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Syllabus
Honors 220: Economic Theory and Policy
OSN 203: MW 1:00-2:15
Professor Mark Pingle
[email protected]; 784-6634
Office Hours (AB 319B) Monday and Wednesday; 2:30-3:45 and by appointment
Fall 2011
Course Description: This is a “core” social science course for the University of Nevada, introducing the
student to economic theory and its application to individual, business, and governmental decision-making.
Upon successfully completing this course, the student will possess a basic understanding of introductory
microeconomic and macroeconomic concepts. More precisely, the student will
(1) understand factors influencing consumer and producer decisions;
(2) understand how a market works to determine the price of a product and the quantity bought and sold;
(3) understand economy works as a whole;
(4) possess an elementary knowledge of US macroeconomic history;
(5) understand how government may be able to influence an economy through policy changes and why
government may not be able to effectively influence the economy;
(6) possess some elementary theoretical and empirical tools used to perform economic analysis;
(7) develop oral and written communication skills.
Required Course Materials:
(1) Freakonomics, Steven D Levitt & Stephen J. Dubner, 2005.
(2) The Economic Naturalist, Robert H. Frank, 2007.
(3) US Macroeconomic Statistics: A Set of Figures and Data Tables to Supplement a Macroeconomics
Course, Mark A. Pingle, 16th Edition, 2011. To be distributed at a cost of $10. Make checks
payable to Omicron Delta Epsilon (or just ODE)
(4) Principles of Macroeconomics, Mark A. Pingle: To be distributed at a cost of $15. Make checks
payable to Omicron Delta Epsilon (or just ODE).
Grading:
20% Midterm 1: Monday, October 3
20% Midterm 2: Monday, November 14
25% Final: Monday, December 19, 10:15-12:15
20% EconWiki Contributions
10% Assignments
5% Participation
EconWiki Contributions: One effective way to learn a subject is to write about it. To write effectively
about a subject, you must understand it. Also, writing helps you learn to think more effectively. Good
writing is good thinking. A significant portion of your grade will be to work with at least one other
person, but no more than two on a chapter that explains some broad idea or principle within economics.
Another portion will be associated with writing up definitions of key terms and phrases and writing up
associated applications. You also will obtain credit by reading the work of others, and editing it when you
believe you can improve it.
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Assignments: You will be given short assignments every now and then. Each assignment will focus on
learning a particular skill or set of skills.
Participation: People learn more when they are more engaged. To be useful, economic thinking must
become a part of your thinking. This typically requires practice, and this is why a significant portion of
your grade will be allocated to participation.
You will have opportunities to earn participation credit in
the following ways:
1. In Class Discussion: At the beginning of most classes, current events will be discussed. You are
expected to keep up on current events by reading (as opposed to just watching TV or listening to the
radio). One convenient way to do this is by picking up a free copy of the New York Times that is
available all over campus. There are also many good internet sites you can use. Pay special attention
to the editorials of columnists who comment on news events and offer policy opinions. Over the
semester, you may be surprised to learn how much insight you can gain by thinking about current
events from an economic perspective
2. Asking Questions: You will have reading assigned that will help learn economic ideas. If some
element of this assigned reading particularly caught your interest, you should express your interest
about a topic in class. Perhaps more importantly, you should ask questions about anything in your
reading that is not clear to you. Learning to ask good questions is part of becoming a more mature
scholar.
3. Web Campus Discussion: You may use Web Campus to ask questions when you think others in the
class may benefit from hearing an answer. You may also comment on a current event, or on your
reading, or on the post of another student. In general, you will earn more participation credit for more
posts, but your posts should be good posts, not fluff.
Date
8/29
8/31
9/5
9/7
9/12
9/14
9/19
9/21
9/26
9/28
10/3
10/5
10/10
10/12
10/17
10/19
10/24
10/26
Course Calendar
EN=Economic Naturalist, F=Freakonomics, P=Pingle Classnotes, Fig=Statsbook Figure
Topic
To Do
Foundations of Economics
Arbitrage and the Invisible Hand
Labor Day
The Market Economy
Market and Command Failures
Modeling a Market
Using a Market Model
Consumer Decisions
Elasticity and Consumer Surplus Applications
Why produce and trade
First Midterm
Producer Decisions
The technology of the firm
Perfect competition
Imperfect competition
Macroeconomic Performance
Labor Market Applications
Labor Market and Aggregate Supply
2
EN Intro, EN1, F1, F3, F4, P1
EN2, EN3, F2, F3
NO CLASS
P2
EN5, EN6
P2
EN2
EN2
EN4
P4
None
P4
To be determined
To be determined
To be determined
P3, Fig 1-4, 20, 21, 28
P5, Fig 23
P6, EN 3
10/31 Money and its functions
11/2 Money and Banking
11/7 Monetary Theory
11/9 The circular flow of economic activity
11/14 Second Midterm
11/16 The role of government in society
11/21 Consumption, savings, investment, AD
11/23 Demand-side recessions
11/28 Macroeconomic stabilization policy
11/30 Supply side recessions
12/5 Altering the Composition of Output
12/7 Economic growth theory
12/12 Review for final
12/19 Final 10:15-12:15
P7
P7
P8
P9, Fig 5
None
Fig 33-43, Fig 9
P9, Fig 11-18
P10
P10
P10
P10
P10
None
Lecture Outlines
1. The Foundations of Economics: Way of Thinking
Key concepts: Opportunity cost, marginal benefit, marginal cost, law of diminishing returns, cost-benefit analysis, incentive
 Schematic of the economic problem
 The economic way of thinking
 Incentives
 Schematic of an economy
2. The Foundations of Economics: Arbitrage and the Invisible Hand
Key concepts: Arbitrage, Compensating Variation
 Lines and Arbitrage
 Some significant economic examples
o Compensating wage differentials
o Normal Rate of Return
o Why businesses do not pay taxes
o Risk-Return tradeoff on assets
o Interest rates and the yield curve
 Examples from Economic Naturalist and Freakonomics
 Invisible hand
o Adam Smith’s butcher and baker
o Profit
 Indication of value creation
 Signal to produce more or less
 Motivation for improvement
3. The Market Economy
Key concepts: Command system, Market system, Capitalism, Socialism, Collectivism, Individualism


