Under each major heading is a list of concepts that will be covered. Assignments are made throughout - PR refers to your textbook. To perform well in this course you need to be able to explain and use each concept mentioned. I have included specific learning outcomes for each section under "Be able to: ..."

Markets and Prices


Review Links - These are developed for a Principles Class but provide a good review here

Deductive vs. Inductive Reasoning

Things are the way they are for a reason

Supply and Demand - Introduction

Demand Analysis Framework

Supply Analysis Framework

Elasticities

Read: PR Chapter 1

Major Topics:
Positive Analysis
Normative Analysis
Markets
Market Price
Relative Prices
Property Rights
Transactions Costs
Hypotheses and Theories
Inductive and deductive theories
Nominal Price
Real Price
The CPI - Consumer Price Index

 Be able to:
• Explain the differences between positive and normative analysis
• Explain the concept of relative price
• Explain how and why market economy's require property rights
• Explain how scientific theories are accepted or rejected
• Explain the relationship between real and nominal prices
• Convert nominal prices to real prices and vice versa


Read: PR Chapter 2.1, 2.2, 2.3

Major Topics:
Market equilibria
Shortages and Surpluses
Dependent vs. Independent Variables
Supply shift parameters
Demand shift parameters
Taxation 

Be able to:
• Explain how market price is determined
• Show and explain the effects of shortages and surpluses
• Explain dependent and independent variables in terms of the demand and supply curves
• List and use the major shift parameters for the demand curve
• List and use the major shift parameters for the supply curve
• Explain the effects of a tax on a market using consumer and producer surplus analysis

A Brief Review of Basic Mathematics
Be able to:
• Multiply and divide fractions
• Calculate and explain slope
• Interpret and use linear functions

 Elasticity - Take good class notes -- your textbook is weak in this area

Read: PR Chapter 2.4 & pages 117-123

Major Topics:
General Concept of Elasticity
Price Elasticity or E_d
Ranges of elasticity's ( 0 < E_d < 1)
Point elasticity
Arc elasticity
Major determinants of Price Elasticity
Changes in Total Revenue and the E_d
Income Elasticity or E_y: Normal, luxury, necessity, income independent, inferior goods
Cross-Price Elasticity or E_cp: Substitutes or Complements?

Read: PR 2.5, 2.6, 2.7
Short-run vs. long-run elasticity
An algebraic treatment of equilibrium
Price Controls

 Be able to:
• Interpret the calculated value of an elasticity
• Explain the difference between point and arc elasticity's
• Calculate point and arc elasticity's
• Explain the effects of price elasticity on the total revenues of the firm
• Calculate and interpret income elasticity's
• Calculate and interpret cross elasticity's
• Discuss the differences between SR and LR elasticity's
• Solve for equilibrium quantity and price given a linear supply and demand curve
• Understand and explain the effects of price ceilings
• Understand and explain the effects of price floors


 Demand Theory

 Read: PR 3.1

Major Topics:
Assumptions: completeness, transitivity, more is preferred to less
Indifference Curves (I-Curves)
Indifference Maps
Cardinal vs. Ordinal Rankings
The Marginal Rate of Substitution of X for Y (MRS_XY) (Handout #2)
MRS_XY - the interpretation of slope
Preferences and the shapes of indifference curves
Strong preferences, neuter preferences, economic bads
Perfect and close substitutes
Perfect and close complements
Utility functions

 Read: PR 3.2 through 3.5

Major Topics:
The Budget Constraint (BC)
Intercepts and slope Y = P_x(Q_x) + P_y(Q_y)
Manipulating the BC: changes in prices and income
Consumer Choice: Maximizing Consumer Satisfaction (equilibrium using I-curves and BCs)
Corner Solutions
Revealed Preference
Marginal Utiltiy and Consumer Choice (Handout #3)
The Composite Commodity Theorem
Utility Theory, Marginal Utility and Consumer Choice
The Law of Diminishing Marginal Utility
Advantages of the I-Curve approach

