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ECON 111 Macroeconomics Exam 1 Study Guide

by: Lauren Heller

ECON 111 Macroeconomics Exam 1 Study Guide Econ 111

Marketplace > University of Alabama - Tuscaloosa > Econ 111 > ECON 111 Macroeconomics Exam 1 Study Guide
Lauren Heller
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About this Document

This study guide answered all questions from the study guided posted by the professor. Chapters 1-2, and 4-5
Kent 0. Zirlott
Study Guide
econ111, EC111, Macro, Macroeconomics, Econ, Economics, Study Guide, exam, Exam 1
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This 6 page Study Guide was uploaded by Lauren Heller on Tuesday February 9, 2016. The Study Guide belongs to Econ 111 at University of Alabama - Tuscaloosa taught by Kent 0. Zirlott in Fall 2016. Since its upload, it has received 52 views.


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Date Created: 02/09/16
Exam 1 Study Guide Chapter 1:  What is the study of economics?  What is microeconomics and macroeconomics?  The study of how society manages its scarce resources  Microeconomics­ study of how households and firms make decisions and how they  interact in specific markets  Macroeconomics­ study of economy­wide phenomena  What is equality (equity)?  What is scarcity?   Equality(equity)­ when prosperity is distributed uniformly among society’s members  Scarcity­ the limited nature of society’s resources  What is efficiency?  Efficiency­ when society gets the most from its scarce resources  What are tradeoffs and opportunity costs?  How do you measure opportunity costs?  Tradeoffs­ To achieve greater equality could distribute wealth but reduces incentive to  work  Opportunity costs­whatever is given up to obtain it  Measuring opportunity costs­ compare the costs and benefits of alternate choices  What is rationality and thinking at the margin?  Rationality­ systematically and purposefully doing the best they can to achieve  objectives  Thinking at the margin­ take an action if and only if the marginal benefit exceeds the  marginal costs  Benefits of trade  Benefits of trade­ rather than be self­sufficient, people can specialize in producing one  good or service and exchange it for other goods  What is a market and market economy?  Market­ a group of buyers and sellers  Market economy­ allocated resources through the decisions of many households and  firms as they interact in markets  What is the “invisible hand”?  Invisible hand­ works through the price system in the interaction of buyers and sellers  to determine prices, each price reflects the goods value to buyers and the costs of  producing the goods, and the prices guide self­interested households and firms to make  decisions that, in many cases maximize society’s economic well­being  What is a market failure?  Market failure­ when the market fails to allocate society’s resources efficiently Ch. 2 Thinking like an Economist  What are models? (economics models)  Models­ a highly simplified representation of a more complicated reality. Economists  use models to study economic issues  Characteristics of the Circular Flow Diagram.  A visual model of the economy shows how dollars flow through the markets among  households (consumers) and firms  How does the Circular Flow Diagram work?  Who are its “actors” and what do they do?  What are the two markets?  Two “actors”­ households and firms  Two markets­ goods and services, factors of production  What are the factors of production and the payments to them?  Factors of production­ inputs, resources the economy uses to produce goods and  services(labor, land, capitol, entrepreneurship)  Households­ own the factors of production, sell/rent them to firms for income, buy and  consume goods/ services ( we sell labor to firm and buy goods)  Characteristics of the Production Possibility Frontier (PPF).  PPF­graph that shows the combinations of two goods the economy can possibly  produce given that available resources and the available technology  How does the PPF work?  What does it tell us?  Slope of the PPF tells us the opportunity cost of one good in terms of the other  Moving along the PPF involves shifting resources from the production of one good to the other  Increasing and constant opportunity costs and how they affect the shape of the PPF.  Constant opportunity cost ­PPF is a straight line. Essentially the same resources are  equally useful for producing in either industry  Increasing opportunity cost­ if opportunity cost rises as the economy produces more of a good, PPF is bow shaped. The resources are specialized and not easily adaptable for  producing in either industry  What causes the PPF to shift or pivot outward?  And what would be the result of the shift?  A technological advancement shifts the possibility frontier outward  Normative vs. Positive statements  Normative­ attempt to prescribe how the world should be (value judgments)  Positive­ describes the world as it is, fact   Ch. 4 Supply and Demand (KNOW EVERYTHING IN THIS CHAPTER)  Difference between Demand and Quantity Demand (QD) and how they appear on a graph  Quantity demanded(QD)­amount of the good that buyers are willing and able to  purchase at a specific price. QD is a point on the demand curve  Demand­ is the utility for a good or service of an economic agent, relative to his/her  income.  How do you create a market demand curve?  Add up all the QD (sum of all quantity demanded by all buyers at each price)  What is the Law of Demand?  law of demand­ the claim that, other things being equal, the quantity demanded of a  good falls when the price of the good rises  Difference between moving along a demand curve and shifting a demand curve.  Movement along the D curve­ a change in the price of a good  Shift­ increase in quantity makes the D curve shift  What causes a movement along the demand curve? (Remember, if you move upward  along a demand curve, that is a decrease in quantity demanded.  If you move  downward along a demand curve, that is an increase in quantity demanded.)  Change in Price, tax  What causes a shift of the demand curve? (Remember, if the demand curve shifts to the  right, that is an increase in demand.  If the demand curve shifts to the left, that is a  decrease in demand.)  # of buyers, income, prices of related goods, tastes, expectations  What are the Determinants of Demand and how a change in them will shift the demand  curve?  include income, the prices of substitutes and complements, tastes, expectations, and the number of buyers. If one of these factors changes, the demand curve shifts.  