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Principles of Microeconomics by N.Gregory Mankiw 4 Ed 2006 - PDF - PDF

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									                              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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