Allocation mechanisms:
o Four ways to get what you want
o WHO produces WHAT, HOW, and for WHOM?
o Origins of the market economy
 Hunting and Gathering
 Agricultural Society
 Feudalism
 Mercantilism
 Capitalism
Command Economy:
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
o Commander controls
o All decided by commander
o Bureaucracy to execute
Market Economy:
o Market controls
 Price System
 Trade is mutually beneficial
 Prices as signals
o All decided by the market
4. Market and Command Failures
Key concepts: Externalities, Public Good, Private Good, Common Resource, Tragedy of the Commons

Command Failures
o Incentive compatibility
o Unintended consequences
o Quality improvement

Market Failures
o Externalities (Benefits received without costs paid, or costs incurred without benefits received.)
 External Benefits: Lead to under production
 Consumption Externality: Social demand higher than market demand
o Education: Others may benefit from the education you pay for
 Production Externality: Social supply higher than market supply
o Bee producer: Orchard owner benefits, but does not pay
o Orchard owner: Bee producer benefits, but does not pay
 External costs: Lead to over production
 Consumption Externality: Social demand lower than market demand
o Automobile consumption: Pollute the air, generating health costs to those
who walk
o Offensive behavior or speech: In consuming your freedom, you injure
others
 Production Externality: Social supply lower than market supply
o Coal burning power plants: Pollute air, CO2 emissions
o Solar panels: Produce electricity but are ugly
 Policy Solutions
 Direct regulation: Laws to mandate activities generating positive externalities and
restrict activities generating negative externalities
 Market solutions
o Pigouvian tax or subsidy: Per unit tax is equal to estimate per unit
external cost, and per unit subsidy is equal to estimated per unit external
benefit.
 Internalizes social cost or social benefit
 Lets market determine amount of activity, not government
o Permits to pollute (permit to emit negative externality)
 For negative externality
 Issue fixed number of permits
 Those who cannot much reduce the externality emission will be
more willing to buy the permits
 Those who can reduce their externality emission have an incentive
to do so because they can make money by reducing their
emissions and selling their permits
 Sunset clause, retiring a fraction of the permits over time, can
reduce the externality, while still allowing the activity
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o
Public Goods
 Four types of goods
 Rival, exclusive: Private goods (e.g., ice cream, car)
o Private property rights (use, exclude use of others, transfer ownership)
 Non-rival, non-exclusive: Public goods (e.g., national defense, air, broadcast TV)
 Rival, non-exclusive: Common resource (e.g., fish in the ocean, living room)
 Non-rival, exclusive: Club goods (e.g. cable TV, journal subscriptions, roads)
 Pure public Good
 Non-rival
o Natural monopoly
 Strong incentive for entry if monopoly is profitable
 Risky to produce
 Marginal cost is zero, but cannot charge zero and be in business
 Non-exclusive
o Free rider problem (Why should I pay when someone else will?)
o Tragedy of the commons (Why should I not use the resource when
someone else will?)
 Problems with paying to produce non-private goods (underproduction)
 Solutions to public good problems
o Government provision of the good: Roads, national defense
o Government regulation of access: Fishing permits, broadcast licenses.
o Cultural Values: “pay your fair share,” “leave some for someone else”, the “golden
rule”
5. Modeling a Market
Key concepts: market, shortage, surplus, supply, demand, equilibrium, market price, product
markets, factor markets
Key model: Supply and demand market model
Outline
 Schematic of an economy’s market structure: Product markets vs factor markets
 Supply and demand model
o Demand
 Measure of willingness to buy
 Factors influencing demand: Price, income, other prices, expectations
 Law of Demand
 Individual demand curve
 Market demand curve
o Supply
 Measure of willingness to buy
 Factors influencing supply: Price, costs, expectations
 Law of Supply (not recognized as much as Law of Demand)
 Individual supply curve
 Market supply curve
o Surplus, shortage, and equilibrium in the market
 The stability question: Is the equilibrium stable?
 Market price: How much will a product cost?
 Price increase: When will this occur?
 Price decrease: When will this occur?
6. Using a Market Model
Key concepts: price ceiling, price floor, comparative static analysis
Key model: Supply and demand market model
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o

