McMaster University

Economics 1B03 Spring Term 2010

Telephone: (905) 525-9140 ext. 27389
E-mail: khanrmcmaster.ca or rashid.krogers.com
Office Hours KTH 420: Tuesday/Thursday 4:30-5:30 PM or by appointment

COURSE DESCRIPTION
Economics 1B03 is a microeconomics course; it will cover the core issues oI choices,
markets and competitive and noncompetitive market structures. AIter taking this course,
students will learn vocabularies used in microeconomics, understand graphs and simple
equations and a logical deductive method oI analyzing economic theories.

REQUIRED TEXTS (available at the University Bookstore):
Krugman, Wells and Myatt: Microeconomics, Canadian Edition, Worth Publishers
R. Khan: Study Guide to Accompany Microeconomics, Canadian Edition, Worth
Publishers

Customized Courseware prepared by the Instructor published by the University Book
Store

3 In-class Tests*
(Best 2 out oI 3)
40

InIormal Pop Quizzes
(Best 3 out oI 4)
10
Final Exam
(180 minutes)
80 MC questions
50

Test #1 Thursday May 12, 2011
Test #2 Tuesday May 31, 2011
Test #3 Thursday June 9, 2011
Three Hour Final Exam: Thursday June 16, 2011

*Students must complete all short answer sections oI tests in pen and multiple choice
sections in pencil.

Practice Problems:
Students are encouraged to attempt all oI the problems in the text, study guide and
courseware dealing with each section oI the course. You are encouraged to spend much
oI your study time in this course working out the solutions to problems, either alone or in
study groups. InIormal Pop Quizzes will be extremely helpIul. It is to be emphasized that
the discussions that arise while working in small groups can be oI great help in mastering
the material at hand.



Course Outline
Page 2
DDITION DETIS:
The instructor and the University reserve the right to modiIy elements oI the course
during the term. The university may change the dates and deadlines Ior any or all courses
in extreme circumstances. II either type oI modiIication becomes necessary, reasonable
notice and communication with the students will be given with explanation and the
opportunity to comment on changes. It is the responsibility oI the student to check their
McMaster email and course websites weekly during the term and to note any changes.

CDEMIC DISHONESTY:
Academic dishonesty consists oI misrepresentation by deception or by other Iraudulent
means and can result in serious consequences, e.g. the grade oI zero on an assignment,
loss oI credit with a notation on the transcript (notation reads: 'Grade oI F assigned Ior
academic dishonesty), and/or suspension or expulsion Irom the university.
It is your responsibility to understand what constitutes academic dishonesty. For
inIormation on the various kinds oI academic dishonesty please reIer to the Academic
Integrity Policy, speciIically Appendix 3, located at
http://www.mcmaster.ca/senate/academic/acintegrity.htm
The Iollowing illustrates only three Iorms oI academic dishonesty:
1. Plagiarism, e.g. the submission oI work that is not one`s own or Ior which other credit
has been obtained.
2. Improper collaboration in group work.
3. Copying or using unauthorized aids in tests and examinations.

MISSED TESTS OR SSIGNMENT DEDINES
No late assignment will be accepted and there will be no makeup Ior a missed test.
However, students with a valid and veriIied excuse (health or Iamily emergency) Ior a
missed assignment deadline and/or test will not be penalized but the Iinal exam will be
weighted more. Documentation must be submitted to the student's Faculty oIIice (Social
Science, Business, etc.) All you have to do is to submit documentation to the Faculty
oIIice. Do not contact the instructor or TA to ask Ior a permission to be absent.

venue to earn
Everything you need to know will be posted on ELM. Course outline, FAQ, inIormation
on assignment, tests, and exam, and any important announcements will be posted there. It
is your responsibility to check ELM.

PPE FOR MRK:
II you have a question about marking oI assignment or test, Iirst talk with your TA who
marked your assignment and test. He/she is the only one able to change your grades.

Calculators
Only the McMaster University standard (Casio FX-991) calculator is permitted.





Course Outline
Page 3
COURSE OUTINE
INTRODUCTION

Choices, Basic Principles
Decision-making and Resource allocation
Positive and Normative Economics
Economic models, graphs and their meaning
Production possibilities Irontier, opportunity costs and economic growth
The Comparative Advantage and gains Irom trade
The market system, specialization, eIIiciency and globalization
Chapters 1-2 (Appendix oI Chapter 2 included)
Pages 216, 23 - 37, 42-50

DEMAND AND SUPPLY AND MARKET STRIKES BACK

Demand and supply: A model oI a competitive market
Determinants oI demand and supply
Market equilibrium and the eIIect oI demand and supply changes
Change in demand (supply) versus change in quantity demanded (supplied)
Price Ceiling, Price Iloor
Quota and Excise Tax
Chapter 3-4
Pages 59 78, 87 - 111

ELASTICITY AND SURPLUS

Price elasticity oI demand
Elasticity and total revenue
Cross elasticity oI demand
Income elasticity oI demand
Elasticity oI supply
Applications oI supply and demand
Excise Tax
Chapters 5-6
Pages 118 138, 146- 164

UTILITY, BUDGET AND INDIFFERENCE CURVE

Utility and Budget line
Optimal Consumption
IndiIIerence curve Analysis
Substitutes and complements
Income EIIect and substitution eIIect
Derivation oI market demand Irom individual demand
Chapters 10-11
Pages 244- 261, 268 - 289
Course Outline
Page 4
MAKING DECISIONS, PRODUCTION THEORY AND COST THEORY

Economic costs, explicit and implicit costs
Normal proIit, economic proIit versus accounting proIit
The law oI diminishing returns
Short-run production costs
Long-run production costs, economies and diseconomies oI scale
Chapters 7-8
Pages171 187, 193- 213

