University of Austin
Center for Economics, Politics, and Applied History
Foundations of Microeconomics II (3 credits)
Course meetings:
Instructor:
Contact info.
Office Hours:
Required Texts:
Suggested Textbooks:
Jeffrey M. Perloff, Microeconomics, Theory and Applications with Calculus, Fourth
Edition (Pearson/Addison-Wesley, 2017). Hereinafter JP.
Sonia Jaffe, Robert Minton, Casey Mulligan, and Kevin Murphy, Chicago Price Theory,
Princeton University Press, 2019. Hereinafter CPT
Listed Readings are recommended and can be found on the Course Website. Other readings may
be circulated during the quarter.
Course Description: This is the 2nd quarter of a two-quarter course in microeconomics. It
develops the tools of economic analysis that are essential for understanding markets and making
business and policy decisions. The goal of the course is to develop students’ economic intuition
about a broad range of problems related to the operation of markets, social policy, and business,
so the economic way of thinking becomes second nature. The course is also a foundation for
subsequent courses where the tools of economic analysis are applied in various specialized areas.
Overview:
The mathematical burden of the course is not large. An understanding of basic calculus (which is
provided in the introductory analytical tools course) is useful. The course is very analytical,
however. The course is organized around twelve central topics, or “Lectures,” outlined below.
The main content of the course will be developed through the lectures, which include both theory
and many applications.
There are three types of readings. The distributed Lecture Notes are self-contained and closely
follow the course material. The textbook by Jeffrey Perloff is recommended but not required.
For those who wish to supplement the Lecture Notes, virtually all of the tools that we develop in
class can also be found in Perloff or in other textbooks.
Other readings supplement the lecture material. These are of two types. Media articles that
illustrate economic principles are from magazines and newspapers like The Economist, The Wall
Street Journal, or The New York Times. The instructors do not necessarily agree with the
analysis or conclusions in these articles—they are meant to spur thinking and discussion. Some
of students’ homework assignments will be based on these readings.
The syllabus also includes a set of more advanced supplemental readings from the text Chicago
Price Theory and from articles published in professional economics journals. These contain
advanced material and are included for students who wish to delve deeper into certain topics.
Some of those readings will sometimes be assigned as part of a homework assignment. Those
assignments will not ask that students work through the technical details of the paper—rather,
they should try to absorb the main ideas and be prepared to discuss them either in class or as part
of a homework assignment.
Prerequisites: none
Course Student Learning Outcomes:
Programmatic Outcomes:
1. Develop an understanding of the basic facts of the evolution of economies,
governments, and businesses throughout human history
2. Develop skills consistent with the disciplinary tools needed to analyze systematically
questions related to politics and economics
3. Use those disciplinary tools to analyze a broad range of economic and political
problems that have arisen in human history
4. Demonstrate understanding of how governments and businesses deal with three core
challenges: producing sufficient economic surplus to maintain the population,
adjudicating disputes within groups, and adjudicating disputes across groups
5. Consider the implications of those four learning outcomes for public policy
Course Requirements:
Policy on Plagiarism: Students are required to familiarize themselves with the definition of
plagiarism included in the Student Handbook. Any student shown to be guilty of plagiarizing
will automatically fail the course.
Attendance and participation: Class attendance and participation in all activities are
mandatory.
Academic Integrity Policy: Please review the University Accessibility Statement in the student
catalog. Students having special needs should contact the Student Success Center.
Accessibility: Please review the University Accessibility Statement in the student catalog.
Students having special needs should contact the Student Success Center
Disability Support Services: The university will make reasonable accommodations for students
with disabilities in compliance with Section 504 of the Rehabilitation Act and the Americans
with Disabilities Act. The purpose of accommodations is to provide equal access to educational
opportunities for eligible students with academic and/or physical disabilities.
