Chapter 7:  [3 Questions on Final] You will be held responsible for Sections 7.3, 7.4, 7.5, & 7.6 dealing with Risk, Uncertainty, and Diversification. (pages 126-134)

You should be able to handle the following material (and answer questions related to it) from Chapter 7:

1. Know the definitions of: Fair Gamble, Risk-Averse, Risk-Neutral, Risk pooling, Risk spreading, Capital market, and Diversification
2. Understand what makes a gamble, or the uncertainty of taking a risk a "Fair Gamble", and how that relates to the expected value of the outcome.
3. Understand why and how Risk Pooling is desirable and the role played by marginal utility in that desirability (Table 7.2 helps here)
4. Understand the difference between Risk Pooling and Risk Spreading
5. Understand the relationship between dininishing margial utility, ,and why different stragegies betting on extremes or betting on averages, gives different total utilities, even in a fair gamble (Figures 7.1 and 7.2 are essential here)
6. Section 7.5 will not be on the exam, other than understanding the difference between uncertainty and risk. Consider the following. You are given the following challenge. You are to walk across a narrow single plank wooden bridge over a stream, and on the other side is a prize, an envelope with $1000 in it. There is a chance you will fall off. In situation A the bridge is 50cm (1.5 feet) above the stream and the stream is 30cm (1 foot) deep. In situation B the bridge is 50m (150 feet) above the stream and the stream is 30m (90 feet) deep. Assume you are equally good, but not perfect, at crossing low and high bridges. How do uncertainty and risk fit into your assessment of the challenge. ALso, if you fall off the bridge you don't get the prize.
7. Understand how diversification doesn't reduce uncertainty but does reduce risk (Table 7.3 helps here). 

Chapter 8:  [8 Questions on Final] The main focus of Chapter 8 is to introduce you to a simple model of a firm's production process, to help understand the firm's supply decisions. A key element in that analysis is to distinguish between short run decision making (when some costs are Fixed Costs) and long run decision making (when all costs are Variable Costs).

1. Know the definiations of all the Key Terms (pp 155-6)
2. Understand the difference between technological efficiency (see: p. 7) and economic efficiency (HINT: do google search on term "isoquant"). You won't be held responsible for isoquant but it will help you understand economic efficiency in relation to technological efficiency.
3. Think of a simple production function in which Q(output) is some function on (Capital, Labour) inputs Q =F(K,L) that translates into a simple cost function where total costs (TC) can be decomposed into fixed costs (FC) which are those that are unavoidable for the time period (e.g. rent on factory) and variable costs (VC) which are those for the inputs (materials, labour, energy) that are bought or not bought depending on immediate production. In other words, think of the simple equation TC = FC + VC as the cost function facing the firm as it makes its production decisions. FC represents fixed or sunk costs and VC reflects the amounts of inputs the firm is using in production. This will help you understand the tables, figures, and equations in Chapter 8.
4. Diminishing marginal product: The remaining key concept to keep in mind when dealing with the total output relationship is the concept of diminishing marginal product. Marginal produce (MP) is the increase in output from a one unit increase in the input of a variable factor of production (think Labour here to keep it simple). Together the composition of the production function and the effects of diminishing marginal product produce all the tables and figures on pages 142-3 in the text.  Average product is just Q/L for each level of L. Marginal product is dQ/dL (change on Q/change in L) for each level of L.
5. Key point (for understanding next section) Page 144: Once we have the production relationship, and prices for costs of inputs, it is straight forward to get the costs of production => TC = FC + VC and then Table 8.2 and Figure 8.3. The shape of the VC curve reflects diminishing marginal product, and the location of the TC curve simply reflects adding in FC.. Table 8.2 also breaks out:  AC = TC/Q    ATC = TC/Q   AVC = VC/Q <= All easy concepts! MC (marginal cost) is -of course- the additional cost of producing one more unit.
6. Figure 8.4 simply graphs the date from table 8.2. The important point here is that all total cost functions that include (a) FC and (b) have diminishing marginal product for variable factor inputs will always exhibit this structure of costs curves. Get comfortable with why they are shaped the way they are (and why the MC curve cuts both AVC and ATC from below through their respective minimum points). Page 148 helps you understand the link between MP and factor (input) prices and production and cost relationships.
7. Section 8.5 makes two points. 1: In the short run production will occur so long as a firm is covering variable costs (VC) even if it is not fully covering fixed costs (FC). Note: in long run FC = 0. 2: The opportunity cost of the entrepreneur's own labour is a second consideration - for an individually owned firm, as is the stockholder capital in the case of an incorporated firm.
8. Relationship between long run and short run costs curves. Keep it simple. You won't be asked about the technical relationship between minimum sort run costs and long run costs as detailed in Figure 8.5, just understand the difference between short run costs and long run costs.
9. Understand what lies behind increasing, constant, and decreasing returns to scale (as firms adjust firm size/production capacity) by increasing (or dcreasing) the scale of operation of the firm.
10. Technological Change & Globalization (8.7): Nothing deep here, just talks about the global integration of markets, and production. We see that clearly in the current global economic recession.
11. Clusters, Externaltities, Learning by Doing, Scope Economics: Know the concepts and what they mean.
12. NEXT: We take these cost curves and look at how firms behave in different market structures where they have no market power (pure competition), complete market power (monopoly) or varying degrees of market power (monopolistic competition) or little market power (oligopoly: highly interdependent market power).