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PPM-103: Economic Analysis

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Normed Course Outlines

PPM-103: Economic Analysis 

Description: This normed course outline covers the principles and techniques of microeconomic theory that are most useful in analyzing economic aspects of public policy. It includes economic incentives and organizations; models of economic behavior; the operation of markets; the price system and how it works; the consequences of market failure and interventions in markets; and policy objectives and instruments. It illustrates how to apply economics to policy issues such as taxation, subsidy programs, education and health policy, and labor markets.

Learning Outcomes: On successful completion of this course students will have the skills and knowledge to be able to appropriately utilize and interpret results of the following theories and principles, taking account of the concepts noted below, to the analysis of public policy and management problems.

  • Theory of the firm
  • Consumer theory
  • Externalities
  • Public goods and commons problems
  • Market failure and optimal intervention
  • Monopoly and oligopoly
  • Asymmetric information and signalling
  • Game theory
  • Taxes and lump sum transfers
  • Trade theory
  • Welfare economics
  • Supply and demand

Concepts to be Learned:  Average Cost, Budget Constraint, Budget Line, Budget Set, Decreasing Returns to Scale, Demand Function Facing the Firm, Diminishing Marginal Product, Discount Rate, Division of Labour, Economic Rent, Endogenous Variable, Exogenous Variable, Factor Demand Curve, Factors of Production, Increasing Returns to Scale, Isoquant, Jensen's Theory of the Firm, Monotonic Property of Technology, Quasi-Fixed Factor of Production, Short Run vs. Long Run, Technological Change, Technological Constraints, Variable Cost, Variable Factor of Production., Assumption of Convex Preferences; Assumption of Monotonic Preferences; Assumption of Transitive Preferences; Budget Constraint; Budget Set;  Consumer Optimization Principle; Consumer's Surplus; Demand Curve; Indifference CurveMarginal Rate of Substitution; Marginal Utility; Optimal Choice; Optimization Principle; Reservation PriceTechnical Rate of Substitution; Utility; Coase Theorem, Externalities, Opportunity Cost, Free Rider, Public Good, Tragedy of the Commons, Market Failure; Moral Hazard, Discriminating Monopolist; Invisible Hand; Monopoly; Natural Monopoly; Oligopoly; Ordinary Monopolist; Perfectly Competitive Market, Asymmetric Information, Dominant Strategy; Game Theory; Prisoner's Dilemma; Ultimatum Game, Fixed Exchange Rate; Floating Exchange Rate; Net Exports; Open Economy; Trade Deficit; Trade Surplus; Net Capital Outflow (NCO); Tariff;Economic Liberalism; Economic Model; Economics; First Theorem of Welfare Economics; Isowelfare Curve; Kaldor-Hicks Criterion; Microeconomics; Monotonic Transformation; Pareto Efficient Allocations; Pareto Improvement; Political Economy; Productivity; Rent Control; Rent-Seeking; Second Theorem of Welfare Economics; Social Welfare Function; Utility; Utility Function; Net Demand; Demand Curve; Diminishing Marginal Rate of Substitution; Diminishing Technical Rate of Substitution; Engel Curve; Equilibrium Principle; Extensive Margin; Giffen Good; Income Elasticity of Demand; Income Offer Curve; Indifference Curve; Inferior Good; Inverse Demand Function; Law of Demand; Luxury Good; Market Demand Curve; Necessary Good; Normal Good; Ordinary Good; Perfect Complements; Perfect Substitutes; Short Run Industry Supply. 

Course Syllabi Sources for this Normed Course Outline: This is the Atlas Editors' second attempt to generate a normed course outline synthesized from actual courses on the Atlas and supplemented by material from the editors. The eight courses used to synthesize this normed course outline were: University of Toronto: PPG-1002Carleton University: PADM-5111; Harvard Kennedy School: API-101; NYU Wagner: GP-1018; Ford School of Public Policy: Public Policy 555; George Washington: PPPA-6003; American: PAUD-630; UCLA: PLC-201; Rutgers- Economics in Public Policy.

We have used these three syllabi to generate 12 normed topics in higher education policy. The topics are normed in the sense that each is designed to have a volume of content capable of being taught in one course-week of instruction − nominally 3 hours of in-class work and 7 hours of outside-class reading.

Normed Topics in this Normed Course Outline:

  1. Theory of the Firm
  2. Consumer Theory
  3. Externalities
  4. Public Goods and Commons Problems
  5. Market Failure and Optimal Intervention
  6. Monopoly, Oligopoly and Cournot Competition
  7. Asymmetric Information and Signaling
  8. Game Theory
  9. Taxes and Lump Sum Transfers
  10. Trade
  11. Welfare Economics
  12. Supply and Demand

Like other normed topics on the Atlas, each of these has a topic description, links to core concepts relevant to the topic, learning outcomes, a reading list drawn from available course syllabi, and a series of assessment questions.

Recommended Readings:

Week 1: Theory of the Firm

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 19 

Week 2: Consumer Theory

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. (Chapter 3 (Pp. 34-56))

Week 3: Exernalities

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 34 (p. 645-667).

