Download I. Introduction to basic economic problems

ST. FRANCIS XAVIER UNIVERSITY
ECONOMICS 100.15
INTRODUCTORY ECONOMICS
SYLLABUS 2003-2004
Instructor:
Marilyn Gerriets
304 Nicholson Hall,
867-3848,
[email protected]
Texts:
IN BRIEF: The micro and macro texts and study guides by Colander.
In detail:
David C. Colander, Peter S. Sephton, Charlene Richter, Microeconomics, 2nd
Canadian edition, (Toronto, 2003).
David C. Colander, Peter S. Sephton, Charlene Richter, Macroeconomics, 2nd
Canadian edition, (Toronto, 2003).
David C. Colander, Douglas Copeland, Jenifer Gamber, Oliver Franke, Study Guide
for use with Microeconomics, (Toronto, 2003)
David C. Colander, Douglas Copeland, Jenifer Gamber, Oliver Franke, Study Guide
for use with Macroeconomics, (Toronto, 2003)
Course requirements:
First Term
Quizzes and assignments
First fall mid-term
Second fall mid-term
Christmas examination
5%
10%
10%
25%
50%
Second Term
Quizzes and assignments
First winter mid-term
Second winter mid-term
Final examination
5%
10%
10%
25%
50%
Goals of the Course specific to the study of economics:
The course helps students understand the workings of a market economy, the circumstances in
which markets achieve economic efficiency and stability and the circumstances in which they do
not achieve these goals. The course helps students understand the economic costs and benefits
of pursuing goals other than efficiency and stability, such as greater equality.
More general goals:
Studying economics will improve your abilities in problem solving and logical reasoning.
Thinking like an economist means thinking logically, weighing costs and benefits appropriately,
and understanding the complicated connections which tie an initial cause to ultimate
consequences.
STUDY TIPS
STUDY MATERIALS:
Copies of the text book and study guide are available in the university bookstore on the third
floor of the Student Union Building. The text book is well written and lively. I hope you enjoy
it. The study guide gives brief summaries of the important concepts that most will find very
helpful in reviewing. It also provides exercises and problems which are an essential part of
learning Economics. The text book web site is: http://www.mcgrawhill.ca/college/colander/
This site has many very useful features including quizzes, exercises and tutorials. All of these
items provide the correct answer with explanations and information on the location of the
material in the textbook. If you like studying at a computer, it will help you to master the
material of the course.
STUDY METHODS:
How NOT to study.
1. Attend class (most of the time, some of the time, now and again?) and say ‘I seem to
understand that.’
2. Review your notes the night before the exam and say ‘Oh, yeah, all that makes
sense.’
3. Write the exam and say ‘*#@! I couldn’t do any of those questions!!!”
HOW TO STUDY.
1. Read (or at least leaf through) study materials on planned topics for the upcoming
class.
2. Attend EVERY class and take careful notes.
3. After each class, review your notes, carefully read the study materials (text book,
study guide, web site), and work problems.
4. Review all the chapters the night before the exam.
5. Write the exam and say ‘That was a piece of cake.’
Comments on study materials and methods:
Different students find different types of study materials useful. Many of you will find the
detailed explanations in the text book essential and sufficient to give you an understanding of
the subject of the course when combined with the lecture materials. Others may find the
study guide particularly helpful. Others may benefit from working through the tutorials,
quizzes and problems on the website, at least for topics you find difficult.
Working any type of problem – true, false, multiple choice, short answer problems, text book
problems – to assist you to gain an understanding of the material. I strongly recommend that
you work problems that require you to draw graphs and write out answers. Performing up to
your potential in the course without working problems is extremely difficult.
WORK PROBLEMS TO SUCCEED!
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Brief Course Outline:
I.
Introduction to basic economic problems
Colander et. al., Microeconomics, chs. 1, 2, 3.
II.
Prices and markets
III.
A.
The principles of supply and demand:
Colander et. al., Microeconomics, ch. 4, parts, ch. 5.
B.
Elasticity:
Colander et. al., Microeconomics, ch. 6.
C.
Efficiency, Equity and Taxes
Colander et. al., Microeconomics, ch. 7, parts chs. 15, 20.
Firms and production
A.
Production and costs
Colander et. al., Microeconomics, chs. 9, parts ch. 10.
B.
Competitive Markets
Colander et. al., Microeconomics, ch. 11.
C.
