| ECO 201B Basic Microeconomics
Spring 2013 |
Dr.
Robert Jantzen
Economics Department |
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In the Spring of 2013 this course meets at 11 a.m.
on Mondays and Wednesdays in Amend107. Classes begin on 1/16/13.
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Dolan, Edwin. 2010. Introduction to Microeconomics: 4th ed. Reno, NV: Best Value Textbooks (ISBN #978-1-60229-961-0 ). Additional xeroxed readings will be distributed to the class at appropriate times. The textbook is available at the Iona College bookstore (suggested retail $50), and as an E-textbook from the publisher @ http://www.bvtstudents.com/details.php?5 for $20. Prices are approximate. |
Exams (4)
= 90% of the course grade.
Homeworks & Class
= 10% of the course grade.
Participation
No extra credit work is available and no makeups will be given for any
of the exams or homework assignments. The lowest exam grade, however,
will be disregarded in determining the course grade. Obviously, neither
plagiarism nor cheating is acceptable behavior, and will warrant failure
of the homework/exam involved. Being late for a class counts as an
absence. Any student who misses ten or more classes may be assigned
the FA (failed for absences) grade.
Course Outline (tentative dates):
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Government Policies |
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Incomes |
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| I. Introduction |
Chapter 1.
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| Objectives:
1. Define economics, and the two fundamental facts necessitating the study of economics. 2. Economics is fundamentally about how to make good choices from alternatives. Explain the foundations of economic thinking. Can those foundations be applied to issues that don't concern money and material things? |
II. Foundations
| A. Supply and Demand |
Chapter 2.
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| Objectives:
1. Explain the law of demand, and what a demand curve shows. Why does the curve slope downward, i.e., why are price and quantity demanded inversely related? 2. Explain the law of supply, and what a supply curve shows. Why does the curve slope upward, i.e., why are price and quantity supplied positively related? 3. How are price and output levels determined in product markets, according to the supply and demand model? What is meant by equilibrium price and quantity? Explain how markets ensure that the amount people want to sell is in balance with the amount people want to buy, i.e., Qs=Qd. Graphically illustrate. 4. Why do prices and output levels change in product markets? If prices increase or decrease, will the underlying equilibrium situation change? Why or why not? 5. Explain what a change in demand means, and how it is illustrated. What nonprice factors could cause demand to change? How so? Why don't price changes in product markets change demand? Why do economists define a change in demand in such a special way? 6. Explain what a change in supply means, and how it is illustrated. What nonprice factors could cause supply to change? How so? Why don't price changes in product markets change supply? Why do economists define a change in supply in such a special way? 7. How will each of the following changes in demand (D) or supply(S) affect equilibrium price and quantity? Do price and quantity rise, fall, or stay the same, or are the answers indeterminate? Verify your answers graphically. a. S increases, D constant. b. D increases, S constant. c. Both S and D increase. d. S increases, D decreases. |
| B. Supply & Demand Elasticities |
Chapter 3.
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| Objectives:
1. Define the price elasticity of demand. How is it computed? Show. Compare and contrast elastic, unit elastic, and inelastic demand. What are the determinants of the price elasticity of demand? How so? 2. Define the price elasticity of supply. How is it computed? Show. Compare and contrast elastic, unit elastic, and inelastic supply. What are the determinants of the price elasticity of supply? How so? 3. If demand is price elastic, how will total revenues to a firm change if prices are increased or decreased? What if demand is inelastic? What are the implications for pricing strategy if a firm wants to maximize profits or minimize losses? 4. Web-Based Question: Stop & Shop is a big grocery chain which has several stores in the Iona area. Go to Stop & Shop's website, http://www.stopandshop.com, and examine the latest Weekly Circular for the New Rochelle Store (zip code 10801). Check out this week's sale items and assess whether they have elastic or inelastic demand. Is Stop & Shop's sales practice consistent with what economic theory argues about sale items? 5. Compute the elasticities of demand and supply for the following data, first if price increases from 7.50 to 8.50, and then if price increases from 2.50 to 3.50. When are supply and demand elastic and inelastic? Qs PriceQd
6. In the interest of promoting the general welfare,
government has on occasion intervened in the marketplace by establishing
price ceilings and floors. Explain, and graphically illustrate, what
is likely to happen if the government enacts a price ceiling(or floor)
and are the elasticities of supply and demand important? If so, why?
