Topics:

WHAT ECONOMICS IS ABOUT AND WHAT ECONOMISTS DO

1. My view of the basics (Mankiw, chapters 1,2)

Key economic principles: opportunity cost, incentives, marginal analysis and why they matter.  What it means to think like an economist.  

HOW MARKETS WORK

2. Supply and demand, elasticity (Mankiw, chapters 4,5)

The model of supply and demand is the basic economic model used to describe how market economies function. Defining and constructing demand and supply curves and functions, shifts vs. movements along the curves, deriving market clearing outcomes, elasticity of demand and supply, impact on revenues from changes in price in elastic versus inelastic markets.

• Which markets are best described by the model of supply and demand
• Estimating elasticity of demand in the markets for oil and cigarettes
• Effect of OPEC cartel strategy on profitability in the world oil market
• Impact of Canadian anti-smoking campaign on cigarette demand

3. When we don’t “like” the market outcome (Mankiw, chapter 6, up to p. 123)

The effect of price floors, price ceilings, subsidies, tariffs and quotas, positive and negative externalities on the market outcome.

• Prices that are “too low”: agricultural subsidies and the WTO debate.
• Prices that are “too high”: immunizations, electricity, rent control.
• When supply or demand excludes costs or benefits to society: reducing pollution, building parks. 

4. Market efficiency and welfare (Mankiw, chapter 7)

Theoretically, the free interaction between buyers and sellers in the demand and supply model maximizes economic welfare and efficiency.  This is one of the fundamental tenants of market economics. Defining and measuring economic welfare, consumer and producer surplus, relationship between market efficiency and welfare maximization.

5. The Economics of Taxation (Mankiw, chapter 6, pp. 124-133, chapter 8)

Taxation changes the market outcome by creating a wedge between the price buyers pay and the price sellers receive with implications that are often counterintuitive. Effect of taxation of goods and services on market equilibrium, impact of taxes levied on buyers vs. sellers, tax incidence, effect of taxation on economic welfare.

• Estimating the impact of US and EU cigarette taxes on demand and tax revenues
• Rationales for and impacts of different types of taxes in OECD countries

PRODUCER AND CONSUMER THEORY

6. Theory of the firm

The study of what firms are, different forms of firm ownership, structure and organization, identifying and modeling firms’ objectives and strategic behavior.

• Addressing the problem of separation of ownership from control in corporations
• When CEOs have goals other than profit maximization: visionaries or megalomaniacs?
• Benefits and challenges of  incorporation
• Zegna, Ferrero, Armani and Illy’s decision to remain privately held
• Impact of stock options on US managerial behavior in the 1990s.

7. Production theory (Mankiw chapter 13)

Identifying the various components of a firm’s costs and the relationships between them, production functions and costs of production, economies of scale and scope.

• How to choose the appropriate plant size and technology 

8. Consumer Theory (Mankiw chapter 21)

Consumer choice models: using indifference curves and utility theory to model consumers’ preferences and choices; statistical demand estimation.

MARKET MODELS

There are five main market models that describe how industries are structured in market economies:

9. Perfect Competition (Mankiw, chapter 14)

Many buyers and sellers relative to the size of the market with no one having any influence over price.  The perfectly competitive model, firm behavior under perfect competition, short-run and long-run supply curves and market outcomes. 

10. Monopoly (Mankiw, chapter 15, up to p. 326)

A single seller that supplies the entire market and thus has control over price and output.  The monopoly model, firm behavior under monopoly, welfare loss under monopoly.

• Incumbent advantage: monopolist’s entry-deterring strategies

11. Monopolistic Competition (Mankiw, chapter 17)

Many sellers (as in perfect competition), some of whom are able through branding or product differentiation to control a portion of the market (as in monopoly.)  W. Chamberlin’s model of monopolistic competition; product differentiation, marketing, advertising and branding; estimating the costs vs. impact of product differentiation and marketing on demand; K. Lancaster’s characteristic model.

• Why do consumers pay premiums of 30-40% for brand name products (even when they have identical ingredients?)

• US firms with top advertising budgets    
• Case study: strategy “Italy”

12. Noncooperative Oligopoly (Mankiw chapter 16)

Few sellers who actively compete with one another and understand that they are affected by the actions of the other sellers.  Developing models to study noncooperative oligopoly behavior: Cournot, Bertrand, Stackelberg models; introduction to game theory, Nash equilibrium, dominant strategies, repeated games.

• Using game theory to model non cooperative oligopoly strategies in the movie, aviation, advertising and arms race markets.
• Mafia solution to the prisoner’s dilemma
• Case study: the risky business of making movies: from phenomenal success to huge losses

13. Monopoly (Mankiw, chapter 15, up to p. 326)

A single seller that supplies the entire market and thus has control over price and output.  The monopoly model, firm behavior under monopoly, welfare loss under monopoly.

• Incumbent advantage: monopolist’s entry-deterring strategies

14. Collaborative oligopoly (Mankiw chapter 16)

Few sellers who join together so as to influence market price and output.

• Examples of successful cooperative oligopolies
• Why certain cooperative oligopolies (cartels) tend to be unstable

• Case study: US and EU price fixing antitrust suits: vitamins, beer, flat screens.

   15. Firm Strategic Behavior (Mankiw, chapter 15, pp. 329-337,

Pricing strategies: price discrimination, predatory pricing, multi-part tariffs

Investment strategies: research and development, vertical and horizontal mergers and acquisitions, tie-in sales, investments to raise rivals’ costs.

GOVERNMENT INTERVENTION INTO MARKETS

   16. Rationales for Government Intervention (Mankiw, chapters 10, 11)

What are the various economic rationales for government intervention into markets?  Market failure, externalities, public goods, common resources, natural monopoly, equity concerns, industries affected by the “public interest.”

   17. Forms of Government Intervention into Markets (Mankiw chapter 15, pp. 326-329; chapter 16, pp. 360-366.)

These include: complete or partial government ownership, private ownership with government regulation of entry, standards, investments and/or prices, price ceilings, price floors, tariffs or subsidies, antitrust (overview and scope of antitrust legislation in the US, landmark antitrust cases), regulation, deregulation and liberalization, (in the electric utility, telecommunications and cable television industries), property rights (Coase Theorem), privatization (in Western and Eastern Europe), patents, trademarks and copyrights.

• How to increase the efficiency of government-regulated enterprises: cost-based versus price cap/incentive regulation;
• How to achieve pollution reduction at least cost: emissions standards, fees, and tradable permits.
• When buyers or sellers have insufficient information: Akerloff’s market for lemons (Nobel prize 2001), health insurance.
• When market participants act wacky: Greenspan’s “irrational exuberance.”
• Case studies:
  • Microsoft, Intel antitrust suits
  • US and EU antitrust actions against cartel-like behavior (price fixing.)
  • Italian highway toll system: a public/private partnership
  • Do we need rules to limit market power in media? Newscorp’s assets and governance
  • China and the market for C02 pollution credits
  • Italian privatization in the 1990s: from telecom to tomatoes

Readings: