ECO 200 & ECO 250 Economics

Frank and Bernanke. Principles of Economics, McGraw-Hill International

Edition, 4th edition.

Students must know the definitions of all key terms in the back of the
chapters.
Students are also responsible to know:

1. What is the scarcity principle?

Scarcity principle (No Free Lunch): Although we have boundless

needs and wants, the resources available to us are limited. So
having more of one good thing usually means having less of
another
Scarcity is a basic fact of economic life. Because of it, having more of one
good thing almost always means having less of another ( the Scarcity
principle).

If we have two kinds of class one is 20 student the other is 100 student. Now these
two classes are differs in number of students also in payment, if a student want be
in class of 20 he or she have to pay 20,000 $ because university has to pay the
professor for the class this class is smaller with more benefits. However if a student
want to attend class of 100 students this class will be little less efficient than the
previous one but the fee is also less which is 10,000$ now this tradeoff is one of the
core principle of economic which is called the scarcity principle.
3-1-1. The range of topics or issues that fit within the definition of economics is
A. limited to market activities, e.g., buying soap.
B. limited to individuals and firms.
C. extremely wide, requiring only the ideas of choice and scarcity.
D. very limited
6.2.1. The logical implication of the scarcity principle is that
A. one will never be satisfied with what one has.
B. as wealth increases, making tradeoffs becomes less necessary.
C. as wealth decreases, making tradeoffs becomes less necessary.
D. choices must be made.

2. What is the cost-benefit principle?

An individual ( or a firm or a society) should take an action if, and

only if, the extra benefits from taking the action are at least as
great as the extra costs.
The cost-benefit principle holds that an individual (or a firm or a society)
should take an action if, and only if,the extra benefit form taking the
action is at least as greater as the extra cost.
17.1.2. Choosing to study for an exam until the extra benefit (improved score)
equals the extra cost (mental fatigue) is
A. not rational.
B. an application of the cost-benefit principle.
C. an application of the scarcity principle.
D. the relevant opportunity cost.

14.2.2. Whether studying the size of the Afghan economy or the number of children
a couple will choose to have, the unifying concept is that wants are
A. limited, resources are limited, and thus tradeoffs must be made.
B. unlimited, resources are limited, and thus tradeoffs must be made.
C. unlimited, resources are limited to some but not to others and thus some people
must make tradeoffs.
D. unlimited, resources are limited, and thus government needs to do more.

3. How to solve simultaneous equations.

For example:
Find out the break even calling volume same for both plans.
10+0.10t
100+0.01t
1) We have to minues equation 2 from eqation one
We get : 10+0.10t-(100+0.01t)=
0=-90-0.09T where T= 1000
2) When we found T value then put it in both eqation see the same
results
10+0.10(1000)= 110
100+0.01(1000)=110
So simultaneous (1000, 110) is the solution.

B= 10+0.04T
B=20+0.02T
Two plans
if we have break even calling volume which is the monthly calling volume
for which the monthly bill is the same under the two plans.
Hereby this point 10+ 0.04(500)=30 and 20+0.2(500)= 30
This point is (500, 30) same for both plans this point lies simultaneously
the algebraic approach just described is often called the method of
simultaneous equation.

Chapter 3 quizes

37.1.1. In the diagram above, the opportunity cost of producing one car is
A. 5,000 tons less of agricultural products.
B. 500 tons less of agricultural products.
C. 5 tons less of agricultural products.
D. 50 tons less of agricultural products.

38.2.1. In the diagram above, the opportunity cost of producing one ton of
agricultural products is
A. 1,000 fewer cars.
B. 1 fewer car.
C. 1/5 fewer car.
D. 1/50 fewer car.

42.1.2. Refer to the figure above. Becky's maximum production of clogs per hour is
represented by point
A. u.
B. t.
C. v.
D. w.