 Examples of I-Curve analysis:
Quantity discounts and a kinked budget constraint
Altruism
Food Stamps
Cash Payments vs. Fringe Benefits
Free Housing vs. Housing subsidy
Non-Wage income (work-leisure model)

 Be able to:
• Explain the assumptions behind the indifference curve
• Explain why ordinal measures are used rather than cardinal preferences
• Use indifference curves to reflect the preferences of an individual
• Determine the MRS_XY
• Explain diminishing marginal rates of substitution for a good
• Explain revealed preference and its implications
• Use the composite commodity theorem to explain why money price is on the vertical axis
• Explain the relationship of utility theory to prices and the MRS_XY
• Apply BC's to reflect information in a word problem
• Apply I-curves to reflect information in a word problem
Note: You will be asked to use I-curve analysis repeatedly in this course

 

Read: PR 4.1

Major Topics:
Price-Consumption Curves (PCC)
Deriving the demand curve
Income-Consumption Curves (ICC)|
Normal and inferior goods
Engel Curves

Be able to:
• Derive the individual's demand curve from her PCC
• Derive the individual's engel curve from her ICC
• Explain the terminolgy used in these concepts

Read: PR 4.2

Major Topics:
Income and Substitution Effects for normal, inferior, and giffen goods

Be able to:
• Delineate between the income and substitution effects for a price increase and a price decrease
• Show the income and substitution effects for a normal good
• Show the income and substitution effects for an inferior good
• Show the income and substitution effects for a giffen good

Read: PR 4.3

Major Topics:
Market Demand

Read: PR 4.4

Major Topics:
Consumer surplus (CS)
Adam Smith and the Diamond-Water paradox

 Read: PR 4.5

Major Topics:
Interdependent Demand Curves
The Bandwagon Effect
The Snob Effect

Be able to:
• Explain how market demand curves are derived
• Explain and use consumer surplus
• Explain the Bandwagon effect
• Explain the Snob effect

PRODUCTION, COSTS, PROFIT MAXIMIZATION, AND COMPETITIVE SUPPLY

PRODUCTION

Read: PR 6.1 & 6.2

Major Topics:
Describing technology: the production function
Isoquants and isoquant maps
Short-run vs. long-run production: fixed vs. variable inputs

Read: PR 6.3

Major Topics:
Production in the Short-run
A short-run production function (at least one fixed input)
The graphical representation of the production function - the Total Product (TP) function
The Average Product of Labor (APL)
The Marginal Product of Labor (MPL)
Relationships among the APL and the MPL
The law of diminishing marginal returns and the SR

Read: PR 6.4

Major Topics:
Production in the Long-run
A long-run production function (no fixed inputs)
The Marginal Rate of Technical Substitution - MRTS_KL
Choosing among inputs - achieving the same goal with different factor mixes
Using isoquants and isocost curves

Read: PR 6.5

Major Topics:
Returns to Scale
Increasing, decreasing, and constant returns to scale

Be able to:
• Explain the information required for a simple SR production function
• Draw a SR production function. What variables are on the axes?
• Determine the APL and MPL from TP information
• Explain the relationship between the MPL and the APL
• Define the Law of diminishing marginal returns (LDMRs)
• Explain the effect of the LDMRs on the shape of the SR production curves
• Clearly delineate the difference between the SR and the LR production function
• Calculate the MRTSKL
• Explain substitution among inputs including how and why these substitutions occur
• Explain what is meant by a declining or diminishing MRTS. Why would this occur in the SR but not in the LR?
• Define and briefly explain types of returns to scale
• Use isoquants to show returns to scale

COSTS

Read:PR 7.1

Major Topics:
Economic Costs
Accounting Costs
Opportunity costs
Implicit and explicit costs
Sunk Costs

Take good class notes on:
The explicit algebraic relationship between the production function and the cost function

Read: PR 7.2
Major Topics:
Combining technology (the production function) and input costs
Costs in the Short-run
TC, FC, VC, ATC, AFC, AVC, MC
Determinants of the shape of the SR cost curves
Typical U-shaped SR cost curves