PERFECT COMPETITION

Characteristics oI the Iour basic market models
Demand and revenue
ProIit maximization short run; long run
Evaluation oI competitive pricing
Chapter 9
Pages 219 237

FACTOR MARKETS

Factor demand curve
Value oI Marginal Product Curve
Equilibrium labour market
Chapter 12
Pages 296 305

MONOPOLY

Characteristics
Barriers to entry
Monopoly price and marginal revenue
Monopoly versus competition
Regulated monopoly
Price Discrimination
Chapter 14
Pages 350 374

OLIGOPOLY AND MONOPOLISTIC COMPETITION

Duopoly
Game Theory, Prisoner`s dilemma and Nash Equilibrium
Kinked demand curve
Short run and long run equilibrium in monopolistic competition
Excess Capacity in monopolistic competition and non-price competition
Chapters 15 - 16
Pages 381 394, 407 - 419
Course Outline
Page 5
Drop your Assignment Solutions in the Avenue to Learn
Bonus ssignment #1 (Due on or before May 17, 211)
2 extra marks will be added to the Final Exam marks.
Question #1
(a) Clearly state the Iactors (in points-Iorm) that causes shiIt oI the demand curve Ior
oil to the right.
(b) Clearly state the Iactors (in points-Iorm) that causes shiIt oI the demand curve Ior
oil to the leIt.
(c) Clearly state the Iactors (in points-Iorm) that causes shiIt oI the supply curve oI
oil to the right.
(d) Clearly state the Iactors (in points-Iorm) that causes shiIt oI the supply curve oI
oil to the leIt.
(e) Explain why oil-price is increasing now. What is your prediction about oil-price
in 2011? Why?

Question #2
Consider the Iollowing demand-supply equations oI sugar in Canada.
Q 20 0.5P |Market Demand|
Q -10 0.5P |Market Supply|
P is dollar price oI sugar per kg and Q is the quantity oI sugar in kg.
Suppose Canada is a price-taker in the world market. The world price is $24 per kg.

(a) What will be the import oI sugar into Canada? What will be the consumer surplus in
this case?

(b) What will be the import oI sugar into Canada iI there is a custom duty oI $4 per kg?




















Course Outline
Page 6
Drop your Assignment Solutions in the Avenue to Learn
Bonus ssignment #2 (Due on or before 1une 5, 211)
2 extra marks will be added to the Final Exam marks.

Question #1
Consider the Iollowing market demand Iunction Ior a given product.
P 100 Q, where P is the dollar price per unit oI output (Q).
Firm`s average cost (AC) is a horizontal line, where AC MC $20.

(a) What will be the price (P), economic proIit and consumer surplus in perIect
competition?

(b) Suppose the competitive market is monopolized by a single Iirm. The monopolist`s
marginal revenue Iunction is: MR 100 2Q. What will be the P, economic proIit and
consumer surplus in monopoly?

(c) What is the deadweight loss due to monopolization?

Question #2
Consider the Iollowing market demand Iunction Ior a given product.
P 100 Q, where P is the dollar price per unit oI output (Q).
Firm`s average cost (AC) is a horizontal line, where AC MC $20.

(a) Find Q in a competitive market and categorize this Q as Q
C
.

(b) Assume that Iirm`s output is categorized as q and the number oI Iirms is categorized
as N. Further assume the Iollowing:

q Q
C
/(N1)

(i) What will be the Iirm`s output, market price and proIit oI each Iirm, iI N 1?


(iii) What will be the Iirm`s output, market price and proIit oI each Iirm, iI N 79?

(c) Categorize various situations where market is Iailing. What can be done in these
situations?


There will be 2 bonus pop quizzes (2 marks to be added to the Final Exam).
These quizzes will take 5 to 10 minutes.
Course Outline
Page 7
Corrections in Micro Study Guide

Chapter 2 Page 27
Problems and Exercise 3
The last entry under the column oI Pounds oI butter and Pounds oI cheese under Joe`s
production is:
0 150
|Delete Joe`s Production possibility Frontier and Betty`s Production possibility Frontier
and delete both graphs and lines in part a (page 27) and insert the Iollowing|:
a. Draw Joe`s production possibility Frontier and Betty`s production possibility Irontier
with cheese in the vertical axis and butter in the horizontal axis

Chapter 2 Page 36
3. a.
1oe`s Production Betty`s Production
Possibility Frontier Possibility Frontier

Replace the graphs in page 36 with the Iollowing graphs.

c. Replace '120 with '150.

d. Replace '1.2 with '1.5.

f. Replace '0.833 with '0.667.

h. |Delete the old answer in this part and insert the Iollowing|:
h. Betty has the comparative advantage in the production oI butter since her opportunity
cost, 4/3 pounds oI cheese, is less than Joe`s opportunity cost oI 1.5 pounds oI cheese.

i. |Delete the old answer in this part and insert the Iollowing|:

i. Joe has the comparative advantage in the production oI cheese since his opportunity
cost, 0.667 pounds oI butter, is less than Betty`s opportunity cost oI 3/4 pounds oI butter.
Chapter 2 Page 38
Pounds of
cheese


150







0 100
Pounds of butter
Pounds of
cheese


160







0 120
Pounds of butter
Course Outline
Page 8
Problems and Exercise 7.b:
Replace 'no with 'yes.

Chapter 3 page 73
Problem and Exercise 12
The heading oI the 3
rd
column is 'Supply curve, not 'Demand curve.
The 4
th
line under the above column should be 'demand, instead oI 'supply.

Chapter 4 page 100
Answers to How Well Do You Understand the Chapter
Last blank in Question 4 is high