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III. Product Markets
| A. Consumer Choice |
Chapter 5.
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| Objectives:
1. Explain the law of demand in terms of the income- substitution effects and in terms of marginal utility theory. 2. For what kinds of items is the income effect likely to be important? Why? For what items can we ignore it? Why? What about the substitution effect? When, and why, is it important and not important? 3. Why is it that a very valuable product like clean water has a much lower price than an item like diamonds? Explain in terms of marginal utility. 4. In a competitive market, what is consumer surplus? What is producer surplus? What is total surplus? Illustrate with a supply/demand example. Show why allowing a company to monopolize the competitive industry would reducing total surplus. 5. Explain the role of time costs in determining consumer demand. How do time costs effect the price elasticity of demand? |
| B. Production and Costs |
Chapter 8.
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| Objectives:
1. Explain how the economic concept of costs differs from the accounting concept. 2. Explain the difference between Fixed Costs and Variable Costs. 3. Explain the concept of diminishing returns. How does it effect the behavior of short run costs as production increases? 4. Explain the following short run cost concepts: a. Average Total Cost; b. Average Variable Cost; c. Average Fixed Cost; and d. Marginal Cost. 5. How are long run cost estimates derived, i.e., Average Costs and Marginal Costs? What do they represent? 6. Explain economies of scale, constant returns to scale, and diseconomies of scale, and their relation to long run costs. How is industrial structure affected by the above? Why does the behavior of long run costs differ between companies. 7. Web-Based Question: Check out the Fortune 500 list of the largest U.S. firms at http://www.fortune.com/. From the top 10 firms, select three firms from three different industries and discuss the likely sources of the economies of scale that underlie their large size. 8. Click here to open an MS-Excel worksheet containing cost numbers for a hypothetical firm. Complete the table by computing Average Fixed Cost, Average Variable Cost, Average Total Cost and Marginal Cost. What is this firm's most efficient production level? NOTE: You can either print out the table and calculate the numbers by hand or you can enter formulas into the "cells" and let Excel do the work for you. For example, the Average Fixed Cost for 10 units (in cell E5) is equal to the Total Fixed Cost for 10 units (in cell B5) divided by the total output (in cell A5). To get Excel to calculate AFC for you, click on cell E5 and type in =b5/a5 and hit the ENTER key. You can also copy that formula to the other Average Fixed Cost cells by left-clicking on the bottom right corner of cell E5 and dragging the formula down across all the other AFC cells. 9. Click here to open another MS-Excel worksheet containing cost numbers for a hypothetical firm. Complete the table by computing Average Fixed Cost, Average Variable Cost, Average Total Cost and Marginal Cost. What is this firm's most efficient production level? |
| C. Pure Competition |
Chapter 9.
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| Objectives:
1. What are the characteristics of a purely competitive market? 2. How are price and output levels determined in the overall market and for the individual firm? Explain fully how the firm will decide how much to produce and what to charge in order to maximize its profits or minimize its losses both in the short run and the long run. Why does marginal cost determine the willingness of a firm to sell at differing prices? What is the maximum amount any firm should be willing to lose? 3. Using the table of production costs contained Question IIIB.8 above, answer the following questions, assuming the firm operates in a purely competitive market: i. What is the firm's maximum allowable loss? ii. What output level would you advise if the market price was 22? What is your level of profits? Are you being most efficient? iii. What would you advise if the market price fell to 17? Profits? iv. What would you advise if the price fell to 12? Profits? v. The industry has been struck by disaster and the price has fallen to 7. What now is your short run advice? Profits? 4. Using the table of production costs contained Question IIIB.9 above, answer the following questions, assuming the firm operates in a purely competitive market: i. What is the firm's maximum allowable loss? ii. What output level would you advise if the market price was 7? What is your level of profits? Are you being most efficient? iii. What would you advise if the market price fell to 4? Profits? iv. What would you advise if the price fell to 2.5? Profits? v. The industry has been struck by disaster and the price has fallen to 1. What now is your short run advice? Profits? 5. What are the advantages of having purely competitive markets? What are the disadvantages? 6. Web-Based Question: Go to the Census Bureau website at http://www.census.gov/ and select Economic Census, then Comparative Statistics, and then Manufacturing. Identify the three manufacturing industries that experienced the largest percentage increase in the number of firms between 2002 and 1997. Find the three with the largest decrease also. What factor is the most likely cause of the entry and exit differences between your two groups? |
| D. Monopoly |
Chapter 10.
