Study Questions For The Second Exam
ECON 262
These questions are not designed to take the place of studying your notes and the reading assignments. Do not e-mail me and ask me to answer all or some of these questions for you. If you have missed class, it is your responsibility to get the notes from another student. Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not. Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.
Topic: Demand Elasticity (make sure you have gone over the practice problems)
Explain the concept of price elasticity of demand. Be able to determine if demand is elastic, unitary elastic or inelastic from a change in price and quantity demanded. Know the formula and how to use it.
What would a demand curve look like if it had a range of prices that were perfectly inelastic?
What are the three factors that influence the price elasticity of demand for a good? Explain each.
Explain the relationship between the price elasticity of demand and total revenue. How would a business person use this information?
Explain the concept of the cross price elasticity of demand. Know how to determine it. What does the sign tell you? Know the formula and how to use it.
How would a business person use information about the cross price elasticity of demand?
Explain the concept of income elasticity of demand. Know how to determine it. What does the sign tell you? Know the formula and how to use it.
How would a business person use information about the income elasticity of demand?
We also discussed the advertising elasticity of demand. What is this concept? Know the formula and how to use it.
Make sure you know the concept of elasticity such that you can come up with your own application!
Note: Students often confuse the price elasticity of demand, the cross price elasticity of demand and the income elasticity of demand - usually because they are trying to memorize formulas, etc. without understanding the concept of each elasticity. Remember -- you are asking how responsive something is to a change in something else -- just keep in mind what it is you are changing and what follows from that change.
Topic: Supply (make sure you have gone over the practice problems)
What are sunk costs?
Explain why a firm's "production costs" are derived from the opportunity costs of the resources used by the firm. How do consumers fit into your explanation? Can you provide an example?
What is the law of supply?
Explain the two theories behind the law of supply. Make sure you understand how opportunity cost relates to the law of supply.
What is the supply curve?
Explain the difference between individual supply and market supply. Derive the market curve from individual firm supply curves.
What are the variables in the supply function and how do they change quantity supplied or supply? Be able to show these changes on a graph.
What are complements in production?
What are substitutes in production?
Explain the concept of price elasticity of supply. Be able to determine if supply is elastic, unitary elastic or inelastic from a change in price and quantity supplied. Know the formula and how to use it.
What are the factors that influence the price elasticity of supply for a good.
Topic: What Do Markets Do?
What do markets do? Make sure you have read this handout and understand it. What does economic calculation mean? How do prices and profits/losses relate to economic calculation? What knowledge is utilized in markets (prices, etc.) in order to direct resource allocation? What assumption is made about how resources should (value judgment) be allocated?
How do the rules of the game relate to the market process? Is there cooperation in markets? Explain.
Topic: Market Clearing Price and Quantity
What does the market clearing price or the "satisfactory inventory level" mean in the demand and supply model? Relate this to inventory levels in general, i.e., what does it mean when a supplier is happy or satisfied with his/her inventory level? How is this shown on a supply and demand graph?What is a shortage? Show this on a graph. What happens in a market when there is a shortage and why? Explain the human action - what do suppliers do?
What is a surplus? Show this on a graph. What happens in a market when there is a surplus and why? Explain the human action - what do suppliers do?
Make sure you can do a problem similar to this one: Assume the market clearing price is $10.00 for deli sandwiches and the amount of exchange that would take place at that price is 300 deli sandwiches per day. You, however, don't have this information and have just opened your deli. You decide to price your sandwiches at $12.00 and are willing and able to sell 350 sandwiches per day at that price. When you do this, you notice you sell 150 sandwiches per day. Draw this situation on a graph and then explain what will happen in this market -- i.e., if there is a shortage or surplus, show this on the graph and then explain what the shortage or surplus will cause to happen in the market. Make sure you talk about inventories in your answer.
What is a price control? Price floor? Price ceiling?
With respect to shortages and surpluses, what will happen when a price floor is set below the market clearing price? Explain.
With respect to shortages and surpluses, what will happen when a price ceiling is set above the market clearing price? Explain.
Topic: Applications of the Supply and Demand Model
What is the intended consequence of rent control? Is rent control a price ceiling or a price floor?
According to economists, rent control will often hurt the very people it is designed to help - what unintended consequences does the supply and demand model predict will occur with rent control? Explain both graphically and in words.
What is the intended consequence of minimum wage laws? Is the minimum wage a price floor or ceiling?
According to economists, minimum wage laws often hurt the very people they are designed to help -- what unintended consequences does the supply and demand model predict will occur with minimum wage laws and why do they occur? Explain both graphically and in words.
Topic: Supply and Demand - Finding Market Clearing Price and Quantity (I don't know if we will get through these problems for the 2nd exam)
Be able to graph changes in demand and/or supply in a market and determine how market clearing price and quantity and resource allocation have changed. There will be several of these problems on the exam. If you haven't worked through all of the practice problems on supply and demand -- I suggest you do so now!!
Be sure to have read chapters 6, 8, 10, and 13 in the Issues book AND "What Do Markets Do?" AND "China Scraps Price Caps on Low-Cost Drugs." Study your notes, in class exercises and homework assignments as well as the readings. And make sure you have done all of the practice problems on Elasticity, Supply, and Demand and Supply.