Read: PR 7.3
Major Topics:
Costs in the Long-run
TC, FC, VC, ATC, AFC, AVC, MC
Isocost Lines
Intercepts and slope TC = PK(QK) + PL(QL)
Shifting the isocost line
Changes in total costs
Changes in input prices
Isocosts and Isoquants: Choosing your input mix
Cost minimization with given input prices
The Expansion Path

Read: PR 7.4
Major Topics:
Comparing and contrasting LR and SR cost curves
Changing the size (scale) of the plant itself
Returns to scale and the LRATC curve
Determination of the shape of the LR cost curves
Constructing the LRATC curve
Shifting the LRATC
Technology
Input prices

Read: PR 7.6
Major Topics:
Dynamic changes in costs
The learning curve

Now that we have derived the MPL and the APL from the total product curve and explained the relationships between each, it is our next charge to carry this over into the firms short-run and long-run cost relationships. There exist direct and specific relationships between production theory and cost theory; between the MPL, APL, and TPL curves mentioned above and the MC, AC, and TC curves. Use the following as a guideline to explain these relationships to yourself.

Be able to:
• Define and explain the various definitions of costs in section 7.1
• Explain the role of sunk costs in economic decision-making
• Understand the conversion of a production information (which is purely technological information) to cost information (which incorporates information concerning input prices.)
• What is the relationship between the TP curve and the TC curve?
• What is the relationship between the APL curve and the AVC curve?
• What is the relationship between the MPL curve and the MC curve?
• Define and calculate SR costs: the ATC, AVC, AFC, & MC
• Explain why SR cost curves are U-shaped
• Explain an Isocost Line. What determines the slope of the isocost line? What determines the position of the isocost line? What happens when the P_L, P_K, or TC change? How is the isocost line different than the Demand Theory's budget line?
• What is meant by "the minimum cost input combination" ? How does this relate to the expansion path?
• Explain the derivation of the LRATC curve
• Explain why LR cost curves are u-shaped
• Show how changes in technology and input prices affect cost curves
• Explain the Learning Curve

 

PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

Read: Class Handout and PR 8.1
Major Topics:
Goals of the firm (handout and class notes)
Profit Maximization
Ownership and control of the firm
Managerial consumption of leisure
Amenity maximization
Sales maximization
Internal controls
Governance structure
Proxy battles
Performance-based pay
External controls
Takeover
Competition
Financial capital markets

Read: PR 8.2
Major Topics:
Price-taking behavior
The assumptions of pure competition
Profit-maximizing firm behavior in competitive markets

Read: PR 8.3, 8.4, 8.5
Major Topics:
Output decisions in the Short-run
Profits in competitive markets: The SR
Zero economic profits
Economic profits or losses
The competitive firm's supply curve in the SR
The shutdown point
The competitive industry's supply curve in the SR
Industry Supply = firm's supplies
SR elasticity of supply
Producer surplus (PS)

Read: PR 8.6
Major Topics:
Output decisions in the Long-run (LR)
Profits in competitive markets: The LR
Long-run equilibrium
The crucial role of entry and exit
Market structure implications for cost and price minimization
Entry and economic rents

Read: PR 8.7
Major Topics:
Deriving the industry's LR supply curve
Increasing, constant, and decreasing cost industries
The Difference between SR and LR supply curves

Read: PR 8.8
Major Topics:
Contestable Markets (take good class notes)

Be able to:
• Write a short essay on the goals of a firm and how economists justify the use of profit maximization as the primary goal
• Explain the importance of price taking behavior in competitive markets
• List the assumptions of pure competition
• Explain the SR output decision for a competitive firm
• Derive the firm's SR supply curve
• Derive the industry's SR supply curve
• Define and explain producer surplus
• Explain the LR output decision for a competitive firm
• Explain LR equilibrium, LR profits, and the role of entry and exit in the LR
• Explain the effects of competitive markets on costs and prices
• Derive a LR supply curve
• Explain increasing cost, decreasing cost, and constant cost industries
• Write a short essay on Contestable Markets

