1 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! 2 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. 3 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. 4 5 ECON 102 Notes (Dr. Wooten) How Do You Get Points? MyEconLab Homework Packback Discussions Midterm Exams Comprehensive Quiz 6 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 7 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. 8 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? 9 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. 10 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: 11 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? 12 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? 13 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: 14 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. 15 ECON 102 Notes (Dr. Wooten) Circular Flow Diagram Two Types of Decision Making Before you make any decision: 1. 2. Types of Costs: 16 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? 17 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: 18 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: 19 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. 20 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 21 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 22 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