The effects of price controls (Market in disequilibrium)
o Price ceiling: Rent control example
o Price floor: Agricultural price support example
How markets work (Comparative static analysis: Market in equilibrium)
o Market for health care
 Supply side shock: Increase in cost of providing health care
 Demand side shock: Increase in income
 Two shocks at once: Which do you think dominates?
o Market for fish (Illustration of market period versus long run)
 Market period: Price reflects demand, not cost of production
 Long Run: Price reflects costs, not demand
o International trade
 World price
 Determines what is imported and what is exported
 Free trade: Effects on domestic prices and consumption
 Import Restrictions
 Tariff
 Quota
 Dead weight welfare losses of tariffs and quotas
7. Consumer Decisions: Product demand and labor supply
Key Concepts: Utility, marginal utility, law of demand, law of diminishing marginal utility, income
effect, substitution effect, substitutes, complements, normal good, inferior good,
elasticity, labor supply, product demand,
 Utility, marginal utility, and the law of diminishing marginal utility
 Budget constraint: Consumption tradeoffs
 Law of Demand: Substitution effect and income effect, role of law of diminishing marginal
utility
 Deriving product demand curve: Result of consumption tradeoffs
 Types of goods: Normal versus inferior, substitute versus complement
 Deriving labor supply curve: Result of labor-leisure tradeoff
8. Elasticity and Consumer Surplus Applications
Key Concepts: Elasticity, consumer surplus
 Elasticity
o Measure of responsiveness
o Elastic vs inelastic
o Price elasticity of demand
 Price elasticity and revenue maximization
 Price elasticity and excise tax incidence
o Price elasticity of supply
o Explaining the volatility of gasoline prices
 Consumer Surplus
o Deadweight loss of price controls
o Why a tariff is better than a quota
9. Why Produce and Trade
Key Concepts: Wealth comes from production specialization and trade, absolute advantage, comparative
Advantage, indifference curve
Key model: Production possibilities model
 Production verses Trade
o Production: A physical process of transformation
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



o Trade: A legal process of transformation
Production possibilities model
o Tradeoffs and the concept of cost
o Efficiency vs inefficiency
o Growth
Absolute advantage: One producer is more effective at producing EVERYTHING, why trade?
Comparative advantage: Even if you are worse at everything, you must be LEAST WORST at
something
o Motivation for specialization and trade
o Self-sufficiency vs Dependency:
Consumption possibilities:
o No trade and self-sufficiency
o Specialization and trade
10. Producer Decisions: Product supply and labor demand
Key concepts: Marginal product, average product, classical theory of income distribution, production
function, profit function
 Production function
 Profit function
 Producer decision problem: How much labor to hire?
 Labor demand curve: The result of the law of diminishing returns
o Classical theory of income distribution
 Product supply curve: The result of the law of diminishing returns
11. The Technology of a Firm
Key concepts: Total cost, fixed cost, variable cost, average total cost, average fixed cost, average
variable cost, marginal cost, productive efficiency, short run, long run.
Key Model: Cost curve model of firm technology
 Short run cost structure of a firm
o Fixed cost: Total fixed cost and average fixed cost
o Variable cost: Total variable cost and average variable cost
o Marginal cost
 Relationship between average variable cost and average total cost
 Relationship between marginal cost and average costs---variable and total
 Sunk costs: Do not affect short run decisions
 Production efficiency: Firm size associated with min average total cost
 Changes in cost structures
o Improved technology: Could mean lower average total cost
o Possible impact of incurring greater fixed cost: Larger efficient firm size
12. Perfect Competition
Key concepts: Market power, price, marginal revenue, entry and exit, economies of scale
 Defining perfect competition
o Firms have no market power
 Demand curve facing firm is horizontal, firm cannot influence market price
 Marginal revenue equals price
o Firms maximize profit
 Chooses output level where marginal revenue=marginal cost
 Since price=marginal revenue, price=marginal cost must also hold
o Free entry and exit
 Profits encourage entry
 Losses encourage exit
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