Analyzing Competitive Markets

Read: PR Chapter 9
Major Topics:
Review of consumer surplus and producer surplus
Welfare conditions under pure competition
Pareto-optimality
Using supply and demand curves as marginal benefit and marginal cost curves
Price Controls - an upper limit on price
Natural Gas
Rent Controls
Price Minimums - a lower limit on price
The Airline Industry under the CAB
Agricultural markets
Limiting entry in tobacco and peanut markets
Price supports
Production quotas
Import quotas and tariffs
Taxation
Subsidies

Read and Discuss the Hayek article
The competitive model as a benchmark

Be able to:
• Show the distribution of CS and PS under competitive market conditions
• Define pareto-optimality
• Explain what effects we can expect if government sets price below the equilibrium price
• Explain what effects we can expect if government sets price above the equilibrium price
• Explain what effects price supports have on markets
• Explain what effects production quotas have on markets
• Explain the effects of a tax on a competitive market
• Explain the effects of a subsidy on a competitive market
• Be able to discuss the role of prices in a market economy (Hayek)

MARKET STRUCTURES - PURE MONOPOLY

Read: PR 10.1
Major Topics:
Price-making behavior
The assumptions of pure monopoly
Profit-maximizing firm/industry behavior in monopolized markets

Read: PR 10.2
Major Topics:
Some observations on monopoly
Mark-up pricing
The "disappearing" the supply curve
The effect of a tax on a monopolist
Operating in the elastic range of the demand curve
Measuring monopoly power
Monopoly and the "guarantee" of profit
The Lerner Index
Concentration Ratios (Class notes)
The Hirfindahl Index (Class notes)

Read: PR 10.3
Major Topics:
Sources of monopoly power

Read: PR 10.4
Major Topics:
Welfare costs of monopoly
Natural Monopoly
Regulating the natural monopolist
Marginal cost pricing versus Average cost pricing

Read: PR 10.7
Major Topics:
Antitrust Law

 Be able to:
•Explain the importance of price making behavior in monopoly markets
• List the assumptions of pure monopoly
• Discuss the profit-maximizing behavior of a monopolist
• Discuss the pricing decision of the monopolist
• Discuss the supply curve under monopoly
• Discuss the relevant range of prices for a monopolist
• Show how a tax could actually increase quantity offerings to the market
• "Measure" monopoly power using the Lerner and Hirfindahl indices
• Explain the major sources of monopoly
• Explain the social or welfare costs of monopoly
• Define a natural monopoly
• Outline the pro's and con's of price regulation of a natural monopolist. Be sure to clearly delineate between MC pricing and AC pricing.

The extraction of Consumer Surplus - Pricing decisions

Read: PR 11.1 & 11.2
Major Topics:
Price discrimination
Three necessary conditions
Types of price discrimination
First degree or Perfect price discrimination
Second degree or Block pricing
Third degree or Segmented market pricing discrimination

Read: PR 11.3
Intertemporal Price Discrimination and Peak-Load Pricing

Read: PR 11.4
The Two-Part Tariff

Read: PR 11.6 -SKIP SPRING 2004
Advertising

Be able to:
• Explain why a firm would want to price discriminate
• Outline the conditions necessary for price discrimination to be effective
• Differentiate among 1st, 2nd, and 3rd degree price discrimination
• Explain Intertemporal Price Discrimination
• Explain Peak-Load Pricing
• Explain how a firm must address the decision to advertise if it is going to profit maximize-SKIP SPRING 2004

Monopolistic Competition
Read: PR 12.1
Major Topics:
Assumptions and Characteristics
SR equilibrium
Profits and Losses
LR equilibrium
"Excess Capacity" - the costs of differentiation
Comparison with pure competition
Advertising and the dynamic effects of product differentiation on cost curves (Class Notes)

