Concentrated Notes Sheet for Test 1
Directions: Studying is a strategy. Studying economics requires a refined strategy focused on learning
the What, Why and How of all concepts. Refer to the handouts and the homework in preparation for all
tests. The following are only some of the notes you need to brush up on. The intention is to reduce to
anxiety and any overwhelming feelings you might have regarding the first test. However, the notes
below do not encompass everything on the test. For that, you truly must go over all the notes we’ve
taken in class, with cognition regarding the why and how of all concepts.
Chapter One
1. Renewable resources are self-replicating, like fish or trees. Therefore, they’re part of the land
resources.
2. Economic institutions are made up of lending institutions, investment firms and insurance
companies. They’re the building blocks of wealth creation.
3. Positive economics is verifiable, but normative is not. It’s not a matter of whether there’s truth
to the statements; simply, whether they can be verified or not.
Chapter Two
Opportunity cost is always what gets sacrificed. The following are questions like the ones we’ve covered
in class, but also like the one you’ll have on the test itself. Check your knowledge along the way, and be
sure you know the methodology.
1. Your opportunity cost of taking this course is:
a. The tuition you paid for the course.
b. The benefit of the activity you would have chosen if you had not taken the course.
c. The benefit of taking this course.
d. The cost of the activity you would have chosen if you had not taken the course.
(Answer: B)
2. Suppose that you have a marginal benefit of $400 per month from your second car, you should
then rent it out only if:
a. Your net worth is negative
b. Your marginal cost is $150
c. Your marginal cost is $550
d. If your second car is not needed
(Answer: B – The MB must exceed the MC $400>$150)
3. Again, how do you answer questions about OC when dealing with a table for the PPC:
a) What is the OC of Chocolate bars for the above country?
Take the maximum of Cola Cans and divide that number by the maximum of chocolate bars:
100/40 = 2.50 cans of cola.
b) What is the OC of cola for the above country?
40/100 = .4 chocolate bars.
4. The question below is meant to remind you how to answer OC questions when you have to read the
points on a PPC:
a. The OC of producing 3 robots is 6 units of wheat, why? Because when putting resources into 3
robots, only enough resources are left for 10 wheat. Therefore, 10 wheat realized – 6 units of
wheat left unrealized = 6 wheat unrealized, which means sacrificed.
b. We can also say that the OC of producing 13 units of wheat is 3 robots. 2 – 5 = -3….3 robots
sacrificed.
c. The OC of producing 3 robots instead of 4 is 4 wheat. Got it?
5. Mary can produce 100 chickens and 70 ducks, or 60 chickens and 110 ducks. The price of
each chicken is $11, and the price of each duck is $17. Which combination of fowl has the
lower OC? Explain.
Option 1: (100 * $11) + (70 * $17) = $2290 in revenue
Option 2: (60 * $11) + (110 * $17) = $2530 in revenue
The second option has the lower OC, which is the better decision.
6. The ideal number of units to produced based on the table below is 3 units, because that’s
where profits peak, and yet at three units you get the added advantage of one more unit
produced. Always look at where the profits peak at the most units, and choose that.
7. Justin can produce 13 bikes and 6 motorcycles. Today, Justin will produce 10 bikes and 8
motorcycles. What is Justin’s OC of a bike?
a. ½ a bike
b. 1.5 motorcycles
c. ½ a motorcycle
d. 2 motorcycles
e. 3 bikes
(Answer: B …. 2 motorcycles/-3 bikes = -.67 motorcycles; .67 of a motorcycle sacrificed)
Chapter Three
1. Indicate the direction of demand and/or supply for McDonald’s Big Mac:
a. Beef is more expensive than it used to be: In this case, supply of Big Mac’s would shrink due
to increase resource prices.
b. The tools and appliances required to process and store the burgers are now cheaper: Supply
would increase due to cheaper and more accessible technology
c. Wendy’s introduces cheaper burgers: Demand would drop for Big Macs due to a cheaper
substitutes
d. McDonald’s put its shakes and fries on sale: Demand would increase for the Big Macs due to
cheaper complements
e. McDonalds sees a rise in the price of their chicken nuggets: Supply of Big Macs would
decrease since it’s more profitable to divest away from the Big Macs and more toward the
one that’s more profitable – the chicken nuggets.
2. The graphs below show you how price (V#1) impacts the quantity of a product (V#2). Both graphs
represent “movements” along the curve. The top graph shows you how price kept dropping,
increasing qd, and the lower graph, shows you how an increase in price kept increasing qs. Now
compare these graphs to the ones below them.
3. The next set of graphs show you how a V#3, a non-price determinant, “shifts” the curves of
demand and supply. Which means, that the total quantities have shifted to an entirely new range.
The top graph shows a leftward shift in Demand, which means that the market in “total” is buy
less, but also is paying less for what it buys, because the buyer is now less able and less willing.
What drives such behavior is a non-price determinant like a drop in income or a loss of interest in
the product. The lower graph shows an increase in supply, which means that the market is now
producing or providing more in total than before. The rightward shift of the supply curve indicates
that the market now is offering a bigger quantity of goods at lower prices due to perhaps
increased competition or cheaper resource prices. Meaning due a V#3.
4. Prices never change demand or supply. Meaning price can never cause curves to shift. A price
change can only cause movements along the respective curves.