A study of Basic Economic Concepts

List of Key concepts and graphs

Concepts: Introduction to the language of economics, micro vs. macro, positive vs. normative economics, economic decision making, pitfalls of decision making, scarcity, opportunity costs, production possibilities, absolute advantage, comparative advantage, specialization, terms of trade, market, command, and mixed economic systems, questions each economic system must answer, property rights and the role of incentives, marginal decision making, economic efficiency using marginal analysis.

Graphs: Production possibilities curve (frontier)

Circular flow of economic activity

List of Key words or terms

Key terms: economics, factors of production–inputs, capital, microeconomics, macroeconomics, positive economics, normative economics, ceteris paribus, fallacy of composition, scarcity, opportunity cost, model, production possibilities, constant costs, law of increasing opportunity cost, absolute advantage, comparative advantage, specialization, terms of trade, productive efficiency, allocative efficiency, capitalism, socialism, private property, incentives, marginal benefit, marginal cost.

Microeconomics Unit Two: The Nature and Functions of Product Markets

The Nature and Functions of Product Markets

A. Supply and Demand

1. Market equilibrium

2. Determinants of supply and demand

3. Price and quantity controls

4. Elasticity

a. Price, income, and cross-price elasticities of demand

b. Price elasticity of supply

5. Consumer surplus, producer surplus, and market efficiency

6. Tax incidence and deadweight loss

List of Key Concepts and Graphs

Concepts: demand schedule, determinants of demand, individual and market demand curves, supply schedule, determinants of supply, market equilibrium, shifts in supply and demand with effects on equilibrium price and quantity, shortages, surpluses, ceilings and floors, price elasticity, characteristics of products with elastic/inelastic demand, total revenue formula, price elasticity using midpoint formula, income and cross-price elasticities, elasticity of supply, consumer surplus, producer surplus, market efficiency, taxation and who bears the burden as determined by elasticities of demand and supply, deadweight loss.

Graphs: demand and supply curves showing equilibrium, shifts of demand/supply

Demand and supply curves showing ceilings and floors

Demand and supply curves showing consumer surplus/producer surplus

Demand and supply curves showing deadweight loss

List of Key Words or Terms

Demand, law of demand, quantity demanded, market demand, substitutes, complements, normal goods, inferior goods, supply, law of supply, quantity supplied, market equilibrium, equilibrium price, equilibrium quantity, shortage, surplus, price ceiling, price floor, elastic, inelastic, unit elastic, perfectly elastic, perfectly inelastic, total revenue, income elasticity of demand, cross-price elasticity of demand, elasticity of supply, consumer surplus, producer surplus, total economic surplus, market efficiency, taxation, tax incidence, deadweight loss.

The Nature and Function of Product Markets…continued…

B. Theory of consumer choice

1. Total utility and marginal utility

2. Utility maximization: equalizing marginal utility per dollar

3. Individual and market demand curves

4. Income and substitution effects

List of key concepts and graphs

Concepts: The law of diminishing marginal utility, marginal utility vs. total utility, equalizing marginal utility per dollar for two or more products, the derivation of the demand curve, horizontal summation of individual demand curves to achieve market demand curve, income effect and the demand curve, the substitution effect and the demand curve.

Graphs:

Demand curve

List of key words and terms

Marginal utility, total utility, MUa/Pa=MUb/Pb, individual demand curve, market demand curve, horizontal summation, substitution effect, income effect

The Nature and Function of Product Markets…continued…

C. Production and costs

1. Production functions: short and long run

2. Marginal product and diminishing returns

3. Short-run costs

4. Long-run costs and economies of scale

5. Cost minimizing input combination

List of key concepts and graphs

Concepts:

Long-run and short run characteristics, law of diminishing marginal returns, relationship between marginal and average product, costs of production in the short run, relationship between short run production and costs, appearance of the various cost curves, cost minimizing input combination

Graphs:

Marginal product-identify ranges of increasing, decreasing, and negative returns

Marginal and average product curves on the same graph

Total fixed cost, total variable cost, and total cost on the same graph

Average fixed cost, average variable cost, average total cost, and marginal cost on the

Same graph

Long-run average total cost curve with three ranges

List of key words and terms

Total product, marginal product, average product, short run, long run, fixed costs, variable costs, total costs, marginal costs, average fixed costs (AFC), average variable costs (AVC), average total costs (ATC), economies of scale, constant returns to scale, diseconomies of scale, minimum efficient scale

The Nature and Function of Product Markets…continued…

D. Firm Behavior and Market Structure

1. Profit:

a. Accounting vs. economic profits

b. Normal profit

c. Profit maximization: MR=MC rule

Perfect competition

Profit maximization

Short-run supply and shutdown decision

Firm and market behaviors in short-run and long-run equilibria

Efficiency and perfect competition

Monopoly

Sources of market power

Profit maximization

Inefficiency of monopoly

Price discrimination

Oligopoly

Interdependence, collusion, and cartels

Game theory and strategic behavior

Monopolistic competition

Product differentiation and role of advertising

Profit maximization

Short-run and long-run equilibrium

Excess capacity and inefficiency

List of key concepts and graphs

Concepts: economic costs, determination of total revenue, types of profit, profit maximization rule

Perfect competition: characteristics of perfect competition, industry vs. firm’s demand curve, profit maximization (loss minimization) in the short run, short-run supply and shutdown decision, changes in supply/demand and the effects in short and long run, long run supply curve, efficiency.

