Exam 1 Study Guide

Chapters 1, 2, 3, 6, 7, 8, 9

Exam Format

  • 75 minutes, closed-book.
  • You may bring one side of one handwritten 8.5x11 note sheet. No photocopies, no printouts, no typed sheets, handwritten only.
  • Multiple choice questions, plus a set of multi-part problems that build from easier to harder within each problem. Show your work on problems for partial credit.
  • Bring a pencil and calculator. No phones.

This page is a checklist of topics, organized by chapter, not a list of exam questions. Use it to find your weak spots before you review your notes, slides, quizzes, and Connect homework.

Chapter 1: Choices

  • Opportunity cost: what it means, and why scarcity is what creates it.
  • The economic perspective: purposeful behavior, utility, marginal thinking.
  • Positive vs. normative economic statements, know the difference and be able to identify each.
  • Reading a budget line: slope, intercepts, attainable vs. unattainable combinations.
  • The factors of production: land, labor, capital, entrepreneurial ability.
  • The MB = MC rule: why a rational decision-maker keeps going until marginal benefit equals marginal cost.
  • The production possibilities frontier (PPF): attainable vs. unattainable points, points inside the curve (unemployed/underused resources) vs. on the curve (efficient).
  • The law of increasing opportunity cost: why the PPF bows outward, and why opportunity cost rises as you produce more of one good.
  • How economic growth, unemployment, and trade each show up on a PPF diagram.

Chapter 2: The Market System

  • How every economy must answer the same three questions (what, how, and for whom to produce), and the two broad ways economies answer them (markets vs. command).
  • Why self-interest, operating through prices and profit, coordinates a market economy rather than wrecking it (the “invisible hand”).
  • Profit as a signal: how rising or falling profit redirects resources toward what consumers want.
  • The least-cost production method: how to compute the cost of different input combinations, and how a firm’s choice of method changes when relative input prices change.
  • The circular flow model: resource market vs. product market, and who is a buyer/seller in each.
  • Creative destruction and how a market system accommodates change over time.

Chapter 3: Supply, Demand, and Equilibrium

  • The law of demand and the law of supply, and why each curve has the slope it does.
  • Movement along a curve vs. a shift in the curve, know which determinants cause which.
  • The determinants that shift demand (income, prices of related goods, tastes, expectations, number of buyers) and supply (input prices, technology, number of sellers, expectations, taxes/subsidies).
  • Finding equilibrium price and quantity, both graphically and algebraically by setting \(Q_d = Q_s\).
  • Shortages and surpluses: what happens away from equilibrium, and what a price ceiling or floor does to the market.
  • Predicting how equilibrium price and quantity change when demand shifts, supply shifts, or both.

Chapter 6: Intro to Macroeconomics

  • Why macroeconomists focus on a few key summary statistics (GDP, unemployment, inflation) instead of tracking every market.
  • Total output growth vs. growth per capita, and why the distinction matters.
  • The tradeoff between consumption today and consumption in the future, and how saving channels into investment (the loanable funds idea).
  • Two different meanings of “investment”: the economist’s definition (new capital goods) vs. the everyday/financial meaning (buying stock).
  • Human capital as a form of investment.
  • Price stickiness: why some prices adjust quickly and others adjust slowly, and why this distinction matters for the short run vs. the long run.

Chapter 7: National Income

  • Why we measure the whole economy with statistics like GDP.
  • The definition of GDP: final goods and services, market value, produced within a country’s borders in a given period.
  • Final goods vs. intermediate goods, and why counting intermediate goods separately would cause multiple counting (use value added instead).
  • What GDP excludes (e.g., secondhand sales, purely financial transactions, nonmarket activity).
  • The expenditure approach: \(\text{GDP} = C + I_g + G + X_n\). Know what’s in each component (including gross vs. net investment, and net exports as exports minus imports).
  • The income approach: GDP can also be built up from the income side (compensation of employees, rents, interest, profits, plus adjustments), and it totals the same GDP as the expenditure approach.
  • Nominal GDP vs. real GDP, and why real GDP is the more reliable measure for comparing output over time.
  • The GDP price index (deflator) and how to use it to convert nominal GDP into real GDP (deflating).
  • Shortcomings of GDP as a measure of well-being (nonmarket activity, leisure, the underground economy, distribution).

Chapter 8: Economic Growth

  • How economic growth is measured, and why small differences in the growth rate compound into large differences over time.
  • The Rule of 70: estimating how many years it takes a growing variable to double.
  • The institutional foundations of growth (property rights, patents/copyrights, financial institutions, free trade).
  • The four supply factors, the demand factor, and the efficiency factor behind growth, and how each shows up as a shift of the PPF.
  • Growth accounting: decomposing real GDP growth into growth in hours worked plus growth in labor productivity.
  • The link between productivity growth and real wage growth.
  • Benefits and costs/critiques of economic growth.

Chapter 9: Business Cycles, Unemployment, and Inflation

  • The four phases of the business cycle: peak, recession, trough, expansion, know what each one means, not just the general idea of ups and downs.
  • Why business cycles are irregular, not predictable on a fixed schedule.
  • Why durable goods industries feel a downturn more than nondurable goods and services.
  • Who counts as unemployed (vs. employed vs. not in the labor force), and how to compute the unemployment rate.
  • The four types of unemployment (frictional, structural, cyclical, seasonal), and what “full employment” actually means.
  • The CPI and how to compute the inflation rate from two CPI values.
  • The Fisher relationship: real interest rate = nominal interest rate minus inflation.
  • Nominal income vs. real income, and who wins/who loses from unanticipated inflation.
  • Costs of inflation even when fully anticipated (menu costs, shoe-leather costs), and what makes hyperinflation different from ordinary inflation.

How to Use This List

For each bullet above, you should be able to: (1) define the term in your own words, (2) explain why it matters or how it connects to the bigger picture, and (3) work through a numerical example if the topic involves a formula or calculation. If any bullet feels unfamiliar, go back to that chapter’s slides, your Connect homework, and the relevant quiz before the exam.