## Microeconomic Theory (Paper-1) MA./M.Sc. Economics Part-I

This course aims at providing comprehensive knowledge of consumer, firm, and market theory and their applications. The course is spread over two parts. The first part revises major concepts in microeconomic theory at an intermediate level. The second part, while ushering participants to more topics, gets rigorous in its treatment to the microeconomic theory. In particular, the students are expected to develop deductive reasoning and comprehend classical methodology pertaining to models of consumer behavior, firms’ decision making, perfect and imperfect market structure, general equilibrium analysis, uncertainty, risk analysis, game theory, and welfare economics. Special importance is placed on developing problem solving skills to the issues related to microeconomics. It is expected that the course would enable its participants to comprehend major microeconomic models which will help in business decision making.

*Prerequisite for this course is elementary-level knowledge of microeconomic theory and intermediate level calculus*.

__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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