Week 16 — Lecture Outline · Final Review & Exam

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Objectives covered: cumulative — Objectives 1–8 (Weeks 1–15). Obj 1 — scarcity, opportunity cost, PPF & comparative advantage; Obj 2 — demand, supply & market equilibrium; Obj 3 — elasticity & total revenue; Obj 4 — surplus, efficiency & government intervention; Obj 5 — production & short-run costs; Obj 6 — perfect competition & monopoly; Obj 7 — monopolistic competition, oligopoly & factor/labor markets; Obj 8 — externalities, public goods, asymmetric information & behavioral economics.
SLOs touched: A (quantitative & graphical analysis — shift curves, compute equilibria, elasticities, surplus, costs, profit) · B (applying economic reasoning; positive vs. normative; competing frameworks)
Meeting pattern: 2 sessions × 75 min = 150 min. Segment minutes below total ~150; scale to your section.

This is the final review-and-exam week — no new content. Each segment briskly re-teaches one or two objectives with its highest-yield ideas, one signature worked example (with every step shown), and the single misconception most likely to cost points. Built to be taught from cold as a capstone review: every definition, worked number, and curve-shift direction travels with the segment. This week's only graded item is the Final (25%) — there is no quiz, no discussion, no assignment, and no workshop. The Final pairs with a Study Guide + Exam-Prep Tutorial + Practice Final, built separately and referenced here by name. (All worked numbers below are pre-computed and independently re-verified — the same verified values used on the Final.)

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Week at a Glance

The week's big question	"Across the whole course — which curve shifts and which way, what does elasticity tell us, where does surplus go, what does the tax wedge do, where is the firm's profit-maximizing output, what does game theory predict, what does VMPL tell a firm to hire, and what tax fixes an externality — can I do each move on demand and name the trap that sinks it?"
By the end of the week, students can…	(1) re-run each objective's core move on demand — state opp cost from a PPF slope and identify comparative advantage (Obj 1); shift the right curve the right direction and find the new equilibrium (Obj 2); compute PED via the midpoint formula and apply the TR test (Obj 3); compute CS and PS as triangles and state the efficiency result (Obj 4); apply a per-unit tax — find Pb, Ps, tax revenue, and DWL (Obj 4); complete a cost table and find min ATC/AVC (Obj 5); find P = MC for a competitive firm and MR = MC for a monopolist, reading P off the demand curve (Obj 6); identify dominant strategies and Nash equilibria; compute VMPL; size the Pigouvian tax; classify goods and information problems (Obj 7–8); (2) name and avoid the highest-cost misconception in each theme; (3) walk into the Final knowing its coverage, its weight (25%), and a concrete plan built around the Study Guide, Exam-Prep Tutorial, and Practice Final.
Key vocabulary (all review)	scarcity, opportunity cost, PPF (efficient/inefficient/unattainable), positive vs. normative; absolute vs. comparative advantage, opp-cost ratio, terms of trade; demand/supply, ceteris paribus, determinants, equilibrium, comparative statics, surplus/shortage; price elasticity of demand (PED), midpoint formula, elastic/inelastic/unit, TR test, YED, XED, elasticity vs. slope; consumer surplus (CS), producer surplus (PS), allocative efficiency, total surplus; price ceiling/floor (binding vs. non-binding), per-unit tax, buyer price, seller price, tax incidence, deadweight loss (DWL); fixed/variable/total/marginal/average cost, AFC/AVC/ATC/MC, min ATC, accounting vs. economic profit; price taker, P = MR = MC, shutdown rule (min AVC), long-run zero economic profit; monopoly, MR < P, MR = MC rule, DWL of monopoly, price discrimination; monopolistic competition (differentiation, excess capacity, zero LR profit); oligopoly, dominant strategy, Nash equilibrium, prisoner's dilemma; derived demand, VMPL = MPL × P, hiring rule; negative/positive externality, Pigouvian tax/subsidy, MSC, Coase theorem; public good (non-rival, non-excludable), free-rider, common resource; adverse selection, moral hazard, signaling; behavioral biases (anchoring, loss aversion, sunk-cost fallacy, present bias)
Materials	slides (Deck 16 — the final-review deck), the Study Guide, the Exam-Prep Tutorial (AI), the Practice Final, scratch paper for the quantitative pockets, one approved chatbot (Gemini / Claude / ChatGPT) for the AI-audit moment
Timing note	8 segments, ~150 min total. Session 1 (Tue) = Segments 1–4 (~75 min): the map + Objectives 1–4 (scarcity/trade → demand/supply → elasticity → surplus & government). Session 2 (Thu) = Segments 5–8 (~75 min): Objectives 5–8 (costs → market structures → factor markets & game theory → market failure) + the Final frame. Scale to your own pattern.