Monopoly
Colander et. al., Microeconomics, ch. 12.
Christmas Examination: Dec. 8
IV.
D.
Imperfectly competitive markets
Colander et. al., Microeconomics, chs. 13.
E.
Price of and demand for factors of production:
Colander et. al., Microeconomics, ch. 21 pp. 457-63.
Macroeconomics
A.
Macroeconomic issues:
Colander et. al., Macroeconomics, ch. 6.
B.
Measuring output and economic growth:
Colander et. al., Macroeconomics, chs. 7, parts of 8.
C.
Determining the level of income:
Colander et. al., Macroeconomics, ch. 9.
D.
The Multiplier:
Colander et. al., Macroeconomics, ch. 10.
E.
Fiscal Policy:
Colander et. al., Macroeconomics, ch. 11, parts of 12.
F.
Money, banking and interest rates.
Colander et. al., ch. 13.
G.
Monetary policy:
Colander et. al., Macroeconomics, chs. 14, parts of 16.
Final Examination: April 18, 9:00 am
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Detailed Course Outline:
I. MICROECONOMICS
This branch of economics is concerned with individual commodities and individual
markets. In it we study how the output and prices of particular products are determined
and what determines the incomes people receive. We study when the market results in
efficient production and when it does not.
A. An overview of economic issues. Ch. 1 pp. 4-20.
Important analytical concepts
Marginal costs and benefits
Opportunity costs
Important issues
Basic economic problems
The nature of economic reasoning
The relationship between economic forces and society as a whole.
B. Using Graphs Appendix A, pp. 20-26.
Graphs are a fundamental tool in economic analysis. They allow us to tell the story of the
impact that one economic force (the price of gasoline) on another economic force (the
quantity that is bought, or the quantity that is sold). Clear economic reason is much
easier when graphs are used. You need to learn how to read them and how to draw
them.
Many of you will already have worked with graphs and be quite comfortable with them.
Others of you may need to refresh your understanding, or build your understanding of
them.
Universal economic problems. Ch. 2 and Appendix A, pp. 27-54.
In every society at a given time, the quantities of goods and services are limited by the
quantity and quality of our factors of production and by our technology. The quantities of
goods and services we would like to consume appears to be unlimited. As a result,
economies must find ways to coordinate production to best meet our wants. Economics
uses scientific methods to study the workings of society related to the fundamental
economic problem of scarcity.
Individuals specialize and trade with each other rather than producing all the goods and
services they wish to consume for themselves. Most people sell their labour and buy
goods and services. Nations also specialize and trade with each other. Trade permits
higher levels of consumption than self-sufficiency.
All societies, whether a medieval manor, a hippie commune, a community of hunters and
gatherers or a complex modern industrial nation must determine what goods to produce,
how to produce them and who will consume them. Some degree of specialization and
trade has been used by all societies we know, even if it is only a division of tasks between
men and women and between the old and the young. Modern capitalism is only one way
of organizing an economy.
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1. Important analytical concepts
Production possibilities
Marginal cost
Efficiency
Growth
Specialization and trade
Division of Labour
Comparative advantage and absolute advantage
Gains from Trade
2. Important issues
Individual liberty, equity between individuals, peace and order, and
efficiency in the use of resources are all values greatly influenced by the type
of social system in place. The relative importance that individuals and society
as a whole places on each of these values varies greatly. An awareness of
when the goals conflict, and when the goals are harmonious is important in
your determination of what a good society is.
C. Fundamentals of the Canadian Economy Ch. 3, pp. 55-81.
1. The economy and social organization. P&B parts of ch. 1, 2, 3, 9, and 15
The distribution of income depends on the distribution of property rights as well as the
income earned by different types of property. The distribution of property rights depends
on legal institutions and past wealth accumulation. A stable and clearly defined system of
property rights is important to a stable well functioning economy. The market is one
system of exchange, but other exchange systems are also used in every society.
Topics
Text pages
Review quizzes
a. Distribution of income.
pp. 5, 348-353.
p. 5 #4, p. 353 #1-4
b. Property rights.
pp. 46.
p. 47 #1
c. Types of exchange
pp. 46, 60
p. 47 #2
d. Markets and firms
pp. 201-11
p. 204 #1-4; p. 209 #1,
4; p. 211 #1-3.
