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Principles of Microeconomics by N.Gregory Mankiw 4 Ed 2006 document sample
ADVANCED PLACEMENT MICROECONOMICS SYLLABUS ANTHONY E. DEFILLIPPO HIALEAH – MIAMI LAKES SENIOR HIGH SCHOOL INTRODUCTION AND COURSE DESCRIPTION The course in AP Microeconomics is designed to replicate the introductory microeconomics course taught in a university setting. As such, the course requires far more effort and commitment from the student than the typical high school course. As may be seen in the syllabus, much of the course work is theoretical in nature. The course goals are threefold: a. To introduce students to the field of microeconomics b. To teach basic economic concepts and analytical skills c. To enable students to score well on the AP Microeconomics Exam In addition to those benefits, the student also receives a weighted grade in this course (e.g., 6grade points for an A instead of the normal 4) Economics is both practical and an academic discipline. As a result economic theories are affected by changes in world economic trends as well as by advances in economic research. In this course, students will acquire an understanding of several microeconomics theories by examining issues currently being debated. Although most economic theories and models are complex by their very nature, every attempt will be made to ensure simplicity without compromising the integrity of the discipline. The long-term goal of this course is to aid students understanding of economic concepts such as scarcity, opportunity costs, and trade-offs. This knowledge will provide a base for future decision making. This short-term goal for this course is to aid student understanding of those concepts tested in the Advanced Placement Exam in Macroeconomics. The course teaches how to generate, interpret, label, and analyze graphs, charts, and data to describe and explain economic concepts through the use of overheads, student board work, and specific case studies based on Free Response Questions from 1995-2006. Students will take sample economic problems and explain causes, effects, and possible solutions using the graph, charts, data, and labeling techniques though in class. TEXT McConnell, Cambell R., and Stanley L. Brue Economics: Principles, Problems and Policies 16th ed. New York: McCraw Hill, Inc., 2005. The website for this edition is: www.mcconnell16.com Fully-integrated tutorials may be found at: www.mcconnell16.com/discoverecon This text combines good use of color with relatively readable text and explanations. McConnell’s text avoids the use of excessive jargon and has excellent “Last Words” to keep up your interest. This text has evolved considerably and has managed to be a product leader for many years. ADDITIONAL TEXTS N. Gregory Mankiw, Principles of Microeconomics. Cincinnati: South-Western, 2007 ADDITIONAL READINGS/INSTRUCTIONAL MATERIALS Heilbroner, Robert. The Worldly Philosophers. 6th ed updated. New York: Plame, 1999. Schuster, 1922. Todd Buchholz, New Ideas from Dead Economists, New York: Plame, 1999. The Wall Street Journal ADDITIONAL WEBSITE National Council on Economic Education: www.ncee.net Best for economic materials, lessons, and resources ATTENDANCE, PARTICIPATION, AND PREPARATION Since exams are based on material presented in class, it is to your advantage to attend class. Participation is encouraged in the form of questions and comments. You are advised to read the material carefully before class. Microeconomics can be a very technical subject; to get to the most of the course you must be as familiar as possible with the economic terminology. If you have read the material before class, we can spend class time on concepts instead of vocabulary. Your exams, you will remember, test application of concepts! The more time you put into the course before class, the easier the homework and exams will before you. If you miss class for any reason it is your responsibility to get any assignments. In order to prepare adequately for the Advanced Placement Microeconomics Exam in May, you must spend a considerable time preparing for class. The text must be read and problems completed in a timely fashion. Assignments must be read and formulated before coming to class. Homework problems are necessary part of learning economics. Typically, you should spend two (2) hours preparing for each class meeting. Note: It is better to turn in something that shows you tried than to turn in nothing at all. The semester grade is composed of an average of the two marking period grades with your final examination grade. In any economic course, graphical and/or mathematical demonstrations play a key role. If you want to understand the material really well, you must spend tie wit the graphs and tables in the text. They will be explained in the written material, but follow the explanation of the graph/table itself. Make sure you can follow the analysis. Many students unfortunately, treat graphs as “stuff we don’t have to read”, and as a result, either never understand the analysis, or understand only enough to pass the course. Another way to improve your understanding is to read the summaries at the beginning and end of the chapters both before and after