# Paper 1. MICRO-ECONOMIC THEORY

__Part A:__

__Part A:__

**Topic 1: Introduction**

- Microeconomics: Comparison with other Branches of Economics.
- An Overview of Microeconomics Topics, Consumer’s Decision, Markets, Economic Models.
- Development of the Economic Theory of value.
- Production, Cost and Welfare.
- Cost Minimization, Introduction to Maximization of a function.
- Functions of several variables & their optimization.
- Implicit functions.
- Derived Demand.
- Game Theory.

**Topic 2: Theory of Consumer Behaviour and Demand Analysis**

- Axioms of Rational Choice.
- The utility function, Arguments of utility function.
- Indifference curves and Marginal Rate of substitution (MRS). Indifference curves and Transitivity. Convexity of Indifference curve.
- An alternative derivation: Marginal utility, MRS. Concepts of Perfect substitutes and perfect complements. Non-homothetic Preference.
- Consumer’s equilibrium
- Income & Substitution effects: Hicksian Framework and Slutsky equation.
- Revealed Preference and the Substitution effect. Indirect utility function & its derivation.

**Topic 3: Market Demand & Elasticity**

- Market demand curves.
- Types of demand curves. Short Run and Long Run analysis:
- Elasticity and relationships among elasticities of demand.
- Theoretical issues in Market demand analysis.
- The implication of Elasticities and Problem Solving Approach.
- Identification of Inferior goods, Giffin goods and normal goods.

**Topic 4: Production Functions**

- The Concept of Production Function; how to Choose Variables. Variation in one input.
- Isoquant Maps and the rate of technical substitution.
- Returns to scale.
- The elasticity of substitution.
- Some common production functions.
- Technical progress.
- Equilibrium of the firm.
- Cobb Douglas Production function.
- CES Production Function. Translog Function.

**Topic 5: Cost of Production**

- Definition of costs.
- Cost functions.
- Traditional Vs Modern theory of cost.
- Changes in input prices.
- Short Run, Long Run distinction.
- Input substitutability.
- Input Cost and Demand for Factors of Production.
- Derived Demand.
- Cost Minimization.
- Decreasing and Increasing Cost Industry and Price Determination.

__Part B__

__Part B__

**Topic 6: Profit Maximization and Supply**

- The nature & behaviour of firms.
- Profit maximization. Marginal Revenue.
- Short Run supply by a Price taking firm.
- Profit maximization and input demand.
- The controversy over the profit maximization hypothesis. Cost minimization.
- relationship between cost and production curves.

**Topic 7: The Theory of Market Behaviour**

**7.1: Perfect competition: The Perfectly competitive market:**

- The assumptions of the Model: Short-run equilibrium of the price taker firm:
- Long-run equilibrium of the price taker firm:
- Equilibrium of the industry:
- Mathematical Derivation of Equilibrium Prices and Quantity:
- Difference between Perfect and Pure Competition; Price and Output Decision.
- Mathematical derivation of Price and Quantity.

**7.2: Monopoly: Monopoly & its Basics:**

- The negatively sloping demand curve:
- Short-run equilibrium, Long-Run Equilibrium:
- Price discrimination:
- Bi-lateral Monopoly:
- Multiplant Monopoly:
- Comparison with perfect competition:
- Monopoly and Price Discrimination
- Mathematically Price and Quality Solution.

**7.3** Monopolistic competitive conditions:

- The historical setting of the theory of monopolistic competition
- Characteristics of monopolistically competitive firms.
- The concepts of industry & group:
- The basic Chamberlain theory of Monopolistic competition.
- Comparison with pure competition & monopoly.
- Mathematical Derivation of Price and Output Decision under Monopoly.

**7.4 **Oligopolistic conditions:

- A simple statement of the problem of oligopoly:
- Models of Non-collusive Oligopoly:
- Cournot, Bertrand, Chamberlin, Sweezy & Price Leadership Collusive model of oligopoly:
- cartels & price leadership models.
- Mathematical Derivation of Price and Quantity Determination.
- Monopsony and Buying Power; influence on Price.

**Topic 8: Game Theory**

- Description of a Game Theory.
- The Payoff Matrix of a Game.
- Nash Equilibrium.
- The Prisoner’s Dilemma.
- Sub-game Perfect Equilibrium:
- Sequential Equilibrium.
- Application of Game Theory. Cournot Equilibrium. Bertrand Equilibrium. Quantity Leadership (Stackelberg Model) Price Leadership. Collusion (Cartel). Conjectural Variation. Stackelberg Case.

**Topic 9: Pricing of Factors of Production**

- Short Run Demand for one Variable Input. Input price Elasticity.
- The Short-run Demand Curve.
- Variable inputs. Market demand Curve for an Input:
- The Price of fixed Factors:
- Rents & Quasi-rents.
- The Supply Curve of Labour:
- Wage Determination, Role of Unions.

**Topic 10: General Equilibrium**

- Assumptions of the 2 X 2 X 2 models. Edge Worth Box diagram, Pareto Optimality; Equilibrium conditions.
- Concept of Contract Curve, Static Properties of A General Equilibrium Model.
- General Equilibrium and the Allocation of Resources.
- Arrow’s Impossibility Theorem.

**Topic 11: Welfare Economics**

- Meaning of Economic welfare.
- Criteria of social welfare.
- Welfare Maximization.
- Welfare Maximization and perfect Competition.
- Market failure and public goods/social goods.
- Externality analysis.
- Anti-trust Policy and regulations.

**Topic 12: Uncertainty and risk Analysis**

- Concept of expected utility & its theorem.
- The uniqueness of expected utility function.
- Affine function. Risk aversion and Risk loving in Risk neutral.
- Arrow Pratt measure of (absolute) risk aversion.
- Measurement of risk aversion.
- Global Risk aversion.
- Arrow Pratt measure of relative risk.

#### Recommended Books:

- Ferguson, C.E & Gould, J.P, Microeconomic Theory. Macmillan, (Latest Edition).
- Henderson, J.M & Quandt, R.E., Microeconomic Theory*. N.Y Melliwra H A Book
- Koutsoyiannis, A., Modern Microeconomics*, London, Macmillan, (Latest Edition).
- Layard and Walter A.A., Micro-Economics*, McGraw Hills, (Latest Edition).
- Varian Hal R., Micro Economics Analysis*, Norton & Company, New York,
- Walter Nicholson, Microeconomic Theory: Basic Principles and Extensions (6th edition).

#### Additional Readings:

- Baumol, W.J., Economic Theory and Operations Analysis, Prentice-Hall (Last Edition).
- Hirshleifer Jack, Price Theory and Applications*, Prentice-Hall (Latest Edition).
- Kameischon, D.T.R., Readings in Microeconomics, New York, The world publishing co., (last Edition).
- Stigler, G.T., The Theory of price, N.Y Macmillan, London. (Last Edition).
- Silberberg E., The Structure of Economics, A Mathematical Analysis, McGraw Hill, (Latest edition).

*(* Strongly Recommended)*

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