43.2.2. Refer to the figure above. Becky's maximum production of sandals per hour
is represented by point
A. u.
B. t.
C. v.
D. z.
97.1.3. Refer to the figure above. As salad production increases, the opportunity
cost of making an additional salad
A. remains constant.
B. increases as the number of salads increases.
C. decreases as the number of pizzas decreases.
D. decreases as the number of salads increases.

99..2.3 The PPC shown in this graph is characteristic of production that displays
A. constant opportunity costs as production of a good increases.
B. decreasing opportunity costs as production of a good increases.
C. increasing opportunity costs as production of a good increases.
D. inefficient production because it is downward sloping.

38-1-1. The production possibilities curves above suggest that:

A. West Mudville should specialize in, and export, baseball bats.
B. West Mudville should specialize in, and export, both baseballs and baseball bats.
C. East Mudville should specialize in, and export, baseball bats.
D. workers will try to immigrate from West Mudville to East Mudville.

41.2.1. Refer to the above graphs. Stanville has a comparative advantage in

producing:
A. product A.
B. product B.
C. both product A and B.
D. neither product A nor B.

Chapter 3

11.1.2. As coffee becomes more expensive, Joe starts drinking tea, therefore
quantity demanded for coffee decreases. This is called
A. the income effect.
B. the change in equilibrium.
C. the substitution effect.
D. a shift in the demand curve.
13.2.2. The quantity of Revlon nail polish demanded by Jen decreased after the
price of Revlon nail polish increased. Jen decides to find a cheaper brand of nail
polish. This is called a(n)
A. substitution effect of a price change.
B. income effect of a price change.
C. decrease in buyer's reservation price.
D. increase in buyer's reservation price.
Note Terms used here :
Ok the important point is that shift in supply is called (increase in supply)
And the movement along the line is called (increase in quantity of supply)

127.1.3. Refer to the figure above. Assume the market is originally at point W.
Movement to point X is a combination of
A. an increase in quantity supplied and an increase in demand.
B. an increase in supply and an increase in demand.
C. an increase in supply and an increase in quantity demanded.
D. a decrease in supply and an increase in quantity demanded.

128.2.3. Refer to the figure above. Assume the market is originally at point W.
Movement to point Y is a combination of
A. an increase in quantity supplied and an increase in demand.
B. an increase in supply and an increase in demand.
C. an increase in supply and an increase in quantity demanded.
D. a decrease in supply and an increase in quantity demanded.
 4. How to read and interpret a production possibilities curve graphically.
A graph that describes the maximum amount of one good that can be
produced for every possible level of production of the other good.
 A production possibilities

curve is a graphical
representation of the alternative combinations of goods and services an
economy can produce
A B C D E F points in frontier are efficient production that we possibley
effort to produce beyond that line is not possible production but under
that frontier is the possible line but not efficient.
This means that, in a full-employment economy, more and more of one
good can be obtained only by reducing the production of another good.
This is due to the basic fact that the economy’s resources are limited.
In this diagram AF is the production possibility curve, also called or the
production possibility frontier, which shows the various combinations of
the two goods which the economy can produce with a given amount of
resources. The production possibility curve is also called transformation
curve, because when we move from one position to another, we are really
transforming one good into another by shifting resources from one use to
another
 The absolute value of the slope of any production possibilities curve equals
the opportunity cost of an additional unit of the good on the horizontal axis. It is the
amount of the good on the vertical axis that must be given up in order to free up
the resources required to produce one more unit of the good on the horizontal axis.
We will make use of this important fact as we continue our investigation of the
production possibilities curve. A production possibilities curve shows the
combinations of two goods an economy is capable of producing.
 The downward slope of the production possibilities curve is an implication of
scarcity.
 The bowed-out shape of the production possibilities curve results from
allocating resources based on comparative advantage. Such an allocation implies
that the law of increasing opportunity cost will hold.
 An economy that fails to make full and efficient use of its factors of
production will operate inside its production possibilities curve.
 Specialization means that an economy is producing the goods and services in
which it has a comparative advantage.

