ECONOMICS
2302 – PRINCIPLES OF MICROECONOMICS
COURSE STUDY
GUIDE
There are 8 parts to the course. For each part, learn the definitions and answer the review questions below.
The class notes and homework sets are on my website. No one element in this course standing alone is sufficient.
I expect that you will use the web notes as a basis for your class notes, read and study the assigned pages in the textbook,
attend class regularly, do the homework sets, and aggressively use this study guide.
Part
1 – Basic Concepts
Read:
Ch 1 and Ch 2.
Review:
Ch 1 Appendix (The instructor assumes you know the math covered in this
appendix).
Definitions:
1. Utility
2. Goods
3. Services
4. Resources
5. Efficiency and Inefficiency
6. Scarcity
7. Benefit – cost analysis
8. Value
9. Rational decision making
10.
11. Rationing device
12. Production Possibilities Frontier (PPF)
13. Economic trade – off
14. Law of Increasing Costs
15. Cost
16. Price
Review
Questions:
17. What is included in each of the four categories of
resources?
18. Describe the transformation process. What is the role
of technology in this process?
19. Why must people make choices?
20. Tell why value is subjective and intensively
personal.
21. How is marginal analysis used in decision making?
22. What are the three economic questions all societies
must answer?
23. How does the market system answer these three
questions?
24. How does the command system answer these three
questions?
25. Contrast positive economic statements and normative
economic statements.
26. What are the two assumptions for a PPF?
27. On a properly labeled PPF, show the trade off when
the product mix is changed.
28. On a properly labeled PPF, show points of
inefficiency, efficiency, and unattainability.
29. On a properly labeled PPF, show economic growth.
30. How can economic growth occur?
31. Describe rational decision making by buyers.
32. Describe rational decision making by sellers.
Part
2 – The Market
Read Ch 3 and Ch 4.
Definitions:
1. Market
2. Law of demand
3. Factors of demand
4. Complementary goods
5. Substitute goods
6. Law of supply
7. Factors of supply
8. Equilibrium
9. Disequilibrium
10. Shortage
11. Surplus
12. Consumer Surplus
13. Producer Surplus
14. Price Ceiling
1. Price Floor
Review
Questions:
2. What is mutually agreeable trade?
3. What sets the (actual) price in the market?
4. What is the difference between “demand” and “quantity
demanded”?
5. Show the law of demand on a properly labeled graph
and in a data table.
6. Tell how a change in each factor of demand affects
demand behavior.
7. When demand increases (decreases), how will equilibrium price and quantity change?
8. Tell why a change in a product’s price does not shift the demand curve.
9. Show the law of supply on a properly labeled graph
and in a data table.
10. Tell how a change in each factor of supply affects
supply behavior.
11. What is the difference between “supply” and “quantity
supplied”?
12. When supply increases (decreases), how will equilibrium price and quantity change?
13. Tell why a change in a product’s price does not shift the supply curve.
14. In a market, show equilibrium on a properly labeled
graph.
15. How does a free market handle a surplus?
16. How does a free market handle a shortage?
17. Show consumer surplus on a properly labeled graph.
18. Show producer surplus on a properly labeled graph.
19. Why is a price ceiling imposed? What are its
consequences?
20. Why is a price floor imposed? What are its
consequences?
21. What is a black market? Why would one develop?
Part
3 – Elasticity and Utility
Read:
Ch 17 and Ch 18.
Definitions:
1. Percent change calculation
2. Elastic demand
3. Inelastic demand
4. Tax incidence
5. Direct tax
6. Indirect tax
7. Deadweight loss
8. Total Utility (TU)
9. Marginal Utility (MU)
10. Law of diminishing marginal utility
11. The MU/P Ratio
12. Consumer equilibrium
13. Utility maximizing rule
Review
questions:
14. Draw a graph which describes (a) Inelastic demand;
(b) Elastic demand.
15. Draw a graph which describes (a) perfectly inelastic
demand; (b) perfectly elastic demand.
16. Identify the characteristics of a good having elastic
demand.
17. Identify the characteristics of a good having
inelastic demand.
18. Tell how total revenue (TR) changes as price (P)
changes for elastic goods.
19. Tell how TR changes a P changes for inelastic goods.
20. Who carries most of the burden of a tax on a good if
its demand is (a) elastic; (b) inelastic?
21. What is the deadweight loss due to the imposition of
a tax?
22. Why is time the major determinant of supply
elasticity?
23. Mathematically relate TU and MU.
24. In choosing how many of one item to buy, use marginal
analysis to decide when to stop buying.
25. How could consumer equilibrium be upset?
26. How could advertising upset consumer equilibrium?
Part
4 – Production, Costs, and Profit
Read:
Ch 19.
Definitions:
1. Explicit costs
2. Implicit costs
3. Normal profit
4. Accounting profit
5. Economic profit
6. Short run
7. Long run
8. Marginal Physical Product (MPP)
9. Law of diminishing returns
10. Marginal Cost (MC)
11. Total Costs (TC)
12. Fixed Costs (TFC)
13. Variable Costs (VC)
14. Average Fixed Costs (AFC)
15. Average Variable Costs (AVC)
16. Average Total Costs (ATC)
17. Sunk Cost
18. Economies of Scale
19. Diseconomies of Scale
Review
questions:
20. Mathematically connect accounting profit, economic
profit and normal profit.