Course Assignments:
Problem sets (25%)
Take home midterm exam (25%)
Final exam (50%)
Students can benefit from working collaboratively, so the problem sets and midterm exam are
group assignments. Students may form a group of 4 (minimum) or 5 (maximum) students for the
purpose of completing those assignments. Students must join a group; if you cannot find one,
you will be assigned to a group. Students may not collaborate with members of other groups—
the assignments you turn in are the joint product of your group members. For each quarter, the
take-home midterm exam is also a group project—it will be distributed in class and you will
have one week to complete it. The final exam is not a group project. The final will cover
material from the entire quarter, and it is “closed book, closed notes.”
Grading Scale: A: 100-90 B: 89-80 C: 79-70 D: 69-60 F: ≤ 59
Weekly Outline and Readings
Lecture 7 (weeks 1 & 2): Cost & Supply: The Theory of the Firm
Learning Objectives: Students learn how to define various firm cost functions such as total cost
average cost, average variable cost, and marginal cost, and relate these to supply decisions in the
short run and long run. Students learn to define capital and the marginal product of capital, and
learn that profit maximization results in the equality of the marginal product of a factor of
production and its market price.
Readings: JP, Chapters 6-8
“Coase’s Theory of the Firm” The Economist, 7/27/17
“Profit and the Public Good” The Economist, 1/20/05
“The Social Responsibility of Business is to Increase Its Profits”, Milton Friedman, NY
Times, Sept., 1970
“China’s Factories Count on Robots as Workforce Shrinks” Wall Street Journal, 8/16/16
Supplemental Readings:
Coase, Ronald, "The Nature of the Firm," Economica, 1937
Alchian, A.A. and Demsetz, H., "Production, Information Costs, and Economic
Organization," American Economic Review, 1972
Grossman, S. and Hart, O. “The Costs and Benefits of Ownership: A Theory of Vertical
and Lateral Integration” Journal of Political Economy, 94, 1986, 691-719
Prendergast, Canice, “The Provision of Incentives in Firms,” Journal of Economic
Literature, 37, March 1999:7-63
Lecture 8 (weeks 3 & 4): Factor Markets, Economic Growth, & Income Distribution
Learning Objectives: Students learn how the entry and exit of producers affects long-run market
equilibrium. Students learn to define the constant returns to scale production function, and the
Solow Growth model. They learn that output growth can be decomposed into the weighted
growth of the factors of production and the growth rate of productivity, and the marginal product
theory of income distribution.
Readings: JP, Chapters 15.1
“Secret Sauce” The Economist, 11/12/09
“Growth is Good” The Economist, 5/25/00
“Why Growth Will Fall” New York Review of Books, 8/18/16
“Italy: The Country that Forgot How to Grow”, Wall Street Journal, 2/27/18
“The Problem with Innovation: The Biggest Companies Are Hogging All the Gains”,
Wall Street Journal, 7/15/18
“Krugman’s Conundrum” The Economist, 4/17/08
“There’s No Productivity Miracle Hiding in the Data”, Wall Street Journal, 7/25/18
“ ‘I Just Feel Lost.’ Young Men Abandon College”, Wall Street Journal, 9/6/21
“More College Educated Women are Having Babies Outside of Marriage”, Wall Street
Journal, 9/6/21
Supplemental Readings:
Mankiw, N. Gregory, Romer, David, and Weil, David N. “A Contribution to the Empirics
of Economic Growth,” Quarterly Journal of Economics, 107(2), May 1992:407-437
Rosen, S, “The Economics of Superstars,” American Economic Review, 1981.
Murphy, K. and Topel, R. “Human Capital Investment, Inequality and Economic
Growth,” Journal of Labor Economics, Volume 34, No. S2, Part 2, April 2016, 99-127
Lecture 9 (weeks 5 & 6): Investment, Interest and Capital—When to Do Things
Learning Objectives: Students learn to define the real interest rate and connect it to the rate of
time preference, expected economic growth, and risk. They learn that the value of a durable asset
equals the present value of its returns, and they learn that increases in interest rates produce
declines in present values. Students learn the life cycle-permanent income hypothesis of
consumer behavior.