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| Objectives:
1. What is a monopoly? What creates a monopoly? 2. How should the monopolist determine how much output should be produced, and what price to charge if (s)he wants to maximize profits or minimize losses in the short run? What kind of data are needed? Be specific. What about the long run? Data? 3. If a monopolist suffers an economic loss in the short run, should (s)he continue to produce output? In the long run? 4. Explain how price and marginal revenue are related for a monopolist. Give an example. 5. Are monopolies good or bad for the consuming public? How? 6. Using the cost data contained in Question IIIB.8 above, and the demand data below: Price Quantity demanded
a. Compute the marginal revenue of each
unit of output.
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| E. Imperfect Competition |
Chapter 11.
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| Objectives:
1. What are the characteristics of a monopolistically competitive industry? 2. How should monopolistically competitive firms decide on how much to produce and how much to charge? What kind of data will they need? Is there a difference between the short and long run plans? 3. Is monopolistic competition superior/inferior to pure competition? How so? 4. Search the websites of the 4 major New York area cell phone carriers for the price and features of their "basic individual" phone plans, i.e., Verizon, Nextel/Sprint, Cingular/ATT and T-Mobile. Are they the same or different? Identify the nonprice competition factors that might lead you to buy from one company rather than the other. 5. What is an oligopoly? Explain fully. 6. Why do certain industries have only a few firms? 7. What is meant by "mutual interdependence?" 8. Explain and graphically illustrate the Kinked-Demand Curve Model. Why wouldn't firms want to engage in a price war? 9. What are the two ways oligopolies can set prices? What is limit-pricing? What is a cartel? Why do cartels inevitably fail? 10. Are oligopolies good or bad for the consuming public? |
| IV. Market Failures and Government Policies |
Chapters 4 & 6.
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| Objectives:
1. Explain the Public Interest (Market Failure) theory view of why business is regulated. When and why are businesses regulated? 2. Explain the Public Choice (Economic Interest) theory view of why business is regulated? When and why are businesses regulated? 3. Do the two theories above differ in terms of their judgments of the proper role of government regulation? How so? 4. What are negative externalities? Why do unregulated markets perform poorly when negative externalities are present? Illustrate using the supply & demand model. 5. How can government make markets perform more efficiently if externalities are present? 6. What is a public good? Why do markets perform poorly in providing public goods? What government regulations are needed in the case of public goods? 7. Compare outright bans/limits with a market approach for controlling pollution. Which is the most efficient strategy and why? Illustrate. |
| V. Health Care Economics |
| Objectives:
1. What are the major economic issues concerning the health care industry? How are they related? 2. How important are economic factors in determining the demand for health care services? Implications? 3. Explain how cross-subsidization, adverse selection and moral hazard effect the health insurance industry. Implications? 4. How has the health insurance industry changed in the past two decades? Implications? |
| VI. Labor Markets and Incomes |
Chapters 13, 15 & 16.
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| Objectives:
1. What are the economic effects of unions? 2. How are labor markets affected by discrimination? Why does discrimination occur? 3. What is poverty and how can it be measured? 4. What are some of the pitfalls for government efforts to reduce poverty? |
Where
and When