Monopoly: characteristics of monopoly, appearance of the demand curve and marginal revenue curve, profit maximizing output and price, price discrimination, natural monopolies and price strategies, anti-trust legislation.

Monopolistic competition: characteristics of monopolistic competition, profit maximization, short-run vs. long run output, price, and profit

Oligopoly: characteristics of oligopoly, game theory model, strategic decision-making

Graphs

Perfectly competitive side-by-side industry and firm graphs

Perfectly competitive firm with short-run profits

Perfectly competitive firm with short-run losses

Perfectly competitive side-by-side industry and firm graphs in long-run equilibrium

Monopoly firm graph with profit maximizing price and quantity

Monopoly firm graph with socially optimal or fair return price

Monopolistically competitive firm in the short-run

Monopolistically competitive firm in the long-run

List of key words and terms

Implicit costs, explicit costs, economic costs, economic profit, normal profit

Perfect competition: price taker, total revenue, average revenue, marginal revenue, profit maximization at MR=MC, shutdown, short-run supply, long-run supply, decreasing cost industries, constant cost industries, increasing cost industries, allocative efficiency, productive efficiency.

Monopoly: price searcher, barriers to entry, patent, rent-seeking behavior, price discrimination, natural monopoly, socially optimal price, fair return price

Monopolistic competition: product differentiation, excess capacity

Oligopoly: cartels, collusion, Herfindahl Index, concentration ratio, prisoner’s dilemma, price leadership model

Microeconomics Unit Three: Factor Markets

III. Factor Markets (10-18%)

Derived factor demand

Marginal revenue product

Labor market and firms’ hiring of labor

Market distribution of income

List of key concepts and graphs

Concepts: Circular flow of economic activity with emphasis on the factor market,

derived demand, how marginal revenue product is determined, shifts in MRP, cost minimization when using more than one resource, profit maximization when using more than one resource, supply of resources, changes in the supply of labor, profit maximization in the perfectly competitive labor market, equilibrium in a monopsony, unions and determination of wages, bilateral monopoly, determination of other factor prices.

Graphs:

Circular flow of economic activity

Marginal revenue product (Demand) curve

Market’s marginal revenue product and marginal resource cost (supply) curves

Firm’s marginal revenue product and marginal resource cost (supply) curves

Side by side perfectly competitive market and firm graphs

Monopsony

List of key words or terms

Factor market, product market, input, resource, derived demand, marginal (physical) product of labor (MPL), productivity, value of the marginal product, marginal revenue product, marginal resource cost, wage taker, substitution effect, output effect, least cost combination of resources, profit maximizing combination of resources, monopsony, unions, bilateral monopoly, nominal wage, real wage, economic rent, interest rate for investment funds, loanable funds market.

Microeconomics Unit Four: Market Failure and the Role of Government

Market Failure and the Role of Government (12-18%)

Externalities

Marginal social benefit and marginal social cost

Positive externalities

Negative externalities

Remedies

Public goods

Public versus private goods

Provision of public goods

Public policy to promote competition

Antitrust policy

Regulation

Income distribution

Equity

Sources of income inequality

List of Key Concepts and Graphs

Concepts: Market failure when marginal social benefit does not equal marginal social cost, recognizing socially optimal price/quantity, positive externalities and remedies to equate MSB and MSC, negative externalities and remedies to equate MSB and MSC, characteristics of public and private goods, various types of taxes, tax burdens, anti-trust policies, promoting competition through regulation, income distribution, issues of income inequality.

Graphs: market supply and demand curves with optimal price/quantity

Market supply and demand curves with positive externality

Market supply and demand curves with negative externality

Lorenz curve

List of Key Words or Terms

Marginal cost-marginal benefit rule, positive externality, spillover benefit, negative externality, spillover cost, Coase theorem, tragedy of the commons, tax, subsidy, quantity control, rivalry, private goods, public goods, common resources, free rider, progressive tax, proportional tax, regressive tax, ability to pay principle, benefits received principle, average tax rate, marginal tax rate, Sherman Act of 1890, Clayton Act of 1914, horizontal merger, vertical merger, conglomerate merger, natural monopoly, equity, Lorenz curve, poverty rate, transfer payments, noncash transfers.