Principles of Economics

Table of Contents

Edited by Mike Sproul


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*0. Mathematics Review

*1. What is Economics About?

a. The Invisible Hand

b. Central Planning Versus Free Market Capitalism

c. Specialization and Comparative Advantage

d. Scarcity and Competition

e. The No Free Lunch Principle

f. The Broken Window Fallacy

g. Cost-Benefit Analysis

h. Why Study Economics?

i. Questions

2. Supply and Demand—the Basics

 * a. The First Law of Demand

 * b. The First Law of Supply

 * c. Equilibrium of Supply and Demand

 * d. Shortages and Surpluses

 * e. The Algebra of Supply and Demand

 *Study Questions

3. Elasticity

  * a. Elasticity of Demand

  * b. Elasticity of Supply

  * c. The Second Law of Demand

  * d. The Second Law of Supply

            Example: the Coffee Market

  * e. Income Elasticity and the Engel Curve

4. Cost-Benefit Analysis of Taxes and Subsidies

*    a. Consumer Surplus

*    b. Producer Surplus

*    c. Imports and Protectionism

*   d. Taxes

        i. Tax Burdens

         Example: Taxation with Fixed Supply

         Example: Tariffs in Big Countries and Little Countries

        ii. The Algebra of Taxation

 * e. Dollar outflows, Trade Deficits, and Bank Runs

 * f. Subsidies: Who Gains? Who Loses?

 *Study Questions

5. Cost-Benefit Analysis of Price Controls

  * a. Total Cost and Total Benefit

  * b. The Effects of Price Ceilings

        Example: Rent Control

  * c. The Effects of Price Floors

        Example: The Minimum Wage

        Example: Farm Price Supports

        Example: Price Supports with Reselling

6. Consumer Choice

  * a. Indifference Curves          {advanced version}

  * b. The Budget Constraint     {advanced version}

  * c. The Consumer’s Optimum           {advanced version}

  * d. The Calculus of Optimization

    e. Rationing and the Consumer’s Optimum

  * f. Income Tax vs. Sales Tax

  * g. A Subsidy versus a Cash Gift

  * h. A Subsidy versus a Voucher

  * i. The Compensating Variation and the Equivalent Variation

  *Study Questions

7. Variations of the Consumer’s Optimum

   *a. The Income Expansion Path

   *b. The Engel Curve

   *c. The Price Expansion Path

   *d. The Demand Curve

   *e. The Compensated Demand Curve

          The income Effect and the Substitution Effect

   *f. The Compensating Variation and the Equivalent Variation Applied to Demand Curves

8. Profit-Maximization by a Competitive Firm

 * a. Cost and Revenue: Total, Average, and Marginal

*  b. The Geometry of Profit-Maximization

*  c. The Calculus of Profit-Maximization          {Alternate Version}

*  d. Costs: Fixed, Variable, and Sunk

    e. The Firm’s Supply Curve and the Shut-Down Price

    f. A Critique of the Shut-Down Price

    g. Short-Run Costs and Long-Run Costs

* Study Questions

9. Behind Cost: The Production Function

    a. The Production Function with One Input                * {Advanced version}

    b. From Production Functions to Cost Functions       * {Advanced version}

    c. The Production Function with Two Inputs              * {Advanced version}

 * d. Isoquants and Isocosts

 * e. The Productive Optimum: Geometry

    f. The Calculus of the Productive Optimum

    g. From Production Functions to Cost Functions—Two Inputs

10. The Competitive Industry

  *a. From Firm Supply to Market Supply

  *b. Externalities and the Industry Supply Curve

  *c. The Zero-Profit Theorem

  *d. A Zero-Profit Paradox: Firm Profits and Industry Profits

    e. Competition and Pareto-Efficiency

  *f. Efficiency in Production, Consumption, and Trade

11. Monopoly

*  a. Profit-Maximization by a monopolist: A Numerical Example

*  b. The Geometry of Monopolistic Profit-Maximization

*  c. The Mathematics of Monopolistic Profit-Maximization

*  d. The Deadweight Loss of Monopoly

*  e. Cost-Reducing Monopoly: Is Monopoly Good For You?

*  f. Regulation and Natural Monopoly

*  g. Regulation of Ordinary Monopolies

*  h. Monopoly and Price Ceilings

*  i. Transfer Pricing

* Study Questions

12. Price Discrimination

 *  a. Price Discrimination and Consumer Surplus          {Alternate version 12.a}

 *  b. Price Discrimination and Economic Efficiency

 *  c. Market Segmentation

 *  d. Imperfect Price Discrimination     

 *  e. The All-Or-Nothing Demand Curve

 * Study Questions

13. Cartels and Oligopolies

*  a. Cartels: Deadweight Loss and the Incentive to Cheat

*  b. Cost-Reducing Cartels

*  c. Example: The Effects of Prosecuting Cartels

*  d. Oligopoly: The Cournot Case

*  e. Game Theory and The Prisoner’s Dilemma

*  f. The Dominant Firm with a Competitive Fringe

14. Monopolistic Competition and Advertising

*   a. Profit-Maximization Under Monopolistic Competition

    b. Monopolistic Competition vs. Pure Competition

    c. Excess Capacity and the Efficiency of Monopolistic Competition

 * d. Advertising: The Pros and Cons

 * e. Advertising and the Price of Eyeglasses

 *  f. Advertising, Brand Names, and Product Quality

15. Input Demand

    a. The Profit-Maximizing Use of an Input                   {Advanced Version}

   *       i. Definitions: MRP, MFC, VMP, AFC

   *       ii. Profit-Maximization Conditions                      {Alternate Version 15.a.ii}

