Study Session # 5
Learning Outcome Statements
(Last revised 12/14/04)

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P1. A. Supply, Demand, and the Market Process
a) explain the laws of supply and demand;
b) differentiate between shifts in and movements along supply curves and demand curves;
c) discuss the factors that cause a demand curve to shift;
d) discuss the factors that cause a supply curve to shift;
e) define short-run and long-run market equilibrium;
f) discuss how markets respond to changes in supply and demand;
g) explain how shortages and surpluses affect the analysis of equilibrium prices;
h) explain how the “invisible hand” principle works.
B. Supply and Demand: Applications and Extensions
a) analyze, in terms of supply and demand, the markets for labor, loanable funds, and foreign
exchange;
b) explain the effects of price ceilings and price floors;
c) contrast the economic efficiency of a black market with the economic efficiency of a market
operating within the legal system;
d) define the incidence of a tax;
e) distinguish between the actual and statutory incidence of a tax;
f) discuss how elasticities of supply and demand influence the incidence of a tax.
1. A. Demand and Consumer Choice
a) explain consumer choice in an economic framework;
b) calculate and interpret price and income elasticity of demand;
c) discuss the determinants of price and income elasticity of demand;
d) describe the relationships among total revenue, total expenditures, and price elasticity of demand;
e) explain why the price elasticity of demand tends to increase in the long run;
f) discuss the characteristics of consumer indifference curves;
g) discuss the role of the consumption-opportunity constraint and the budget constraint in
indifference curve analysis;
h) distinguish between the income effect and the substitution effect.
B. Costs and the Supply of Goods
a) describe the principal–agent problem of the firm;
b) distinguish among the types of business firms;
c) distinguish between (1) explicit costs and implicit costs, (2) economic profit and accounting
profit, and (3) the short run and the long run in production;
d) define opportunity costs, sunk costs, fixed costs, variable costs, marginal costs, and average
costs;
e) differentiate between economic costs and accounting costs;
f) state the law of diminishing returns and explain its impact on a company’s costs;
g) describe the shapes of the short-run marginal cost, average variable cost, average fixed cost, and
average total cost curves;
h) define economies and diseconomies of scale, explain how each is possible, and relate each to the
shape of a company’s long-run average total cost curve;
i) describe the factors that cause cost curves to shift.
C. Price Takers and the Competitive Process
a) distinguish between price takers and price searchers;
b) discuss the conditions that characterize a purely competitive (price taker) market;
c) explain how and why price takers maximize profits at the quantity for which
d) marginal cost, price, and marginal revenue are equal;
e) calculate and interpret the total revenue and the marginal revenue for a price taker;

f) explain the decision by price takers with economic losses to either continue to operate,
temporarily shut down, or go out of business;
g) describe the short-run supply curve for a company and for a competitive market;
h) contrast the role of constant-cost, increasing-cost, and decreasing-cost industries in determining
the shape of a long-run market supply curve;
i) explain the impact of time on the elasticity of supply.
D. Price-Searcher Markets with Low Entry Barriers
a) describe the conditions that characterize competitive price-searcher markets;
b) explain how price searchers choose price and output combinations;
c) summarize the debate about the allocative efficiency of price-searcher markets with low barriers
to entry, including the implications of contestable markets and entrepreneurship;
d) explain how price discrimination increases output and reduces allocative inefficiency.
E. Price-Searcher Markets with High Entry Barriers”
a) discuss entry barriers that may protect companies against competition from potential market
entrants;
b) distinguish between a monopoly and an oligopoly;
c) describe how a profit-maximizing monopolist sets prices and determines output;
d) discuss price and output under oligopoly, with and without collusion;
e) discuss why oligopolists have a strong incentive to collude and to cheat on collusive agreements;
f) discuss the obstacles to collusion among oligopolistic companies;
g) describe government policy alternatives intended to reduce the problems stemming from high
barriers to entry.
F. The Supply of and Demand for Productive Resources
a) explain the relationship between the price of a resource and the quantity demanded of that
resource;
b) identify and describe the influence of three factors that cause shifts in the demand curve for a
resource;
c) define the marginal revenue product of a resource and explain how it influences the demand for
that resource;
d) explain the necessary conditions to achieve the cost-minimizing employment levels for two or
more variable resources;
e) discuss the factors that influence the supply and demand of resources in the short run and long
run;
f) explain how prices for resources are determined in a market economy;
g) explain the process through which changing resource prices influence resource utilization and
the performance of the economic system.
2. The Financial Environment: Markets, Institutions, and Interest Rates
a) identify and explain the factors that influence the supply and demand for capital;
b) describe the role of interest rates in allocating capital;
c) explain how the supply of and demand for funds determine interest rates;
d) discuss the factors that cause the supply and demand curves for funds to shift;
e) distinguish between the real and the nominal risk-free rate of interest;
f) explain the effect of inflation on the real rate of return earned by financial securities and by
physical assets;
g) define the inflation premium and describe how the inflation premium is determined;
h) describe the default risk, liquidity, and maturity risk premiums;
i) explain interest rate risk and reinvestment rate risk.

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