5. What factors can shift a production possibilities curve?

 Income, tastes or preference, population or potential buyer population,
expectations of higher price in future, and the prices of substitutes and
complements are among the factors that shift demand schedules. Supply
schedules in turn are primary governed by technology, input prices,
expectations of lower future price, the more number of sellers, ad
especially for agricultural products the weather .
Quantity demanded (Qd) is the total amount of a good that buyers would
choose to purchase under given conditions. The given conditions include:
• price of the good • income and\ wealth • prices of substitutes and
complements • population • preferences (tastes) • expectations of future
prices

Quantity supplied (Qs) is the total amount of a good that sellers would
choose to produce and sell under given conditions. The given conditions
include: • price of the good • prices of factors of production (labor,
capital) • prices of alternative products the firm could produce •
technology • productive capacity • expectations of future prices
6. How to read and interpret a supply and demand curve with and
without excess supply and excess demand graphically.
7. How to read and interpret shifts in supply and demand graphically.
8. What is the Efficiency Principle?
9. What is the Equilibrium Principle?( HAS NO ANSWER BY NOW)

Chapter 4
10.
11. 5.1.1. If the price of cheese falls by one percent and the quantity demanded
rises by 3 percent, then the price elasticity of demand for cheese has a value of
12. A. 30.
13. B. 0.30.
14. C. 0.333.
15. D. 3.
Percentage change in quantity/ percentage change in price = price
elasticity.
3/1=3
16.
17. 6.2.1. If the price of textbooks increases by one percent and the quantity
demanded falls by one-half percent, then the price elasticity of demand has a value
of
18. A. 0.05.
19. B. 0.5.
20. C. 2.
21. D. 5.
22.
23. 42.1.2. Demand tends to be _______ in the short run than in the long run.
24. Note :(In long run demand is elastic in short run demand is inelastic)
25. A. more elastic
26. B. more inelastic
27. C. more volatile
28. D. less important
29.
30. 44.2.2. Assume the price of gasoline doubles tonight and remains at that
price the next two years. The price elasticity of demand for gasoline measured
tomorrow will be ______ when compared with the price elasticity of demand for
gasoline measured two years from now.
31. A. more elastic
32. B. larger in absolute value
33. C. the same
34. D. more inelastic
35.
36. 120.1.3. If most consumer goods and services are ______, then most income
elasticities are ______.
37. A. normal; negative
38. B. inferior; positive
39. C. normal; greater than one
40. D. normal; positive
41.
42. 124.2.3. If you consume less of a good as your income increases,
43. A. your demand curve is not downward sloping for that good.
44. B. the good must be an inferior good.
45. C. the good must not have any close substitutes.
46. D. your quantity demanded changed by a movement along the demand
function.

47.How to calculate price elasticity of demand.

Price elasticity of demand refers to the degree of change in the demand for a
product with respect to change in the given price, while keeping other determinants
of demand at constant. In other words, price elasticity of demand denotes the ratio
of percentage change in the demand for a product to a percentage change in its
price

Percentage change in quantity demanded/ percentage change in price

6 percent/(-2)= (-3) its very elastic because its bigger than one.

P (original price) = Rs. 20 Q (original demand) = 10 kgs

P1 (new price) = Rs. 22 Q1 (new demand) = 9 kgs

Therefore, change in price of coffee is:

∆P = P1 –P ∆P = 22 – 20 ∆P = 2

Similarly, change in quantity demanded for coffee is:

∆Q = Q1 – Q ∆Q = 9 – 10 ∆Q = -1

Price elasticity of demand for coffee is:

ep = ∆Q/∆P * P/Q

ep = 1/2 * 20/10
ep = 1

48.What are the determinants of the price elasticity of demand?

