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Week 8 · Lecture outline

Week 8 — Lecture Outline · Midterm Review & Exam

Principles of Microeconomics · ECON 1 Fall 2026 · Prof. Kessler Fictional sample

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Objectives covered: cumulative — Objectives 1–4 (Weeks 1–7)
Obj 1 — scarcity, opportunity cost, the PPF & positive vs. normative · Obj 2 — comparative advantage & gains from trade · Obj 3 — demand, supply & market equilibrium; comparative statics · Obj 4 — elasticity; consumer/producer surplus & efficiency; government intervention (price controls, taxes, DWL)
SLOs touched: A (quantitative and graphical analysis — shift the right curve, find the new equilibrium, compute elasticity/surplus/tax incidence) · B (economic reasoning applied to real policy questions, positive vs. normative)
Meeting pattern: 2 sessions × 75 min = 150 min. Segment minutes below total ~150; scale to your own section.

This is a review-and-exam week — no new content. Each segment briskly re-teaches one objective's highest-yield ideas, one signature worked example with every number shown, and the single misconception most likely to cost points on the midterm, then the final segment frames the exam itself. Built to run from cold as a review — an instructor can teach from this without notes from the first seven weeks, because every definition, worked example, and cure travels with the segment.

Week at a Glance
The week's big question "Across the whole first half — scarcity, comparative advantage, markets, and welfare — what is the one honest move each topic demands of us, and where does everyone slip?"
By the end of the week, students can… (1) compute an opportunity cost and read a PPF; (2) identify comparative advantage from a production table and name a valid terms of trade; (3) solve for market equilibrium and apply comparative statics to any described shock; (4) compute PED via the midpoint formula and interpret with the TR test; (5) compute CS, PS, and DWL from a linear market with or without a tax; (6) walk into the Midterm knowing its format, weight (20%), and a concrete prep plan.
Key vocabulary (all review) scarcity, opportunity cost, PPF (efficient/inefficient/unattainable), positive/normative; absolute vs. comparative advantage, terms of trade; law of demand/supply, demand/supply determinants, movement along vs. shift, surplus/shortage, comparative statics; price elasticity (midpoint formula), elastic/inelastic/unit, total revenue test, income elasticity, cross-price elasticity; consumer surplus, producer surplus, total surplus, allocative efficiency, deadweight loss; price ceiling, price floor, binding/non-binding, per-unit tax, buyer price (Pb), seller price (Ps), tax incidence, tax revenue
Materials slides (Deck 8 — the review deck); Study Guide (M); Exam-Prep Tutorial (N); Practice Exam (O); approved chatbot for the audit-the-AI moment
Timing note 8 segments, ~150 min total. Session 1 (Tue) = Segments 1–4 (~75 min): Objectives 1 and 2. Session 2 (Thu) = Segments 5–8 (~75 min): Objectives 3 and 4 + the midterm frame.

Segment 1 — Hook & the Map of the First Half (8 min) · Session 1 opens

Hook. Write one sentence on the board with no comment: "Two countries, each better off by doing less of what it does best." Let the room debate for 90 seconds — most students will say this is impossible. Reveal: comparative advantage shows exactly how both countries can gain by each specializing in what they give up least, not what they produce most. That's the magic trick of the first half: careful thinking about costs and incentives produces results that feel wrong but are demonstrably true.

  • "That instinct — that something's off, so let's check the model — is exactly what the first half of this course trained. Today we walk the whole arc once, fast, and find the exact spot where points get lost on each topic."

The map (one slide, say it aloud):

Obj 1 — SCARCITY & CHOICE: opportunity cost, the PPF, positive vs. normative. Obj 2 — COMPARATIVE ADVANTAGE: opportunity-cost ratios, specialization, gains from trade. Obj 3 — DEMAND & SUPPLY: equilibrium, comparative statics, movement vs. shift. Obj 4 — WELFARE & POLICY: elasticity, surplus, government intervention, DWL.

Why it matters line: "These four objectives are one sentence: people and societies make choices at the margin, markets coordinate those choices through prices, and economists measure the costs and benefits of interfering with that process."

Segment 2 — Objective 1 Review: Scarcity, the PPF & Positive vs. Normative (18 min)

Re-teach in plain language. Three moves live here. (1) Opportunity cost is the value of the next-best alternative you give up — not the sum of all alternatives, not the dollar price on the tag. (2) The PPF makes this graphical: any point on the frontier is efficient (all resources in use); inside is inefficient (resources idle); outside is unattainable given current resources and technology. The PPF's slope IS the opportunity cost. A bowed-out PPF reflects increasing opportunity cost as a country drags over resources that are increasingly poorly suited to the expanding good. (3) Positive vs. normative: positive = testable claim about what IS (data can settle it); normative = value judgment about what OUGHT to be (data can inform it, not settle it). The classic trap: confusing "positive" with "good" or "normative" with "wrong."

