中级微观经济学教学大纲(王则柯).doc

四学分中级微观经济学教学大纲王则柯MICROECONOMICS ( 4 credits, as of 2002 )Classroom Lecture Notes ( Draft, to be improved )ByWang ZekeLBased onIntermediate Microeconomics, by Hal R. Varian, Fifth Edition,referring toPrice Theory and Applications, by Jack Hirshleifer and Amihai Glazer,Fourth Edition.Youd better to think it as the First step of academic training in EconomicsTips:Essential contents are mainly at or near figuresPay attention to graphically problem-solvingWe will focus on short-run study, and leave you discrete casesItem with stars, such as * Nash Theorem, are optionalChapter 0 EconomicsThe source of all economic problems is scarcity. Thus problems of trade-off, and choice. Economics, as a way of thinking, as a dismal science. Problems-solutions-hidden consequences.Main decision-making agents: individuals (household), firms, and governments.Objects of economic choice are basically commodities, including goods and services.Main economic activities: consumption, production, and exchange.Microeconomics and macroeconomics: to show the invisible hand and to supplement it.The circular flow of economic activities. The product market and the factor market.The market relation is mutual and voluntary.Positive issues and normative issues.Marginal analysis. Relations between total, average, and marginal magnitudes:MM is the slope of the TM curve;AM is the slope of the ray from the origin to the point at the TM curve. Thus, 1, TM increasing (decreasing) if and only if MM 0 ( MM AM ( MM 0. Thus both the income offer curves and the Engel curves are all rays through the origin. With homothetic preferences, the utility function u can be represented as the composition of a strictly monotone transformation g and a function h homogeneous of degree one: u ( x ) = g ( h ( x ) ).Example: Quasilinear preferences lead to vertical (horizontal) income offer curves and vertical (horizontal) Engel curves.Chapter 7 Revealed PreferenceFrom (observable) behavior to (perhaps hidden) preference.Direct revealed preference and indirect revealed preference. Recovering preference.Weak axiom of revealed preference: If x is directly revealed preferred to yx, then it cannot happen that y is directly revealed preferred to x. Checking WARP.Strong axiom of revealed preference: If x is revealed preferred to yx (either directly or indirectly), then y cannot be directly or indirectly revealed preferred to x. Checking SARP.Quantity Indices: I q = (w 1 x 1 t + w 2 x 2 t ) / (w 1 x 1b + w 2 x 2b )Paasche quantity index: P q = (p 1 t x 1 t + p 2 t x 2 t ) / (p 1 t x 1b + p 2 t x 2b )Laspeyres quantity index: L q = (p 1 b x 1 t + p 2 b x 2 t ) / (p 1 b x 1b + p 2 b x 2b )Price Indices: I p = (p 1 t w 1 + p 2 t w 2 ) / (p 1 b w 1 + p 2 b w 2 )Paasche price index: P p = (p 1 t x 1 t + p 2 t x 2 t ) / (p 1 b x 1t + p 2 b x 2 t )Laspeyres price index: L p = (p 1 t x 1 b + p 2 t x 2 b ) / (p 1 b x 1b + p 2 b x 2b )Indexing Social Security PaymentsChapter 8 Slutsky EquationHow the optimum moves when the price of a good changes? Decomposition: the total effect = the substitution effect + the income effect.The pivot gives the substitution effect, the shift gives the income effect.Slutsky decomposition, pivoting the budget line around the original choice. Fig.Hicks decomposition, pivoting the budget line around the indifference curve. Fig.The law of demand. Choosing taxes. (Fig. 5.9)The standard, the Slutsky, and the Hicks (the compensated) demand curves, according to holding income, purchasing power, or utility fixed.Slutsky identity: x1 =x1s +x1m with x1s negative while x1m and x1 either, or x1 (p1, m) - x1 (p1, m) = x1 (p1, m) - x1 (p1, m) + x1 (p1, m) - x1 (p1, m).* The Slutsky equation: x1s (p1, p2 , x1*, x2 *) x1 (p1, p 2 , p1x1*+ p2x2*), thus x1 (p1, p2 , m*) / p1 = x1s (p1, p2 , x1*, x2*) / p1 - x1*x1 (p1, p2 , m*) / mRebating a small tax: p x + y = m , p= p + t , R = t x, and (p + t) x+ y = m + t x. Thus p x + y = m , showing worse off by the rebating tax. Or using calculus,d x = (x /p) d p + (x /m) d m = (x /p) t + (x /m) t x = (x s /p) t .Chapter 9 Buying and Selling for a consumer with an endowment Net and gross demands, net supply. Offer curve and demand curve. A figure review.Slutsky revisited: Ordinary vs endowment income effects,x1 / p1 = x1s / p1 + (1 - x1)x1m / m.Labor supply. A graphical discussion.Chapter 10 Intertemporal ChoiceSuppose for example in a 3-period model, the consumption is ck and the interest rate is rk in period k, then the present value of the consumptions is c1 + c2 / (1+r1) + c3 / (1+r1) (1+r2).The responses to an interest rate increasing of a lender and a borrower.Chapter 11 Asset MarketsAssets are goods that provide a flow of services over time. Assets that provide a monetary flow are called financial assets.The no arbitrage condition: in equilibrium, there should be no opportunities to realize a sure return by buying some of one asset and selling some of another.Assets with consumption returns: The housing example.Taxation of asset returns. The dividend (interest) return vs capital gains. Municipal bonds. Financial institutions.Chapter 12 UncertaintyA contingent consumption plan: a specification of what will be consumed in each different (future) state of nature.Utility functions and probabilities. Expected utility functions, or von Neumann-Morgenstern utility functions: EU = i piU(si), where pi is the probability the event si occurs. They are indifferent up to any positive affine transformation.Risk aversion and risk loving. Concave vs convex utility. The second derivative.Diversification. Risk spreading. The stock market.Chapter 13 Risky AssetsMean-variance utility: if a random variable w takes values ws for s = 1, S with probability s , then the mean of the probability distribution is w = s ws , and the variance is w2 = s ( ws w ) 2 while its square root w is the standard deviation. The associated utility is then u (w , w2 ) or u (w , w ).A simple portfolio problem: if 1-x : ( r f ), and x : (m s , p s ; r m , s m ), then we have r x = s ( x m s + (1-x ) r f )s = x s m s s + (1-x ) r f ss = x r m + (1-x ) r f and x2 = x 2 m 2. Thus, between risk and return, MRS = ( r m - r f ) / s m , the price of risk. As for Figure 13.3, think of y as a new mutual fund.Measuring risk: the beta b i = how risky asset i is / how risky the stock market is. The risk adjustment = b i ( r m - r f ), and thus r i = r f + b i ( r m - r f ), the Capital Asset Pricing Model.r i = r f + b i ( r m - r f ) as the market line ( to ranking mutual funds).Chapter 14 Consumers SurplusDemand for a discrete good. Reservation prices and consumers surplus. Fig.Producers surplus. Fig. Calculating gains and losses. The water-diamond paradox.Compensating and Equivalent Variations (coinciding if quasilinear utilities).Chapter 15 Market DemandOne can think of the market demand as the demand of some “representative consumer”. Adding up demand curves: the horizontal summation principle. Fig.The price elasticity of demand:= (q / q ) / (p / p)= ( p / q ) / (p /q), or= (dq / q ) / (dp / p)= ( p / q ) / (dp /dq).It is normally negative. So, very often people turn to consider its absolute value |.A commodity has an elastic ( inelastic, unit) demand if | 1 ( | 1 , | = 1 ).Elasticity and revenue. R = pq, dR = q dp + p dq, and then dR / dp = q 1 +(p) where ( p ) = ( p dq ) / (q dp). Fig.Similarly, MR = dR / dq = p (q) 1 + 1 /(q) where ( q ) = ( p dq ) / (q dp). Strikes and profits. The Laffer curve.Constant elasticity demands. Another way to express elasticity: = d ln q / d ln p.The income elasticity of demand . With p1 x1 + p2 x2 = m, we have 1 = p1 dx1/dm + p2 dx2/dm = s11+s22, where si is the expenditure share of good i .The arc elasticity vs the point elasticity.Chapter 16 Partial EquilibriumThe market supply curve. A competitive market. The equilibrium. Pareto efficiency. Fig.Market surplus and market shortage. Fig. Shortage is not scarcity.Two special cases: of a vertical supply and of a horizontal supply. Figs.Algebra of the equilibrium: D ( p ) = S ( p ). Comparative statics. Shifting both curves.Taxes. Distinguish Pp , the price paid by consumers, Pr , the price received by producers, Pl , the list price, and Po , the original price. The two ways to analyze the effect of a tax (imposed on demand or imposed on supply) are equivalent.Algebra of the equilibrium with a tax:D ( pp ) = S ( pr ), and pp = pr + T. Who bears the burden of a tax? The one with less elasticity shares more burden.Passing along a tax. The deadweight loss of a tax. Figs.A subsidy is the opposite of a tax.Chapter 17 AuctionA topic in Economics of Information.Private-value auctions and common-value auctions.Four types of auctions according to bidding rules: (Progressive) English auction, and its minimal bid increment (Degressive) Dutch auction First price sealed bid auction FPSB auction Second price sealed bid auction SPSB auction, or Vickrey auctionAuction Design: Pareto efficiency and Profit maximization.English auction and Vickrey auction are truth-telling.Winners Curse. Sellers Curse. Reservation price. Collusion. Chapter 18 TechnologyThese four chapters focus mainly on resource allocation insider firms.Inputs and outputs. Factors of production: land, labor, capital, raw materials, and so on.Financial capital and physical capital. Technological constraints. A production set: X = input(s) , Y = output.Example of one-input-one-output case: production function. Fig.Examples of technology in two-inputs-one-output case (isoquants analysis): fixed proportions, perfect substitutes, Cobb-Douglas. Figs.Assumptions of technology: monotonic (free disposal), convex. Fig.The marginal product, The technical rate of substitution (TRS): with dy = 0,TRS (x1, x2 ) = dx2 / dx1 = MP1 (x1, x2) / MP2 (x1, x2 ).Diminishing MP. Diminishing TRS. The long run (LR) and the short run (SR). Returns to scale: increasing, decreasing, and constant.Chapter 19 Profit MaximizationThe organization of firms. Proprietorships, partnerships, or corporations.Profits and stock market value. Fixed and varia