Intermediate Microeconomics
Introduction
These lecture notes are intended to be used to supplement and guide a course in
“Intermediate Microeconomics”, typically taught in the second/third years of undergraduate Economics programs after sufficient math courses and introductory Economics courses have been completed. In my personal opinion regarding prerequisites, I think anyone with an understanding of continuous functions and their derivatives1 can follow these notes as long as they are interested enough, which is likely
the most difficult challenge for any Economics student. As a passionate instructor
of social science, I’m quite confident that it is absolutely appropriate to engage with
this material without any previous study of social science.
Perhaps it is a bit odd to claim that standard introductory Economics courses are
unnecessary for an ‘intermediate’ course, especially since this directly conflicts with
the current institutional requirements of Economics departments in most universities. In most sciences, prerequisite course paths follow a necessarily progressive sequence2 . Such a relationship does not exist between Introductory and Intermediate
microeconomics. I highlight this particular difference, between the prerequisites of
Economic science and the ‘hard’ sciences, as an introduction to the characteristic sentiment found throughout these notes: Economists have tended to disagree, especially
on matters of first principles, and perhaps more than any other academic discipline of
comparable popularity. Authors of the most popular undergraduate Economics textbooks tend to advertise the opposite claim, and are quick to ensure their students
that while Economics has an undeniably large amount of disagreement, primary
principles and methodologies have more or less solidified over the past century on
the path towards the status of proper ‘hard’ science.
Economic theory does not have the solidarity of physics or chemistry. As a
teacher, I believe that expressing this conviction at the onset of this course is essential for an honest exposition. The true value of contemporary ‘neoclassical’ models of modern Economic theory cannot be honestly understood as a robust body of
empirically supported models. From my perspective, boasting solidarity among neoclassical Economists only reveals the projections of an indoctrinated disciple, it does
not reflect any scientific evaluation of Economic theory. Academic thought (especially social theory) is not a stable outcome of collecting sufficient ‘truths’, it is an
on-going interplay of hypotheses, empirics, and debate. Physics and chemistry are
afforded the title of ‘hard science’ for developing a dialectic which has established
‘solid’ frameworks for extremely reliable and applicable predictions. While such re1
any introductory knowledge of Calculus will suffice
organic chemistry can’t be understood without some understanding of the periodic table, and calculus can’t be understood without some familiarity with algebra
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liability may describe a future goal for social theory, it cannot honestly describe the
present condition.
So why are the introductory and intermediate courses both mandatory for majors
of the discipline, and why in sequential order? My speculation is that this sequence
of courses has crystallized itself within the curriculum by effectively pseudo-solving
two constant inconveniences for Economics departments, killing two birds with one
stone. The first is that Economics seems forever culturally inseparable from Business. Much of the industrial and academic world operates as if these terms are
synonymous, and thus every year huge portions of undergraduates who are keen on
building their professional ‘business’ careers end up eagerly enrolled in Economics.
However, Economics is not equivalent to ‘the study of business’ 3 , thus many students
benefit from a brief exposition of this difference before committing to their major.
The second inconvenience is that every academic department must offer general
education courses outside of their major curriculum. This issue compounds with
the first issue, as many non-Economics professional majors (engineering, communications, etc.) tend to arbitrarily assign Introductory Microeconomics as a course
requirement for their major, assuming the importance of a ‘business’ course in their
professional curriculum. Teaching Economic theory to college freshmen with nearly
zero prerequisites is an impossible task when in reality modern Economic theory is
a collection of abstract utopian arguments expressed in the language of Calculus.
Introductory Microeconomics in it’s current state (and Macro as well) is designed
to be portable: to be a fairly regulated and standard course for any undergraduate
at any level, to provide an ‘overview’ of Economic thought without formal precision
or ‘scientificity’ for students to be introduced to Economics without the commitment
of majoring in the discipline. The intermediate courses have been designed around
this institution of introductory courses, specifically for students who have already received the ‘overview’, to attain an actual introduction to the formal nature of modern Economic theory. After the non-major students are filtered out, Intermediate
Microeconomics courses then require Calculus as a legitimate prerequisite, creating
activities which resemble courses in the physical sciences: mathematical problems
which need to be solved through the exercise of well-practiced techniques. This
course will not be any different.
However, with this course I’d like to avoid teaching these techniques as if they
represent a stable position of Economic theory. I hold the belief that the technocratic
form of modern education has a tendency to create dogmatic relationships between
students and science. To avoid this, I try to include discussions of the history of
Economic thought to trace the origins, influence, and theoretical merits of various
concepts. This is not to necessarily add qualitative material to the assignments and
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This course is especially not the study of business, nor is any other course in ‘Intermediate Microeconomics’.
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coursework. Rather, by including these histories, which have been slowly eroded
out of Economics programs in recent decades, I hope to make more honest sense of
why students are being presented with this material in the first place. Generally, it
seems clear from my historical perspective that the theories contained in these notes
represent articulations of constantly ongoing Economic debates, and the desire to engage with such debates is itself a sufficient motivation to wrestle with the theoretical
models of this course. By my accounts, there is not a single concept contained in
these notes (which are all canonical theories of modern Economics) that could be
reasonably interpreted as a stable, robust, or ‘true’ scientific theory.
What Is, What Should Never Be, and the Art of Storytelling
The concern for truthful theory brings many instructors to begin their Economics
courses by presenting the following dichotomy of intellectual merit: “Economics is
positive and normative” 4 . Let’s briefly unpack this statement. I hope that doing
so will illustrate how these merits can be misleading, how they might be honestly
re-interpreted, and how an alternative value can perhaps outshine these ones.
