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Midterm Review Outline

Chapter 1 What is Economics?


1. Try to understand the seven Ideas for Beyond the Final Exam. What is the difference between opportunity cost and money cost? Try to use some vivid examples (say, the cost of your college education, etc.) to help yourself understand the concept of opportunity cost. 2. What is an economic model? Because of the great complexity of human behavior, economists use simplified models to understand the real world and predict its behavior; much as a child uses a model railroad to learn how train work. Therefore, abstraction from unimportant details is necessary to understand the functioning of anything as complex as the economy. 3. How to measure the slope of a straight line? Or the slope of a curved line? Please try to fully understand two-variable diagrams, since much of the economic analysis found in this course requires that we keep track of two variables simultaneously.

Chapter 2 The Economy: Myth and Reality


1. What are characteristics of American economy? 2. Since the circular flow of goods and money lies at the center of the analysis of how the national economy works, please make sure you understand how all economic activities are linked by a series of interconnected markets (even though some of which are highly competitive and others of which are less so). 3. How to define an open economy? A closed economy? 4. What are inputs or factors of production? Outputs? 5. What is GDP (Gross domestic product)? What does it mean by recession? 6. What is the role of government in a mixed economy?

Chapter 3 The Fundamental Economic Problem: Scarcity and Choice


1. Please remember firmly that all decisions are constrained by the scarcity of available resources. All economic decisions involve trade-offs. Then what is an optimal decision? 2. What does a production possibilities frontier show? Please try to plot the production possibilities frontier for production by a single farmer and for the entire economy. 3. What does the principle of increasing costs state? Comparing a production possibilities frontier with no specialized resources with one with specialized resources might help you better understand the principle of increasing costs. 4. Whats the concept of efficiency? What are the three coordination tasks of any economy? 5. What does division of labor mean? Try to understand the amazing principle of comparative advantage. 6. The United States is one of the worlds wealthiest countries. Think of a recent case in which the decisions of the U.S. government were severely constrained by scarcity. Describe the trade-offs that were involved. What were the opportunity costs of the decisions that were actually made?

Chapter 4 Supply and Demand: An Initial Look


1. What does the phrase used by Adam Smith invisible hand mean? How does the invisible hand lead a market system? 2. Please practice plotting a demand curve based on a demand schedule. Identify the quantity demanded. Be clear about movements along versus shifts of a demand curve. After you understand the demand side well, then practice the supply side. 3. Put the demand and supply sides together in a diagram to analyze the supply and demand equilibrium. When will shortage or surplus happen in a market? 4. What does the law of supply and demand state in a free market? Try to analyze the effects of demand shifts on supply-demand equilibrium, and the effects of

supply shifts on supply-demand equilibrium. Thinking about the application such as raising the gasoline tax might be helpful for your understanding. 5. Try to study why battling the invisible hand, i.e., restraining the market mechanism such as price ceilings and price floors, brings so many side effects. Please use some real world examples.

Chapter 5 An Introduction to Macroeconomics


1. What does it mean by aggregation? 2. Try to show inflation, recession and unemployment, Economic growth using aggregate demand and supply curves. 3. GDP (gross domestic product) is the most comprehensive measure of the output of all the factories, offices, and shops in an economy. Please pay attention to several features of the definition of GDP. What are final goods and services? An intermediate good? Whats the difference between nominal GDP and real GDP? 4. Whats inflation? Deflation? Stagflation? 5. Whats fiscal policy? Monetary policy? Stabilization policy? When should these policies be employed? 6. Give some reasons why GDP is not a suitable measure of the well-being of the nation.