Lane Community College


ECON 201 Microeconomics
STUDY GUIDE: EXAM 1
(Updated: Jan. 30, 2011)

CHAPTER 3:  SUPPLY AND DEMAND: REVIEW ONLY, NOT TESTED

Concepts and Definitions:
    Law of Demand
    Law of Supply    
    The difference between demand and quantity demanded
    The difference between supply and quantity supplied
    The determinants of demand and their impact
    The determinants of supply and their impact
    A change in demand versus a change in quantity demanded
    A change in supply versus a change in quantity supplied
    
Graphical and technical issues:
    Slopes of the demand curve and supply curve
    Movement (or sliding ) along a curve versus shifting of the entire curve
    What is a theoretical model?

Applications and interpretations:
    How is demand represented graphically?
    How is quantity demanded represented graphically?
    How is supply represented graphically?
    How is quantity supplied represented graphically?
    Why is the demand curve sloped downward?
    Why is the supply curve sloped upward?
    Know how to represent and interpret changes in the economy graphically on
supply and demand graphs. (e.g. prices of inputs, technology, resource availability, expectations, prices of other goods, preferences, income, wealth, etc.)





WEB PAGES
History of Microeconomics Theory
Smith and Free Market Theory
Know the relationship of the following: self-ineterst, competition, price
adjustments, equilibrium, beneficial results.
Beneficial Results: productive efficiency, economic efficiency, allocative
efficiency; social optimality, consumer sovereignty, uniqueness.
What is Pareto optimality?
Market Imperfections and Market Failures, definitions.
Under what circumstances does the market generate market imperfections or
market failures.
Market power, Externalities, Public goods,  Imperfect Information, Equity.
What is the relationship between market imperfections and failures and the
beneficial results of the free market?
Under what circumstances might government intervention in the economy be
justifed?
Utilitarian Theory of Human Behavior.
Marginalists, Neoclassicals, Utility Maximization.
Economic Rationality.
Irrationality and Behavioral Economics.

Four Cases of Utility Maximization
Know the for cases or models of uitility maximization and their corresponding maximization conditions.
Be able to explain each model.
Marginal utility, total utility.
The Law of Diminishing Marginal Utility.




CHAPTER 19: THE THEORY OF CONSUMER BEHAVIOR

UTILITY THEORY

Concepts and definitions:
    What is microeconomics?
    What does demand theory model?
    What is Adam Smith’s explanation of how the market works?
    What is the utilitarian theory (or law) of human behavior?
    What contribution did the marginalists make to microeconomic theory?
    How did the marginalists restate the utilitarian law of human behavior with
regard to consumers and producers?
    What are required characteristics of a “rational” economic agent?
    How is “rational” defined in economics?
    What are the rational choice conditions?
    Total utility
    Marginal utility
    Diminishing marginal utility
    Rational Decision-making Rules (or Maximization Conditions) for all four cases.

Graphical, mathematical and technical  issues:
    How are total utility and marginal utility related graphically?
    Graphically, when is total utility maximized in the Free Good Case and the Two
 Goods with Prices Case?
    How is marginal utility represented graphically?
    Be able to determine the optimal combination of goods which will give the
 maximum total utility from a table listing total utility and marginal utility.
    Be able to determine the best purchase per dollar spent: theoretically, in a table
 and on a graph.

Applications and Interpretation:
    Understand that microeconomic theory is about simplifying and modeling
 decision-making and not  a description nor explanation of the world.
    What do we mean by utility?   Why do we use this idea?
    Why do we say consumers maximize utility?
    How do we interpret the slope of the total utility curve?



CHAPTER 19 - APPENDIX: INDIFFERENCE CURVES

Concepts and definitions:
What does an indifference curve model?
Applications and Interpretation
    Be able to identify an Indifference Curve graph, including:
        The point of maximum Total Utility that a  consumer can afford within a
budget;
        The Indifference curve
        The Budget Line.
        The maximum amount of a single good a consumer can afford within a budget.

Graphical, mathematical and technical  issues:
What is the slope of the Indifference curve equal to?
What is the slope of the budget line equal to?


CHAPTER 20: ELASTICITIES

Elasticity = a measure of the responsiveness or sensitivity of an economic actor to an economic stimulus.  If an actor has a strong response to a stimulus the response is referred to as "elastic".  If an actor has a weak or no response to a stimulus the response is referred to as "inelastic".

Consumer Elasticities

The Price Elasticity of Demand: a measure of the responsiveness of consumers to a change in the price of a good. It is calculated as the average- percent-change in the quantity demand of a good due to a measured average- percent-change in the price of a good.
Necessities have low price elasticities of demand. (They are relatively inelastic). Their demand curves are relatively steep, as there is little change in the quantity demand even if  their price rises or falls a great deal.
Luxuries have high price elasticities. (They are relatively elastic). Their demand curves are relatively flat, as there is a large change in the quantity demand even if  their price rises or falls by a small amount.

The Cross Price Elasticity of Demand: measures the responsiveness of consumers' demand for one good due to the change in the price of a different good. Cross price elasticity of demand measures the degree of substitutibility or complementarity between two goods.
Substitute Goods have a negative Cross Price Elasticity of Demand since a price increase of of a good will result in consumers increasing the purchase of a substitute good.

Complimentary Goods have a positive Cross Price Elasticity of Demand since an increase in the price of a good will result in consumers buying less of the good and less of other goods consumed with the original good, for example a game consol and game software.

The Income Elasticity of Demand: a measure of the responsiveness of consumers' Demand to a change in their income. It is calculated as the average- percent-change in the quantity demand of a good due to a measured average- percent-change in theconsumers' income.
Normal Goods have a positive Income Elasticity of Demand, since as consumers' incomes rise they buy more of the good, for example, steak.
Inferior Goods have a negative Income elasticity of Demand, since as consumers' incomes rise they buy less of the good, for example Spam (canned, processed meat product).




POTENTIAL SHORT ANSWER ESSAY TOPICS:

1.    What is the purpose of models in economics?

2.    Summarize Smith’s theory of the free market.
3.     What are the beneficial outcomes that Smith's theory of the Free Market claims are
generated at by an unregulated market?
4.     Under what conditions can the free market fail to acheive efficiency or optimality?
5.     What was the Utilitarian Theory of Human Behavior?

6.     How did the marginalists re-state (or translate) the Utilitarian Theory of Human Behavior with respect to consumers and producers?

7.     All economic models assume that all economic agents are “rational”.
 What does “economically rational” mean?

8.    Explain the Behavioral Economics perspective on rationality?

9.     What are the 4 models of Consumer Utility Maximization and their corresponding maximization conditions, as covered in lecture?
10.     Explain each of the 4 models of Consumer Utility Maximization and their correspondng
maximization conditions.
11.   Be able to draw and explain an indifference curve-budget constraint analysis,
including identifying all relevant points on the graph.