Positive social theories attempt to describe how society really is. Such theories
may be simplistic, but they are literal ‘models’ in that they attempt to imitate observable patterns of real observable interactions.
Normative social theories attempt to describe how society should or could be.
Such theories may make assumptions and generate conclusions which can’t reasonably apply to the undeniably complications of real human interaction, but nonetheless describe ideals that individuals and institutions should, or could, strive for.
Some Economists get away with claiming that certain theories are both positive
and normative, but it takes little time at all to recognize this as a blatant contradiction. Others make the argument that whenever Economics is not positive, meaning
the theory does not match reality, it is normative, meaning society should change
itself to match the beauty of the theory whenever possible. Or vise-versa, Economic
theory is wise and normative until it is absurdly disagreeable, in which case the
analysis is simply revealing some tragic dismal truth of reality.
Lingering on these positions is unnecessary. Economics is not positive. It did not
develop through a dialectic of empirical evidence for it’s assumptions. It is not normative: Economists have no agreed-upon notions of welfare. Economics is however,
rhetorical. It is a collection of cleverly woven stories and even existential questions
that continue to intrigue countless scholars. This rhetoric has often gotten out of
hand. A responsible student must take the task of interpreting our models as seriously as the task of analyzing the technical details of the models themselves.
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this dualist obsession with positivity and normativity is ubiquitous in all contemporary social sciences, from Intro
Micro textbooks to best-selling psychology books.
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Neoclassical Economics
This course will primarily be a course devoted to understanding a collection of
theoretical models which have become organized within academic thought as ‘neoclassical’ economic models. Most theoretical Economics research today falls into this
camp, although it may be worth mentioning that Economics research of recent years
has become more data-driven and less theoretical. Perhaps strangely, one will find
none of these technical calculus-based theories when reading the ‘classic’ critiques
of the political economy such as the writings of Adam Smith, David Ricardo, or Karl
Marx.
The material of this class is the outcome of the “marginal revolution”, a trending collection of ideas and models developed in the later 19th and early 20th centuries. The market models of authors like León Walras, Alfred Marshall, Vilfredo
Pareto, along with the game theoretic models of mathematicians like John von Neumann and John Nash have come to establish a mathematical framework, a particular
paradigm, which has become the hegemonic theoretical framework of Economists
in almost all academic institutions.
At the heart of neoclassical rhetoric, we find two key characters that repeatedly
present themselves as centers of attention. These characters provide the structural
foundations of Supply and Demand in the traditional economic models of competitive markets found in the large majority of introductory-level economics texts. The
buyers that constitute market ‘demand’ are known within foundational economic
theory as consumers, and the sellers that constitute market ‘supply’ are known as
producers or firms.
Rational Choice Theory
The definitive qualities of consumers and producers lie at the heart of countless
philosophical debates. Despite the never-ending controversies regarding the material/metaphysical nature of the most powerful economic players5 and their values,
neoclassical Economics has mostly settled over the past century on a particular quality of all decision-makers, which can be used to analyze the behavior (i.e. choices
and actions) of these characters independently from the philosophical debates regarding their biological, physical, and ideological structures. Here I am referring
to the modelling of our characters as rational decision-makers, which is likely the
most definitive and unifying assumption of neoclassical analysis. A precise definition
of rational choice will act as our conceptual acorn for the various discussions grown
out of the tree of Economic theory. With this definition established, we can precisely,
in fact mathematically, develop theories of rational consumers and producers.
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What even are firms, states, and social planners? Or entrepreneurs for that matter?
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In the rational choice framework, ‘decision-makers’ are mathematical functions
that select alternatives from some collection of problems/menus. A decision-makers
is rational if their choices can be explained as choosing their most-preferred alternatives from every menu they face.
Definition 1. A preference ¥ is a relation between two different alternatives (x ¥ y
means that x is preferred to y) that satisfies the following two properties:
• completeness: for any two alternatives x and y, either x ¥ y or y ¥ x
• transitivity: if x ¥ y and y ¥ z, then x ¥ z.
If x is preferred to y but y is not preferred to x, then we say that x is strictly preferred
to y written x ≻ y. If x is preferred to y and y is preferred to x, then we say that x
and y are indifferent, written x ∼ y.
Definition 2. A decision-makers’ choice are rational if there exists some set of preferences ¥ such that all of their choices are the ¥-best available alternatives.
Preferences act as the atomic structures of economic models, while rational choices
which maximize these preferences act as the dynamic forces of motion. Most economic agents are modeled as rational decision-makers, who have preferences over
all alternatives that they maximize when faced with any given problem. This framework has provided economists with an incredibly simple, and portable, tool to develop surprisingly rich and complex models. Nonetheless, there are many instances
where this framework feels incompatible with natural behavior. Even in such cases
however, the rational benchmark can perhaps help illustrate how deviations from
rationality may be of interest as well.
(Note) Condorcet’s Paradox: As an undeniably interesting irrational procedure,
consider the icon of egalitarian democracy: majority voting. Majority voting behavior over 3 goods among 3 different rational individuals may be irrational. This
is not to say that the majority rule is poor or inefficient in any way. Rather, when
we limit our analysis to rational choice we are inherently excluding the possibility
for the behavior in our models to be driven by mechanisms even as common and
intuitive as majority rule. Thus we are even excluding intuitive models of individual
choice, such as a single person deciding on what to order for dinner. If a customer
chooses their own dinner by evaluating various pro’s and con’s, perhaps within their
own mind conducting a majority vote between lowest price, best taste, and closest
location, they are irrational according to this particular definition.
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