Bachelor 2020/2021

Economic Theory

Type: Compulsory course (HSE University and University of London Parallel Degree Programme in International Relations)

Area of studies: Public Policy and Social Sciences

Delivered by: Faculty of World Economy and International Affairs

Where: Faculty of World Economy and International Affairs

When: 1 year, 3 module

Mode of studies: offline

Instructors: Yury V. Avtonomov, Ella Khromova (Fokina), Polina Koroleva

Language: English

ECTS credits: 4

Contact hours: 60

Course Syllabus

Abstract

Economic theory is a one-module undergraduate course, which combines a brief introduction to the standard methodology of economics with an overview of the essential models of mainstream micro- and macroeconomics. It’s intended to give students an overview of the economic models that describe the behavior and interaction of individual consumers and firms, formation of prices in various market structures, and the real-life problems of economic inefficiency caused by market failures as well as macroeconomic issues of aggregate product and national income determination, unemployment, inflation, economic growth and the main instruments and consequences of fiscal and monetary policy.

Learning Objectives

• The course is meant to familiarize the students with the essential toolkit of economic analysis instruments and teach them to apply these for answering specific questions about peoples', firms' or governments' decisions about resource allocation.

Expected Learning Outcomes

• Explain and apply the concepts of scarcity, opportunity cost and sunk cost
• Explain and apply the cost-benefit principle
• Explain the purpose of economic modelling
• Distinguish between micro- and macroeconomics, positive and normative economics
• Use the production possibility frontier to illustrate opportunity cost and comparative advantage
• Compute material and opportunity cost and use them to identify absolute and comparative advantage
• Describe how the demand and supply curves summarize the behavior of buyers and sellers in the market.
• Enumerate the factors that can shift market demand/supply curve
• Explain the concepts of producer and consumer surplus; illustrate PS and CS in market equlibrium.
• Iluustrate and quantify the effects of government regulation on equilibrium price, quantity, CS, PS and social welfare
• describe the production function
• describe and identify diminishing marginal returns and the type of returns to scale
• distinguish between economic and accounting definitions of cost
• describe the relationship between revenue, cost and profit
• find the profit maximising level of output, given the price of output and inputs
• Solve the firm's short- and long-run cost minimization problems
• analyse total, average and marginal cost, in the short run and long run
• describe how a firm choses output, in the short-run and the long-run
• define perfect competition
• describe why a perfectly competitive firm equates marginal cost and price
• demonstrate how profits and losses lead to entry and exit
• carry out comparative static analysis of a competitive industry
• define pure monopoly and find the optimal price and output levels for a monopolist
• recognise how output compares under monopoly and perfect competition
• describe how price discrimination affects a monopolist’s output and profits.
• recognise imperfect competition, oligopoly and monopolistic competition
• identify equilibrium in monopolistic competition
• describe game theory and strategic behaviour
• identify the problem of externalities and possible solutions
• describe and illustrate the free rider problem
• describe the nature of macroeconomics as the study of the whole economy
• discuss internally consistent national accounts; why measuring GDP by income, by expenditure or by output produces the same result
• recognise and understand the identity Y ≡ C + I + G + NX
• explain and illustrate the Paradox of thrift
• define narrow and broad money
• explain how banks create money
• discuss how money demand depends on output, prices and interest rates
• describe the central bank’s role in influencing the money supply and in financial regulation
• derive the IS curve and the LM curve
• identify the impact of fiscal and monetary policy on equilibrium output and interest rate
• use the IS–LM–BP framework to analyse changes in monetary and fiscal policy under fixed and floating exchange rate regimes.
• discuss the stylized facts of growth
• discuss the possible determinants of economic growth
• explain the Philips curve
• analyse inflation expectations
• Explain the nature of current and capital account
• Explain the determinants of imports and exports.
• Determine equilibrium output with exports and imports
• List the types and causes of unemployment.
• Explain how wages and unemployment are determined in the aggregate labor market
• define aggregate demand and graph the AD schedule
• define aggregate supply in the classical model
• discuss the effects of short-run and permanent demand and supply shocks

