EC0 100
Fall 2011
Henry Farber
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email:
Office: farber@princeton.edu
107 Fisher Hall
Office Phone: (609)258-4044
Office Hours: Monday and Tuesday 1:30-3:00
Lecture: M/W 11:00-11:50 – McCosh 50
Organizer: Qi Ge (qge@princeton.edu)
Course Description: Economics is the study of how individuals, firms, and the institutions of an economy (e.g., markets) produce and allocate scarce resources. We will examine 1) the decision making of individuals regarding what and how much to consume, 2) the decision making of firms regarding what and how much to produce, 3) how these decisions are coordinated (for better and for worse) through market and other institutions, and 4) the role of public policy.
Classes: There are two lectures and one precept each week. Lectures start promptly at 11AM.
Please be seated on time. All changes of precept must be arranged through the organizer.
Required Text: Parkin, Michael.
Microeconomics, tenth edition.
The text is available at
Labyrinth Books. An earlier edition (or even another microeconomics text) will almost surely suffice, although you will be on your own to figure out the relevant readings. Other reading assignments will be made as needed during the term.
Course Requirements and Grading:
Final Examination
Mid-Term Examination
40%
30%
Problem Sets & Participation in Precepts 30%
• The midterm examination is scheduled for the evening of Tuesday October 25 .
• The final examination will take place during the final examination period at end of term.
•
These problem sets will be graded on a 0, − ,
√
,
√
+ scale. I will drop the one problem set with the lowest grade.
• Problem sets must be turned in at the beginning of lecture in the lecture hall on the due date.
Late problem sets or problem sets turned in elsewhere will not be graded. No excuses.
Other Important Points:
• We will be covering a lot of material, and it will pay to not fall behind.
• In order to reduce your note-taking burden and to allow you to focus on the lecture, I will post lecture notes on Blackboard .
• The posted lecture notes will not always include all material covered in lecture, and you will be responsible for all material.
• I will not always cover all of the slides in lecture. Some will be covered in precept and some you will study on your own.
• I do not closely follow the text. The text and the lectures are complementary resources.
• You will get more out of this course if you discuss the lectures, readings, and ideas with your classmates (and others). You are also encouraged to share ideas regarding the problem sets, but the work you turn in must be your own and prepared by you alone.

EC0 100
Fall 2011
Lecture #
1. Introduction – What is economics I? – Parkin, ch 1, ch 2.
• What is economics?
• What does it mean to think like an economist?
• Economics as a Social Science
• Using Resources Efficiently: Marginal Analysis
• The production possiblities frontier
2. What is economics II? – Parkin, ch 2, ch 3.
• Division of Labor
• Comparative advantage
• Competitive Markets and Efficiency
• Efficiency vs. Equity
• Demand and supply
• Market Equilibrium
Henry Farber
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3. Consumer Choice: Utility as the Foundation of Demand. – Parkin, ch.8, pp. 179-186; ch. 9, pp. 203-210.
• The convenient notion of utility
• Marginal utility
• Opportunity cost
• Budget constraints and indifference curves
• Consumption Choice as the result of utility maximization
4. Consumer Choice: Derivation of Demand Curves – Parkin, ch 8, pp. 187-198; ch 9, pp.
210-218.
• Individual demand curves
• Income and substitution effects of price changes
• Market demand curves
• Consumer Surplus
5. Decision Making Under Uncertainty – Parkin, ch 20, pp. 465-471.
• Incomplete information
• Probabilistic outcomes.
• Expected Utilty
• attitudes toward risk
• insurance

EC0 100
Fall 2011
Henry Farber
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6. Decision Making Under Uncertainty, continued; Elasticity I – Parkin, ch 4, pp.83-90.
• Risk seeking behavior: gambling
• Elasticity Defined
• Elasticity Calculated
• Price elasticity of Demand
7. Market Demand and Elasticity – Parkin, ch 4. pp. 91-99.
• Income elasticity
• Cross elasticity: What is a market?
• Substitutes and complements
• Movements along versus shifts in demand curves.
8. Foundations of Supply. – Parkin, ch 10, pp. 227-233; ch 11, pp. 251-256.
• The Firm and its goals
• Accounting profit vs. economic profit
• Production functions
• Cost functions.
• Total, average, and marginal products
• The law of diminishing marginal returns
9. Foundations of Supply, cont’d. – Parkin, ch 11.
• Short run costs
• Long run costs
• Economies of scale
• Equivalence of profit maximization and cost minimization
10. Perfectly Competitive Markets – Parkin, ch 11, pp. 239-259.
• Firm-level decisions in a competitive market
• Short-run equilibrium for the firm
• The importance of free entry and exit
• Long-run equilibrium of the firm
• Long-run equilibrium of the industry
• Competition and Efficiency
11. Question and Answer Session before Midterm Examination.

