Prof. Bryan Caplan

Econ 103

Fall, 2000


Microeconomics Syllabus


Course Focus:

The course provides an introduction to modern microeconomics.† It covers the fundamentals of economic theory, supply and demand, the theory of the firm, competition and monopoly...



I assume that you are familiar with graphing and algebra.




Most of the course material will consist in detailed notes that will be handed out in class.† There will also be required readings in each of the following:


James Gwartney and Richard Stroup, Introduction to Economics: The Wealth and Poverty of Nations

Frederic Bastiat, Economic Sophisms

Frederic Bastiat, Selected Essays on Political Economy

David Friedman, Hidden Order


Grading and Exams:


There will be two midterms and a final exam - essentially, an exam for each Part of the course.† The midterms count 20% each; the final exam is 40%; homework counts for the remaining 20%.† These weights are fixed - improvement on later exams will not retroactively raise your grades on earlier exams.


There is no formal grade for participation, but if you are one of the students who (in my judgment) contributes most to the quality of class discussion you will be "bumped up" a fraction grade (e.g. B- to B).




There will be approximately six homework assignments during the semester.† Depending upon how good a job you do, your homework will receive a check-plus (4 points), a check (3 points), or a check-minus (2 points) if you turn it in; otherwise you receive 0 points.† Late homework loses one point.† Late homework is no longer accepted after I pass out my suggested answers for a given assignment.


Office Hours


The best way to contact me is by email at† Many questions and requests can be satisfied by going to my homepage at† My office is in 8 Carow Hall; my office number is 3-2324.† My official office hours are TT 3:00-4:30, but you can also schedule an appointment or just drop by and see if Iím available.


Tentative Schedule:


My proposed schedule for the semester follows.† If it proves too ambitious, I will try to simply say less about each topic rather than cut the topics for the final weeks.




PART I: Fundamentals of Economics


Weeks 1-2: The Economic Way of Thinking

        Economics as social science

        Economists' basic analytical framework: preferences and constraints

        The nature of preferences: human selfishness

        Intentions and results

        Exceptions to selfishness and Tullock's law

        Scarcity: the origin of constraints

        Scarcity and opportunity costs

        Opportunity costs and economic profit

        Scarcity and a brief history of progress

        Incentives: thinking strategically about your constraints

        Incentives and marginal analysis

        The principal of diminishing marginal utility

        Marginal analysis and the indifference principal



Gwartney and Stroup, chapter 1

Bastiat, Economic Sophisms, (First Series) chapters 1-3

Bastiat, Selected Essays on Political Economy, chapter 1: "What Is Seen and What Is Not Seen"


Week 3: Trade and Property Rights

        Selfishness and cooperation

        Trade as mutual benefit

        Exploitation fallacies: better-off versus well-off

        Paternalism and trade

        Trade and reciprocal altruism

        Trade as technology

        Property rights as a precondition of trade

        Property rights as incentives for production and maintainence

        The tragedy of the commons



Gwartney and Stroup, chapter 2

Landsburg, The Armchair Economist, chapter 21: "The Iowa Car Crop"


Weeks 4-5: Supply and Demand

        Markets and trade

        Observed markets and conceptualized markets

        Partitioning sellers and buyers: supply and demand

        Quantity, price, and the axes

        The law of demand

        The law of supply

        Market forces and equilibrium price

        Demand shifts

        Supply shifts

        Shifts versus movements along a curve


        The inter-relatedness of markets

        The effect of price ceilings

        The effect of price floors

        Entry and exit



Gwartney and Stroup, chapters 3-4





PART II: Applications of Supply and Demand


Week 6: Taxation and the Concept of Efficiency

        The concept of incidence

        Taxation analyzed from suppliers' viewpoint

        Taxation analyzed from demanders' viewpoint

        Transfers versus deadweight losses

        Deadweight losses and efficiency

        The many margins of tax avoidance

        Example: luxury taxes

        Example: income taxation and the Laffer curve



Landsburg, The Armchair Economist, chapter 7: "Why Taxes are Bad: The Logic of Efficiency"


Week 7: Housing Markets, Credit Markets, and Price Controls

        Housing demand

        Housing supply

        Shifts in housing demand and housing supply

        Rent control: short-run effects

        Rent control: long-run effects

        Housing quality and rent control

        Demand for credit

        Supply of credit

        Default risk


        Shifts in the supply and demand for credit

        Usury laws and loan-sharking

        Bankruptcy laws



David Friedman, Hidden Order, chapter 17


Week 8: Labor Markets and Labor Regulation

        Labor demand and marginal productivity

        Labor supply and the labor/leisure trade-off

        Shifts in labor demand and labor supply

        Minimum wage laws

        Firing and layoff restrictions


        Competitive labor markets and discrimination



Gwartney and Stroup, chapter 9



Week 9: Quality Regulation

        Quality competition

        Quality regulation


        Black markets and quality



David Friedman, Hidden Order, chapter 7


Week 10: Information Economics


        Search theory


        Asymmetric info and adverse selection

        Insurance markets and moral hazard









PART III: Market Failure versus Government Failure


Weeks 11-12: Monopoly and Competition

        Bertrand competition

        Government as a source of monopoly

        Economies of scale






Gwartney and Stroup, chapters 7-8

David Friedman, The Machinery of Freedom,chapters 6-7



Week 13: Externalities I: Market Failure

        Return to the tragedy of the commons

        Negative externalities (aka "public bads")

        Ex: Pollution

        Positive externalities (aka "public goods")

        Ex: Defense

        Bad but popular examples

        Good but unpopular examples

        Externalities, efficiency, and fairness

        Coase, property rights, and externalities

        Regulation versus tradeable permits



Gwartney and Stroup, chapter 20

David Friedman, Hidden Order, chapter 17


Week 14: Externalities II: Government Failure

        Externalities generalized

        Externalities and rational ignorance

        The consequences of rational ignorance

        Externalities and rational irrationality

        The consequences of rational irrationality

        Markets versus government: the comparative institutions approach



Gwartney and Stroup, chapters 22

David Friedman, Hidden Order, chapter 18

Bryan Caplan, "The Logic of Collective Belief"



Week 15: Some Modest Proposals

        Legalize baby-selling

        Privatize national parks

        Make employee/borrower/consumer rights waivable options

        Legalize drugs

        Eliminate subsidies to education

        Restrict the franchise