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Segment 1 — Hook & the Map of the Whole Course (10 min) · Session 1 opens

Hook. Put one line on the board with no comment: "A $10 concert ticket that sells out instantly proves the concert is underpriced." Ask: "True or false — and how do you know?" Let the room react, then point out they're reaching for exactly the move the whole course taught: don't trust what feels obvious; find the model, shift the right curve, and read the result. (The claim is broadly true — at $10 the quantity demanded exceeds quantity supplied, producing a shortage — but the question of whether the promoter should charge more is normative, not positive.)
- "That instinct — to separate what the model says from what we think ought to happen — is the entire course, sixteen weeks and eight objectives. They line up into one story: what trade-offs look like, how markets work, what happens when they don't, and how we decide who should do what about it. Today we walk the whole story once, fast, and find the exact spot in each chapter where points get lost. That's the Final."

The promise (write it on the board): "By Thursday you'll be able to take any of the eight big moves — compute an opportunity cost, shift a curve, run the elasticity, find the surplus, read the tax wedge, fill the cost table, find MR = MC, size the Pigouvian tax — and state the one mistake that sinks each one."

The map (one slide, say it out loud):

FOUNDATIONS: Obj 1 scarcity, opp cost & the PPF; comparative advantage & trade. Obj 2 demand, supply & market equilibrium.
MARKET BEHAVIOR: Obj 3 elasticity & total revenue. Obj 4 consumer & producer surplus, efficiency & government intervention.
THE FIRM'S WORLD: Obj 5 production & short-run costs. Obj 6 perfect competition & monopoly.
BEYOND THE COMPETITIVE MARKET: Obj 7 oligopoly, game theory & factor markets. Obj 8 externalities, public goods, asymmetric information & behavioral economics.

Why it matters line (memory hook): "Microeconomics is one sentence: scarcity forces trade-offs, markets find equilibrium, and policy changes who gets the surplus and who bears the deadweight loss."

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Segment 2 — Objectives 1 & 2 Review: Scarcity, Trade & Supply/Demand (22 min)

Re-teach Obj 1 in plain language. Scarcity = unlimited wants, limited resources → every choice has an opportunity cost (the value of the next-best alternative given up). A PPF shows the max combinations of two goods; its slope IS the opp cost; a bowed-out (concave) frontier shows increasing opp cost because resources are specialized. Points on the frontier = efficient; inside = attainable but idle/inefficient; outside = currently unattainable. Comparative advantage: compute each producer's opp-cost ratio for each good; the producer with the lower opp cost for a good has the CA in that good. A terms of trade between those two ratios makes both producers better off. Never confuse CA with absolute advantage (having more output per input).

Re-teach Obj 2 in plain language. The law of demand: price up, Qd down (other things equal). The law of supply: price up, Qs up. Demand shifters (shift the curve): income (normal/inferior), prices of substitutes/complements, tastes, expectations, number of buyers. Supply shifters: input prices, technology, taxes/subsidies on sellers, number of sellers. A change in the good's own price = movement along, NOT a shift — the central trap of the whole course. Equilibrium: set Qd = Qs algebraically. Comparative statics: identify which curve shifts and which direction, then read off the new P and Q.

One quick worked example (do the algebra out loud — pre-verified):

Equilibrium + comparative statics. Market: Qd = 100 − 2P, Qs = −20 + 4P.
- Set equal: 100 − 2P = −20 + 4P → 120 = 6P → P = 20, Q = 60. Check: Qd = 100 − 40 = 60; Qs = −20 + 80 = 60. ✓
- Input price falls → supply increases by 30 (Qs shifts to 10 + 4P). New eq: 100 − 2P = 10 + 4P → 90 = 6P → new P = 15, Q = 70. P fell, Q rose (pre-verified): supply shift right → P down, Q up. ✓

Highest-cost misconception + cure:
- ❌ "A price change shifts the demand (or supply) curve." → ✅ A price change is a movement ALONG the curve. Demand shifts only when a non-price determinant changes (income, a substitute's price, etc.). This is the single most frequently tested trap in the course.
- ❌ "The country with more output per worker has comparative advantage." → ✅ Absolute advantage is about productivity; comparative advantage is about lower opp cost — they are not the same thing.