you have read the material. Doing this will help you get a handle on which topics and concepts are important in each chapter, and you will be able to see if you understand them. TESTS Tests will consist of any or all of the following formats: 1. Multiple choice 2. Graph interpretation 3. True and false 4. Mathematical analysis 5. Free response There will be examinations approximately every 3 teaching days, or as appropriate to the coverage of the material. These examinations will last approximately one hour and are either 100% multiple choice or 100% essays. The essays can either be either a long single question or a number of shorter interpretive writings. (this follows the format of the AP exam). There will be a final exam. MAJOR ASSIGNMENTS / CLASS PARTICIPATION Students will, through use of the overhead projector and board, generate, interpret, label, and analyze selected charts, graphs, and data in order to demonstrate practical application of specific subject matter. Each student will explain a concept of their choice (first come). They will also prepare a handout for their discussion. Assignments: The History of economic Thought Adam Smith, Thomas Malthus, David Ricardo, Karl Marx, and John Maynard Keynes. Using the Heilbroner and Buchholz readings each student will write a six- page paper about each man and his philosophy and then apply their individual perspective to a current economic problem (to be approved) The following list shows how each element of the course contributes to the final grade: Periodic examinations: 50% Major Assignments: 15% History of Economic Thought (see above) Class Participation: 15% Final: 20% CAUTION: One of the differences between college and high school classes is that high school students tend to be dependent on classes for learning. It is not possible to cover all of the material that is tested in class. You will have to read and learn material on your own. I will test material that is not covered in class! Much information will have to be obtained by students on their own. HONOR CODE AGAINST CHEATING It should be understood that ALL academic work will be accomplished by students without collusion with others. Cheating will be dealt with immediately and without equivocation. All written work will be student’s own, with no help from anyone else. Since this is a course that can determine the academic futures of students of those enrolled, I cannot, and will not permit cheating to unfairly hurt the academic futures of students or unfairly help those who cheat. That means those giving and receiving information on the contents of examination and this will probably cost a student at least two letters grades in a quarter. IF YOU ARE CAUGHT THERE IS NOTHING TO DISCUSS I. ACADEMIC GRADE: A. 90-100 B. 80-89 C. 70-79 D. 60-69 F. 59-below Based on: Examinations II. CONDUCT GRADE Based on: 1. Behavior 2. Responsiveness to Homework/Class work 3. Tardies III. EFFORT GRADE Based on: 1. Effort to learn in relation to your potential and your performance 2. Timeliness of the handing in your work 3. Timeliness of your making up for work 4. Responsibility in making up missed work and test 5. Grades / Ability IV. CLASS CALENDAR – Posted; It is your responsibility to stay up-to-date V. MAKE-UP WORK All tests must be made up: a. Before first block b. On your lunch period c. After School d. With the written permission of another period’s techer e. Never during my class If you can prove that you have more than three test in one day (including mine) you may ask for an extension. COURSE OUTLINE WITH PROJECTED TIMELINE WEEKS 1 – 3 BASIC ECONOMIC CONCEPTS SCARCITY, CHOICE, OPPORTUNITY COST PRODUCTION POSSIBILITIES COMPARATIVE ADVANTAGE, SPECIALIZATION, TRADE ECONOMIC SYSTEMS PROPERTY RIGHTS, ROLE OF INCENTIVES MARGINAL ANALYSIS WEEKS 4 – 10 THE NATURE AND FUNCTIONS OF PRODUCT MARKETS SUPPLY AND DEMAND MARKET EQULIBRIUM DETERMINANTS OF SUPPLY AND DEMAND PRICE AND QUANTITY CONTROLS ELASTICITY PRICE, INCOME, AND CROSS-PRICE ELASTICITIES OF DEMAND PRICE ELASTICITY OF SUPPLY CONSUMER SURPLUS, PRODUCER SURPLUS, AND MARKET EFFICIENCY TAX INCIDENCE AND DEADWEIGHT LOSS THEORY OF CONSUMER CHOICE TOTAL UTILITY AND MARGINAL UTILITY UTILITY MAXIMIZATION INDIVIDUAL AND MARKET DEMAND CURVES INCOME AND SUBSTITUTION EFFECTS PRODUCTION AND COSTS PRODUCTION FUNCTIONS LONG AND SHORT RUN MARGINAL PRODUCT AND DIMINISHING RETURNS SHORT AND LONG RUN COSTS ECONOMIES OF SCALE COST MINIMIZING THROUGH INPUT COMBINATION FIRM BEHAVIOR AND MARKET STRUCTURE PROFIT ACCOUNTING PROFIT V. ECONOMIC PROFIT NORMAL PROFIT PROFIT MAXIMIZATION PERFECT COMPETITION PROFIT MAXIMIZATION SHORT RUN SUPPLY AND SHUTDOWN DECISION SHORT RUN AND LONG RUNFIRM AND MARKET BEHAVIOR EFFICIENCY AND PERFECT COMPETITION MONOPOLY SOURCES OF MARKET POWER PROFIT MAXIMIZATION INEFFICIENCY OF MONOPOLIES PRICE DISCRIMINATION OLIGOPOLY INTERDEPENDENCE, CARTELS, AND COLLUSION GAME THEORY AND STRATEGIC BEHAVIOR MONOPOLISTIC COMPETITION PRODUCT DIFFERENTIATION AND ADVERTISING PROFIT MAXIMIZATION SHORT-RUN / LONG-RUN EQUILIBRIUM EXCESS CAPACITY AND INEFFICIENCY WEEKS 11 – 14 FACTOR MARKETS DERIVED DEMAND MARGINAL REVENUE PRODUCT LABOR MARKET / HIRING PRACTICES MARKET DISTRIBUTION OF INCOME WEEKS 15 – 18 MARKET