Principle of Economics

 date:2010-1-7 12:11:00          

Principle of Economics


Feng Lu: Principle of Economics (China's Version), Peking University Press, Beijing, 2002 (Teaching Material)

Joseph E. Stiglitz, Carl E. Walsh: Economics, Third Edition, W. W. Norton & Company, 2002

N. Gregory Mankiw: Principle of Economics, Third Edition, South-Western College Pub, 2003

Structure of the Course:

1.       What is Economics

2.       Price and supply/demand model & mechanism

3.       Consumer behavior

4.       Production theory

5.       Cost analysis

6.       Efficiency of competition

7.       Cost of Intervention (Price Controls)

8.       Theory of monopolistic competition

9.       Oligopoly

10.   Information asymmetry

11.   Property

12.   Externality & Public goods

13.   Introductory macroeconomics

14.   Supply/demand of currency

15.   Financial system

16.   International trade

17.   International balance of payment

18.   Income Determination

19.   Aggregate supply demand model

20.   Inflation

Course Objectives:

By studying Principle of Economics, students should learn some basic knowledge of Economics, master fundamental economic concepts and use economic theories to analyze micro- and macroeconomic phenomena in our daily life. In addition, students should lay a solid foundation to study further economic courses.


Regular attendance, participation, 4 quizzes: 28%

1 Essay: 12% (Requirement: Based on the principles and methods of economics, the essay should analyze and explain some real situation in economic life.)

Mid –Term Test: 30%

Final Test: 30%

Credits & Workload:

4 Credits & 4 hours per Week (teaching) + 2 hours per Week (tutoring); 12 Weeks, 48 hours (teaching) + 24 hours (tutoring)


12 Externalities:

Market Efficiency - Market Failures

Recall that: Adam Smith's “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market.

But market failures can still happen.

Market Failures: Externalities

When a market outcome affects parties other than the buyers and sellers in the market, side-effects created are called externalities.

Externalities cause markets to be inefficient, and thus fail to maximize total surplus.

An externality arises…

…when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.

When the impact on the bystander is adverse, the externality is called a negative externality.

When the impact on the bystander is beneficial, the externality is called a positive externality.

Examples of Negative Externalities

Automobile exhaust

Cigarette smoking

Barking dogs

Loud stereos in an apartment building

Examples of Positive Externalities


Restored historic buildings

Research into new technologies


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