Lecture notes on Microeconomics - GitHub Pages

This publication was co-financed by the European Union from the European Social Fund.

Lecture notes on Microeconomics

by Lukasz Wo?zny

Warsaw School of Economics 2016

This publication is the result of the project Mlodzi projektuja zarzadzanie co-financed by the European Social Fund within Human Capital Operational Programme, Priority IV "Higher education and science," Measure 4.1 "Strengthening and development of didactic potential of universities and increasing the number of graduates from faculties of key importance for knowledge-based economy," Sub-measure 4.1.1 "Strengthening and development of didactic potential of universities."

Publisher: Szkola Gl?owna Handlowa w Warszawie (SGH)

Reviewer: Marek Garbicz

First Edition

c Copyright by Szkola Gl?owna Handlowa w Warszawie (SGH) al. Niepodleglo?sci 162 02-554 Warszawa, Polska

ISBN: 978-83-65416-11-7 Circulation: 200 copies Cover design: Monika Trypuz

Typesetting and printing Agencja Reklamowa TOP 87-800 Wloclawek, ul. Torun?ska 148 tel. 54 423 20 40 fax 54 423 20 80 e-mail: @agencjatop.pl

Preface

These notes are prepared for the Microeconomic courses I teach at the Warsaw School of Economics. They are aimed to serve as a supplementary material for Microeconomic course at the introductory or intermediate level. The material covers canonical first level microeconomic topics including: consumer and producer choice, as well as competitive and monopolistic (partial) equilibrium analysis. If time allows (and it usually did during 15 meetings, hour and a half each) I also recommend to cover additional topics including: choice under uncertainty, introduction to non-cooperative games, selected issues from industrial organization or externalities (including analysis of public goods). Finally to introduce the reader to more advanced microeconomic topics I have prepared two short chapters on general equilibrium analysis as well as economics of asymmetric information. These are, however, only sketched here. The selection of material covered can depend also on major taught, and can vary between economics, finance or management. Each chapter includes a separate section with (subjectively selected) references to some important further readings. Finally, although material presented here is usually more than enough to cover during a standard one semester course, some important economic topics / disciplines are missing here (including public choice, mechanism design, cooperative game theory to mention just a few).

Clearly, the notes are far from being complete and cannot compensate for reading a full textbook on Microeconomics. One reason is that some (important) details are missing here. Firstly, whenever not restrictive to present the main argument I use standard tools from constrained optimization for differentiable objectives and constraining functions, hence "non-smooth"/discrete case is not covered here. Secondly, as the exposition is mainly aimed to show the basic trade-offs but not solve all the problems, I only occasionally discuss the second order optimality conditions. Thirdly, when presenting some theorems or statements I miss their proofs but give a reference for such or sketch an argument when necessary. I tried to keep the exposition clear, though.

Writing these lectures I used Besanko and Braeutigam (2011), Varian (1992), Mas-Colell, Whinston, and Green (1995) textbooks and which I recommend for a

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REFERENCES

more detailed treatment of topics covered here (for introductory, intermediate and advanced level respectively). I also recommend a textbook by Nicholson and Snyder (2012) that presents intuitively and exemplifies many concepts covered in these notes.

Finally, I want to thank Pawel Dziewulski for reading an early draft of these notes as well as the Department of Economics, University of Oxford for hosting during the writing of these notes.

References

Besanko, D., and R. Braeutigam (2011): Microeconomics. International student version. Wiley.

Mas-Colell, A., M. D. Whinston, and J. R. Green (1995): Microeconomic theory. Oxford University Press.

Nicholson, W., and C. M. Snyder (2012): Microeconomic theory: basic principles and extensions. South-Western, Cengage Learning, Mason OH.

Varian, H. (1992): Microeconomic analysis. W.W. Norton & Company, New York.

Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1 Introduction to economic methods . . . . . . . . . . . . . . . . . . 7 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

2 Consumer theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.1 Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.2 Choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.3 Demand and consumer surplus . . . . . . . . . . . . . . . . . . . . . . 21 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

3 Producer theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.1 Technology and output . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.2 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

4 Perfect competition . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.1 Company at the perfectly competitive market . . . . . . . . . . . . . . 33 4.2 Competitive equilibrium and welfare . . . . . . . . . . . . . . . . . . . 34 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

5 Monopoly and pricing . . . . . . . . . . . . . . . . . . . . . . . . . . 37 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

6 Risk and ambiguity . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.1 Expected utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.2 Evaluating risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 6.3 Subjective probability and state dependent utility . . . . . . . . . . . 49 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

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