Introductory Microeconomics: Midterm Exam Study Guide

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Microeconomics Midterm Exam Study Guide

Exam Instructions and Format

This midterm exam for ECON*1050 covers foundational concepts in microeconomics. The exam consists of 90 multiple choice questions, and students are permitted to use only simple or scientific calculators. The duration is 2 hours.

Read each question carefully.
Record answers on both the exam and scantron form.
Return both exam and scantron sheet at the end.

Core Microeconomic Concepts

Production Possibilities Frontier (PPF)

The Production Possibilities Frontier (PPF) illustrates the maximum possible output combinations of two goods that an economy can produce given its resources and technology.

Scarcity: The PPF demonstrates scarcity because resources are limited, and not all combinations of goods are attainable.
Opportunity Cost: Moving along the PPF involves shifting resources from one good to another, incurring opportunity costs.
Shape of the PPF: The PPF is typically bowed outward due to increasing opportunity costs.
Efficiency: Points on the PPF are efficient; points inside are inefficient; points outside are unattainable.

Formula:

Opportunity Cost of Good X =

Example: If moving from point B to C on the PPF table below means producing 10 more units of X and 10 fewer units of Y, the opportunity cost of each unit of X is 1 unit of Y.

Point	Production of X	Production of Y
A	5	40
B	10	36
C	15	26
D	20	16

Comparative and Absolute Advantage

Absolute Advantage refers to the ability of a producer to produce more of a good using the same amount of resources. Comparative Advantage is the ability to produce a good at a lower opportunity cost than another producer.

Trade benefits both parties when each specializes according to comparative advantage.
Specialization increases total output and efficiency.

Example: If Amber can produce 1 samosa or 1 spring roll per hour, and Trish can produce 2 samosas or 4 spring rolls per hour, Trish has an absolute advantage in both goods. Comparative advantage depends on opportunity costs.

Supply and Demand

The Law of Supply states that, ceteris paribus, an increase in price leads to an increase in quantity supplied. The Law of Demand states that an increase in price leads to a decrease in quantity demanded.

Equilibrium: The market equilibrium is where quantity supplied equals quantity demanded.
Surplus: Occurs when quantity supplied exceeds quantity demanded.
Shortage: Occurs when quantity demanded exceeds quantity supplied.

Formula:

Equilibrium:

Example: If the price of masks rises, medical supply companies produce more masks, illustrating the law of supply.

Price Adjustment Mechanisms

Price changes help eliminate shortages and surpluses in the market.

When price rises, quantity supplied increases and quantity demanded decreases, reducing a shortage.
When price falls, quantity supplied decreases and quantity demanded increases, reducing a surplus.

Market Forces and Scalping

Market forces refer to the effects of supply and demand on prices and quantities in a market. Scalping occurs when tickets are resold at prices above their face value due to excess demand.

Fixed supply and high demand lead to scalping.
Venues may tolerate scalping if ticket prices are set below equilibrium.

Economic Statements: Positive vs. Normative

Positive statements are objective and fact-based, describing what is. Normative statements are subjective and value-based, describing what ought to be.

Example of positive statement: "Canada should cut back on its use of carbon-based fuels such as coal and oil."
Example of normative statement: "Every Canadian should have equal access to healthcare."

Efficiency and Trade-Offs

Allocative efficiency occurs when resources are distributed such that marginal benefit equals marginal cost. Trade-offs are necessary because resources are limited.

Efficiency and equity often involve a trade-off.
Deadweight loss occurs when market outcomes are not efficient.

Formula:

Allocative Efficiency:

Opportunity Cost

Opportunity cost is the value of the next best alternative foregone when making a choice.

Opportunity cost increases as more of a good is produced (bowed-out PPF).
Trade-offs are illustrated by the slope of the PPF.

Specialization and Gains from Trade

Specialization according to comparative advantage leads to gains from trade, increasing total output and consumption possibilities.

Both parties can consume more than they could produce alone.
Absolute advantage is not necessary for gains from trade; comparative advantage is key.

Market Equilibrium and Shocks

Market equilibrium can be affected by external shocks such as supply chain issues or changes in consumer preferences.

Supply chain disruptions can decrease supply, raising prices.
Changes in demand or supply shift the equilibrium price and quantity.

Substitutes and Complements

Substitutes are goods that can replace each other; an increase in the price of one increases demand for the other. Complements are goods used together; an increase in the price of one decreases demand for the other.

If goods X and Y are substitutes, a fall in the price of X decreases demand for Y.
If goods X and Y are complements, a fall in the price of X increases demand for Y.

Consumer and Producer Surplus

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Producer surplus is the difference between the price received and the minimum price at which producers are willing to sell.

Marginal Analysis

Marginal analysis involves comparing the additional benefit and additional cost of an action.

Marginal benefit should equal marginal cost for optimal decision-making.

Formula:

Optimal Consumption:

Table: Production Possibilities Frontier Example

Point	Production of X	Production of Y
A	5	40
B	10	36
C	15	26
D	20	16

Main Purpose: This table is used to illustrate opportunity cost and comparative advantage between two goods.

Figure: Bowed-Out PPF

The bowed-out shape of the PPF in the figure indicates increasing opportunity costs as more of one good is produced. The curve is downward sloping, reflecting trade-offs and scarcity.

Key Terms and Definitions

Scarcity: Limited nature of resources.
Opportunity Cost: Value of the next best alternative forgone.
Comparative Advantage: Ability to produce a good at a lower opportunity cost.
Absolute Advantage: Ability to produce more of a good with the same resources.
Efficiency: Optimal allocation of resources.
Trade-Off: Sacrificing one good for another due to scarcity.
Market Equilibrium: Point where supply equals demand.
Surplus: Excess supply over demand.
Shortage: Excess demand over supply.
Substitutes: Goods that can replace each other.
Complements: Goods used together.
Marginal Benefit: Additional benefit from consuming one more unit.
Marginal Cost: Additional cost from producing one more unit.

Application Examples

Ticket Scalping: Occurs when demand exceeds fixed supply, leading to resale at higher prices.
Covid Supply Chain: Disruptions can decrease supply, raising prices and shifting equilibrium.
Trade Specialization: Amber and Trish can both benefit by specializing and trading according to comparative advantage.

Summary Table: Types of Economic Statements

Type	Description	Example
Positive	Describes what is	"Canada should cut back on its use of carbon-based fuels."
Normative	Describes what ought to be	"Every Canadian should have equal access to healthcare."

Conclusion

This study guide covers the essential microeconomic concepts tested in the midterm exam, including PPF, opportunity cost, comparative advantage, supply and demand, market equilibrium, and efficiency. Understanding these principles is crucial for analyzing real-world economic scenarios and making informed decisions.