Basic Economic Concepts



Content Area Percentage Goals of Final ExamI.Basic Economic Concepts(10–15%)A.Scarcity, choice and opportunity costB.Production possibilities curve & Marginal parative advantage, absolute advantage, Specialization and tradeD.Economic systemsE.Property rights and the role of incentivesF. Macroeconomic issues: business cycle, unemployment, inflation, growthII.The Nature and Functions of Product Markets (55–70%)A.Supply and demand (15–20%)1.Market equilibrium2.Determinants of supply and demand3.Price and quantity controls by government4.Elasticity: price elasticity of demand and supplyB.Production and costs (10–15%)1.Production functions: short and long run2.Marginal product and diminishing returns3.Short-run costs4.Long-run costs and economies of scale5.Cost minimizing input combinationC.Firm behavior and market structure (25–35%)1. Profit:a.? Normal profit & Accounting versus economic profitsb.?Profit maximization: MR=MC rule2. Perfect competitiona.?Profit maximizationb.?Short-run supply and shutdown decisionc.?Behavior of firms and markets in the short run and in the long rund.?Efficiency and perfect competition3. Monopolya.?Sources of market powerb.?Profit maximizationc.?Inefficiency of monopolyd. Natural monopoly4. Oligopolya.?Interdependence, collusion and cartelsb.?Game theory and strategic behavior5. Monopolistic competitiona.?Product differentiation and role of advertisingb.?Profit maximizationc.?Short-run and long-run equilibriumd.?Excess capacity and inefficiencyIII.Labor and Capital Markets . (10%)A.Derived demandB.Marginal revenue product (value added by labor or capital)C.Labor market and firms’ hiring of laborIV.Market Failure and the Role of Government (10–20%)A. Externalities1.?Marginal social benefit and marginal social cost2.?Positive externalities &?Negative externalities3.?RemediesB. Public goods1.?Public versus private goods2.?Provision of public goodsC. Public policy to promote competition1.?Antitrust policy2.?RegulationD. Income distribution1.?Equity2.?Sources of income inequalityBasic Economic Concepts Scarcity, choice and opportunity costsProduction possibilities curveComparative advantage, absolute advantage, specialization and exchangeDemand, supply and market equilibriumMeasurement of Economic Performance (15%)National income accountsCircular flowGross domestic productComponents of gross domestic product [C+I+G+(X-M]Real versus nominal gross domestic product (Real + Inflation = Nominal)Inflation measurement and adjustmentPrice indicesNominal and real values (Real + Inflation = Nominal)Costs of inflationUnemploymentDefinition and measurementTypes of unemployment Labor Force Participation Rate“Natural” rate of unemploymentCapacity Utilization and “Employment Gap”National Income and Price Determination (15%)Aggregate demandDeterminants of aggregate demand [C+I+G+(X-M)] Multiplier and crowding-out effectsAggregate supply (Productive Resource Limitations)Short-run Limits (only Land and Labor can change) and Long-run Limits (focus on more or better capital to increase per-capita growth in the long run )Sticky versus flexible wages and prices Determinants of aggregate supplyMacroeconomic equilibriumReal output and price levelShort and long runActual versus full-employment outputEconomic fluctuations (business cycle and shocks to demand and supply)Financial Sector (20%)Money, banking and financial marketsDefinition of financial assets: money, stocks, bondsMeasures of money supplyBanks and creation of moneyMoney demandMoney marketLoanable funds marketCentral bank and control of the money supplyTools of central bank policyQuantity theory of money [MV=PQ, assume V is constant or stable]Real versus nominal interest ratesInflation, Unemployment, and Stabilization Policies (20%)Fiscal policyDemand-side Tax changesSimple aggregate changes – increase/decreaseStructural Changes – sources and distribution of tax burdenGovernment Spending ChangesSimple – increase/decreaseSpecific targets of government budget – road constructions vs. entitlements, Human/Physical Capital vs. “Pork” or reliefSupply-side effectsLaffer’s theory and its problems in the US contextEvidence from the 1930s - 1980s (Krugman & Yergin)Goals and problems of regulationGoals and problems of deregulationGoal: Limited, but effective rules – how’s that going these days?Government BudgetDeficitsCyclical Structural Debt Benefits -- Gov’ts borrow just as individuals and corporations do Human & Physical capital development income and consumption smoothing.Problems Source of Debt (Loan shark vs. Credit Union vs. Parents)Debt as % of income (GDP) & repaymentInflation and unemploymentTypes of inflationDemand-pull inflation (spending’s impact on resource markets)Cost-push inflation (resource markets’ impact on spending)The Phillips curve: short run versus long run (Labor market and Inflation)Role of expectationsEconomic Growth and Productivity (10%)Investment in human capitalInvestment in physical capitalResearch and development, and technological progressGrowth public policy debateOpen Economy: International Trade and Finance (10%)Balance of payments accountsBalance of tradeCurrent account-Financial (Capital) accountForeign exchange marketDemand for and supply of currenciesExchange rate determinationCurrency appreciation and depreciationNet exports and financial capital flowsLinks to financial and goods markets- ................
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