21. What is the entrepreneur’s decision of his economic
profit is (a) > 0; (b) = 0; (c) < 0?
22. Relate marginal physical product (MPP) to MC.
23. Define marginal cost (MC), as it applies to
production.
24. Mathematically connect total costs (TC), total
variable costs (TVC), and total fixed costs (TFC). Show these variables on one
properly labeled graph.
25. Given proper data, be able to calculate (a) average
fixed costs (AFC), (b) average variable costs (AVC), (c) average total costs
(ATC), and (d) marginal costs (MC).
26. Locate AVC, ATC, and MC on one properly labeled
graph.
27. What causes (a) economies of scale; (b) diseconomies
of scale?
28. Show how a firm would use economies of scale and
diseconomies of scale to find the best plant size for its industry.
Part
5 – Market Structures
Read:
Ch 20, 21, 22, and 23.
Definitions:
1. Perfect Competition
2. Price taker.
3. Marginal Revenue (MR)
4. The profit-maximizing rule.
5. Monopoly.
6. Market power
7. Natural monopoly
8. Anti-trust
9. Merger.
10. Monopolistic Competition.
11. Oligopoly.
12. Market share
13. Interdependence.
14. Brand loyalty.
Review
questions:
15. Tell why a perfect competition firm is called a price
taker.
16. How would a firm use the profit-maximizing rule to
determine how much to produce?
17. In a loss situation, how would a firm decide whether
or not to shut down?
18. Why will a low cost producer be a long run survivor
in a competitive market?
19. In a competitive market, why do economic profits tend toward zero in the long
run?
20. In a competitive market, why do economic losses tend toward zero in the long
run?
21. What are the significant barriers to entry?
22. Show, on a properly labeled graph, how a firm would
identify its profit maximizing quantity and price.
23. Why is there no incentive for a monopolist to
arbitrarily raise its price?
24. Why will a monopolist always charge a higher price
and produce a smaller quantity than an industry in competition?
25. Contrast how a monopoly and a competitive industry
will respond to increasing consumer demand.
26. What are the three types of mergers? Give an example
of each.
27. What is the cycle of product differentiation? What
are the results of this cycle?
28. Given proper data, be able to calculate market share.
29. Why are firms in an oligopoly interdependent in
decision making?
30. How could firms in an oligopoly cooperate? Why would
they want to do so? What is the position of the
31. How does a cartel work? Why is it difficult for a
cartel to be successful?
32. Describe an industry life cycle.
33. Describe and contrast the characteristics of the four
market structures.
Part
6 – Factor Markets
Read:
Ch 24, 25, 26, and 27.
Definitions:
1. Productivity
2. Labor productivity
3. Marginal physical product (MPP)
4. Direct demand
5. Derived demand
6. Wage
7. Automation
8. Minimum Wage Law
9. Adam Smith’s Invisible
Hand
10. Workplace discrimination
11. Income mobility
12. Poverty line
13. Welfare trap
14. Economic rent
Review
questions:
15. Who are the buyers and who are the sellers in a
resource market?
16. Identify two ways labor productivity can be
increased.
17. What two factors make up marginal revenue product
(MRP)? How could MRP increase (decrease)?
18. How would a profit-maximizing firm decide how many
workers to hire?
19. How will the number hired change if (a) MRP
increases? (b) MRP decreases? (c) wages rise?
20. How does a firm decide which mix of resources is best
to maximize profits? How would this mix change if wages rise?
21. Describe how jobs are both lost and created when an
industry automates the workplace.
22. What will happen if there is a minimum wage increase
with no demand or productivity change?
23. Why is there a difference in supply elasticity for
low skilled workers and high skilled workers?
24. If labor demand suddenly increases, how would wages change
in (a) low skilled labor markets? (b) high skilled
labor markets?
25. How does discrimination in hiring affect wages?
26. List several reasons why earnings differ among
workers.
27. Contrast the characteristics of high-income earning
families with those of low-income earning families.
28. What is the trade off inherent in the political goal
of equal income distribution?
29. How does inflation affect the prevailing interest
rate?
Part
7 – Markets and Government
Read:
Ch 28 and 29
Definitions:
1. Market failure.
2. Government failure.
3. Negative externality
4. Positive externality.
5. Pollution
6. Private good
7. Public good
8. Transfer payment
9. Marginal tax rate
10. Progressive tax system
11. Regressive tax system
12. Proportional tax system
13. Special interest group
14. Rent seeking
Review
questions:
15. When does a market fail?
16. Why does the market produce too many goods having
negative externalities? What is the role of government?
17. Why does the market produce too few goods having
positive externalities? What is the role of government?
18. Describe pollution as inefficiency in the
transformation process.
19. Use benefit-cost analysis to determine the optimal
amount of environmental cleanup.
20. Relate a nation’s standard of living to its concern
for the environment.
21. Describe the free-rider dilemma.
22. Who must buy public goods? Why them?
23. What is your opportunity cost of paying taxes?
24. Be able to calculate a tax bill using a marginal tax
rate table.
25. Contrast decision outcomes in the voting booth and in
the market.
26. Contrast decision making in a bureaucracy with that
in a competitive firm.
Part
8 – International Economics
Read:
Ch 30, 31 and 32.
Definitions:
1. Exports
2. Imports
3. Trade deficit
4. Comparative advantage
5. Tariff
6. Quota
7. Currency appreciation
8. Currency depreciation
9. Flexible exchange rate system
10. Fixed exchange rate system