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Segment 3 — Objectives 3 & 4 (Part A) Review: Elasticity & Surplus (22 min)

Re-teach Obj 3 in plain language. Price elasticity of demand (PED): midpoint formula = (% ΔQ) ÷ (% ΔP), where each % change uses the midpoint average as the denominator. |PED| > 1 → elastic (consumers very responsive); < 1 → inelastic; = 1 → unit elastic. TR test: elastic → P and TR move in opposite directions; inelastic → same direction. Elasticity ≠ slope — a straight-line demand has different PED at every point. Determinants of elasticity (all tell you how elastic the good is): more substitutes, longer time horizon, luxury good, bigger budget share → more elastic. YED > 0 = normal good (> 1 = luxury); < 0 = inferior. XED > 0 = substitutes; < 0 = complements. Tax incidence: the inelastic side bears more of the burden.

Re-teach Obj 4A (Surplus) in plain language. Consumer surplus (CS) = area under the demand curve and above the price (a triangle for a linear demand: ½ × base × height). Producer surplus (PS) = area above the supply curve and below the price (also ½ × base × height for a linear supply). Total surplus = CS + PS and is maximized at the competitive equilibrium — that's what allocative efficiency means. Any price forced away from equilibrium shrinks total surplus.

One quick worked example (do the arithmetic out loud — pre-verified):

Elasticity. Along Qd = 120 − 10P, price rises from 4 to 6 (Q falls from 80 to 60).
- %ΔQ: (60 − 80) / ((80 + 60)/2) = −20/70 ≈ −0.286.
- %ΔP: (6 − 4) / ((4 + 6)/2) = 2/5 = 0.40.
- PED = −0.286/0.40 ≈ −0.71 → inelastic (|PED| < 1). TR test: 4 × 80 = 320 → 6 × 60 = 360 → P↑, TR↑ confirms inelastic. (Pre-verified.)

Surplus. Market: P = 20 − 0.5Q and P = 4 + 0.5Q → Q = 16, P = 12.
- CS = ½ × 16 × (20 − 12) = 64. PS = ½ × 16 × (12 − 4) = 64. Total surplus = 128. (Pre-verified.)

Highest-cost misconception + cure:
- ❌ "Elasticity equals the slope of the demand curve." → ✅ Elasticity ≠ slope. The midpoint formula uses percentage changes; slope is absolute. A line with constant slope has different elasticities at every point.
- ❌ "CS is the area above the demand curve." → ✅ CS is the area under demand and above the price; PS is the area above supply and below the price — mix them up and you have both backwards.

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Segment 4 — Objective 4 (Part B) Review: Government Intervention & DWL (21 min) · Session 1 closes (~75)

Re-teach in plain language. Price ceiling (set below eq): Qd > Qs → shortage. Price floor (set above eq): Qs > Qd → surplus. A non-binding control (above eq for a ceiling, below for a floor) does nothing. Per-unit tax: creates a wedge — buyers pay Pb (above old P); sellers receive Ps (below old P); the difference is the tax. The curve of the taxed party shifts; the incidence split depends on the slopes (elasticities): the more inelastic side bears more of the burden — regardless of who legally writes the check. Tax revenue = tax × Q_after. DWL = ½ × tax × ΔQ (the triangle of surplus destroyed).

One quick worked example (do the arithmetic out loud — pre-verified):

Tax. Same market as Segment 3 (eq P = 12, Q = 16). A $4/unit tax on sellers.
- New supply shifts up by 4: P = 8 + 0.5Q. New eq: 20 − 0.5Q = 8 + 0.5Q → Q = 12. Pb = 20 − 0.5(12) = 14. Ps = Pb − 4 = 10.
- Incidence: buyers pay 14 − 12 = $2 more; sellers receive 12 − 10 = $2 less (50/50 because slopes are equal).
- Tax revenue = 4 × 12 = 48. DWL = ½ × 4 × (16 − 12) = 8. (Pre-verified.)