Readings: JP, Chapter 15.2-15.3
“The Health Effect,” The Economist, 6/1/00
“Why Permanent Tax Cuts are the Best Stimulus” Wall Street Journal, 10/25/08
“The Proper Rate of Capital Income Tax is Zero,” The Economist, 2/28/12
“How to Think About Corporate Tax Cuts”, NY Times, 3/30/18
“Is it Worth It?” The Economist, 12/3/09
“Social Cost of Carbon”, U.S. Environmental Protection Agency, 12/15
“Guess Who’s for a Carbon Tax Now”, NY Times, 4/11/17
Supplemental Readings:
Hall, Robert E., “Stochastic Implications of the Lifecycle Permanent Income Hypothesis:
Theory and Evidence,” Journal of Political Economy 86(6), Dec. 1978:971-987
Topel, R. and Rosen, S., “Housing Investment in the United States”, Journal of Political
Economy, (1988): 718-740.
Hotelling, H., “The Economics of Exhaustible Resources,” Journal of Political Economy,
39(2), April 1931:137-175
Nordhaus, William D., "A Review of the Stern Review on the Economics of Climate
Change," Journal of Economic Literature, 45(3), Sept. 2007:686-702
Lecture 10 (weeks 6 & 7): Strategic Behavior I: Price Setting & Market Power
Learning Objectives: Students learn about deviations from perfect competition and the
inefficiencies they can create, including monopoly, Bertrand oligopoly, and Cournot oligopoly.
Students learn about some of the regulatory policies that have been developed to mitigate or
prevent these deviations.
Readings: JP, Chapter 11, 13
“Monopolies of the Mind” The Economist, 11/11/04
“Fixing for a Fight” The Economist, 5/18/02
“Game Theory: Prison Breakthrough” The Economist, 9/16
“Everybody Wants to Rule the World” The Economist, 11/29/14
“A Provocative Look at the Harm from Corporate Heft”, Wall Street Journal, 8/31/17
“The Market for Driverless Cars Will Head Toward Monopoly”, The Economist, 6/7/18
Supplemental Readings:
Stigler, George. “A Theory of Oligopoly,” Journal of Political Economy, Vol. 72, No. 1,
(Feb., 1964), pp. 44-61.
Posner, Richard, “The Social Cost of Monopoly and Regulation,” Journal of Political
Economy, 83(4), August 1975:807-827
Hotelling, Harold, “Stability in Competition,” The Economic Journal, 39(153), Mar.
1929:41-57
De Loecker, Jan and Eeckhout, Jan, “The Rise of Market Power and the Macroeconomic
Implications”, NBER Working Paper #23687, August 2017
Lecture 11 (weeks 8 & 9): Strategic Behavior II: Pricing and Business Practices, Antitrust
Policy
Learning Objectives: Students learn to define price discrimination, its various forms (such as
tying, bundling, and two-part pricing), and learn about its welfare consequences, and the
regulatory responses to it.
Readings: JP, Chapter 12
“Antitrust on Trial” The Economist, 11/11/99
“A Bundle of Trouble” The Economist, 7/5/01
“Europe v Google: Android Attack” The Economist 4/23/16
“The Dynamics of Pricing Tickets for Broadway Shows” NY Times, 1/13/05
U.S. District Court for the District of Columbia, United States v. Google, Complaint filed
10/20/20
U.S. Court of Appeals for the Second Circuit, United States v. American Express
Company, 9/26/16
“The Supreme Court Devastates Antitrust Law”, NY Times, 6/26/18
Supplemental Readings:
Klein, Benjamin and Leffler, Keith B., "The Role of Market Forces in Assuring
Contractual Performance," Journal of Political Economy 89 (August 1981): 615-41.
Murphy, K., Snyder, E. and Topel, R., “Competitive Discounts and Antitrust Policy”
Oxford Handbook of Antitrust Economics, 2015.
Klein, Benjamin and Murphy, Kevin, “Vertical Restraints as Contract Enforcement
Mechanisms,” Journal of Law and Economics, 31, Oct. 1998:265-297