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ECON 102 Notes (Dr. Wooten)
ECON 102
COURSE
PACK
Page Number
Dr. Jadrian
Wooten
Penn State
University
Lesson
2
Introduction to the course
12
Lesson 1: Foundations and Models
23
Lesson 2: The Interaction of Demand and Supply
43
Lesson 3: The Market for Labor and Other Factors of Production
53
Lesson 4: Economic Efficiency
59
Lesson 5: Elasticity
77
Lesson 6: Price & Quantity Controls
89
Lesson 7: Taxes & Tax Policy
100
Lesson 8: Externalities, Environmental Policy, and Public Goods
120
Lesson 9: Comparative Advantage and the Gains from International Trade
136
Lesson 10: Technology, Production, and Costs
150
Lesson 11: Perfect Competition
163
Lesson 12: Monopoly Power
178
Lesson 13: Monopolistic Competition
188
Lesson 14: Oligopoly
200
Lesson 15: Pricing Strategy
206
Lesson 16: Game Theory
211
Lesson 17: Consumer Choice and Behavioral Economics
ECON 102 Notes (Dr. Wooten)
Introduction to the Course
Hello and welcome to the ECON 102: Introductory Microeconomic Analysis
and Policy. I am excited that you have chosen my section of ECON 102! I
have spent a lot of time developing this course over the past few years and I
hope you find it valuable to your learning experience.
Although you aren’t required to bring this coursepack to class everyday, I
encourage you to do so and use it to take your notes. This course pack will
provide you with a redacted version of 90% of the slides I cover in class. It is
here to help guide your note taking in class and make it easier for you to
stay organized. I have made sure there is extra “white space” so you can
add relevant discussions or examples I talk about in class. This is also a great
place to make notes about material you need to further review.
We have a scarcity of time together and we won’t be able to cover every
topic in lecture. This is where your textbook comes into the picture. You
should be reading along each week in the textbook to ensure yourself a
solid grade in my class. Showing up, taking notes, and studying from the
course pack is not enough to get you an A in this course. You must be
actively studying on your own using your book and the material I provide
on Canvas.
If you put in the work for this course, I have no doubt you will succeed and
may even enjoy it! I am very passionate about teaching, and I hope my
passion for economics wears off on you.
Enjoy the course!
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ECON 102 Notes (Dr. Wooten)
Instructor Biography
I grew up in a small town outside of Houston, Texas. You’ll notice relatively quickly
that I don’t have a “Texas accent.” I worked hard when I was in high school to get
that out of my system since it doesn’t have the best connotation. I went to Sam
Houston State University in Huntsville, Texas (close to Houston) and spent 4
wonderful years working on a Bachelor of Business Administration in
management, economics, and entrepreneurship. This will come across as we cover
material in course.
During my time at Sam Houston, I tutored for the Economics Department and fell
in love with teaching. I learned so much more from tutoring than I ever did as a
student. I loved working with students and sharing my passion with them. I
eventually took on roles as a research assistant and a graduate assistant, but I
never stopped tutoring. It was clear I wanted to do this for a career.
Between my junior and senior year, I decided I wanted to become a university
professor, but it was too late to start preparing for graduate school. I stayed an
extra year and earned a Master of Business Administration degree while
improving my background for a PhD program in economics. I applied to many
places, but eventually accepted a position with Washington State University in
Pullman, Washington.
I completed my PhD in four years and wrote a dissertation in sports economics.
During my time there I taught undergraduate and graduate level courses in
Sports Economics as well as Principles of Microeconomics, which is the course
you’re about to take with me!
I applied for a position with Penn State in November 2013, and here I am! I
teach Labor Economics, Introductory Microeconomics, and an occasional special
topics course for the department. I look forward to possibly seeing you in my
other classes.
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ECON 102 Notes (Dr. Wooten)
Other Facts About Me:
• My mother was disappointed that I wasn’t using my MBA and instead decided
to get a PhD so that I could “just teach.”