Interaction — positive/negative verdict rapid-fire (~5 min): five short statements on a slide; thumbs-up/thumbs-down.

1. "A binding price ceiling causes a shortage." (positive — factually true in the model)
2. "Rent control is unfair to landlords." (normative — value judgment)
3. "A $4 tax reduces equilibrium quantity from 16 to 12." (positive)
4. "We ought to tax cigarettes heavily." (normative)
5. "Tax incidence falls more on the side that legally pays the tax." (positive — and FALSE; incidence depends on elasticity, not legal liability)

Highest-cost misconception + cure:
- ❌ "Tax incidence falls on whoever legally pays the tax." → ✅ Incidence depends on elasticity, not legal liability. The inelastic side bears more of the burden, period.
- ❌ "A price ceiling always causes a shortage." → ✅ Only a binding ceiling (set below equilibrium) causes a shortage; a ceiling above equilibrium is non-binding and has no effect.

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Segment 5 — Objective 5 Review: Production & Short-Run Costs (18 min) · Session 2 opens

Hook back in: "Session 1 was all markets seen from the outside. Now we go inside the firm and ask: how much does it cost to make things, and at what output is the firm best off?"

Re-teach in plain language. The short run: at least one input is fixed (e.g., capital/plant). Fixed cost (FC) doesn't change with Q; variable cost (VC) does; total cost TC = FC + VC. From those three, derive: AFC = FC/Q (always falls as Q rises — FC spread over more units); AVC = VC/Q (U-shaped); ATC = AVC + AFC = TC/Q (U-shaped); MC = ΔTC/ΔQ (the cost of one more unit — also U-shaped from diminishing marginal returns). Two golden rules: (1) MC crosses AVC at AVC's minimum; (2) MC crosses ATC at ATC's minimum. The minimum of ATC is the efficient scale. Accounting profit = TR − explicit costs. Economic profit = TR − explicit − implicit (opportunity) costs.

One quick worked example (full cost table — pre-verified):

Cost table (FC = 60, verified figures from the course):

Q	VC	TC	MC	AVC	ATC	AFC
1	40	100	40	40.0	100.0	60.0
2	70	130	30	35.0	65.0	30.0
3	90	150	20	30.0	50.0	20.0
4	120	180	30	30.0	45.0	15.0
5	160	220	40	32.0	44.0	12.0
6	210	270	50	35.0	45.0	10.0

Min ATC = 44 at Q = 5; min AVC = 30 at Q = 3. MC crosses ATC at Q = 5 (ATC = 44 = MC = 40 → actually MC just passed through, confirm: MC at Q5 = 40 < ATC = 44; MC at Q6 = 50 > ATC = 45, so ATC min is at Q = 5, the turning point.) (Pre-verified.)

Highest-cost misconception + cure:
- ❌ "MC cuts ATC at ATC's maximum." → ✅ MC cuts ATC at ATC's minimum (efficient scale). When MC < ATC, adding a unit pulls ATC down; when MC > ATC, it pulls ATC up; they cross at the bottom.
- ❌ "AFC eventually rises." → ✅ AFC always falls as Q increases — the fixed cost is spread over more units. AVC and ATC are U-shaped; AFC is not.

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Segment 6 — Objective 6 Review: Perfect Competition & Monopoly (22 min)

Re-teach perfect competition in plain language. A perfectly competitive firm is a price taker: P is given by the market, so P = MR. The firm's rule is produce where P = MC (on the upward-sloping MC above AVC). Profit = (P − ATC) × Q. If P > ATC → economic profit; if AVC < P < ATC → loss but operate (loss < FC); if P < AVC → shut down (loss equals FC, better to produce nothing). In the long run, profits attract entry (supply increases, P falls) and losses cause exit (supply decreases, P rises) until P = min ATC and economic profit = 0.

Re-teach monopoly in plain language. A monopolist is a price maker — it faces the downward-sloping market demand. Because price falls when output rises, MR < P for every unit after the first. For a linear demand P = a − bQ, MR = a − 2bQ (same intercept, twice the slope). Profit-maximizing rule: set MR = MC → find Q_m, then read P_m off the demand curve (NOT off MR). The monopoly produces less and charges more than the competitive benchmark; the difference in surplus is the DWL of monopoly = ½ × (Q_c − Q_m) × (P_m − MC).