FAILURE AND THE ROLE OF GOVERNMENT EXTERNALITIES MARGINAL SOCIAL BENEFIT AND SOCIAL COST POSITIVE AND NEGATIVE EXTERNALITIES REMEDIES PUBLIC GOODS PUBLIC V. PRIVATE GOODS PROVISION OF PUBLIC GOODS PUBLIC POLICY TO PROMOTE COMPETITION ANTITRUST REGULATION DEREGULATION INCOME DISTRIBUTION EQUITY SOURCES OF INCOME INEQUITY AP Microeconomics – Course Detail by topic Topics I. Basic Economic Concepts The basic study of microeconomics requires students to understand that, I n any economy, the existence of limited resources along with unlimited wants results in the need to make choices. We begin by introducing the concepts of opportunity costs and trades-offs, and illustrate these concepts of opportunity possibilities curve or other analytical examples. We will proceed to a consideration of how different types of economies determine which goods and services to produce, how to produce them, and to whom to distribute them. It is also important that students understand why and how specialization and exchange increase the total output of goods and services. We will differentiate between absolute and comparative advantage, to identify comparative advantage from differences in output levels and opportunity costs, and to determine the basis under which mutually advantageous trade can take place between countries. The importance of property rights, the role of incentives in the function of free markets, and the principle of marginal analysis will also be discussed. II. The nature and functions of product Markets We will analyze supply and demand models, consumer choice, production and costs, and theory of the firm. We will explore the determined supply and demand and the ways in which changes in these determinants affect equilibrium price and output. In particular, we will make the important distinction between movements along the curves and shifts in the curves. We will emphasize the impact of government policies such as price floors and ceilings, excise taxes, tariffs, and quotas on the free market price and quantity exchanged. The concepts of consumer surplus and producer surplus will also be introduced. We will apply the concepts of price, cross-price, income elasticity of demand, and the price elasticity of surplus. Students will be shown basic assumptions underlying consumer choice: utility, the law of diminishing marginal utility, and utility-maximizing conditions, and their application in consumer decision-making and in explaining the law of demand. We will examine the demand side of the product market, and learn how incomes, prices, and tastes affect consumer purchases. Students will derive an individual’s demand curve, and understand individual and market demand curves are related, and how the income and substitution effects determine the shape of the demand curve. We will then cover production and cost analysis both in the short run and in the long run, by introducing the short-run production function, describing the relationship between the quantity of input and the quantity of output. Within the context of the production function, we will discuss average and marginal returns and learn the link between productivity and costs as well as examine the relationships among the short-run costs: total, average, and marginal. We will introduce the concept of cost minimization, and also include a discussion of long-run costs and examination of economies and diseconomies of scale, as well as return scale. We will cover the behavior of firms in different types of market structures. Beginning with the definition of profits and making the distinction between accounting and economic profits, and establishing the profit-maximizing rule, using marginal analysis. In converting perfect competition, we will focus on determining short-run and long-run equilibrium, both for the profit-maximizing individual firm and for the industry, and on the equilibrium relationships among price, marginal and average revenues marginal and average costs, and profits. The student ill then analyze adjustments process to long-run equilibrium. In considering the market behavior of a monopolist, we will identify and examine the sources of monopoly power and understand the relationship between the monopolist’s demand curve and its marginal revenue curve and learn how the monopolies total revenue changes along its demand curve as prices varies. Students will then compare a monopolist’s price, level of output, and profit with those of a firm operating in a perfectly competitive market. We will explore the concept of allocative efficiency. The concept of deadweight lass will be used as a good device to show the efficiency loss due to monopoly as well as the model of price discrimination. While covering oligopoly we will stress the interdependency of firms and their tendency to collude or to form a cartel. With a payoff matrix, the basic game-theory model will be used to enhance the students’ understanding of the interdependent behavior of firms in an oligopolistic market, and with identification of dominant strategies. Finally, we will consider the market structure of monopolistic competition and highlight the importance of product differentiation and the role of advertising in the behavior of firms, and