The price elasticity of demand for a good or service tend to be larger
when 1) substitutes for the good are more readily available 2) when the
goods share in the consumers budget is larger’’ the larger the share of
your budget an item accounts for, the greater is your incentive to look for
substitutes when the price of the item raises. ’3) and when consumers
have more time to adjust to change.
Note: the price elasticity of demand for any good or service will be higher
in the long run than in the short run
How to read and interpret price elasticity of demand graphically.
a) When price elasticity of demand is greater than 1 , in this case
changing price and result will change total expenditure always move in
opposite directions. because your NOT only in the market there ARE
MORE substitute for buyers to move

b) When price elasticity of demand is less than 1 changes in price and

changes in total expenditure always moves in the same directions
because your only in the market there is no substitute for buyers to
move
 49.How to calculate price elasticity of supply.

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to

a change in price. It is necessary for a firm to know how quickly, and effectively, it
can respond to changing market conditions, especially to price changes. The
following equation can be used to calculate PES.

Here are three extreme cases of PES.

1. Perfectly elastic, where supply is infinite at any one price.( Horizantal line )
2. Perfectly inelastic, where only one quantity can be supplied.(verticle line)
3. Unit elasticity, which graphically is shown as a linear supply curve coming
from the origin.

Extra notes about price elasticity

Key points
 Price elasticity measures the responsiveness of the quantity demanded or
supplied of a good to a change in its price. It is computed as the percentage change
in quantity demanded—or supplied—divided by the percentage change in price.
 Elasticity can be described as elastic—or very responsive—unit elastic,
or inelastic—not very responsive.
 Elastic demand or supply curves indicate that the quantity demanded or
supplied responds to price changes in a greater than proportional manner.
 An inelastic demand or supply curve is one where a given percentage change
in price will cause a smaller percentage change in quantity demanded or supplied.
 Unitary elasticity means that a given percentage change in price leads to an
equal percentage change in quantity demanded or supplies

50.3333

51.What is the rational spending rule?

52.How do firms maximize profits in a perfectly competitive market?
 Perfect competition arises when there are many firms selling a homogeneous good to many buyers
with perfect information.  Under perfect competition, a firm is a price taker of its good since none of
the firms can individually influence the price of the good to be purchased or sold. As the objective of
each perfectly competitive firm, they choose each of their output levels to maximize their
profits.  The key goal for a perfectly competitive firm in maximizing its profits is to calculate the
optimal level of output at which its Marginal Cost (MC) = Market Price (P). As shown in the graph
above, the profit maximization point is where MC intersects with MR or P.  If the above competitive
firm produces a quantity exceeding qo, then MR and Po would be less than MC, the firm would incur
an economic loss on the marginal unit, so the firm could increase its profits by decreasing its output
until it reaches qo.  If the above competitive firm produces a quantity fewer than qo, then MR and
Po would be greater than MC, the firm would incur profit, but not to its maximum. Therefore, the
firm could increase its profits by increasing its output until it reaches qo. 
53.What is the “law” of supply?
The marginal cost are upward sloping in the short run and in the long run
it does not apply. In the firms marginal cost curve in the long run would be
horizontal not upward sloping thus for we say that law of supply in short
run but not in the long run. Supply curve represent the cost side of the
market and demand carve represent the benefit side of the market.
54.What are the three types of profit?
Example:
400,000 revenue, 250,000 explicit cost and we supplied 1000,000 dollar
on equipments
Accounting profit=total revenue-explicit cost
400,000-250,000=150000

Economic profit= total revenue- implicit and explicit cost

400,000-250,000-100.000=50,000
 We supplied machines and other equipment for 1million here we have
used our money on the equipment. Now the interest on the bank is 10% if
we did not supplied we could get this 10% but not now it’s gone:
1,000,000.10=100000. This 100000 this is opportunity cost which is also
called implicit
Normal profit= the differences between accounting profit and economic
profit
150,000-50,000=100,000
55.What are the five sources of market power?
Exclusive control over input, pattern and copyrights, government licenses
or franchise, economic of scale, and network economies.
56.How does a monopoly maximize profit?
Monopolists maximize profit by choosing the output level at which
marginal revenue equal to marginal costs
57.What are the three elements of a game?
The players, the list of strategies that from which they can choose and the
payoff to each combination of strategies
x