One worked example (do every step on the board):

PPF: a country can produce 30 units of wheat or 10 units of cloth (straight-line PPF).
Opportunity cost of 1 cloth = 30 ÷ 10 = 3 wheat.
Opportunity cost of 1 wheat = 10 ÷ 30 = 1/3 cloth.
Pre-verified: 30/10 = 3; 10/30 = 0.333. State it both ways: "each cloth costs 3 wheat; each wheat costs 1/3 cloth." Students must name BOTH goods.

Highest-cost misconception + cure:
- ❌ "A point inside the PPF is unattainable" (it is attainable but inefficient).
- ❌ "Positive = a good claim; normative = a bad claim." → ✅ Positive = testable; normative = value-laden.
- ❌ Flipping the opportunity-cost ratio. → ✅ Always divide (max of the OTHER good) by (max of THIS good).

Segment 3 — Objective 2 Review: Comparative Advantage & Gains from Trade (18 min)

Re-teach in plain language. Absolute advantage: who can produce more with the same resources. Comparative advantage: who has the lower opportunity cost — this is what drives specialization and mutual gain. A country can have absolute advantage in everything and still gain from trade by specializing in the good where its opportunity cost is relatively lower. The gains from trade exist whenever opportunity costs differ; the terms of trade must lie between the two countries' opportunity costs for both to gain.

One worked example (pre-verified, every number on the board):

Country A: 10 wheat or 5 cloth per worker-day. Country B: 6 wheat or 6 cloth per worker-day.
A's OC of 1 cloth = 10 ÷ 5 = 2 wheat. B's OC of 1 cloth = 6 ÷ 6 = 1 wheat.
A's OC of 1 wheat = 5 ÷ 10 = 0.5 cloth. B's OC of 1 wheat = 6 ÷ 6 = 1 cloth.
B has comparative advantage in cloth (1 wheat < 2 wheat). A has comparative advantage in wheat (0.5 cloth < 1 cloth). A has absolute advantage in wheat (10 > 6); B has absolute advantage in cloth (6 > 5).
Valid terms of trade: between 1 and 2 wheat per cloth (e.g., 1.5 wheat per cloth benefits both).

Highest-cost misconception + cure:
- ❌ "The country with absolute advantage in everything shouldn't trade" → ✅ Opportunity costs differ → both gain from specialization.
- ❌ Confusing absolute with comparative advantage → ✅ CA is about lower opportunity cost, not more output.
- ❌ Naming a ToT outside the valid range → ✅ ToT must be strictly between both countries' opportunity costs.

Segment 4 — Objective 3 Review (Part 1): Demand, Supply & Equilibrium (18 min) · Session 1 closes (~75 min)

Re-teach in plain language. The law of demand: price up, Qd down, all else equal. Demand shifters: income (normal → demand rises; inferior → demand falls), prices of substitutes (XED > 0), prices of complements (XED < 0), tastes, expectations, number of buyers. The central trap: a change in the good's own price is a movement ALONG the demand curve — NOT a shift. The law of supply: price up, Qs up. Supply shifters: input prices, technology, taxes/subsidies, number of sellers, expectations.

Equilibrium: set Qd = Qs; solve for P, then substitute to find Q.

One worked example (pre-verified):

Qd = 80 − 2P, Qs = −10 + 3P.
Set equal: 80 − 2P = −10 + 3P → 90 = 5P → P* = 18.
Q = 80 − 2(18) = 80 − 36 = 44. Check: Qs = −10 + 3(18) = 44 ✓.
Shortages/surpluses: at P = 14 (below P=18): Qd = 52, Qs = 32, shortage = 20.

Interaction — rapid-fire comparative statics (think-pair-share, ~6 min):
Show four shocks on a slide; students identify which curve shifts, which direction, and what happens to P and Q:
1. Coffee harvest ruined by frost → supply left → P↑, Q↓.
2. New study: coffee reduces heart disease → demand right → P↑, Q↑.
3. Price of coffee rises → movement along demand (NOT a shift).
4. Price of tea falls (substitute for coffee) → demand left → P↓, Q↓.

Highest-cost misconception + cure:
- ❌ "A price change shifts the demand curve" → ✅ Own-price change = movement along; only a change in a determinant shifts the curve.
- ❌ "If both curves shift, I can always find the new P and Q" → ✅ If both shift the same direction, one of P or Q is indeterminate.

Segment 5 — Objective 4 Review (Part 1): Elasticity (20 min) · Session 2 opens

Hook back in: "Session 1 — how markets find their equilibrium and what shifts it. Now: how responsive are buyers and sellers to those price changes, and how do we measure that?"