then proceed to examine firm behavior in the short run and in the long run, and the existence of excess capacity and its implication for efficiency. III. Factor Markets Students will now apply the concepts of supply and demand to markets for factors such as labor, capital, and land, and analyze the concept of derived demand, understand how a factor’s marginal product and the marginal revenue of the product affect the demand for the factor, and consider the role of facto prices in the allocation of scarce resources. Attention should be given to the labor market, particularly labor supply and wage and employment determination. We will emphasize perfectly competitive labor markets, the effect of deviations from perfect competition, such as minimum wages, unions, monopolies, and product market monopolies. We well also examine the concept of economic rent and the relationship of the interest rate to the supply and demand investment funds. We will analyze how the market determines the distribution of income and the sources of income inequality in a market economy. IV. Market Failure and the Role of government We will examine the arguments for and against government intervention in an otherwise competitive market. As well as examine the conditions for economic efficiency, using the marginal social benefit and marginal social cost principle, and the ways in which externalities, public goods, and the market distribution of income create market failures even in perfectly competitive economies. In addition, students will study the effectiveness of government policies such as subsidies, taxes, quantity controls, and public provision of goods and services, which are designed to correct market failures and achieve economic efficiency. We will emphasize that monopolies can cause market failures when they use their market power to engage I behavior that restrains competition and to examine the government’s attempt to solve such problems by using antitrust policy and regulations. We will explore key measures of income distribution (Lorenx curve and Gini coefficient) and examine the impact of government tax policies and transfer programs, both on the distribution of income and on economic efficiency. AP Microeconomics Syllabus -Chapter 3: Individual Markets: Demand and Supply This chapter provides a basic, but rather detailed introduction to how markets operate as well as an introduction to demand and supply concepts. Both demand and supply are defined and illustrated; determinants of demand supply are listed and explained. The concept of equilibrium and the effects of change in demand and supply on equilibrium price and quantity are explained and illustrated. The chapter also includes brief discussions of supply and demand factors in resource markets and the importance of the ceteris paribus assumption. -Instructional Objectives Students should be able to: 1. Identify, explain, and provide examples of markets. 2. Explain who and what demand and supply represent. 3. Differentiate between demand and quantity demanded; and supply and quantity supplied. 4. Graph demand and supply curves when given demand and supply schedules. 5. State the Law of Demand and the Law of Supply, and explain why price and quantity demanded are inversely related, and why price and quantity supplied are directly related. 6. List the major determinants of demand, and explain how a change in each will affect the demand curve. 7. List the major determinants of supply, and explain how a change in each will affect the supply curve. 8. Explain the concept of equilibrium price and quantity. 9. Illustrate graphically equilibrium price and quantity. 10. Explain the rationing function of prices. 11. Explain and graph the effects of changes in demand and supply on equilibrium price and quantity, including simultaneous changes in demand and supply. 12. Define price ceilings and price floors and provide examples. 13. Graph and explain the consequences of government-set prices. -Chapter 20: Elasticity of Demand and Supply Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in the chapter. The text attempts to sharpen the students’ ability to estimate price elasticity by discussing major determinants. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross elasticities and income elasticities of demand and price elasticity of supply are also addressed. -Instructional Objectives Students should be able to: 1. Define price elasticity of demand and compute the coefficient of elasticity given the appropriate data on prices and quantities. 2. Explain the meaning of elastic, inelastic, and unitary price elasticity of demand. 3. Recognize graphs of perfectly elastic and perfectly inelastic demand. 4. Use the total-revenue test to determine whether elasticity of demand is elastic, inelastic or unitary. 5. List four major determinants of price elasticity of demand. 6. Explain how a change in each of the determinants of price elasticity would affect the elasticity coefficient. 7. Define price elasticity of supply and explain how the producer’s ability to shift resources to alternative uses and times affect price elasticity of supply. 8. Explain cross elasticity of demand and how it is used to determine substitute or complementary products. 