!smaller!than!expected;! Know!that!it!is!possible!to!decrease!inflation!however!it!often!comes!at!a!cost! of!higher!unemployment;! Know!if!the!costs!of!inflation!increase!or!decrease!when!inflation!gets!higher;!

8. ! Reference:!Lecture!slides!19;!

Long-term%growth% 1. How!to!calculate!GDP!growth!rate;! 2. Know!how!to!use!the!rule!of!70;! 3. Know! that! growth! is! compounding! and! that! even! small! differences! in! GDP! growth!can!result!in!big!differences!in!GDP!over!time.! 4. Know!what!productivity!is;! 5. Know! that! increase! in! productivity! creates! long-term! growth;! Know! that! physical!capital,!human!capital!and!technology!increase!productivity;! 6. Know!examples!of!physical!and!human!capital,!technology;! 7. Know! that! there! are! diminishing! returns! to! physical! capital;! Know! what! these!diminishing!returns!are!and!examples!of!when!they!appear;! 8. Know!what!convergence!hypothesis!is;! 9. Know!that!some!Asian!countries!converged!to!Europe!and!U.S.!somewhat!and! most!of!the!African!countries!did!not!converge;! 10. Know!some!reasons!why!growth!rates!across!countries!differ;! ! Reference:!Lecture!slides!20;!

Aggregate%Demand%and%Supply,%AD-AS%model% 1. Know! if!aggregate! demand! (AD)! curve!is! upward! or! downward! sloping!and! why;! 2. Know!what!is!wealth!effect!(affecting!the!slope!of!AD);! 3. Know!what!is!interest!rate!effect!(affecting!the!slope!of!AD);! 4. Know!what!creates!movement!along!the!AD!curve;! 5. Know! what! shifts! the! AD! curve! (change! in! government! purchases,! money! supply,!etc)!and!which!direction;! 6. Know!how!aggregate!supply!curve!looks!in!short!run!(SRAS).!Is!it!upward!or! downward!sloping!or!vertical!or!horizontal?!Why!does!it!have!this!slope?! 7. Know!what!are!the!sticky!wages!and!how!they!affect!SRAS!slope;! 8. Know!what!shifts!SRAS!curve!and!which!direction;! 9. Know!how!aggregate!supply!curve!looks!in!the!long!run!(LRAS).!Is!it!upwar...