It is more important to be able to apply the big ideas (chapter 1) than to be able to list them. In other words, you should be able to look at a situation and see why the incentives matter, what the trade-offs are, and what the opportunity cost of an action is. If you can do this (and the problems at the end of each chapter are good for testing yourself), then you should do well. There are several questions where you will need to think about the incentives--even if that is not what is asked for directly. Don't make the questions too hard! Remember ceteris paribus (all other things being equal) and don't bring in all kinds of other assumptions.
Pay special attention to the things that shift demand and supply.
Demand shifters:
The good's own price does not affect demand. The good's own price affects the quantity demanded.
Supply shifters:
The good's own price does not affect supply. The good's own price affects the quantity supplied.
Know what happens to price and quantity when supply or demand shift. (See figure 3.8 page 43 and be able to apply it.)
Pay special attention to the things that shift demand and supply.
Demand shifters:
- Income
- Population (# of buyers)
- Price of substitutes and complements (know which is which!)
- Expectations
- Tastes (preferences)
The good's own price does not affect demand. The good's own price affects the quantity demanded.
Supply shifters:
- Technological innovation
- Taxes and subsidies
- Expectations
- Entry and exit of producers (# of producers)
- Changes in opportunity cost (see homework problem on corn and soybeans)
The good's own price does not affect supply. The good's own price affects the quantity supplied.
Know what happens to price and quantity when supply or demand shift. (See figure 3.8 page 43 and be able to apply it.)
