1. Principles of Macroeconomics Econ 231 Spring 2010 William J. Polley Department of Economics College of Business and Technology Western Illinois University

2. Top 10 Things to Know for the Exam 1. People respond to incentives! 2. Opportunity cost is a result of choice. It is the best foregone alternative to the chosen action. 3. Trade-offs are everywhere! 4. Law of demand: Ceteris paribus, an increase (decrease) in price causes a decrease (increase) in the quantity demanded. (Demand curves slope downward!)

3. Top 10 Things to Know for the Exam 4. Continued. Law of Supply: Ceteris paribus, an increase (decrease) in price causes an increase (decrease) in the quantity supplied. 5. Change in demand (or supply)=Shift of the curve, whereas a change in the quantity demanded = movement along the curve. 6. The equilibrium price is where Qs=Qd=Qe (the equilibrium quantity). 7. At equilibrium, consumer surplus + producer surplus is maximized.

4. Top 10 Things to Know for the Exam 8. Price controls prevent Qs from equaling Qd and therefore cause inefficiencies. 9. With price ceilings and price floors, goods do not necessarily go to their highest valued uses. 10. The market system (interaction of supply and demand) transmits powerful signals to people and creates powerful incentives… and people respond to incentives!