9. Define income elasticity and its relationship to normal and inferior goods. 10. Define ceiling price and floor price in relationship to the equilibrium price. -Chapter 22: The Cost of Production This chapter develops a number of crucial cost concepts that will be employed in the succeeding three chapters to analyze the four basic market models. A firm’s implicit and explicit costs are explained for both short- and long-run periods. The explanation of short-run costs includes arithmetic and graphic analyses of both the total-, average-, and marginal-cost concepts. These concepts prepare students for both total-revenue—total-cost and marginal-revenue — and marginal-cost approaches to profit maximization, which are presented in the next few chapters. The law of diminishing returns is explained as an essential concept for understanding average and marginal cost curves. The general shape of each cost curve and the relationship they bear to one another are analyzed with special care. The final part of the chapter develops the long-run average cost curve and analyzes the character and factors involved in economies and diseconomies of scale. The role of technology as a determinant of the structure of the industry is presented through several specific illustrations. -Instructional Objectives Students should be able to: 1. Distinguish between explicit and implicit costs, and between normal and economic profits. 2. Explain why normal profit is an economic cost, but economic profit is not. 3. Explain the law of diminishing returns. 4. Differentiate between the short run and the long run. 5. Compute marginal and average product when given total product data. 6. Explain the relationship between total, marginal, and average product. 7. Distinguish between fixed, variable and total costs. 8. Explain the difference between average and marginal costs. 9. Compute and graph AFC, AVC, ATC, and marginal cost when given total cost data. 10. Explain how AVC, ATC, and marginal cost relate to one another. 11. Relate average product to average variable cost, and marginal product to marginal cost. 12. Explain what can cause cost curves to rise or fall. 13. Explain the difference between short-run and long-run costs. 14. State why the long-run average cost is expected to be U-shaped. 15. List causes of economies and diseconomies of scale. 16. Indicate relationship between economies of scale and number of firms in an industry. -Chapter 23: Pure Competition Explanations and characteristics of the four models are outlined at the beginning of this chapter. Then the characteristics of a purely competitive industry are detailed. There is an introduction to the concept of the perfectly elastic demand curve facing an individual firm in a purely competitive industry. Next, the total, average, and marginal revenue schedules are presented in numeric and graphic form. Using the cost schedules from the previous chapter, the idea of profit maximization is explored. The total-revenue—total-cost approach is analyzed first because of its simplicity. More space is devoted to explaining the MR = MC rule, and to demonstrating that this rule applies in all market structures, not just in pure competition. Next, the firm’s short-run supply schedule is shown to be the same as its marginal-cost curve at all points above the average-variable-cost curve. Then the short-run competitive equilibrium is discussed at the firm and industry levels. The long-run equilibrium position for a competitive industry is shown by reviewing the process of entry and exit in response to relative profit levels in the industry. Long-run supply curves and the conditions of constant, increasing, and decreasing costs are explored. Finally, the chapter concludes with a detailed evaluation of pure competition in terms of productive and allocative efficiency (P = minimum ATC, and P = MC). -Instructional Objectives Students should be able to: 1. List the four basic market models and characteristics of each. 2. Describe characteristics of a purely competitive firm and industry. 3. Explain how a purely competitive firm views demand for its product and marginal revenue from each additional unit sale. 4. Compute average, total, and marginal revenue when given a demand schedule for a purely competitive firm. 5. Use both total-revenue—total-cost and marginal-revenue—marginal-cost approaches to determine short-run price and output that maximizes profits (or minimizes losses) for a competitive firm. 6. Find the short-run supply curve when given short-run cost schedules for a competitive firm. 7. Explain how to construct an industry short-run supply curve from information on single competitive firms in the industry. 8. Explain the long-run equilibrium position for a competitive firm using entry and exit of firms to explain adjustments from nonequilibrium positions. 9. Explain the shape of long-run industry supply curves in constant-cost and increasing-cost industries. 10. Differentiate between productive and allocative efficiency. 