• I spend way too much time on Twitter as @Wootenomics
• I manage the Economics Media Library online that hosts video clips for other
instructors to use when teaching economics (www.EconMediaLibrary.com)
• My wife teaches at Penn State as well; your friends may be taking her.
• You can learn a lot about me on my website: www.JadrianWooten.com
• I wrote a book on economic concepts found in Parks and Rec.
• I am a huge teaching nerd. You will see me get WAY too excited about this
course. It’s okay to call me a nerd.
Assignments
We won’t spend a lot of class time covering the structure of the course.
That’s really what the syllabus is for. I have posted some pages and videos
in Canvas to help you with how to access/use MyEconLab and Packback.
Download the syllabus and work through the Onboarding material in
Canvas now. Highlight the important parts on the next few pages so that
you always have access it. If you have questions about assignments, see
me in office hours and we can make sure you don’t start off the course
behind.
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5
ECON 102 Notes (Dr. Wooten)
How Do You Get Points?
MyEconLab Homework
Packback Discussions
Midterm Exams
Comprehensive Quiz
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ECON 102 Notes (Dr. Wooten)
Important Class Dates
Date
Regular drop deadline
Midterm #1
Midterm #2
Midterm #3
Late drop deadline
Lesson 1: Foundations and Models
Summary
In this section of the course, we define economics and its subfields,
macroeconomics and microeconomics. We will explore the idea of scarcity and
rationality, which are the foundations of our entire discipline. We will look at
marginal analysis and try to understand how models and their assumptions shape
our results.
Review Material
q Weekly Lesson Videos: Lesson 1
q Hubbard and O’Brien: Chapter 1
q Hubbard and O’Brien: Chapter 1 Appendix (Math Review)
q Study Tips for Economics
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ECON 102 Notes (Dr. Wooten)
Types of Markets
Are markets today the same or different than markets from 1700s?
Command Economy
Examples of command economies:
1.
2.
3.
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ECON 102 Notes (Dr. Wooten)
Command Economy
Completely determined and controlled by the
central authority or government
The Invisible Hand
“It is not from the benevolence of the butcher, the brewer, or the baker,
that we expect our dinner, but from their regard to their own interest. We
address ourselves, not to their humanity but to their self-love, and never
talk to them of our necessity but of their advantage”
---Adam Smith
The Wealth of Nations
What does it mean for us?
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ECON 102 Notes (Dr. Wooten)
Microeconomics
Microeconomics: The study of individual decision making
Examples of things we’ll talk about:
1.
2.
3.
Market Failures
Examples of market failures:
1.
2.
3.
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ECON 102 Notes (Dr. Wooten)
Resources Are Scarce
Two big examples:
1.
2.
Opportunity Costs
Opportunity costs are the value of the next best alternative that you could
have done
Examples:
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ECON 102 Notes (Dr. Wooten)
People Respond to Incentives
Social Goal
Possible Solutions
Unintended Consequences
Get students
to learn more
Reduce teen
pregnancy
Reduce use of
plastic bags
There are Gains From Trade
Why doesn’t each person make their own food and educate their own children?
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ECON 102 Notes (Dr. Wooten)
There are Gains From Trade
Jack
Jane
Laundry
20 minutes
25 minutes
Dishes
30 minutes
45 minutes
If they split their time:
If they specialize:
Markets Move to Equilibrium
An equilibrium is a situation where no individual would be better off
without doing something different.
Example:
Why is the market moving?
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ECON 102 Notes (Dr. Wooten)
Resources Should be Used Efficiently
What do economist mean when they say resources to be used efficiently?
Efficiency
Equity
Markets Usually Lead to Efficiency
What usually ensures an efficient outcome?
Example:
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ECON 102 Notes (Dr. Wooten)
Government Intervention Can Help
What is the government trying to solve?