Guide Questions
Chapter
Text Problems Guide Hints
2
None
None
True False: #14, 15
9
None
#3
Short Answer: 5, 8, 9a, 10
15
None
#1
True False: #2-6
D. Price and quantity in competitive markets. P&B chs. 3, 4, 5, 6.
In perfectly competitive markets prices paid and quantities exchanged are determined by
impersonal exchange. Understanding the influences on supply and demand is essential to
understanding why prices and quantities change. Understanding the workings of
competitive markets is essential to understanding the consequences of interfering in those
markets.
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1. Supply and Demand P&B Ch. 3.
The interaction of supply and demand determines the prices of goods and services
produced in competitive markets.
Topics
Text pages
Review quizzes
a. Demand
pp. 83-89
b. Supply
pp. 89-94
c. Equilibrium
pp. 95-99
d. Changes in equilibrium
Chapter
Text Problems
Guide Hints
Guide Short Answer
3
pp. 81-82 #1-12
#1-4
1-7, 8a-c
2. Elasticity P&B Ch. 4.
The concept of elasticity helps us understand how much prices and output change as
supply and demand shift.
Topics
Text pages
Review quizzes
a. Price elasticity of demand
pp. 84-90
p. 90 #1-6
b. Income elasticity of demand pp. 92-93
p. 93 #3-5
c. Elasticity of supply
pp. 94-96
p. 96 #1-5
Chapter Text Problems
Guide Hints
Guide Short Answer
4
pp. 101-2 #1-10, 13-16 #1-4
#1-6, 8
3. Efficiency and equity P&B ch. 5 and part of ch. 18.
In certain circumstances, competitive markets result in the efficient production of goods
and services. Whether that production is also equitable is an important normative issue.
Topics
Text pages
Review quizzes
a. Efficiency (review)
pp. 104-5 (11, 37-39) p. 105 1-3
b. Consumer surplus
pp. 106-107
p. 107 #1-3
c. Producer Surplus
pp. 108-109
p. 109 #1-3
d. Competition and efficiency
pp. 110-113
p. 113 #1-4
e. Pollution and efficiency
pp. 414-418
p. 421 #1-3
f. Efficiency and equity
pp. 114-117
Chapter Text Problems
Guide Hints
Guide Short Answer
5
pp. 121-2 #1-6.
#1-6
#1-10
18
p. 429 #1-2
#1
#1
4. Markets in Action P&B ch. 6, parts of chs. 33 and 34.
People often dislike the prices and outputs that result from the operation of markets. As a
result governments interfere in these markets. Sometimes interference results in a loss of
efficiency and sometimes it may improve efficiency, although alternatives to market
regulation generally give better results, if implementation is possible.
Topics
Text pages
Review quizzes
i. Prescription drugs
pp. 118-119
Critical Thinking 1 a-c.
ii. Rent controls
pp. 124-127
p. 127 #1-6
iii. Minimum wages
pp. 128-30
p. 128 #1-4
iv. Tariffs
pp. 793-5, 797-805
p. 796 #4-5; p. 803 #1-5
6
v. Illegal drugs
pp. 135-36
p. 136 #1-4
vi. The exchange rate
pp. 815-823
p. 823 #1-5
Chapter Text Problems
Guide Hints Guide Short Answer
6
p. 146 #1-4
#1-2
#1-3, 8
33
p. 808 # 8 Critical Thinking 1 a-d #3-5
#2-4
34
None
#1-2
#3-4, 8-9
E. Firms and the determination of prices and output.
Most goods and services are produced by firms whose goals are to maximise profits. A
better understanding of the workings of a market economy can be gained by studying
how the goal of profit maximisation influences firms’ decisions.
1. Inputs, outputs and costs. P&B chs. 9 and 10
The types of products and the technologies of production differ greatly from firm to firm.
Nonetheless every firm faces similarities in the behaviour of output as inputs change and
similarities in the behaviour of costs as output changes.
Topics
Text pages
Review quizzes
i. Measuring costs and profits
p. 196-198
p. 198 #1-5
ii. Decision time frames
p. 218
iii. Production functions
pp. 219-222
p. 222 #1-3
iv. Cost functions
pp. 223-227
p. 227 #1-5
Chapter Text Problems
Guide Hints
Guide Short Answer
9
p. 215 #1-2
#1
#1
10
p. 235 #1-6
#1-4
#1-8
2. Perfect competition. P&B ch. 11
Firms operating in perfectly competitive markets have no influence over the price of their
products which are identical to the products of large numbers of other firms. In spite of
these firms’ best efforts to maximise profits, in the long-run they just earn enough to keep
them in business. As a result, in certain circumstances, production in these industries is
efficient.