11. Explain why allocative efficiency and productive efficiency are achieved where P = minimum AC = MC. -Chapter 24: Pure Monopoly This chapter is divided into six basic sections: the characteristics of pure monopoly; the barriers to entry that create and protect monopolies; price and output determination under monopoly; the economic effects of monopoly; price discrimination under monopoly; and the regulation of monopolies. A discussion of barriers to entry states at the outset that these barriers may occur to some extent in any form of imperfect competition, not just in a pure monopoly. The concept of a natural monopoly is addressed in this section. Building on the analysis of the preceding chapter (23), the discussion of price-output decision- making by monopoly firms points out that the marginal-revenue—marginal-cost rule still applies. Emphasis here is on the major difference between the determination of marginal revenue in pure competition and in pure monopoly. The misconceptions about monopoly pricing behavior are presented as well as a comparison of efficiency in pure competition and pure monopoly. This section ends with a discussion of effects of monopoly power in the U.S. economy and some policy alternatives. The case of price discrimination and its effects are discussed along with the conditions necessary for it to occur. At the end of the chapter, the basic issues involved in the regulation of public service monopolies are reviewed. -Instructional Objectives Students should be able to: 1. List the five characteristics of pure monopoly. 2. Explain the difference between a “pure” monopoly and a “near” monopoly. 3. List and give examples of the four barriers to entry. 4. Describe the demand curve facing a pure monopoly and how it differs from that facing a firm in a purely competitive market. 5. Compute marginal revenue when given a monopoly demand schedule. 6. Explain why the marginal revenue is equal to the price in pure competition but not in monopoly. 7. Determine the price and output level the monopoly will choose given demand and cost information in both table and graphic form. 8. Discuss the economic effects of pure monopoly on price, quantity of product produced, allocation of resources, distribution of income, and technological progress. 9. Give examples of how new technology has lessened monopoly power. 10. List three conditions necessary for price discrimination. 11. Explain why profits and output will be higher for a discriminating monopoly as compared to non-discriminating monopoly. 12. Identify two pricing strategies of monopoly regulation and explain the dilemma the regulators face in utilizing these strategies. -Chapter 25: Monopolistic Competition and Oligopoly Pure competition and pure monopoly are the exceptions, not the rule, in the U.S. economy. In this chapter, the two market structures that fall between the extremes are discussed. Monopolistic competition contains a considerable amount of competition mixed with a small dose of monopoly power. Oligopoly, in contrast, implies a blend of greater monopoly power and less competition. First, monopolistic competition is defined, listing important characteristics, typical examples, and efficiency outcomes. Next we turn to oligopoly, surveying the possible courses of price, output, and advertising behavior that oligopolistic industries might follow. Finally, oligopoly is assessed as to whether it is an efficient or inefficient market structure. -Instructional Objectives Students should be able to: 1. List the characteristics of monopolistic competition. 2. Explain how product differentiation occurs in similar products. 3. Determine the profit-maximizing price and output level for a monopolistic competitor in the short run when given cost and demand data. 4. Explain why a monopolistic competitor will realize only normal profit in the long run. 5. Identify the reasons for excess capacity in monopolistic competition. 6. Explain how product differentiation may offset these inefficiencies. 7. Describe the characteristics of an oligopolistic industry. 8. Differentiate between homogeneous and differentiated oligopolies. 9. Identify and explain the most important causes of oligopoly. 10. Describe and compare the concentration ratio and the Herfindahl index as ways to measure market dominance in an industry. 11. Use a profit-payoffs matrix (game theory) to explain the mutual interdependence of two rival firms and why oligopolists might tempt to cheat on a collusive agreement. 12. Identify three possible models of oligopolistic price-output behavior. 13. Use the kinked demand curve theory to explain why prices tend to be inflexible. 14. Explain the major advantages of collusion for oligopolistic producers. 15. List the obstacles to collusion behavior. 16. Explain price leadership as a form of tacit collusion. 17. Explain why oligopolies may prefer nonprice competition over price competition. 18. List the positive and negative effects of advertising. 19. Explain why some economists assert that oligopoly is less desirable than pure monopoly. 20. Explain the three ways that the power of oligopolists may be diminished. -Chapter 26: Technology, R&D, and Efficiency This chapter introduces students to the importance of technical advances, R&D decisions, and innovation and brings these topics directly into the core microeconomic chapters. This chapter focuses explicitly on the effects of market structure on technological progressiveness. -Instructional Objectives Students should be able to: 1. Distinguish between the short run, the long run, and the very long run. 2. Describe the elements of technological advance. 