* reading is NOT required
R – Additional readings
N – Class notes (material we will cover in class, but is not included in the readings for the day — if you skip class make sure to get the notes from your classmates so you can prepare for exams)

[GM]  Mankiw, Gregory. (2011). Principles of Microeconomics (6th ed.). Pearson.

Introduction & course overview


What is Economics about? Why study it?

  • The past, the future, and the current.
  • President Bush on Home Ownership [watch here]
  • Scarcity. The Economic Problem. Three Solutions to the Economic Problem.
Foundations of Economic Thinking

POWER POINTS [ download here]



  • Rational self-interest.
  • Milton Friedman on Greed [click here to watch]*
  • The Virtue of Selfishness & Objectivism [visit Ayn Rand’s institute right here]*
  • People respond to incentives.
  • Marginal Thinking.
  • Rational behavior & marginal thinking in “Harold and Kumar Go to White Castle” [watch here]*
  • Utilitarianism.
  • Information, Uncertainty, and Speculation.

Basic Economic Lessons

  • Mutual gains from trade. [watch here]
  • Comparative vs Absolute Advantage
    • Finding You Niche, Economist Feb 27, 2003 [read here]*
    • Krugman on Comparative Advantage [read here]*
    • D. Friedman on Comparative Advantage and The World of Warcraft [read here]*
  • Property Rights.
  • Divisions of Labor. Specialization.
    • How I build a toaster — from scratch [watch here]*

Methodological issues. Is economics a science?

  • Is Economics a science?
  • Testing Economic Theory.
  • Hoover, Perez. Three Attitudes Toward Data Mining (2000) [read here]*
  • Leamer, Let’s Take the Con Out of Econometrics (1982) [read here]*
  • What went wrong with economics? The Economist [read here]*

Pitfalls in (economic) thinking.

  • “Money is Wealth” Fallacy.
  • 7 Fallacies of Economics [read here]*


  • Mankiew’s Ten Principles of Economics  Translated [watch here]*

Extra Stuff (to be discussed in class)

Economic Systems

“Any 20 year-old who isn’t a liberal doesn’t have a heart, and any 40 year-old who isn’t a conservative doesn’t have a brain.” — W. Churchill

POWER POINTS [ download here]


Economic Systems

Communism vs Capitalism

  • Characteristics of the Market Economy.
  • Protection of private property.
  • Freedom of enterprise and choice.
  • Self-interest.
  • Competition & The Invisible Hand.
  • Markets & Prices.
  • Technology & Innovation.
  • Specialization (division of labor)
  • Sound money. [watch here]*
  • Active, but limited government.

“What’s great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca Cola, and you know that the President drinks Coca Cola, Liz Taylor drinks Coca Cola, and just think, you can drink Coca Cola, too. A coke is a coke and no amount of money can get you a better coke than the one the bum on the corner is drinking. All the cokes are the same and all the cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.” — Andy Warhol

Problems with Capitalism.

  • Are the richer getting richer and the poor getting poorer? [see here]*
  • E. Frank, The Ideology of the Free Market [click here to read]*
  • Bill Gates on creative capitalism [watch here]*

Problems with Communism.

Case studies.


  • Summary of Hayek’s essay, The Use of Knowledge in Society (above).
Supply, Demand & Market Equilibrium

POWER POINTS [ download here]



Demand & The Law of Demand

Shifts in Demand & Change in Quantity Demanded

Supply & The Law of Supply

Shifts in Supply

Markets and Prices

  • Market Equilibrium
  • Finding Equilibrium Price & Quantity (algebraic example)

Case Studies

The Fallacy of Supply and Demand

  • Are people like ducklings?
  • The Fallacy of Supply and Demand [read] and [watch]*
Economic Efficiency & Government Price Fixing

POWER POINTS [ download here]


  • [GM], Ch. 6-8
  • H. Hazlitt, Government Price-Fixing [and] Rent Control  [click here to read]
  • S. Dubner, Human Organs for Sale, Legally…in Which Country? [click here to read]
  • J. Stossel, Confessions of a Welfare Queen [read here]
  • Howard Zinn, Economic Justice: The American Class System [read here]

Consumer and Producer Surplus

  • The Water-Diamond Paradox
  • Gains from trade in “Just Go With It”  [watch here]*

Welfare (deadweight) Loss

  • Underproduction
  • Overproduction
  • Taxation

Government Price Fixing

Price Floors

Price Ceiling

Price Support

Should we legalize the market for human organs? or prostitution? or drugs?

Politics and Free Markets


POWER POINTS [ download here]


  • [GM], Ch. 5
  • S. Skeel, What if we Legalized Drugs? [read here]

What is elasticity?

Price elasticity of demand

  • Price elasticities of demand for various goods [see here]*

Algebraic Examples

Elasticity and Total Revenue

  • Why farmers don’t always like good weather.

Determinants of Elasticity

Substitutes and Complement Goods

Tax Incidence (Who pays the tax?)

Should we legalize the market for drugs?