One quick worked example (do every step out loud — pre-verified):

Monopoly. Demand P = 100 − 2Q → MR = 100 − 4Q. Constant MC = 20.
- MR = MC: 100 − 4Q = 20 → 4Q = 80 → Q_m = 20.
- Read P off demand: P_m = 100 − 2(20) = 60 (NOT 100 − 4(20) = 20 — the most common error).
- Competitive benchmark: P = MC → 100 − 2Q = 20 → Q_c = 40, P_c = 20.
- DWL = ½ × (40 − 20) × (60 − 20) = ½ × 20 × 40 = 400. Profit = (60 − 20) × 20 = 800. (All pre-verified.)

Highest-cost misconception + cure:
- ❌ "The monopolist reads P off the MR line." → ✅ Set MR = MC to find Q_m; then go UP to the demand curve to find P_m. Reading P off MR gives you MC — the most common monopoly error on exams.
- ❌ "For a competitive firm, MR = MC is the monopoly rule." → ✅ Both firms use MR = MC, but for a price taker P = MR, so P = MC. For a monopolist MR < P, so MR = MC means P > MC. Keep the distinction clean: P = MC (perfect competition) vs. MR = MC with P > MC (monopoly).

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Segment 7 — Objectives 7 & 8 (Part A): Game Theory, Factor Markets & Market Structure Overview (18 min)

Re-teach Obj 7 (structures) in plain language. Monopolistic competition: many firms, differentiated products, free entry/exit → zero long-run economic profit, but with excess capacity (firms operate on the downward-sloping part of ATC — they don't hit min ATC). Oligopoly: few interdependent firms with barriers to entry; each firm's decision depends on rivals' decisions (strategic). Game theory tools: a dominant strategy is the best choice regardless of the rival's choice. A Nash equilibrium is a strategy pair where neither player wants to deviate. The prisoner's dilemma: both have a dominant strategy that leads to an outcome worse for both than cooperation — cartels are unstable precisely because defecting is each firm's dominant strategy.

Re-teach Obj 7 (factor markets) in plain language. Labor demand is derived from the demand for output. A firm hires another worker if the value of the marginal product (VMPL) ≥ wage. VMPL = MPL × output price. Diminishing MPL → eventually each additional worker adds less output → the VMPL curve slopes down. The hiring rule: hire while VMPL ≥ wage; stop when VMPL < wage.

One quick worked example (do the numbers out loud — pre-verified):

Payoff matrix. (Firm 1, Firm 2): (High, High) = (10, 10); (Low, Low) = (5, 5); (Low, High) = (12, 3); (High, Low) = (3, 12).
- Firm 1's dominant strategy: if Firm 2 plays High, Firm 1 prefers Low (12 > 10). If Firm 2 plays Low, Firm 1 prefers Low (5 > 3). Low dominates. Same for Firm 2 by symmetry.
- Nash equilibrium = (Low, Low) = (5, 5) — neither wants to deviate. But (High, High) = (10, 10) is jointly better → this is a prisoner's dilemma. (Pre-verified.)

VMPL. MPL schedule: worker 1 → 20 units, worker 2 → 18, worker 3 → 14, worker 4 → 10, worker 5 → 6. Output price = $5, wage = $50.
- VMPL: 100, 90, 70, 50, 30. Hire while VMPL ≥ 50 → hire 4 workers (5th worker: VMPL = 30 < 50 → stop). (Pre-verified.)

Highest-cost misconception + cure:
- ❌ "The Nash equilibrium is always the best outcome for both players." → ✅ The Nash equilibrium is stable (neither deviates) but not necessarily efficient — the prisoner's dilemma is the canonical example.
- ❌ "Labor demand depends on the number of workers seeking jobs." → ✅ Labor demand is derived from the demand for the firm's output and from productivity (VMPL = MPL × output price). A rise in the output price shifts the labor demand curve rightward.

