Revision

This is not necessarily an indication of what will be, or won’t be in the exam. This is an overview of main

concepts & diagrams

General suggestions• Review main definitions

– At the side of text pages or the glossary at the back

• Know how to recognise definitions when phrased as a scenario

• Characteristics of key economic situations– eg market structures, money market

• Identify main themes of the modules/chapters– 10 principles of economics help to do this

• Identify key diagrams & explanations that go with those diagrams

Revision sources

• Review past few exams for structure (2002 only)

• Review suggested study guide exercises recommended at end of lecture or in USQ study book

• Set yourself practice questions or re-do those from tutes and PALS

Exam technique

• Keep in mind the relative weightings– Don’t bog down on multiple choice questions

• Be prepared to move on and come back to questions you find difficult

• Extended response– 1. content most important

– 2. answer the specific question, especially in the conclusion

– 3. keep writing. It increases your chances of making a point that is worth marks

Introductory concepts

• You should be able to:– Explain each of the principles of economics– Describe and discuss the circular flow as a

model and definitions of components– Identify and explain the difference between

positive vs normative statements– Know about the natures and purposes of

economic models

Opportunity Cost & Specialisation

• Specialisation (definition & reason for)

• Opportunity cost (definition)

• Recognise examples of opportunity cost and correctly identify the opportunity cost– eg a person stops studying and goes to the

movies

• Plot PPFs from a table of figures

Correct calculation & expression of opportunity cost

Food 10 8 6 4 2 0

Cloth 0 3 6 9 12 15Opp. Cost ofincreasingcloth prod.

2/3= 0.66kgs/wkof food

2/3= 0.66kgs/wkof food

2/3= 0.66kgs/wkof food

2/3= 0.66kgs/wkof food

2/3= 0.66kgs/wkof food

What combinations of production are possible and not

possible? Explain why/why not.

Information gigabytes/yr

Textilescu m/yr

* *

Recognise the increased consumption possibilities

with trade

Food(Kgs/wk)

Cloth (m/wk)

9

6

3 6 9 15

3

12

12

Utopia

Euphoria

* Utopia consumes more with trade

What causes shifts in the PPF?

Information gigabytes/yr

Textilescu m/yr

What policy/social decisions cause shifts within the frontier?

Information gigabytes/yr

Textilescu m/yr

750,000

1 m

500,000

5m 6.5 m16 m

*

*

Market Definitions

• Change in demand/supply vs change in quantity demanded/supplied– Shift in the curve vs along the curve

• Competitive market

• Price searching

• Equilibrium

• Inferior and normal goods

What causes an increase/decrease in

demand?Price

QuantityQ1

D1

Q2

D2

P

Q0

D0

Substitutes and Complements

• Recognising when goods are likely to be substitutes or complements

• The effect a change in the price of a substitute has on the original good

• The effect a change in the price of a complement has on the original good

What causes an increase/decrease in

supply?Price

Quantity

S0

P

Q1 Q2Q0

S2

S1

Market Diagrams

• Be able to:– Draw and label a market diagram to illustrate

an explanation of market principles– construct a market diagram from a table of

figures– Correctly identify new price and quantity when

there is a shift in supply or demand

What happens to equilibrium price and quantity when supply

and/or demand changes?Price

Quantity

S0

P0

Q0

D0

P1

Q1

S1

D1

If given a scenario, show what happens to supply and/or

demand and how this affects equilibrium price and quantity

Price

Quantity

S0

P0

Q0

D0

What is revenue?What happens to revenue when

demand or supply changes?Price

Quantity

S0

P0

Q0

D0

Q1

P1

D1

Elasticity: What to know

• Definition• How to do a calculation of elasticity (basic

method) if given changes in price and quantity

• How to calculate it if given % changes• If given the elasticity of a good,identify

whether it is (relatively) elastic or inelastic• Explain why elasticity changes along a line

Remember:

• Actual elasticity can indicate– whether elastic or inelastic– whether inferior or normal (if income elasticity)– whether goods are substitutes or complements

(if cross price elasticity)

• Eg income elasticity = -2– Income elastic– Normal good

How does the relative elasticity affect changes in

producer revenue?Price($)

Quantity/wk

70

1400

D0

90

1000

Government intervention

• Why would governments intervene in markets?

• What are the forms of intervention?

• What happens to price and quantity?