Re-teach in plain language. Price elasticity of demand (PED) via the midpoint formula: %ΔQd ÷ %ΔP, where each % change is (new − old) ÷ average. |PED| > 1 = elastic; < 1 = inelastic; = 1 = unit elastic. Total revenue test: if demand is inelastic and price rises, TR rises (P and TR move together). If elastic and price rises, TR falls (opposite). TRAP: elasticity ≠ slope. A steeper demand curve is not necessarily more inelastic over any given price range. YED: positive = normal good (> 1 = luxury); negative = inferior. XED: positive = substitutes; negative = complements.

One worked example (pre-verified, every step):

Price rises from $4 to $6, Q falls from 80 to 60.
%ΔQd = (60 − 80) ÷ ((60 + 80)/2) = −20 ÷ 70 = −0.2857.
%ΔP = (6 − 4) ÷ ((6 + 4)/2) = 2 ÷ 5 = 0.40.
PED = −0.2857 ÷ 0.40 = −0.714. |PED| = 0.71 < 1 → inelastic.
TR check: 4 × 80 = $320 → 6 × 60 = $360. TR rose as P rose → confirms inelastic ✓.

Also verify the P 2→4, Q 100→80 case: %ΔQ = −20/90 = −0.222; %ΔP = 2/3 = 0.667; PED = −0.333 → |PED| = 0.33, inelastic; TR $200 → $320, rises with price ✓.

Highest-cost misconception + cure:
- ❌ "Elasticity is just the slope of the demand curve" → ✅ Elasticity uses percentages, not raw changes; the same line can be elastic over some ranges and inelastic over others.
- ❌ Sign confusion on XED → ✅ Substitutes have positive XED (higher coffee price → higher tea demand); complements have negative XED.

Segment 6 — Objective 4 Review (Part 2): Surplus & Efficiency (16 min)

Re-teach in plain language. Consumer surplus (CS) = area under demand, above the price. For a linear demand: ½ × base × height. Producer surplus (PS) = area above supply, below the price. Total surplus = CS + PS. At the competitive equilibrium, total surplus is maximized — this is allocative efficiency: resources flow to their highest-valued uses. Any price forced off equilibrium (ceiling, floor, or tax) reduces total surplus and creates deadweight loss (DWL).

One worked example (pre-verified, every number):

Market: Demand P = 24 − Q, Supply P = 4 + Q.
Equilibrium: 24 − Q = 4 + Q → 20 = 2Q → Q = 10, P = 14. (Pre-verified.)
CS = ½ × 10 × (24 − 14) = ½ × 10 × 10 = $50.
PS = ½ × 10 × (14 − 4) = ½ × 10 × 10 = $50.
Total surplus = $100 at equilibrium (maximum).

Note for instructors: this is a FRESH market used in the midterm — different from the W6/W7 workshop market (D: P=20−0.5Q, S: P=4+0.5Q). Both sets of numbers are pre-verified.

Highest-cost misconception + cure:
- ❌ "CS is above the demand curve" → ✅ CS is below demand, above the price.
- ❌ Confusing the base and height of the CS/PS triangles → ✅ Base = Q* (horizontal); height = (demand intercept − P) for CS; (P − supply intercept) for PS.

Segment 7 — Objective 4 Review (Part 3): Government Intervention (22 min)

Re-teach in plain language. Price ceiling (legal maximum): if below equilibrium → binding → shortage (Qd > Qs). If above equilibrium → non-binding → no effect. Price floor (legal minimum): if above equilibrium → binding → surplus (Qs > Qd). Per-unit tax: inserts a wedge between the buyer price (Pb) and the seller price (Ps). Tax incidence depends on elasticities — the more inelastic side bears more of the burden. Tax revenue = tax × Q_new. DWL = ½ × tax × ΔQ.

One worked example (pre-verified W7 numbers, every step):

Market: D: P = 20 − 0.5Q, S: P = 4 + 0.5Q → equilibrium Q = 16, P = 12.
$4/unit tax on sellers: new supply P = (4 + 4) + 0.5Q = 8 + 0.5Q.
Set 20 − 0.5Q = 8 + 0.5Q → 12 = Q → new Q = 12.
Pb = 20 − 0.5(12) = 14. Ps = 14 − 4 = 10. Check: Pb − Ps = 4 ✓.
Buyer burden = 14 − 12 = $2. Seller burden = 12 − 10 = $2. Fifty-fifty (slopes of D and S are equal).
Tax revenue = 4 × 12 = $48.
DWL = ½ × 4 × (16 − 12) = ½ × 4 × 4 = $8.

