Exam Structure and Policies

Overview of Exam Format

The first exam in ECON-1010 covers foundational topics in microeconomics and is designed to assess both conceptual understanding and problem-solving skills. The exam is closed book and closed notes, and students are permitted to use a stand-alone calculator (not a phone or smartwatch). The exam typically consists of two main sections:

• Multiple Choice: 20-25 questions, accounting for 40-50% of the total score.

• Open Answer: 5-6 questions, accounting for 50-60% of the total score. All open answer questions are drawn from a specified list of topics.

Exam #1 constitutes 20% of the final course grade. Failure to take the exam as scheduled, without prior arrangement, results in an automatic zero.

Key Microeconomics Topics for Exam #1

Solving for Equilibrium & Related Calculations

Market equilibrium occurs where the quantity demanded equals the quantity supplied. Calculating equilibrium involves setting the demand and supply equations equal to each other and solving for price and quantity.

• Equilibrium Price and Quantity: The intersection point of the demand and supply curves.

• Equation: where is quantity demanded and is quantity supplied.

• Example: If and , set and solve for .

Positive vs. Normative Analysis

Economics distinguishes between statements of fact and statements of opinion or value judgment.

• Positive Analysis: Objective statements that can be tested or validated (e.g., "An increase in the minimum wage will lead to higher unemployment among teenagers.").

• Normative Analysis: Subjective statements based on values or opinions (e.g., "The government should increase the minimum wage.").

Tax Incidence

Tax incidence refers to the distribution of the tax burden between buyers and sellers. The actual burden depends on the relative elasticities of demand and supply.

• Key Point: The side of the market (buyers or sellers) that is less elastic bears more of the tax burden.

• Equation:

• Example: If demand is inelastic and supply is elastic, consumers bear most of the tax.

Production Possibility Frontiers (PPF)

The PPF illustrates the maximum possible output combinations of two goods that can be produced with available resources and technology.

• Key Concepts: Efficiency, opportunity cost, and economic growth.

• Shape: Typically bowed outward due to increasing opportunity costs.

• Equation: Opportunity cost of good X = Loss of good Y / Gain of good X

Normal vs. Inferior Goods

Goods are classified based on how demand responds to changes in income.

• Normal Goods: Demand increases as income rises.

• Inferior Goods: Demand decreases as income rises.

Comparative Advantage, Absolute Advantage, & Opportunity Cost

These concepts explain the basis for trade and specialization.

• Absolute Advantage: The ability to produce more of a good with the same resources.

• Comparative Advantage: The ability to produce a good at a lower opportunity cost.

• Opportunity Cost: The value of the next best alternative foregone.

Substitutes vs. Complements

Goods are related based on how the demand for one responds to changes in the price of another.

• Substitutes: Increase in the price of one leads to an increase in demand for the other (e.g., tea and coffee).

• Complements: Increase in the price of one leads to a decrease in demand for the other (e.g., printers and ink cartridges).

Specialization & Gains from Trade

Specialization allows individuals or nations to focus on producing goods where they have a comparative advantage, leading to increased total output and mutual gains from trade.

• Key Point: Trade enables consumption beyond the PPF.

Externalities

Externalities are costs or benefits of a market activity borne by a third party.

• Negative Externality: Imposes costs (e.g., pollution).

• Positive Externality: Confers benefits (e.g., vaccination).

Supply & Demand Curves – Graphing, Shifting, etc.

Understanding how to graph and interpret shifts in supply and demand is fundamental in microeconomics.

• Shifts in Demand: Caused by changes in income, tastes, prices of related goods, etc.

• Shifts in Supply: Caused by changes in input prices, technology, number of sellers, etc.

Government Responses to Externalities: Taxes & Subsidies

Governments can correct externalities through taxes (for negative externalities) or subsidies (for positive externalities).

• Example: A tax on carbon emissions to reduce pollution.

Consumer Surplus, Producer Surplus, & Economic Surplus

These concepts measure the benefits to buyers and sellers in a market.

• Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.

• Producer Surplus: Difference between the price received and the minimum price at which producers are willing to sell.

• Economic Surplus: Sum of consumer and producer surplus; maximized at equilibrium.

Coase Theorem

The Coase Theorem states that if property rights are well-defined and transaction costs are low, private bargaining can solve externality problems without government intervention.

Market Equilibrium & Consequences of Moving Off It

Market equilibrium is the point where quantity demanded equals quantity supplied. Deviations from equilibrium result in surpluses (excess supply) or shortages (excess demand).

• Surplus: Occurs when price is above equilibrium; quantity supplied exceeds quantity demanded.

• Shortage: Occurs when price is below equilibrium; quantity demanded exceeds quantity supplied.

Summary Table: Key Microeconomics Concepts