3. Give a specific example of invention, innovation, and diffusion. 4. Compare and contrast the historical view of technological advance with the contemporary view. 5. Evaluate the role of entrepreneurs and other innovators in technological advancement. 6. Identify and explain how a firm’s optimal amount of R&D spending is determined. 7. List the possible sources of R&D financing. 8. Explain how marginal utility theory can be used to determine the success or failure of a new product. 9. Explain how process innovation adds to a firm’s profits. 10. Describe and give an example of the “fast-second” strategy. 11. Enumerate the protections and potential benefits for firms that take the lead with R&D and innovation. 12. Evaluate the strengths and weaknesses of each of the four basic market structures regarding the likelihood of R&D and innovation. 13. Describe the inverted U theory. 14. Evaluate the impact of technological advance on productive and allocative efficiency. 15. Describe, and give an example of “creative destruction.” -Chapter 27: The Demand for Resources This chapter and the next two chapters (28, 29) survey resource pricing. The basic analytical tools involved in this survey are the demand and supply concepts of earlier chapters. While the present chapter focuses on resource demand, the following two chapters couple resource demand with resource supply in explaining the prices of human property and resources. The two most basic points made in this chapter are closely related. First the MRP = MRC rule for resource demand is developed. Most students will recognize that the rationale here is essentially the one underlying the MR = MC rule of previous chapters, but that the orientation now is in terms of units of input rather than units of output. Second, the MRP = MRC rule is applied under the assumption that resources are being hired competitively to explain why the MRP curve is the resource demand curve. Resource demand curves are developed for both purely competitive and imperfectly competitive sellers, but the emphasis is on the pure competition model in the hiring of resources. Also covered are changes in resource demand and the elasticity of resource demand. The final section applies the equi-imarginal principle to the employment of several variable resources. An extended numerical example is used to help students understand and distinguish between the least-cost and profit-maximizing rules. -Instructional Objectives Students should be able to: 1. Present four major reasons for studying resource pricing. 2. Explain the concept of derived demand as it applies to resource demand. 3. Determine the marginal-revenue-product schedule for an input when given appropriate data. 4. State the principle employed by a profit-maximizing firm in determining how much of a resource it will employ. 5. Apply the MRP = MRC principle to find the quantity of a resource a firm will employ when given the necessary data. 6. Explain why the MRP schedule of a resource is the firm’s demand schedule for the resource in a purely competitive product market. 7. Explain why the resource demand curve is downward sloping when a firm is selling output in a purely competitive product market; an imperfectly competitive product market. 8. List the three determinants of demand for a resource and explain how a change in each of the determinants would affect the demand for the resource. 9. Explain what demand factors have influenced the growth and decline of the occupations listed in Tables 25.5 and 25.6. 10. List three determinants of the price-elasticity of demand for a resource, and state how changes in each would affect the elasticity of demand for a resource. 11. State the rule for determining the least-cost combination of resources. 12. Find the least-cost combination of resources when given appropriate data. 13. State the rule used by a profit-maximizing firm to determine how much of each of several resources to employ. 14. When given necessary data, find the quantities of two or more resources a profit-maximizing firm will hire. 15. Explain the marginal productivity theory of income distribution and present two criticisms of it. -Chapter 28: Wage Determination This chapter provides a detailed supply and demand analysis of wage determination in a variety of possible labor market structures. Though the analysis may seem rigorous, it is little more than an application of supply and demand tools. A discussion of the general level of real wages opens the chapter. The critical link between labor productivity and real wages merits emphasis as a theoretical and policy issue. The section on wage determination in particular labor markets is the heart of the chapter. Competitive, monopsonistic, unionized, and bilateral monopoly market models are examined. Discussion of the effectiveness of unions in raising wages, and the complex issue of minimum wage laws follow. Wage differentials are explained by the differences among worker characteristics, job characteristics, and lack of worker mobility. The chapter concludes with a discussion of pay schemes that link earnings to worker performance, their contributions to efficiency, and possible negative side effects. -Instructional Objectives Students should be able to: 1. Differentiate between nominal and real wages. 