Course Contents

• Introduction to economics.
  Definition of economics. Economic goods. Scarcity and choice. Opportunity costs and sunk costs. Economic models. Microeconomics and macroeconomics. Positive and normative economics. (Frank & Bernanke, Ch. 1)
• Comparative advantage and exchange.
  Comparative advantage. Production possibility frontier. Factors shifting the production possibility frontier. Specialization and exchange of goods. Comparative advantage and international trade. Economic systems: market economy, command economy, mixed economy. (Frank & Bernanke, Ch. 2)
• Introducing the competitive market model.
  Demand curve and its determinants. Supply curve and its determinants. Equilibrium and efficiency. Producer surplus and consumer surplus. Own-price elasticity of demand and its determinants. Own-price elasticity of demand and total revenue. Cross-price elasticity of demand: substitutes and complements. Income elasticity of demand: normal and inferior goods. Own-price elasticity of supply. Frank & Bernanke, Ch. 3, P & R, Ch 2.
• Effects of government regulation in competitive markets.
  Price controls, excess demand and excess supply. Quotas. Price supports. Taxes and subsidies. Elasticities and tax incidence. Frank & Bernanke, Ch. 3, P & R, Ch 2.
• Technology. Inputs and outputs.
  Production functions. Examples: fixed proportions, perfect substitutes, Cobb-Douglas. Marginal product. The long run and the short run. Returns to scale. P & R, Ch 6.
• Profit maximization.
  Accounting profit and economic profit. Profits and stock market value. Short-run profit maximization. Comparative statics. Profit maximization in the long run. Inverse factor demand curves. Profit maximization and returns to scale. P & R, Ch 6.
• Cost minimization.
  Short-run and long-run cost functions. Fixed and quasi-fixed costs. Returns to scale and economies of scale. Average, average variable and marginal costs. Interrelations between short-run marginal costs, average variable costs and labor productivity. Interrelations between short-run and long run cost curves. P & R, Ch 7.
• Firm and industry supply.
  The supply decision of a competitive firm in the short run and in the long run. Profits and producer’s surplus. Short-run industry supply. Short-run competitive equilibrium. P & R, Ch 8.
• Perfect competition.
  Short-run and long-run competitive equilibrium. The long-run industry supply curve. Forms and welfare consequences of government regulation. Elasticity and tax incidence. Application: the labor market. Human capital and signalling theories. P & R, Ch 9.
• Monopoly.
  Profit maximization under monopoly. Comparison with perfect competition: output and price. Social cost of a monopoly. Natural monopolies. Regulation of natural monopolies. 1st, 2nd and 3rd degree price discrimination. Two-part tariffs. P & R, Ch 10-11.
• Monopolistic competition and oligopoly.
  Features of monopolistic competition. Comparison with perfect competition: output and price. Advertising. Features of oligopoly. Elements of game theory: players, actions, strategies. Nash equilibrium. Prisoner’s dilemma. The Cournot and Bertrand models. Price wars and collusion. Cartels. Barriers to entry. FB, Ch. 9; P & R, Ch 12.
• Externalities and public goods.
  Externalities. Property rights and transaction costs: the Coase Theorem. Tragedy of the commons. Public goods. Private provision of the public good: the free-rider problem. P & R, Ch 18.
• Introducing macroeconomics.
  Subject of macroeconomics. Aggregation: macroeconomic agents and macroeconomic markets. The key macroeconomic questions. The circular flow model. Measuring aggregate output – introducing GDP. A first look at inflation and unemployment: Okun's law and the Phillips curve. BJ, ch. 1, 2.
• Short-run: the goods market.
  Components of aggregate demand. Short-run model of input determination. Equilibrium: planned expenditures and actual expenditures, investment and saving. The “Keynesian cross model”. The multiplier effect. «Paradox of Thrift». BJ, ch. 3.
• Short run: the money market.
  Kinds of money: monetary supply aggregates. Demand for money. Financial intermediaries: the banking system. Central bank and its functions. Banks as creators of money: deposit and loan multipliers. Monetary base, money multiplier and money supply. Money market equilibrium: interest rates and bond prices. BJ, Ch. 4.
• The IS-LM model.
  Goods market and the IS relation. Money market and the LM relation. General macroeconomic equilibrium: IS-LM. Dynamics of adjustment. BJ, Ch. 5.
• Introducing the open economy.
  Choice between the domestic and foreign goods/assets – the nominal and real exchange rates. Balance of payments: current and capital account. BJ, Ch. 18.
• Goods market equilibrium in an open economy.
  The IS relation in the open economy. Determinants of imports and exports. Equilibrium output and trade balance. Reaction to changes in domestic/foreign demand. BJ, Ch. 19.
• Output, interest rate and exchange rate.
  Investing at home versus investing abroad. Fiscal and monetary policies in an open economy. The fixed exchange rate VS a flexible exchange rate regime. BJ, Ch. 20.
• The labour market.
  Specific features of Russian labour market. Types and causes of unemployment. Modelling the aggregate labor market: unemployment and wage determination. The natural rate of unemployment. BJ, Ch. 6.
• Aggregate demand and aggregate supply.
  Aggregate supply: the labor market equilibrium. Aggregate demand: equilibria in the goods and money markets. Short- and medium-run equilibria. Effects of discretionary fiscal and monetary policies. BJ, Ch. 7.
• Unemployment and inflation: NAIRU and the Phillips curve.
  Deriving the Phillips curve from the AS relation. Trade-offs between inflation and unemployment: the short-run Phillips curve. Mutations of the Phillips curve. Natural rate hypothesis and the long-run Phillips curve. Phillips curve under high levels of inflation. BJ, Ch. 8.
• The facts of economic growth.
  Measuring the standard of living. Aggregate production function. Sources of economic growth: labour productivity, capital accumulation and technological progress. Is there any convergence? BJ, Ch. 10.

Assessment Elements

• In-class quizzes
  In-class quizzes require students to answer short (typically, maximal time allowed is 5 minutes) questions dealing with the contents of the preceding lecture. There will be no make-ups for missed quizzes. But, if a quiz has been missed for an objective, documentally verified reason registered with the study office, its weight in the final grade will be transferred to other quizzes this student has written.
• Final end-of-module exam
  The exam is a written paper, consisting of several short, free-response questions and two longer free response problems. The assignment will be published on Piazza ("resources" section), the platform that has been used for all teacher-student communication throughout the course. Total duration of the exam is 120 minutes (100 minutes to write down the answers + 20 minutes to photograph them and send them to your classteacher's email - exactly the same way that you did with the first, "home assignment" part of the exam).

Interim Assessment

• Interim assessment (3 module)
  0.6 * Final end-of-module exam + 0.4 * In-class quizzes

Bibliography

Recommended Core Bibliography

• Blanchard, O., Amighini, A., & Giavazzi, F. (2017). Macroeconomics (Vol. Third edition). New York: Pearson. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1535899

Recommended Additional Bibliography

• Principles of microeconomics, Frank, R. H., 2009
• Stiglitz, J. E. (2016). Principles of Economics (Vol. Second edition). Milton, Qld: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1650548