 Zero profit condition: price=average cost
Plotting perfect competition diagrammatically
o Price > average cost: Economic profit encourages entry and decreases price
o Price < average cost: Economic loss encourages exit and decreases price
o Price=marginal cost and price=average cost only where average cost is at a minimum
Examining the efficiency of perfect competition
o Allocative efficiency: price=marginal cost
o Productive efficiency: price=minimum average cost
o Perfect competition is productively and allocatively efficient
Using the perfect competition model
o If higher fixed costs decrease minimum average cost, then the average firm size will tend
to grow and consumers will benefit by paying lower prices.
o If resource depletion increases minimum average cost, then prices will increase over
time
13. Imperfect Competition: Monopoly and Monopolistic Competition
Key concepts: Market power, contestable market
 Defining monopoly
o There is a single firms, which has market power
 Demand curve facing firm has negative slope because firm influences market
price
 Firm can sell more if price is lower, but will sell less if price is higher
 Marginal revenue less than price
o Firms maximize profit
 Chooses output level where marginal revenue=marginal cost
 Since price>marginal revenue, price>marginal cost must also hold
o No free entry, but free exit
 Barriers to entry protect economic profits
 Losses encourage exit, which means the product will not be provided to anyone
 Defining monopolistic competition
o Competition eliminates economic profits
o Zero profit condition: price=average cost
 Defining a contestable market
o Competition from a potential entrant economic profits
o Zero profit condition: price=average cost
 Plotting monopoly diagrammatically
o Price  average cost: The monopolist must avoid economic loss to remain in business
o Marginal revenue=marginal cost
 Plotting monopolistic competition or a contestable monopoly market diagrammatically
o Price > average cost: Economic profit encourages entry and decreases price
o Price < average cost: Economic loss encourages exit and decreases price
o So, Price=average cost us hold
 Examining the efficiency of imperfect competition
o Allocative inefficiency, since price>marginal cost
o Productive inefficiency, since price>minimum average cost
o Imperfect competition is productively and allocatively inefficient
 Keys to Efficiency
o No market power: So, an increase in price will drive customers to a competitor
o Free Entry: To eliminate economic profit and reduce price to average cost
 Using the imperfect competition model
o Generic Drugs: The value to consumers of making close substitutes available.
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14. Macroeconomic Performance
Key Concepts: Economic growth, inflation, unemployment
 Economic Growth
o Gross Domestic Product as a measure of economic growth
 Nominal vs Real: Adjusting for the effects of inflation
 Level vs Per Capita: Adjusting for population growth
 Recession
 Examining some data
 Why the Great Depression was great
 Just how wealthy are people today?
 Economic Instability
o Inflation
 Measuring Inflation
 The GDP Deflator: A price index
 Examining Some Data
 Deflation in the Great Depression
 High inflation periods
o Unemployment
 Measuring Unemployment
 Defining unemployment
 Types of Unemployment
o Structural
o Seasonal
o Frictional
 Examining some data
 The Great Depression
 Correlation of unemployment and rate of economic growth
 Phillips Curve: Correlation of unemployment with inflation
15. The Labor Market Applications
Key concepts: Full employment, involuntary unemployment, minimum wage, Phillips curve
Labor market in disequilibrium
o Effect of a minimum wage
 Labor market in equilibrium
o Effect of population growth
o Effect of reduced willingness to work
o Effect of technological improvement
16. The Labor Market and Aggregate Supply
Key concepts: Efficiency wage
 Deriving the aggregate supply curve from the labor market
 Why the nominal wage might be sticky
 Effect of unions
o No change in productivity vs change in productivity
 Efficiency wage concept
17. Money and Its Functions
Key concepts: Commodity money, commodity backed money, fiat money