2. List those factors that have led to an increasing level of real wages in the U.S. historically. 3. Determine the equilibrium wage rate and employment level when given appropriate data for a firm operating in a purely competitive product and labor market; a firm operating in a monopolistically competitive product market and a purely competitive labor market; and a firm operating in a purely competitive product market and a monopsonistic labor market. 4. Illustrate graphically how wage rates are determined in purely competitive and monopsonistic labor markets. 5. List the methods used by labor organizations to increase wages and the impact each has on employment. Give specific examples. 6. Illustrate graphically how an inclusive (industrial) union and an exclusive (craft) union would affect wages and employment in a previously competitive labor market. 7. Explain and illustrate graphically wage determination in the bilateral monopoly model. 8. Present the major points in the cases for and against the minimum wage. 9. Explain the demand factors that create wage differentials. 10. Explain the supply factors that create wage differentials. 11. Describe briefly salary systems in which pay is linked to performance rather than to time. 12. Describe the negative side effects of poorly planned incentive pay plans. -Chapter 29: Rent, Interest, and Profit The discussions of the income shares-rent, interest, and profits- found in this chapter are relatively brief. Because the theories of rent, interest, and profits are quite unsettled, and because together they constitute only about 28 percent of national income, only the basic features of these income shares are covered. The complete inelasticity of the supply of land and certain natural resources is the foundation for the analysis of economic rent. Related topics, such as differential rents and single-tax movement, are presented. The determination of the interest rate and its role in allocating loanable funds are briefly surveyed. In the discussion of profit economic and accounting profits are differentiated. There is also an analysis of the sources and functions of profits. The chapter concludes with and overview of the relative shares of national income. -Instructional Objectives Students should be able to: 1. Explain what determines economic rent. 2. Explain why economic rent is a surplus payment. 3. Explain the single-tax theory and is criticisms. 4. Explain what determines rent differentials. 5. Explain how rent functions as a cost to the individual firm. 6. Describe how the interest rate is determined. 7. Explain how business firms make investments. 8. Distinguish between nominal and real interest rates. 9. State five factors that may cause interest rates to differ. 10. Distinguish between economic, normal, and accounting profits. 11. Explain why profits are received by some firms and not others. 12. List three sources of economic profits. 13. Describe the genera functions of profits. 14. Summarize the current relative shares of national income. -Chapter 30: Government and Market Failure This chapter extends and deepens our understanding of government’s role in a market- oriented economy. We will identify some of the problems the government faces in carrying out its economic functions. We will examine the topic of market failure. Through marginal analysis we will explore public goods and externalities, as well as various approaches for limiting negative externalities. The growing pollution problem, including global warming, is also discussed. We will end by addressing the problem of information failures in the private sector and possible government solutions to this problem. -Instructional Objectives Students should be able to: 1. Describe graphically the collective demand curve for a particular public good and explain this curve. 2. Explain why the supply curve for the public goods is upward sloping and explain how the original quantity of a public good is determined. 3. Identify the purpose of cost-benefit analysis and explain the major difficulty in applying this analysis. 4. Explain what is meant by spillover or externalities. 5. Describe graphically and verbally how an overallocation of resources results when spillovers costs are present and how this can be corrected by government action. 6. Describe graphically and verbally how and underallocation of resources occurs when spillovers benefits are present and how this can be corrected by government action. 7. Explain the Coase theorem. 8. Using supply and demand diagrams, explain the economics of recycling. 9. Discuss the predicted effects of global warming and how cost-benefit could be used to determine international policies and goals. 10. Give two examples of how inadequate information about sellers can create a market failure. 11. Explain the moral hazard and adverse selection problems faced by sellers.
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