After taking Boal's section of Econ 2, students will be able to do the following.

Part 1: Competitive Supply and Demand

A. Introduction

- Recognize the economic definition of "rational behavior."

- Distinguish normative from positive economic statements.

- Compute percent changes using the midpoint formula.

- Apply approximation rules for percent changes of products or ratios.

B. Production and trade

- Compute average product and marginal product from a table of output and input levels, and recognize diminishing returns.

- Construct a production possibility curve using data on production functions and available inputs.

- Recognize the tradeoff between consumption and economic growth using a production-possibility framework.

- Compute opportunity cost from a linear production-possibility curve, or from a table of alternative output levels.

- Identify comparative advantage using opportunity costs of two producers.

- Apply comparative advantage to find a trade that will put both producers outside their individual production-possibility curves.

C. Supply and demand

- Identify the advantage of monetary trade over barter.

- Distinguish normal goods from inferior goods, and substitutes from complements.

- Find market equilibrium from graphs of supply and demand, or from lists of demanders and suppliers and their values and costs.

- Recognize factors which shift demand curves (income, prices of related goods, tastes) and the direction of shift.

- Recognize factors which shift supply curves (input prices, technology, government regulation) and the direction of shift.

- Find the changes on equilibrium price and quantity caused by shifts in demand or supply curves.

- Conversely, find the shift in demand or supply curves that could explain a given change in equilibrium price and quantity.

D. Elasticities

- Compute price elasticities of demand using the "arc elasticity" formula.

- Recognize factors influencing the elasticity of demand (availability of substitutes, budget share, time to respond).

- Recognize perfectly elastic and perfectly inelastic demand and supply curves.

- Use price elasticity of demand to compute the effect of price change on quantity demanded and revenue.

- Distinguish the effects of price changes on revenue when demand is elastic or inelastic.

- Identify the signs of the cross-price elasticities for substitutes and complements.

- Identify the signs of the income elasticities for normal and inferior goods.

- Use price elasticity of supply to compute the effect of price change on quantity supplied and revenue.

- Use income elasticity of demand to compute the effect of income change on quantity demanded and budget share.

- Distinguish the effects of income changes on budget share when a good is a necessary good or a luxury (or superior) good.

Part 2: Applications of Supply and Demand

A. Applied price theory

- Compute changes in equilibrium price and quantity, given graphs of supply and demand, when government participates in markets as a buyer.

- Find changes in demand when buyers' "time costs" change.

- Compute "expected punishment costs" on buyers or sellers of illegal goods.

- Compute changes in equilibrium money price and quantity, given graphs of supply and demand, when "expected punishment costs" change.

B. International trade, arbitrage, and speculation

- Given demand and supply schedules for two countries, compute international demand and supply schedules, international equilibrium price and quantity, and exports or imports.

- Given lists of demanders and suppliers in two countries and their values and costs, compute international equilibrium price and quantity, and exports or imports.

- Recognize how arbitrage links prices at different locations.

- Recognize how speculation links forward prices and expected spot prices.

- Recognize how speculation makes stock prices unpredictable.

C. Market controls and taxes

- Given graphs of supply and demand, compute the quantity traded when the market is subjected to a price ceiling or a price floor.

- Given graphs of supply and demand, compute the equilibrium price when the market is subjected to a quota on buyers or sellers, and compute the equilibrium price of a quota permit if permits are auctioned.

- Given graphs of supply and demand and an excise (per-unit) tax, compute the equilibrium quantity, the buyers' total price, and the sellers' net price.

- Given demand and supply elasticities, determine which side of the market bears more of the tax burden.

- Given graphs of supply and demand and per-unit subsidy, compute the equilibrium quantity, the buyers' net price, and the sellers' total price.

Part 3: Choices Underlying Supply and Demand

A. Choices and demand

- Graph a consumer's budget line, given the consumer's income and the prices of two goods.

- Given prices of consumer goods, compute consumers' opportunity costs of one good in terms of another.

- Recognize how budget lines shift when income or prices shift.

- Use a graph of a set of indifference curves to infer how a consumer would rank alternative bundles.