Normal vs. Inferior Good  Normal good­If the demand for a good falls when income falls (ex. Ice cream)  Inferior good­If the demand for a good rises when income falls (ex. Bus rides)  Substitutes vs. Complements  Substitutes­ When a fall in the price of one good reduces the demand for another good  (ex. Hot dogs and hamburgers)  Complements­ When a fall in the price of one good raises the demand for another good  (ex. Peanut butter and jelly)  Quantity supplied­ the amount that sellers are willing and able to sell at a specific price. QS  is a point on the supply curve  How do you create a market supply curve?  Quantity supplied in the market is the sum of the quantities supplied by all sellers at  each price  What is the Law of Supply?  The claim that, other things being equal, the quantity supplied of a good rises when the  price of the good rises  Difference between moving along a supply curve and shifting a supply curve.  Movement along the supply curve­ price change  Shift­ a change in a supply determinant   What causes a movement along the supply curve? (Remember, if you move upward along a supply curve, that is an increase in quantity supplied.  If you move downward along a supply curve, that is a decrease in quantity supplied.)  Change in price  What causes a shift of the supply curve? (Remember, if the supply curve shifts to the  right, that is an increase in supply.  If the supply curve shifts to the left, that is a  decrease in supply.)  Input prices, production technology, # of sellers, expectations  What are the Determinants of Supply and how a change in them will shift the supply curve?  In addition to price, other determinants of how much producers want to sell include input  prices, technology, expectations, and the number of sellers. If one of these factors  changes, the supply curv. shifts  Supply and Demand Together.  What is an Equilibrium?  Equilibrium­ Price has reached the level where the quantity supplied equals quantity  demanded  How do you determine equilibrium price and quantity?  (Both on a graph and  mathematically.)  Points where supply and demand curve intersect   Set both equations equal to one another and solve for P (price)  Equilibrium price­ the price that equates quantity supplied with quantity demanded  Equilibrium quantity­ the quantity supplied and quantity demanded at the equilibrium  price  Shortage vs. Surplus  Shortage­ excess demand, when the quantity demanded is greater than quantity supply  Usually from prices being too low  Falls below equilibrium  Surplus­ excess supply, when quantity supplied is greater than the quantity demanded   On a graph it is above equilibrium  Usually price is too high  What happens to the equilibrium price and quantity if the supply curve shifts, if the demand  curve shifts, or if both supply and demand shift?  The curves shift until a new equilibrium is found Ch. 5 Elasticity  What is price elasticity of demand?  Price elasticity of demand= measures how much QD responds to a change in price  % change in QD       % change in P  Calculating price elasticity of demand using the midpoint method.  End value – start value   x 100% midpoint  Why is the midpoint method better for calculating elasticity?  the midpoint method gives the same answer regardless of the direction of change  Relationship between slope and elasticity.  The flatter the demand curve that passes through a given point, the greater the price  elasticity of demand. The steeper the demand curve that passes through a given point,  the smaller the price elasticity of demand  Slope­ ratio of 2 changes, elasticity­ ratio of 2 percentage changes  The 5 types of elasticity of demand and their characteristics and examples.  Elastic Demand  Demand Curve­ relatively flat  Consumer’s price sensitivity­ relatively high  Big changes in quantity demanded  Elasticity­ greater than 1  (>1)  Inelastic Demand  Demand Curve­ relatively steep  Consumer’s price sensitivity­ relaticely low  Quantity only changes a little  Elasticity­ less than 1 (<1)  Unit Elastic Demand  % change in price = % change in quantity  Elasticity­ 1  Perfectly Inelastic Demand  Demand Curve­ Vertical  Consumer’s price sensitivi y­ None   Price goes up and down, quantity stays the same  Elasticity­ 0  Ex. Life saving drug like insulin, will take every day regardless of price increases or  decreases  Perfectly Elastic Demand  Demand Curve­ Horizontal  Consumer’s price sensitivity­ Extreme  Elasticity­ Infinity   As long as price stays there, it will be infinitely consumed   Demand curve of perfect competition  Determinants of Elasticity of Demand and how they affect the shape of the demand curve.  How many close substitutes there are  Necessity or luxury  Broadly or narrowly it is defined  The time horizon, higher in long run because more options  Relationship between Total Revenue and Elasticity of Demand.  A higher price means more revenue on each unit you sell  But you sell fewer units(lower Q) because law of demand  When demand is inelastic (a price elasticity less than ), price and total revenue move in  the same direction: If the price increases, total revenue also increases.  When demand is elastic (a price elasticity greater th revenumove and total inopposite directions: If the price increases, total revenue decreases.  If demand is unit elastic (a price elasticity exactly equal to ), total revenue remains  constant when the price changes.  What is price elasticity of supply?  (Remember, you will not have to calculate elasticity  of supply on the exam.)  measures how much the quantity supplied responds to changes in the price.  The 5 types of elasticity of supply and their characteristics and examples  Elastic supply  Inelastic supply  Perfectly elastic supply  Perfectly inelastic supply  Unit elastic supply  Determinants of Elasticity of Supply.  Time (long run, short run)  Income Elasticity of Demand and what it is used for.  (Remember, you will not have to  calculate income elasticity on the exam.)  Why is the sign of the elasticity important?  measures how much the quantity supplied responds to changes in the price  supply is said to be elastic if the quantity supplied responds substantially to changes in price  supply is said to be inelastic if the quantity supplied responds only slightly to changes in price  calculate price elasticity of supply by percent change in quantity supplied divided by percent change in price   Cross­Price Elasticity and what it is used for.  (Remember, you will not have to calculate  cross­price elasticity on the exam.)  Why is the sign of the elasticity important?  measures how the quantity demanded of one good responds to a change in the price of another  Calculated by percent change in quantity demanded of good 1 divided by percent change in the price of good 2  Substitutes have a positive cross price elasticity  Compliments have a negative cross price elasticity


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