Barter

The evolution of money from commodity money to fiat money

The functions of money

Examining some data on money
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18. Money and Banking
Key concepts: Commodity money, commodity backed money, fiat money
 Banking
o Basic banking business
 Borrow from some (accept deposit) and lend to others (make loans)
 Earnings from interest on loans
o Role of banks in economy
 Channel saving into investment, so banks facilitate growth
 Provide credit
 More economic activity
 Can buy now and pay later
 Facilitates large purchases
 Can endure temporary economic downturn
 Can more readily start and expand businesses
 Can more quickly obtain new technologies (enhanced productivity)
 Banks can create money (or create purchasing power)
o How do banks create money
 Fractional reserve banking
 A loan creates new money: When, how, and why?
 Loan repayments destroy money
 Factors influencing ability of banks to make loans
 Reserve requirements
 Willingness to loan excess reserves
o How a central bank can control the economy’s money supply
 Control reserve requirement
 Encourage or discourage banks to loan excess reserves
 Discount rate
 Open market operations
19. Monetary Theory
Key concepts: Quantity theory of money, velocity of money , equation of exchange

Classical Monetary Theory
o The quantity theory of money
 The equation of exchange (Cambridge Equation)
 Velocity of money
o Keynesian Monetary Theory
 Relationship between asset prices and interest rates
20. The Circular Flow
Key concepts: gross domestic product, economic growth, saving, investment, capital, human capital,
crowding out
 Most simple version
o : Accounting for GDP, income and wealth come from production
o Importance of per capita GDP measure
o Importance of real measure versus nominal measure
 Adding the capital market: saving becomes investment and accumulates as capital
Adding government: Effect of the budget deficit (crowding out) or budget surplus (crowding in)
Adding foreign sector: Effect of foreign saving (international debt) or foreign investment
21. The Role of Government in Society
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Key concepts: Government receipts, government expenditures, transfer payments, net taxes
 Size of government
 Deficits and Debt
 Composition of government receipts
 Composition of government expenditures
 Transfer payments
o A negative tax
 Net taxes
o To and From Examples
22. Consumption, Savings, Investment
Key concepts: Consumption, savings, investment, autonomous spending multiplier
 Defining savings relative to consumption
 Defining savings relative to investment
 Examining data
o Changes in the U.S. savings rate
o Foreign saving and U.S. investment
 Aggregate demand
o Relationship to market for saving
o Keynesian thinking versus classical
o Keynes’ spending multiplier
23. Demand side recessions
Key concepts: Recession
 Cause of Recession: Loss of aggregate demand
 Ways to lose aggregate demand
o Consumption
o Investment
o Government
o Foreign
 An analysis
24. Macroeconomic Stabilization Policy
Key concepts: Stabilization, fiscal policy, monetary policy
 Ways to replace deficient demand
o Increase in government spending
o Decrease in taxes
o Increase in money supply
 Some analyses
25. Supply Side Recessions
Key concepts: Stagflation
 Cause of Recession: Loss of aggregate supply
 Ways to lose aggregate supply
o Loss of raw material access
o Destruction of capital
o Loss of know-how
 Analysis
o Stagflation
 Difficulty of reversing a supply recession
26. Altering the Composition of Output
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Key concepts: Composition of output
 Long run use of fiscal policy
o Changing the level of taxes
 Alters composition within private sector
o Changing the level of government purchases
 Alters the composition private versus public
 Economic Growth
o Reduces the relative size of the public sector
27. Economic Growth Theory
Key Concepts: economic growth, technology
 Using the production possibilities frontier to consider growth
 Using a market model to consider growth
o Positive supply side shocks: More capital, better technology, increased population
 Sustaining economics growth\
o Increasing labor productivity is key
 Skills: human capital
 Physical capital: It’s link to human capital
 Management: Organize production efficiently
 Research and development: Science and entrepreneurship needed for growth
o Policy implications of growth theory
 Education and training is important; Measure quality by increases in productivity
 Immigration policy: Immigration increases ability to produce but will decrease
living standards, unless immigration increases productivity enough to offset
diminishing returns to labor
 Encourage saving and investment:
 Effective banking system
 Capital gains tax policy (Italy has not capital gains tax)
 Consumption tax vs income tax
 Taxation of retirement accounts
 Control government borrowing: Limit crowding out
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