Introduction to
Microeconomic Theory
Lectures in Microeconomic Theory
Fall 2010, Part 1
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Why Microeconomics once more?

Some new subjects
Game theory — new to some of you
Uncertainty — new to some of you
G
General
l equilibrium
ilib i

But mainly: Same old topics

Still: The course is useful. Why?
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What do you learn?

The basic toolbox of economics

Somewhat like a math course
Methods, concepts and ideas that are used
Methods
over and over again, in different contexts

But it is economics
Economic interpretation of formal results
are very important
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Few applications

You will find the applications in other courses

The new concepts are abstract

But, as always:
Expect to put in lot of your own effort
if you want to benefit from the course
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What is Microeconomic Theory?

Begins by considering the behavior of individual
actors and builds from this foundation to a theory
of aggregate economic outcomes
Th
Theory
off the
th firm
fi
Consumer theory
Equilibrium analysis (partial and general)
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What is in the toolbox?

Principles of microeconomics:
Standard analytical procedure and fairly simple
theorems that can be applied again and again to
apparently dissimilar economic problems.
Duality theory

Abstract modeling of economic interaction:
Economic actors
Firms and consumers
Motivation
Profit & utility max.
Economic environment Perfect competition
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Specific goals of microeconomic analysis

Show under which conditions the self-interested
actions of consumers and firms lead to a good
outcome for the economy as a whole.
Existence.
Pareto efficient allocation (welfare theorems).

Thereby indicating what kind of intervention
should be undertaken if these conditions are not
satisfied.
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A competitive market is characterized by

Sellers and buyers take the market price as given and
determine their supply and demand accordingly.

The market price is determined so that
market supply = market demand.

A good is transferred if and only if the price is paid.

Sellers and buyers have the same information about
the transferred good.
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Pure exchange

All economic agents are consumers.
Consumption goods
Consumer 1
Consumer 2
Payments
Given the market prices and initial endowment of
consumption goods, consumers choose the best
vector of consumption goods, given that positive
net demand of some goods must be financed by
positive net supply of other goods.
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With production

Some economic agents are consumers, other agents
are firms.
Consumption goods
and payments
Consumers
Profits
Firms
Labor (and capital) and
Given the market
Given the market
prices, each consumer wages (and interest)
prices and the
chooses a best combination of
technological constraints,
labor supply and consumption
each firm chooses a
good demand, given that he
combination of consumption
must pay for the consumption
good supply and factor demand
that maximizes profits.
goods with his labor income.
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Rôle for intervention

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Prevent that firms get market
power ― competition policy
A competitive market is characterized by

Sellers and buyers take the market price as given and
determine their supply and demand accordingly.

The market price is determined so that
market supply = market demand.

A good is transferred if and only if the price is paid.

Sellers and buyers have the same information about
the transferred good.

Ensure that markets clear ― labor market policy

Protect private property, create low transaction costs

Ensure that firms pay for external effects (pollution)

Ensure efficient provision of public goods

Address informational problems

Contribute to a just income distribution
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Fields of microeconomics

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Industrialthat
Prevent
organization
firms get market
power ―
(Game
theory)
competition policy
A competitive market is characterized by

Sellers and buyers take the market price as given and
determine their supply and demand accordingly.

The market price is determined so that
market supply = market demand.

A good is transferred if and only if the price is paid.

Sellers and buyers have the same information about
the transferred good.

Ensuremarket
Labor
that markets
economics
clear ― labor market policy

Protect private
Economics
of crime,
property,
transaction
create low
costs
transaction
economics
costs

Ensure that firms
Environmental
economics
pay for external effects (pollution)

Ensureeconomics
Public
efficient provision of public goods

Address informational
Information
economicsproblems
(Game theory)

Contribute
to a just public
incomefinance
distribution
Welfare
economics,
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