Examples:
Your Spending is My Income
How does a reduction in home sales lead to empty shopping malls?
Economic Modeling
A model is a simplified representation of reality.
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ECON 102 Notes (Dr. Wooten)
Circular Flow Diagram
Two Types of Decision Making
Before you make any decision:
1.
2.
Types of Costs:
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ECON 102 Notes (Dr. Wooten)
Examples of Implicit and Explicit Costs
What’s the true cost of a diet?
Accounting vs. Economic Profit
Guess which measure economists prefer?
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ECON 102 Notes (Dr. Wooten)
Zero Profits
If you quit your job as a lion tamer ($45,000/year) to open a tanning
studio ($45,000 left over after costs are paid)
What is your economic profit?
“How Much” is a Marginal Decision
Marginal analysis is a decision making tool to analyze how much of an item you
want to consume
Example:
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ECON 102 Notes (Dr. Wooten)
Decision Making
There are different types of decisions:
1.
2.
Making “Either-Or” Decisions
Principle of “either-or” decision making:
When faced with an “either-or” choice between two activities (all else
equal) choose the one with:
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ECON 102 Notes (Dr. Wooten)
Examples of “Either-Or” & “How Much” Decisions
“Either-or”
“How Much?”
Marginal Analysis
Marginal benefit is the benefit of doing a little more of something.
Marginal cost is the cost of doing a little more of something.
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ECON 102 Notes (Dr. Wooten)
Let’s Look at an Example
Sarah needs to decide how many years to go to PSU
Each year has an explicit cost of $17,000
Quantity of schooling
Total Cost
Marginal Cost
0
$0
---
1
$30,000
2
$70,000
3
$130,000
4
$220,000
5
$350,000
Marginal Cost of Sarah’s Schooling
Marginal
cost
$300,000
200,000
100,000
0
1
2
3
4
5
Quantity of schooling (years)
Each year’s implicit cost
increase because:
Quantity
of
schooling
Total Cost Marginal Cost
0
$0
--
1
$30,000
$30,000
2
$70,000
$40,000
3
$130,000
$60,000
4
$220,000
$90,000
5
$350,000
$130,000
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ECON 102 Notes (Dr. Wooten)
Marginal Benefit of Sarah’s Schooling
Each year that Sarah goes to school makes her a more valuable employee.
Quantity of schooling
Total Benefit
Marginal Benefit
0
$0
---
1
$300,000
2
$450,000
3
$540,000
4
$600,000
5
$650,000
An additional year of school
raises her:
Quantity
of
schooling
Total
Benefit
Marginal
Benefit
0
$0
--
Margin
al cost
1
$300,000
$300,000
2
$450,000
$150,000
$300,000
3
$540,000
$90,000
4
$600,000
$60,000
5
$650,000
$50,000
Marginal Benefit of Sarah’s
Schooling
200,000
100,000
0
1
2
3
4
Quantity of schooling (years)
5
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ECON 102 Notes (Dr. Wooten)
Marginal Analysis
Profit-maximizing principle of marginal analysis
For a profit-maximizing “how much” decision, the optimal quantity is the
largest quantity at which:
Quantity of schooling
Marginal Benefit
Marginal Cost
0
--
--
1
$300,000
$30,000
2
$150,000
$40,000
3
$90,000
$60,000
4
$60,000
$90,000
5
$50,000
$130,000
Marginal Analysis
Quantity of
schooling
Marginal
Benefit
Marginal
Cost
Marginal
Profit
0
---
---
---
1
$300,000
$30,000
$270,000
2
$150,000
$40,000
$110,000
3
$90,000
$60,000
$30,000
4
$60,000
$90,000
- $30,000
5
$50,000
$130,000
- $80,000
Marginal
cost,
Marginal
benefit
$300,000
MC
200,000
100,000
0
MB
1
2
3
4
Quantity of schooling (years)
Marginal Profit
5