Week 4: Public Goods and Commons Problems

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 36 (p. 695-718).

Week 5: Market Failure and Optimal Intervention

Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 10 (Pp. 357-385, 389-392)

Week 6: Monopoly, Oligopoly, and the Cournot Model

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 24.

Week 7: Asymmetric Information and Signaling

Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 17 (p. 631-651).

Week 8: Game Theory

Robert S. Pindyck and Daniel L. Rubinfeld. 2012. Microeconomics, Eighth Edition. Prentice-Hall. Chapter 12.

Week 9: Taxes and Lump Sum Transfers

Krugman, Paul and R. Wells. Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 5 (up to p. 141) and Chapter 7.

Week 10: Trade

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 8 (p. 218 onward).

Week 11: Welfare Economics

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 33 (p. 632-644).

Week 12: Supply and Demand

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 6

Sample Assessment Questions:

1a) When economists speak about the difference between the "short run" and the "long run" what specifically do they mean? 1b) What is economic rent and why is this an important concept for those advising on public policy to understand?

2a) In each of the following examples, a consumer purchases just two goods: x and y. Based on the information in each of the following parts, sketch a plausible set of indifference curves (that is, draw at least two curves on a set of labeled axes, and indicate the direction of higher utility). Also, write down a utility function u(x, y) consistent with your graph. Note that although all these preferences should be assumed to be complete and transitive (as required for utility representation), not all will be monotone. a) Jessica enjoys bagels x and coffee y, and consuming more of one makes consuming the other more enjoyable. 2b) Plamen loves mocha swirl ice cream x, but he hates mushrooms y. 2c) Jennifer likes Cheerios x, and neither likes nor dislikes Frosted Flakes y. 2d) Edward always buys three white tank tops x for every pair of jeans y. 2e) Nancy likes both peanut butter x and jelly y, and always gets the same additional satisfaction from an ounce of peanut butter as she does from two ounces of jelly. [Source: MIT's Open Courseware at http://ocw.mit.edu/courses/economics/14-01sc-principles-of-microeconomics-fall-2011/unit-2-consumer-theory/problem-set-2/MIT14_01SCF11_assn02.pdf, accessed 5 February 2015.] 

3a) Why is the clear delineation of property rights important for minimizing the negative impacts of externalities. 3b) Identify one area of public policy where externalities create a sub-optimal outcome, requiring (in at least the minds of some) a public policy response. Describe one situation in which externalities contribute to market failure, and at least one policy tool that could be employed in response.

4a) What are the characteristics of public goods and why do public goods produce market failures in the absence of government intervention? 4b) Explain, using an illustrative example, the "free rider" problem and how it relate to the concept of public goods, and why is it an important concept for policymakers to understand.

5a) Explain the concept of market failure and identify two different potential causes of market failure and provide an example of a policy tool available to policymakers when each type of market failure occurs. 5b) Explain the concept of moral hazard and why is this an important concept in public policy and management.

6a) What is the difference between oligopoly and monopoly? 6b) Draw a diagram that illustrates how monopoly impacts price and quantity as compared to what would occur in a competitive market. 6c) Draw a diagram that illustrates how oligopolies impact price and quantity as compared to what would occur in a competitive market. 6d) How is a discriminating monopolist different from an ordinary monopolist? 6f) Describe a natural monopoly, when they occur and the tools available to government to promote the public good in situations of natural monopoly. 6g) What is the "tragedy of the commons”?

7a) What do economists mean when they refer to asymmetric information? 7b) Why does asymmetric information sometimes prevent Pareto-improving exchanges? 7c) Explain the concept adverse selection using an example. 7d) Some argue that in addition to human capital development, many post-secondary education participants pay for and pursue degrees for signaling purposes. What is meant by this assertion?

8a) What is game theory, and why is it important for the study of economics and public policy? 8b) What is a mixed-strategy game? 8c) Explain the concept of prisoner's dilemma and its importance in public policy and management using at least one example.

9a) Some economists have argued that lump-sum payments to poor people would be more efficient and beneficial than other anti-poverty policies such as higher minimum wages. Explain the logic underlying this argument. 9b) Identify one means-tested and one "universal" cash benefit paid by any level of government to citizens living in their jurisdiction.

10a) What are trade deficits and trade surpluses? 10b) Is it necessarily a problem if a country has a trade deficit with respect to its trade with any other specific country? 10c) What is the difference between a fixed and floating exchange rate? 10d) What is currency manipulation and why does it sometimes interfere with open trade? 10e) Explain what a tariff is using at least one example.

11a) What are the first and second theorems of welfare economics? 11b) What is a utility function and how does it differ from a social welfare function?

12a) What do economists mean when they refer to a "perfectly competitive market"? 12b) Using a diagram, please illustrate how prices and quantities are determined in a perfectly competitive market. 12c) What are complementary goods? 12d) Use a diagram to show an individual’s utility function for a pair of complementary goods. 12e) What is the law of demand and why is this an important concept for public policy students to understand?

Page created by: Ian Clark, last updated 15 June 2015.

 

 


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© University of Toronto 2008
School of Public Policy and Governance