  • CannaBiz: The Secret Economy of Marijuana [watch here]*
  • The 20 most dangerous drugs [watch here]*
  • Milton Friedman’s argument against drug regulation [watch here]*
  • Lobbying and Drugs [read here]*
Consumer Choice

POWER POINTS [ download here]


  • [GM], Ch. 21
  • Baxandall, Diminishing Marginal Utility and the Utility of Diminishing Marginal Inequality [click here to read]


  • Benjamin Wallace on the price of happiness [watch here]*

The Law of Diminishing Marginal Utility

Total vs marginal utility
Utility Analysis
The Budget Constraint
Indifference Curves

The Marginal Rate of Substitution

The Tangency Condition

Implications for Economic Efficiency

Behavioral Economics

POWER POINTS [download here]


  • Kahneman Nobel Price Lecture [read here]
  • A. Durning, The Dubious Rewards From Consumption [read here]
  • The Economist. The tyranny of choice [read here]
  • D.Futrelle , Can Money Buy Happiness? [read here]




  • 1. Kahneman, D. & R. Thaler. (2006). Anomalies: Utility Maximization and Experienced Utility. The Journal of Economic Perspectives, pp. 221-234 [download here] : What is the difference between experienced and expected utility? What are the four main areas that the authors discuss in which people commit systematic mistakes in their decision-making? Provide examples.
  • 2. MIT Video. Neuroeconomics [watch here] : What are the three case studies that Prelec uses to demonstrate violations of rationality? What can we learn about the brain from his experiments?
  • 3. Kahneman & Tversky (1979) Prospect Theory: An analysis of decision under risk. Econometrica. P.263-292 [read here] : What are the main conclusions of Kahneman and Tversky? How did they reach them?
  • 4. TED Video: Nic Marks: The Happy Planet Index [watch here]: Nick Marks argues that we need new measures of socio-economic performance. Summarize his talk and discuss whether you agree with him or not.
  • 5. Herbert Simon’s Nobel Lecture [read here]: Are people utility “maximizers” according to Herbert Simon? What is Simon’s idea of “bounded rationality” and how does it help us redefine economic theory?
  • 6. The paradox of choice [watch here]:  Barry Schwartz argues that the official dogma of all western industrial societies is that maximizing welfare requires more freedom, and more freedom means living in a world with more choices. But, according to Schwartz, more choices can also be bad. How can more choice lead to lower personal satisfaction? Do you agree with Barry Schwartz? And would you rather live in a world with more choice or less choice?
Production, Cost & Profit

POWER POINTS [download here]


  • [GM], Ch. 13
  • H. Hazlitt, The Function of Profits [read here]

Firm’s Objectives

  • Implicit vs Explicit Costs
  • Economic vs Accounting Profit [Khan Academy]

Are profits good or bad?

Production, Average & Marginal Product [Khan Academy]

  • Trade-off between marginal products of labor and capital in Wasabi Sushi Restaurant [watch here]

The Law of Diminishing Marginal Returns

Costs in the Short Run

Short vs Long Run, Fixed vs Variable, Total, Average & Marginal Cost [Khan Academy]

Costs in the Long Run

International Trade and Economies of Scale

  • Paul Krugman’s Nobel Prize lecture [watch here]


Watch Richard Wolff’s video on “Capitalism Hits the Fan” and summarize his major points. Are profits good or bad according to him? Do you agree with him? [watch here]

Perfect Competition

POWER POINTS [download here]


[GM], Ch.14

Conditions for Perfect Competition [Khan Academy tutorial]

Profit Maximization & Short Run Equilibrium

  • Marginal cost in Two and a half men [watch here]

Shutdown Decision

Sunk Costs

Short-Run Supply Curve

Long-Run Equilibrium



POWER POINTS [download here]


[GM], Ch.15

Is Small Beautiful, Is Bigger Better? [read here]

What is monopoly?

What creates monopolies?

Natural monopolies

Legal restrictions

Economies of scale

Control of essential resources

Technical superiority

Deliberately created barriers

Price, MR, and Demand

Profit maximization

The welfare cost of monopolies


Why the DWL may be higher?

Why smaller?

Regulation and Entrepreneurship

  • Entrepreneurship game
Imperfect Competition & Oligopoly

POWER POINTS [download here]


[GM], Ch.16 & 17

Introduction [Khan Academy]

What is monopolistic competition?

MC in the short run & long-run [Khan Academy]

MC and DWL

Advertising – good or bad?

Brand names

  • Brand names and the American Gangster [watch here]

What should we think about chain stores? [watch here]

What is oligopoly?

Duopoly example

Competition, monopoly, and cartels [Khan Academy]

The prisoner’s dilemma game

Public Policy

The Microsoft case

Game Theory & The Rise of the State

POWER POINTS [download here]


  • [GM], Ch. 10 & 11
  • Blaise Pascal, The Wager [read here]
  • P.Singer, The Prisoner’s Dilemma [read here]
  • N.Angier, Why Are We So Nice? [read here]

More on game theory: Coordination & cooperation games

Public goods

  • Free riding in the Wedding Crashers [watch here]


  • Positive externality from education [watch here]

The Coase Theorem

Common resources & the tragedy of the commons

Public policy


Read and summarize ch.1 from Regulation: A Primer [read here]

Special Topics: Entrepreneurship


  • Peter Sims (2011). Little Bets: How Breakthrough Ideas Emerge from Small Discoveries. Simon & Schuster [buy here]