Econ 102: Midterm 1 Review

3/9/2021
 Chapter 1: Big Ideas in Economics
• Incentives matter
• Institutions define incentives
– Good institutions align self and social interest
• Trade-offs are everywhere
– Opportunity cost what matters
• Trade is good
• Economic growth important for welfare
• Institutions matter for economic growth
 Chapter 1: Big Ideas in Economics

• Business cycles can’t be avoided, but can be moderated

– Great Depression made worse by bad policy
• Prices rise when government prints too much money
• Central Banking is difficult
– Taking a blind shot at a moving target
 Chapter 2: Power of Trade

• Possible for everyone to benefit from trade

• Three reasons trade is beneficial:
– Differing preferences
– Specialization
– Comparative advantage
• PPF
• Absolute vs. Comparative advantage
• Law of comparative advantage
 Chapter 3: Supply and Demand

• Demand Curve
– Law of Demand
– Consumer Surplus
– Demand Curve Shifters
• Supply Curve
– Law of Supply
– Producer Surplus
– Supply Curve Shifters
 Chapter 4: Equilibrium

• Competitive Equilibrium
– Intersection of Supply and Demand Curve
– Determines Quantity of Good Sold and its Price
• Competitive equilibrium is efficient
– Maximizes total surplus (PS + CS)
• Effects of supply and demand shifts on competitive
equilibrium
 Chapter 5: Price Ceilings and Floors
• Price ceiling
– Upper bound on market price of a good
– Binding when below equilibrium price
– Creates shortage
• Costs of shortage (Corruption, wasted time, misallocation)
• Price floor
– Lower bound on market price of a good
– Binding when above equilibrium price
– Creates surplus
 Chapter 6: GDP and the Measurement of
Progress
• GDP: market value of all final goods and services
produced in a country in a year
– Equal to total expenditure:
– Also equal to total income
• Effects of inflation
– Nominal vs. Real GDP
– GDP Deflator
• Effects of population growth: GDP per Capita
 Chapter 6: GDP and the Measurement of
Progress
• Issues with GDP
– Mismeasurement of consumption
– Excludes goods without market value
• Black market
• Home production
• Leisure
– Doesn’t measure inequality
 Chapter 7: The Wealth of Nations and
Economic Growth
• Growth facts
– Real GDP per capita varies a lot across countries
– Everyone used to be poor
– Growth miracles and growth disasters
• Causes of the wealth of nations
– Different amounts of inputs
– Incentives
– Institutions
• Institutions that encourage growth
Chapter 8: Growth, Capital Accumulation,
and the Economics of Ideas
• Solow growth model
– Solving for steady state
• Two kinds of growth
– Catching up growth
• Capital accumulation
• Limited in the long-run (steady state)
– Cutting edge growth
• New technology