• What happens to a market if government intervention ceases?– Assume it returns to equilibrium

Price floor (minimum price)Why will there be a surplus?

How can you calculate the surplusPrice

Quantity

S0

P0

Q0

D0

P1

Q1

Price Ceiling (maximum price)Why will there be a ‘shortage’?Price

Quantity

S0

P0

Q0

D0

P1

Q1

What happens to price and quantity when markets are deregulated?

Price

Quantity

S0

P0

Q0

D0

P1

Q1

Who ‘pays’ for a tax on goods and how much do they pay?

Price

Quantity

S0

P0

Q0

D0

Pt

Qt

Consumer share of tax

P2

Producer share of tax

How does the imposition of a tax affect consumer price/demand

producer revenue and?Price

Quantity

S0

P0

Q0

D0

Pt

Qt

P2

Initial producer revenue

Producer revenue with tax

Macroeconomics

Measuring GDP: What to know• Definition of GDP

• Define and explain components of GDP (expenditure method)

• Classify items/situations according to which component of expenditure they belong to

• How to use a deflator to derive real GDP from a nominal GDP

• How to use a CPI to calculate real prices from nominal prices

• Calculate inflation rate from production and price table

Growth: what to know• Define and explain each of the factors of production,

Y=A F(L, K, H, N)• Explain how govt can influence each factor to

encourage growth• Categorise situations or examples according to which

factor they are a part of• Define and explain impact on growth of:

– Catch-up effect– Diminishing returns on capital– Political stability – Population growth

The Financial System

• Define &/or identify examples of:– Components of financial markets– Financial intermediaries– Budget deficit and surplus

• Identify relationship in savings & investment in:– a closed economy (no overseas income)– an open economy (includes overseas income)

The market for loanable funds

• Who are the suppliers (lenders) & who are the ‘consumers’ (borrowers)?

• What causes changes in supply and demand of loanable funds?

• Draw, label and show effects of changes in supply and demand

• Effect of government decisions and actions on market

Unemployment• Define and explain types of unemployment• Define and explain the natural rate of

unemployment• Main factors that lead to an increase in

unemployment• Identify and categorise situations in terms of the

factors that lead to an increase• Draw and explain the effect of minimum wage

laws on unemployment

Monetary System• Define

– functions and kinds of money– Liquidity

• Outline roles of central banks (eg the RBA)• Explain the principles of open-market operations• Understand the concept of liabilities and assets in

a trading bank, especially reserves • Do simple calculations of money increase based

on the reserve and the money mulitplier

Inflation

• Explain causes of inflation

• Outline the quantity theory of money

• List and explain the problems with having high inflation

• Calculate real interest rates

• Calculate real after-tax interest rates

Trade & the Open Economy

• Understand the concept of net foreign investment• The relationship between net exports and net

foreign investment (they are equal, why?)• Understand currency appreciation/depreciation• Calculate the real exchange rates of products and

explain the implications • Explain the main principles of purchasing power

parity (no need for all detail)

Macroeconomics of the open economy

• Outline the components of each of:– The market for loanable funds– The demand for net foreign investment &– The currency exchange rate market

• Explain the relationship between the three• Show and explain what will happen when

variables change with government policy or capital flight

AD/AS

• Understand the short run nature of this model

• What changes aggregate demand

• What changes supply (long run & short run)

• Explain and show how changes in policy or circumstance affect the price level and output

Analysing Policy Effects

• Outline the components of the supply and demand for all money in a model

• Know what shifts aggregate demand• Explain why supply is vertical• Show and explain the relationship between

money in the economy and aggregate demand, which influences output and price level

Fiscal Policy• Define and recognise examples of automatic

stabilisers• Purpose of fiscal policy• Define and explain the mechanisms of fiscal

policy (taxes and spending)• Outline the direct effect on aggregate demand• Problems of fiscal policy

– Crowding out effect on investment

– Price increases through stimulation

Monetary policy

• Purpose of monetary policy

• Show and explain how it works, from central bank, through money supply/demand to impact on aggregate demand

Unemployment/inflation trade-off

• Explain the principles behind the Phillips curve

• Explain how monetary policy can be used to control inflation

• Might also be useful to keep in mind the examples of how the Phillips curve shifted in Australia from the 1970s-90s

Policy Debates

• The pros and cons of active stabilisation

• The pros and cons of using discretionary monetary policy

• How much should inflation be?

• The pros and cons of balance budgets

• STUDY HARD!!!