# Microeconomics II

**Number of credits allocated:** 6 ECTS Credits

**Objective of the course (expected learning outcomes and competences to be acquired)**

This course is intended to offer a formal introduction in the traditional microeconomic analysis. We will introduce, as rigorously as an undergraduate programme allows, the axiomatic foundation of microeconomic theory and proceed to examine consumer choice, producer theory and basic theory of the markets. We aim at combining analytical/algebraic methods with more intuitive diagrammatic analysis. To this end, the lectures introducing the theory are complemented by classes in which exercises are explicitly solved by teachers and tutorials in which the participants hand in their solutions to selected exercises and discuss problems they might have encountered in solving them.

**Prerequisites:** Microeconomics 1

**Course contents**

1. Consumer Theory.

(a) Prefrences and their representation.

(b) Utility and indifference curves.

(c) Utility maximisation-Cost minimisation. Marshallian-Hicksian demand.

(d) Substitution and Income effects.

(e) Value functions: Indirect utility function and expenditure function. Duality between Hicksian and Marshallian demand. Roy’s identity and Shephard’s lemma

(f) Slutsky’s equation.

(g) Consumer surplus.

(h) Substitutes and complements. Normal and inferior goods, Giffen goods.

2. Uncertainty

(a) Lotteries/games.

(b) Preferences on lotteries.

(c) Expected Utility Rule and von Neumann-Morgenstern utility functions. Ordinal and cardinal

utility functions.

(d) Uncertainty and paradoxes (Allais, Elsberg etc.).

(e) Risk attitude and risk aversion. Measures of risk aversion.

(f) Certainty equivalent and risk premie.

3. Producer theory.

(a) Production functions.

(b) Cost minimisation.

(c) Cost functions and curves.

4. Markets.

(a) Competition. Perfect competition assumptions. Short and long run supply of a firm. Market supply function. Short and long run equilibrium. Producer surplus. Applications. Collusion.

(b) Monopoly. Profit maximisation for a monopoly. Deadweight loss. Monopoly and elasticity.

**Recommended reading**

I suggest a rather long list of references. You should try as many textbooks and articles as possible to decide which you like. Different texts might cover different topics in a way that suits you best. Starting from the top of the list, I suggest some good undergraduate textbooks that should give a good first introduction to the issues covered. Proceeding towards the bottom, you will find textbooks of increasing difficulty and primary literature. Don’t be disappointed if you cannot follow the more difficult textbooks/papers. For those of you who are really enjoying microeconomics they might serve as an appetizer. For the rest, just to introduce you to what more advanced microeconomics looks like...

__Undergraduate-advanced undergraduate textbooks__

A classic textbook is Varian (2005) and the somewhat more difficult Gravelle & Rees (2004). Somewhat more recent approaches can be found in Nicholson & Snyder (2011) and Besanko & Braeutigam (2012) with a diagrammatic approach throughout the text and a little more algebra in the appendices.

__For micro enthusiast__

As a graduate textbook Varian (1992) is a classic and widely used. Mas-Colell, Whinston & Green (1995) are perhaps the most complete reference book in economics. At times it is very difficult. Some parts however can be read by a technically proficient undergraduate student. In any case it is The reference book in graduate micro and cannot be omitted. An excellent alternative, somewhat more easy is provided Jehle & Reny (2001). Rigorous but at times sacrificing generality to become more understandable. For a good look into uncertainty Hirshleifer & Riley (1992)

__Only for fanatics__

For those who wish to dive into primary sources have a look at the following (most are very technical and are suggested only for the most keen fanatics!):

1. Consumer theory Deaton & Muellbauer (1980) with an emphasis on empirics andBarten & Bohm (1982) for those who require a mathematical approach and of course the classic thesis by Debreu (1959)

2. Producer theory: Debreu (1959) without doubt and McFadden (1978).

REFERENCES

Barten, A. & B¨ohm, V. (1982), ‘Consumer theory’, Handbook of mathematical economics 2, 381–429.

Besanko, D. & Braeutigam, R. (2012), Microeconomics, Wiley, N.Y.

Deaton, A. & Muellbauer, J. (1980), Economics and consumer behavior, Cambridge University Press, Cambridge.

Debreu, G. (1959), Theory of value, Yale University Press, New Haven.

Gravelle, H. & Rees, R. (2004), Microeconomics, Prentice Hall, London.

Hirshleifer, J. & Riley, J. (1992), The Analytics of Uncertainty and Information, Cambridge University Press, Cambridge.

Jehle, G. & Reny, P. (2001), Advanced Microeconomic Theory, Addison Wesley, N.Y.

Mas-Colell, A., Whinston, M. & Green, J. (1995), Microeconomic Theory, Oxford University Press, Oxford.

McFadden, D. (1978), Cost, revenue and profit functions, in M. Fuss & D. McFadden, eds, ‘Production Economics: A Dual Approach to Theory and Applications’, North-Holland Publishing Company, Amsterdam.

Nicholson,W.& Snyder, C. (2011), Microeconomic Theory: Basic Principles and Extensions, South-Western College Pub, Mason, OH.

Varian, H. (1992), Microeconomic Analysis, W. W. Norton & Co, N. Y.

Varian, H. (2005), Intermediate Microeconomics: A Modern Approach,W.W. Norton and Company, N.Y.

**Teaching methods:** Two 2-hour weekly lectures plus classes and tutorials.

**Assessment methods:**

Final written exam. Exams consist of a number of multiple choice questions (around 25) that account for 70% of the final mark a choice of one out of two essay type question corresponding to the remaining 30%. Use of calculators/phones-smartphones or any other kind of electronic devices is NOT ALLOWED during the exams. Any such devices should be stashed away. Exercises will be constructed to allow easy solutions for students with basic knowledge of algebra, differentiation, perhaps a little integration and constrained optimisation. For the rest I suggest looking into the above before attempting an exam.

**Language of instruction:** Greek