Topics
Text pages
Review quizzes
i. Demand curve
pp. 238-239
p. 239 #1-4
ii. Profit maximising output
pp. 240-242
p. 245 #1-2
iii. Firm and industry supply
pp. 244-245
p. 245 #3-4
iv. Equilibrium
pp. 246-248
p. 249 #1-3
v. Efficiency
pp. 254-255
Chapter Text Problems
Guide Hints
Guide Short Answer
11
pp. 259-260 #1-8
#1-6
#1-8, 10
3. Monopoly. P&B ch. 12
A firm with a monopoly is the sole producer of a product with no close substitutes. As a
result, this type of firm may gain excess profits in the long-run. Some barrier must
prevent entry to this industry, or else the profits would attract competitors and it would
no longer be a monopoly. Generally a monopoly’s production is inefficient; it will
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produce less of the product and sell it at a higher price than if the product were
manufactured in a competitive industry.
Topics
Text pages
Review quizzes
i. Sources of monopoly
pp. 262-263
ii. Demand curve
pp. 264-265
p. 267 #1
iii. Profit maximising output
pp. 266-267
p. 267 #2-4
iv. Monopoly and efficiency
pp. 268-271
p. 271 #1-3
Chapter Text Problems
Guide Hints
Guide Short Answer
12
pp. 281-282 # 1-6
#1-2
#1-2
4. Imperfect competition. P&B ch. 13
In monopolistic competition there are many close substitutes for each firm’s output, but
none of the outputs are identical. As a result, each firm has some control over the price of
its product. However, in the long run firms in these industries will make only normal
profits. Output will be lower and price higher than if the firm operated in a perfectly
competitive market. Each firm will have excess capacity. In an oligopoly a small number
of firms dominate the industry. In these industries, each firm must consider the response
of its rivals to changes in price or output.
Topics
Text pages
Review quizzes
i. Monopolistic competition
pp. 284-288
p. 288 #1-4
ii. Oligopoly games
pp. 293-300
p. 300 #1-5
Chapter Text Problems
Guide Hints
Guide Short Answer
13
pp. 306-7 # 1-2, 9-12
#1-4
#1, 3, 5, 6, 7
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II. MACROECONOMICS
This branch of economics studies the overall behaviour of the economy. The two major
concerns are the long-run growth of the economy and short-run stability of the economy.
A. Fundamental macroeconomic questions and variables
1. An overview of macroeconomic goals P&B ch. 19, 21
Macroeconomic goals are high and stable rates of growth in output, with high and stable
levels of employment, and low and stable rates of inflation. Success in achieving these
goals has varied through time.
Topics
Relevant pages
Review quizzes
a. Growth and cycles
pp. 438-444, 478.
p. 444 #1-8 p. 478 #1-2
b. Unemployment
pp. 444-446, 480-489
p. 446 #1-4, p. 489 #1-5
c. Inflation
pp. 447-449, 490-493
p. 449 #1-5, p. 493 #1-4
d. Macroeconomic policy
p. 451
p. 451 #1-3
Chapter Text Problems
Guide Hints
Guide Short Answer
19
p. 456 #6
#1-4
#1, 3-4, 6-10
21
p. 497 #1-10
#1-3
#1-10
2. Measuring output P&B ch. 20
The circular flow of income shows the equality between total expenditures and total
income. Remember that every dollar spent becomes someone’s income. Economists have
constructed conventional measures of output and other economic variables so that
economic performance can be monitored. GDP attempts to measure the value of goods
and services produced in the economy, but our economic well being is influenced by
many other factors as well. Of course, our overall well being as human beings is
influenced by many non-economic factors.