- Identify a consumer's optimal consumption bundle, given a graph of a budget line and a set of indifference curves.

- Generate a consumer's demand curve, given a graph of indifference curves, the consumer's income, a range of prices for the good in question, and the fixed price of other goods.

- Compute consumer surplus at any price from a graph of a linear demand curve.

B. Business decisions and supply in the long run

- Compute average cost and marginal cost from a table of output and total cost.

- Recognize graphical relationships between average cost and marginal cost.

- Compute a firm's profit-maximizing output by applying the rule "price = marginal cost" to a table of cost or a graph of cost curves, and compute total maximized profit.

C. Business decisions and supply in the short run (SR)

- Distinguished SR fixed and variable inputs and their costs.

- Compute SR average fixed cost, SR average variable cost, SR average total cost, and SR marginal cost from a table of output and SR variable cost and data on fixed cost.

- Find the firm's shutdown price and breakeven price from a table of SR costs or a graph of SR cost curves.

- Compute a firm's profit-maximizing output by applying the rule "price = SR marginal cost" to a table of SR costs or a graph of SR cost curves, and compute total maximized profit.

- Compute SR producer surplus from data on revenue and variable cost.

- Compute the discounted present value of a short stream of variable payments, or a perpetual stream of constant payments, given an interest rate.

- Compute LR producer surplus at any price from a graph of a linear supply curve.

D. Economic efficiency

- Identify Pareto improvements.

- Apply the "compensation test" to identify potential Pareto improvements (also called "economically efficient changes").

- Compute changes in producer and consumer surplus and compute social deadweight loss from a price ceiling, a price floor, a quota on sellers, or a quota on buyers, given graphs of linear demand and supply.

- Compute changes in producer and consumer surplus and compute social deadweight loss from an excise (per-unit) tax or subsidy, given graphs of linear demand and supply.

- Compute changes in producer and consumer surplus and compute welfare gain from international trade, given graphs of linear demand and supply and a new world price.

Part 4: Perfect and Imperfect Competition

A. Perfect competition

- Apply the "zero economic profit" condition to identify long-run industry equilibrium.

- Find the time path of prices in response to a demand shift, given graphs of short-run supply and long-run supply.

- Distinguish constant-cost industries from increasing-cost industries based on their long-run supply curves.

- Identify situations of economy-wide efficiency by applying the condition that the slope of the production-possibility curve must be equal to the price ratio and to all consumers' marginal rates of substitution.

B. Monopoly

- Compute marginal revenue from data on changes in price and quantity sold.

- Compute the monopolist's profit-maximizing quantity and price from graphs of demand, marginal revenue, and marginal cost.

- Compute the monopolist's profit-maximizing price by applying the pricing rule P = MC/(1+(1/e)).

- Apply the pricing rule to a market-segmenting ("third degree") price-discriminating monopolist.

- Compute optimal quantity, revenue, and profit for a perfect ("first-degree") price-discriminating monopolist, from graphs of demand, marginal revenue, and constant marginal cost.

- Identify incentives to cheat in a cartel.

C. Monopolistic competition

- Distinguish homogeneous from differentiated products.

- Identify markets that might be characterized by monopolistic competition based on entry conditions and degree of product differentiation.

Part 5: Input Markets and Environmental Economics*

A. Markets that determine people's incomes

- Compute the value of marginal product from a table of output and input levels and data on output price, and find the profit-maximizing level of the input given the input price.

- Identify a worker's optimal labor supply, given a graph of a set of indifference curves, total available time, and a wage rate.

- Generate a worker's labor supply curve, given a graph of a set of indifference curves and total available time.

- Distinguish the elasticity of demand for labor at the firm level (no change in output price) from elasticity at the industry level (with change in output price).

- Identify major causes of wage differentials: education, experience.

B. Environmental economics

- Determine whether unregulated markets produce too little or too much when there are externalities.

- Compute socially-optimal and actual output levels, from graphs of demand, supply, and marginal social benefit or marginal social cost.

- Identify examples of nonrival or nonexcludable public goods.

* These topics are not covered in the summer term, and are covered only as time permits in the regular term.

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