EC0 100
Fall 2011
Henry Farber
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12. Welfare Economics – What’s so good about competitive markets? – Parkin, ch 5; ch 12, pp.
290-291.
• Maximizing quantity: efficient resource allocation
• Consumer surplus, producer surplus, and total surplus
• The invisible hand: the role of prices
• The role of information
• What about equity?
13. Imperfect Markets I: Monopoly – Parkin, ch 13.
• Market power
• Marginal revenue of a monopolist
• Pricing of a monopolist
• Output of a monopolist and welfare loss
• Natural monopolies Are they common?
14. Imperfect Markets II: Monopolistic Competition and Oligopoly – Parkin, ch 14; ch 15, pp.
341-355.
• Monopolistic competition and differentiated products
• Price and output levels under monopolistic competition
• Oligopoly – When a few large firms dominate
• Models of strategic interaction – game theory
– Nash equilibrium
– The prisoner’s dilemma (is everywhere)
15. Government Regulation of Markets and Anti-Trust Policy – Parkin, ch. 15, pp. 356-359; ch.
10, pp. 237-241.
• Maximizing surplus: consumer surplus, producer surplus, or total surplus?
• Government intervention in markets: Can economics inform the political process?
• Regulating markets
• Anti-competitive activities of firms
• Measures of market structure
• Anti-trust policy
16. Taxation – Parkin, ch 6, pp. 133-141.
• Income, sales, and property taxes
• Horizontal and vertical tax equity
• Tax incidence: who pays?
• Efficient taxation
• Subsidies as reverse taxes
• Quotas

EC0 100
Fall 2011
Henry Farber
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17. Market Failures I: Externalities and the Role of Government – Parkin, ch 16; ch 17.
• Missing or incorrect property rights and externalities
• Taxation as a remedy
• Regulation as a remedy
• Environmental Regulation
18. Market Failures II: Public Goods, and the Role of Government – Parkin, ch 16.
• What is a public good?
• Market Underprovision of Public Goods.
• The role of government as a provider of public goods.
• Common Resources
19. Market Failures III: Incomplete information – Parkin, ch 20, pp. 472-480; ch. 10, pp. 233–236.
• Adverse Selection – the lemons problem
• The market for used cars
• Moral Hazard – a mis-match between who pays and who benefits
• The market for insurance
• Principal-agent problems: aligning goals
• Policy Problem: Health Care Reform
20. International Trade and Comparative Advantage – Parkin, ch. 7.
• Gains from trade and the law of comparative advantage.
• The efficiency of free trade
• Restrictions on trade: tariffs and quotas
• Arguments for protection
• Is out-sourcing different from trade in goods?
21. Capital Markets – (Readings to be Assigned); Parkin, ch 18, pp. 434-435.
• Rates of Return and Discounting
• Economic Rent and Opportunity Cost
• Risk and Diversification
• Efficient Market Hypothesis
• Options
22. Is labor Different from Other Inputs? – Parkin, Ch. 18.
• Labor markets – demand and supply
• Labor Demand and the Minimum Wage
• Monopoly and Monopsony in Labor Markets
• Labor Unions

EC0 100
Fall 2011
23. Unemployment in the Great Recession – (Readings to be Assigned)
• Defining and Measuring Unemployment
• Incidence and Duration of Unemployment
• Unemployment Insurance
• Public Policy to Reduce Unemployment: Payroll Tax Holiday
24. Wages, Income, and Inequality – Parkin, ch 19.
• Wage determination – The Concept of Human Capital.
• Discrimination in Labor Markets
• Measuring Inequality.
• Changes in the Distribution of Income
• Redistribution – Taxes and Transfers.
Henry Farber
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