    b. The Geometry of Input Demand

   *       i. Why the MRP Curve is the Firm’s Input Demand Curve

   *      ii. Input Demand Curves Always Slope Down

   *     iii. Input Demand is Flatter than MRP

   * c. Profit-Maximization by a Monopsonist

   * d. Monopsony and the Minumum Wage

16. Labor Supply and Earnings

 * a. The Worker’s Optimum

 * b. The Labor Supply Curve

 * c. Overtime Wages

        i. Supply and Demand Analysis

        ii. Indifference Curve Analysis

 * d. Labor Unions

    e. Anti-Poverty Programs

        i. In-Kind Transfers

        ii. The Negative Income Tax

        iii. The Pros and Cons of Anti-Poverty Programs

 * f. Education and Earnings

 * g. The Economics of Discrimination

17. Welfare Economics and Exchange

    a. Utilitarianism

*  b. The Edgeworth Box                                  {Advanced Version}

    c. Envy

*  d. The Community Production-Possibilities Curve

    e. The Geometry of General Equilibrium

18. Externalities and Public Goods

*  a. Externalities and Efficiency

*  b. The Coase Theorem

    c. Liability Law

    d. Common Property

*  e. Public Goods and Efficiency

19. Interest, Present Value, and Investment Decisions

*  a. Future Value and Present Value                {Alternate version of 19.a.}

    b. Interest and Inflation

*  c. Bond Pricing         {Alternate version of 19.c.}                  {Alternate version 2}

*  d. The Present Value Rule for Investments                 {Alternate version}                   {Alternate version 2}

    e. The Aging Problem

*  f. The Economics of Exhaustible Resources     

20. Financial Markets

*  a. Bond Markets

    b. Stock Markets

*  c. Reading Stock Market Tables

*  d. Going Long and Selling Short

    e. Forward Markets

    f. Interest Parity

*  g. Options

    h. Eurodollars

21. Consumption and Production Over Time

    a. Borrowing-Lending Equilibrium

    b. Saving-Investment Equilibrium

 * cInvestor Choice

 * d. The Capital Asset Pricing Model

    *  i. Portfolio Choice

    *  ii. Stock Prices and Beta

22. Measuring Prices and Incomes

   * a. The Consumer Price Index

   * b. The GDP deflator                      

   * c. Gross Domestic Product

      e. Wages, Prices, and Indexation for Inflation

   * f. Real vs. Nominal Interest Rates

23. Economic Development

    a. Economic Growth Around the World

    b. Productivity, Capital, and Resources

    c. The Limits to Growth

    d. The Globalization Debate

    e. Overpopulation

24. Unemployment, Recession, and the Emergence of Keynesian Economics

    a. The Great Depression and Laissez Faire Economics

    b. The Philllips Curve

  *c. Unemployment

     *i. Measurement

     *ii. Minimum Wages

        iv. Job Search and the Natural Rate of Unemployment

25. Money, Banking, and the Federal Reserve

   *a. Types of Money

   *b. Functions of Money

   *c. The Federal Reserve

            i. Structure

            ii. Duties

   *d. Deposit Money and the Multiplier

   *e. The Fed's Control of the Money Supply

        i. Open Market Operations and the Federal Funds Rate

        ii. The Discount Window and the Discount Rate

        iii. Reserve Requirements

26. Inflation and the Quantity Theory of Money

    a. The Effects of Inflation

  *b. The Quantity Equation

    c. Money Supply, Money Demand, and the Value of Money

    d. Money and Prices: The Evidence

    e. Inflation: Some False Causes

    f. A Critique of the Quantity Equation

    g. A Critique of Money Supply and Money Demand

27. Aggregate Demand and Aggregate Supply

    a. The Shape of the Aggregate Demand Curve

        i. The Wealth Effect

        ii. The Interest Rate Effect

        iii. The Exchange Rate Effect

    b. Shifts In Aggregate Demand

    c. The Shape of the Aggregate Supply Curve

        i. Long Run vs. Short Run

        ii. Misperceptions

        iii. Sticky Wages

        iv. Sticky Prices

    d. Shifts of Aggregate Demand and Supply

    e. A Critique of Aggregate Demand and Aggregate Supply

28. Monetary Policy, Fiscal Policy, and Aggregate Demand

    a. Monetary Policy and Aggregate Demand

    b. Fiscal Policy and Aggregate Demand

    c. Stabilization Policy

29. Paper Money {Download entire chapter in MS Word}

   *a. Early Paper Money

            *i. French Playing Card Money

            *ii. Paper Money in Massachusetts

            *iii. Private Bank Notes

   *b. Credit Rationing

   *c. Bank Runs

   *d. Inconvertible Money

   *e. Fiat Money

30. International Trade

    a. Exports, Imports, and the Circular Flow Model

    b. Trade Deficits, Trade Surpluses, and Net Foreign Investment

  *c. Purchasing Power Parity

    d. Interest Rate Parity
Exchange Rates
The Loanable Funds Theory of Exchange Rates
The Balance of Payments

    c. Budget Deficits and Trade Deficits