Topics
Text pages
Review quizzes
a. The circular flow of income
pp. 458-462
p. 462 #1-4
b. Measuring GDP
pp. 463-464
p. 446 #1-3
c. Measuring real GDP
pp. 465-467
p. 467 #1-2
d. GDP and economic welfare
pp. 468-471
p. 471 #1-5
Chapter Text Problems
Guide Hints
Guide Short Answer
20
pp. 475-6 #1-8
#1-5
#1-10
B. Determinants of equilibrium income and long-run growth
1. Determining equilibrium income and potential income P&B ch. 22.
Aggregate supply and aggregate demand together determine equilibrium income and the
price level. Shifts in aggregate demand and supply cause the business cycle and
contribute to economic instability
Topics
Text pages
Review quizzes
a. Aggregate supply
pp. 500-504
p. 504 #1-4
b. Aggregate demand
pp. 505-508
p. 508 #1-3
c. Equilibrium income
pp. 509
d. The business cycle
pp. 510-513, 478
p. 513 #1-4
Chapter Text Problems
Guide Hints
Guide Short Answer
9
22
pp. 519-520 #1-10
#1-5
#1-10
2. Potential GDP and economic growth P&B chs. 29, 30
Our economic well being is ultimately limited by the level of potential GDP. The
accumulation of both human and physical capital is important in determining the
amount of output a given population can produce per hour of work. The experience of
economic growth has varied considerably through time.
Topics
Text pages
Review quizzes
a. The production function
pp. 680-682
p. 682 #1-3
b. Labour and Aggregate Supply pp. 683-688
p. 688 #1-6
c. Economic growth
pp. 688-692
p. 692 #1-3
d. Experience of growth
pp. 708-716
p. 710 #1-3, p. 712 #1-3
Chapter Text Problems
Guide Hints
Guide Short Answer
29
pp. 705-706 #1-6
#1-3
#1-10
C. Stabilizing the economy
An important responsibility of government is stabilizing the economy so that real GDP
remains near its potential. Both monetary tools wielded by the Bank of Canada and fiscal
tools wielded by the federal government play important roles in stabilization.
1. Fiscal policy
Governments can change expenditures directly through their spending decisions and
indirectly through tax policies. As a result government policy can influence equilibrium
income.
2. Expenditure multipliers P&B ch. 23.
When people to decide to spend more out of a given level of income, income increases by
more than the increase in expenditure. When people to decide to spend less out of a
given level of income, income decreases by more than the decrease in expenditure. The
larger the multiplier the greater is the instability of the economy.
Topics
Text pages
Review quizzes
a. The consumption function
pp. 528-533
p. 533 #1-5
b. Equilibrium expenditure
pp. 533-537
p. 537 #1-4
c. The multiplier
pp. 538-543
p. 543 #1-3
d. The impact of price changes
pp. 543-547
p. 547 #1-4
Chapter Text Problems
Guide Hints
Guide Short Answer
23
pp. 553-554 #1-6
#1-6
#1-4, 6-9
3. Government and income levels P&B ch. 24.
Government can use discretionary changes in government spending or taxes to alter
equilibrium income and stabilize the economy. Automatic stabilizers are established
government policies which stabilize the economy by reducing the size of the multiplier.
Topics
Text pages
Review quizzes
a. Government budgets
pp. 556-561
p. 561 #1-3
b. Fiscal policy multipliers
pp. 562-566
p. 568 #1-3
c. Automatic stabilizers
pp. 566-568
p. 568 #4-5
Chapter
Text Problems
Guide Hints
Guide Short Answer
24
pp. 579-580 #1-2, 5-6 #1-3
#1-6, 8
10
4.
Monetary Policy
1. Money and banking P&B ch. 25
Money is created through the banking system. The rate of expansion of the money
supply has an important impact on interest rates and therefore on desired levels of
expenditure.
Topics
Text pages
Review quizzes
a. Defining money
pp. 582-584
p. 584 #1-5
b. Banks and money creation
pp. 585-590
p. 584 #1-5, p. 590 #1-3
c. The demand for money
pp. 591-594
p. 594 #1-4
d. Interest rate determination
pp. 594-596
p. 596 #1-5
e. Interest rates and expenditures pp. 597-599
p. 599 #1-3
Chapter Text Problems
Guide Hints
Guide Short Answer
25
pp. 603-604 #1-9
#1-3
#1-10
2. Monetary policy P&B ch. 26
The Bank of Canada intervenes in money markets and influences the rate of growth
of the money supply and the level of interest rates. The decisions the Bank of Canada
makes have a large impact on the stability of the economy.
Topics
Text pages
Review quizzes
a. The Bank of Canada and
pp. 606-610
p. 610 #1-5
monetary policy
b. Controlling the quantity of
pp. 611-615
p. 615 #1-4
money
c. The impact of monetary policy pp. 615-621
p. 620 #1-5
Chapter
Text Problems
Guide Hints
Guide Short Answer
26
pp. 625-626 #1-8
#1-2
#1-7, 9
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