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Segment 8 — Objective 8 Review: Market Failure + Final Frame (17 min) · Session 2 closes

Re-teach Obj 8 in plain language. Four sources of market failure:

(1) Externalities. A negative externality (e.g., pollution) means MSC > MPC → the market overproduces relative to the social optimum. The fix: a Pigouvian tax = the marginal external cost, which shifts the supply (MPC) curve up until it coincides with MSC, restoring the social optimum. A positive externality (e.g., education) → MSB > MPB → underproduction; fix: subsidy. The Coase theorem: if property rights are clear and transaction costs are low, private bargaining reaches the efficient outcome regardless of who holds the right.

(2) Public goods. Non-rival (one person's use doesn't reduce another's) + non-excludable (can't keep non-payers out) → free-rider problem → private markets underprovide. Common resources are rival but non-excludable → tragedy of the commons (overuse).

(3) Asymmetric information. Adverse selection: hidden info before a transaction (lemons, insurance applicants) — the market can unravel. Moral hazard: hidden action after a transaction (insured driver takes more risk). Fixes: signaling (seller reveals info), screening (buyer elicits info).

(4) Behavioral biases. Anchoring, loss aversion, sunk-cost fallacy (ignore sunk costs — they are gone; only marginal matters), present bias, framing. Policy implication: nudges can steer choices without mandates.

One quick worked example (do the numbers out loud — pre-verified):

Pigouvian tax. MB (demand) P = 40 − Q; MPC (supply) P = 4 + 0.5Q; marginal external cost = $6 (so MSC = 10 + 0.5Q).
- Market eq: 40 − Q = 4 + 0.5Q → 36 = 1.5Q → Q_market = 24, P = 16.
- Social optimum: MB = MSC → 40 − Q = 10 + 0.5Q → 30 = 1.5Q → Q_social = 20, P = 20.
- Pigouvian tax = $6 (= the marginal external cost, shifting supply from MPC up to MSC).
- DWL of the externality = ½ × (24 − 20) × 6 = 12. (All pre-verified.)

The Final frame (last 5 min of the week):
- "The Final: 25 items, 100 points. Mix of MC, matching, multiple-answer, and true/false — all auto-gradable. Described-graph and curve-shift items (no freehand drawing). Proportional coverage across all 8 objectives.
- Items test the moves — shift the curve, compute the elasticity, read the tax wedge, find MR = MC, read P off demand, solve the payoff matrix, compute VMPL, size the Pigouvian tax. Several items are quantitative with clean numbers.
- Your prep kit: Study Guide (do it first) → Exam-Prep Tutorial with your chatbot (submit the share link) → Practice Final (timed). Then sit the real Final. AI is not permitted on the Final.
- Biggest traps we've named all term: shifting the wrong curve, elasticity-is-slope, reading P off MR, forgetting the shutdown rule, confusing adverse selection with moral hazard. You've been catching those errors all term. One more time — you've got this."

Highest-cost misconception + cure:
- ❌ "A Pigouvian tax is just any tax — you can set it at any rate." → ✅ The Pigouvian tax is calibrated exactly to the marginal external cost so that the after-tax private supply curve coincides with MSC. Too high → undershoots social optimum; too low → still overproduces.
- ❌ "Adverse selection and moral hazard are the same thing." → ✅ Adverse selection = hidden info before the deal (the lemon car, the high-risk insurance applicant enters the pool). Moral hazard = hidden action after the deal (insured driver speeds). Timing is the tell.

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Quick-Reference: The Eight Curve-Shift and Calculation Moves (board summary)

Objective	The Move	The Trap
1	Opp cost = slope of PPF; CA = lower opp-cost ratio	Absolute ≠ comparative advantage
2	Own-price → movement along; everything else → shift of	Shifting demand when price changes
3	PED midpoint; TR test (inelastic: P & TR same direction)	Elasticity = slope
4A	CS = ½bh under demand above P; PS above supply below P	CS and PS swapped
4B	Tax wedge: Pb up, Ps down; DWL = ½ × tax × ΔQ	Incidence = who writes the check
5	MC cuts ATC and AVC at their minimums; MC = ΔTC	AFC can fall below zero / MC cuts at max
6	PC: P = MC; Monopoly: MR = MC → Q_m, then P_m from demand	Monopolist reads P off MR
7–8	Dominant strategy first, then Nash; VMPL = MPL × P; Pigou tax = MC_ext	Nash = jointly best; VMPL = MPL only

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