Be able to:
• List the assumptions of monopolistic competition
• Discuss the profit-maximizing behavior of a monopolistically competitive firm
• Discuss the SR pricing and output decision of a monopolistically competitive firm
• Discuss the LR pricing and output decision of a monopolistically competitive firm
• Explain the role of entry and exit in the LR
• Define and explain the concept of excess capacity in the LR
• Compare the monopolistically competitive firm to the competitive firm
• Discuss the static and dynamic role of advertising

Oligopoly
Read: PR 12. 2 - 12.6
Major Topics:
Assumptions and Characteristics
Nash Equilibrium - define and explain
Cournot Equilibrium - define, explain, derive
Bertrand Equilibrium - define, explain, derive (homogeneous products only)
When to use Cournot and Bertrand Models
Competition vs. Collusion
The payoff matrix
The Prisoner's Dilemma
Implications of the Prisoner's Dilemnma for Oligopolisitic Pricing
Price Rigidity - Kinked demand curve model
Price leadership models by the low cost firm
Price leadership models by the dominant firm
Cartels and collusion
Formalized market coordination
Decisions required to form a cartel
Factors which make it easier to form a cartel
Why cartels fail
Informal market coordination

Be able to:
• List the assumptions of oligopoly
• Discuss the profit-maximizing behavior of an oligopolist
• Discuss the SR pricing and output decision of an oligopolist
• Discuss the LR pricing and output decision of an oligopolist
• Define a Nash Equilibrium
• Define, explain and derive a Cournot Equilibrium
• Define, explain and derive a Bertrand Equilibrium
• Conpare and contrast the uses of Cournot vs. Bertrand
• Construct and use a payoff matric
• Explain the Prisoner's Dilemma and use it in a payoff matrix analysis
• Discuss the implications of the Prisoner's Dilemma for Oligopolistic Pricing - "Schizophrenia Pricing"
• Develop the kinked demand curve model to explain price rigidity
• Develop a price leadership model based on the low cost firm
• Develop a price leadership model based on the dominant firm
• Define cartels and collusion
• Outline the decisions which are required to form a cartel
• Outline the factors which make it easier to form a cartel
• Explain why cartels eventually fall apart

Game Theory and Competitive Strategy
Read: PR 13.1 - 13.9
Major Topics:
Gaming and Strategic Decisions
Dominant Strategies
The Nash Equilibrium Revisited
SKIP: Mixed Strategies
Repeated Games
Sequential Games
Threats, Commitments, and Credibility
Entry Deterence
Bargaining Strategy
Auctions

Be able to:
• Explain the difference between cooperative and noncooperative games
• Identify and explain dominant strategies in a payoff matrix
• Show single and multiple Nash Equilibria in a payoff matrix
• Explain the Nash Equilibrium in a beach location game
• Identify and explain the maximin strategy in a payoff matrix
• Explain how a repeated game affects choices (again using a payoff matrix)
• Explain how a sequential game affects choices (again using a payoff matrix)
• Explain why there is an advantage to moving first
• Construct and use a payoff matric
• Explain the Prisoner's Dilemma and use it in a payoff matrix analysis
• Discuss the implications of the Prisoner's Dilemma for Oligopolistic Pricing - "Schizophrenia Pricing"
• Develop the kinked demand curve model to explain price rigidity
• Develop a price leadership model based on the low cost firm
• Develop a price leadership model based on the dominant firm
• Define cartels and collusion
• Outline the decisions which are required to form a cartel
• Outline the factors which make it easier to form a cartel
• Explain why cartels eventually fall apart

 Disclaimer: The schedules and procedures in this course are subject to change in the event of extenuating circumstances.

Web page Last Updated on January 26, 2005

© FGCU 1997. The framework and images are those of an official FGCU web page.

© Bradley K. Hobbs, Ph.D. 2001. All written portions of this work are those of Bradley K. Hobbs and his alone.
Intellectual property rights are claimed over my intellectual product (Read "Capitalism" by Ayn Rand.)