Price ceiling check: at P = 8 (below eq P=12): Qd = (20−8)/0.5 = 24, Qs = (8−4)/0.5 = 8, shortage = 16.*

Interaction — audit the AI (the course's recurring habit, ~6 min):

Paste to an approved chatbot: "In a market with demand P = 20 − 0.5Q and supply P = 4 + 0.5Q, a $4/unit tax reduces Q from 16 to 12. What is the DWL, and who legally pays the tax matters for incidence, right?"
Check it. Common errors: (1) computing DWL as 4 × 12 = 48 (that's tax REVENUE, not DWL); (2) claiming incidence depends on who writes the check (it does not — it depends on elasticities). If you can catch those two, you are ready for the midterm.

Highest-cost misconception + cure:
- ❌ "Whoever legally pays the tax bears all the economic burden" → ✅ Economic incidence depends on relative elasticities — the more inelastic side bears more.
- ❌ "A non-binding price ceiling creates a shortage" → ✅ Only a binding ceiling (below equilibrium) does.
- ❌ Confusing tax revenue with DWL → ✅ Tax revenue = tax × Q_new (the rectangle); DWL = ½ × tax × ΔQ (the triangle).

Segment 8 — The Midterm Frame: Format, Coverage & Prep (16 min) · Session 2 closes (~75 min)

What's on the Midterm (state it plainly — put it on the closing slide):
- Coverage: cumulative, Weeks 1–7, Objectives 1–4 (everything above). It does not reach production costs, market structures, factor markets, or market failure (Weeks 9–15).
- Format & weight: 20 items, 100 points (5 each) — mixed item types: single-answer MC, matching (one-to-one), true/false, and multiple-answer (select all that apply). No free-response. Coverage weight (proportional to teaching time): Obj 1 ≈ 3 items; Obj 2 ≈ 3 items; Obj 3 ≈ 6 items; Obj 4 ≈ 8 items — study Objectives 3 and 4 hardest. The midterm is 20% of the course grade. Window opens Mon Oct 19; due Sun Oct 25, 11:59 p.m.; one attempt; AI not permitted.

The preparation plan (point to each artifact by name):
1. Study Guide (M) — work it first; topic-by-topic review of all four objectives with worked examples and fresh practice items with vetted answers.
2. Exam-Prep Tutorial (N) — run with an approved chatbot and submit the share link; it diagnoses and drills your weak spots adaptively.
3. Practice Exam (O) — sit it timed, cold, like the real thing; score it; use the Study Guide to patch gaps.
4. Midterm (L) — one attempt; AI not permitted. Bring your understanding.
5. Discussion 8 — the debrief happens after the exam; reflect on the process and make a plan for the back half.

Callback + tease:
- Callback: "Every item on the midterm is a move you have already made in Weeks 1–7. Today we just named it out loud and found where it slips."
- Tease next: "After the midterm, Week 9 opens production and costs — fixed vs. variable costs, the U-shaped ATC curve, and why diminishing returns makes every firm's cost curve bend upward. The tools you built this half are the scaffolding for everything that follows."

Instructor FAQ — Common Stumbles (Review Week)

Student says / does Quick cure
Calls an own-price change a "shift" of demand. Own price → movement along; only a determinant (income, other prices, tastes, etc.) shifts the curve.
Flips the opportunity-cost ratio. Divide (max of the OTHER good) ÷ (max of THIS good): 30 wheat / 10 cloth = 3 wheat per cloth.
Confuses absolute advantage with comparative advantage. CA is about lower opportunity cost, not more output. A country can have absolute advantage in everything and still trade because opportunity costs differ.
Thinks the legal payer of a tax bears all the burden. Economic incidence depends on relative elasticities — the more inelastic side bears more.
Confuses a binding vs. non-binding ceiling or floor. Binding ceiling = below equilibrium → shortage. Binding floor = above equilibrium → surplus.
Says elasticity is the same as slope. Elasticity uses percentages (midpoint formula); slope uses raw units. The same line can be elastic over some ranges and inelastic over others.
Mixes up CS and PS triangles. CS = under demand, above price. PS = above supply, below price.
Confuses DWL with tax revenue. DWL = ½ × tax × ΔQ (the triangle). Tax revenue = tax × Q_new (the rectangle).
Panics that the exam is "everything." It is Objectives 1–4 only (Weeks 1–7). Production, costs, market structures, factor markets, and market failure (Weeks 9–15) are not on the midterm.

Scope flag

This outline is pure review of Objectives 1–4 — no new content. Named laws, models, and concepts (the law of demand, comparative advantage, deadweight loss) are used factually as the discipline's content; no quotes or statistics are attributed to real economists. The midterm and its bundle (Study Guide, Exam-Prep Tutorial, Practice Exam) are built separately and only referenced here by name.

~ Prof. Kessler's edition · Fall 2026 · built with thecoursemaker.com