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2.2 Production Function 13 MM VENKATESHWARA OPEN UNIVERSITY MICROECONOMIC THEORY www.vou.ac.in MICROECONOMIC THEORY MICROECONOMIC MICROECONOMIC THEORY MA [MEC-102] VENKATESHWARA OPEN UNIVERSITYwww.vou.ac.in MICROECONOMIC THEORY MA [MEC-102] BOARD OF STUDIES Prof Lalit Kumar Sagar Vice Chancellor Dr. S. Raman Iyer Director Directorate of Distance Education SUBJECT EXPERT Bhaskar Jyoti Neog Assistant Professor Dr. Kiran Kumari Assistant Professor Ms. Lige Sora Assistant Professor Ms. Hage Pinky Assistant Professor CO-ORDINATOR Mr. Tauha Khan Registrar Authors Dr. S.L. Lodha, (Units: 1.2, 1.4, 1.6, 1.7, 5.2, 5.3.1, 5.4, 9.4, 10.2, 10.3, 10.3.2) © Dr. S.L. Lodha, 2019 D.N. Dwivedi, (Units: 1.3, 1.5, 1.8, 2.2-2.4, 3.2-3.3, 3.4.1-3.4.2, 4.2-4.4, 5.3, 5.5-5.6, 6.2-6.4, 6.5.2-6.7, 7.2-7.4, 8.2-8.5.2, 8.6, 9.2-9.3, 10.2.1-10.2.2) © D.N. Dwivedi, 2019 Dr. Renuka Sharma & Dr. Kiran Mehta, (Units: 3.4.3-3.4.5, 7.5, 8.7) © Dr. Renuka Sharma & Dr. Kiran Mehta, 2019 Vikas Publishing House (Units: 1.0-1.1, 1.9-1.13, 2.0-2.1, 2.5-2.9, 3.0-3.1, 3.4, 3.5-3.9, 4.0-4.1, 4.5-4.9, 5.0-5.1, 5.7-5.11, 6.0-6.1, 6.5-6.5.1, 6.8-6.12, 7.0-7.1, 7.6-7.10, 8.0-8.1, 8.5.3, 8.8-8.12, 9.0-9.1, 9.5-9.9, 10.0-10.1, 10.3.1, 10.4-10.8) © Reserved, 2019 All rights reserved. No part of this publication which is material protected by this copyright notice may be reproduced or transmitted or utilized or stored in any form or by any means now known or hereinafter invented, electronic, digital or mechanical, including photocopying, scanning, recording or by any information storage or retrieval system, without prior written permission from the Publisher. Information contained in this book has been published by VIKAS® Publishing House Pvt. Ltd. and has been obtained by its Authors from sources believed to be reliable and are correct to the best of their knowledge. However, the Publisher and its Authors shall in no event be liable for any errors, omissions or damages arising out of use of this information and specifically disclaim any implied warranties or merchantability or fitness for any particular use. Vikas® is the registered trademark of Vikas® Publishing House Pvt. Ltd. VIKAS® PUBLISHING HOUSE PVT LTD E-28, Sector-8, Noida - 201301 (UP) Phone: 0120-4078900 Fax: 0120-4078999 Regd. Office: A-27, 2nd Floor, Mohan Co-operative Industrial Estate, New Delhi 1100 44 Website: www.vikaspublishing.com Email: [email protected] SYLLABI-BOOK MAPPING TABLE Microeconomic Theory Syllabi Mapping in Book Unit-I : Consumer’s Choice under Certainty Unit 1: Consumer’s Choice Preference ordering and utility function – Utility maximization and Marshallian under Certainty demand function– Indirect utility function and cost/expenditure duality (Pages 3-39) between constrained utility maximization and constrained cost minimisation – Hicksian demand function – Properties of budget line and demand function: Engle aggregation, Cournot aggregation, homogeneity – Linear expenditure system – An overview of estimation of demand functions. Unit-II : Theory of Production Unit 2: Theory of Production Production function – Returns to scale and returns to a factor- Elasticity of (Pages 41-70) factor substitution – Types of production function: Homogeneous production function, Cobb-Douglas, CES production functions and its properties – Derivation of Cobb-Douglas and Leontief production functions from CES production function. Unit-III : Theory of Cost and Factor Pricing Unit 3: Theory of Cost and Derivation of cost function from production function – Technical progress Factor Pricing (Hicksian and Harrodian version) and factor shares – Theories of distribution: (Pages 71-100) Marginal Productivity theory and Euler’s theorem, Ricardo, Kalecki and Kaldor. Unit-IV : Theory of Market Unit 4: Theory of Market Critique of perfect competition as a market form – Actual market forms: (Pages 101-139) Duopoly, oligopoly and monopolistic competition – Cournot and Stackelberg’s model of duopoly – Collusive oligopoly: Cartel. Unit-V : Game Theoretic Approach to Economics Unit 5: Game Theoretic Two-person zero-sum and non-zero sum game – Pure strategy, maximin and Approach to Economics minimax - saddle point, and minimax theorem – mixed strategy, its solution – (Pages 141-156) Two person co-operative game, non-co-operative game – dominated strategy – Prisoner’s dilemma and its repetition – Nash equilibrium – application of game theory to oligopoly. Unit-VI : Alternative Theories of the Firm Unit 6: Alternative The traditional theory of firm and its critical evaluation – Baumol’s revenue Theories of Firm maximization model – Williamson’s model of managerial discretion – (Pages 157-178) Managerial firm vs. entrepreneurial firm – Marris’s model of managerial enterprise – Limit pricing theory. Unit-VII : Theory of General Equilibrium Unit 7: Theory of General Principles of general equilibrium, existence, uniqueness and stability Equilibrium (Walrasian and Marshallian conditions of stability) – Walrasian general (Pages 179-206) equilibrium system – Computable general equilibrium. Unit-VIII : Welfare Economics Unit 8: Welfare Economics Pareto Optimality, Pareto Optimality conditions: Consumption, production (Pages 207-239) and exchange, critical evaluation of Pareto Optimality – Compensation tests: Kaldor, Hicks and Scitovsky and Little’s criterion – Social welfare function – Arrow’s Impossibility Theorem. Unit-IX : Choice under Uncertainty and Risk Unit 9: Choice under Difference between Uncertainty and risk; classes of measures: associative Uncertainty and Risk measure, ordinal and cardinal measures, Axioms of Neumann-Morgenstern (Pages 241-260) (N-M) utility, Characteristics of N-M utility index; relationship between the shape of the utility function and behaviour towards risk, elasticity of marginal utility and risk aversion; absolute and relative risk aversion. Unit-X : Economics of Imperfect Information Unit 10: Economics of Information and decision making under certainty and uncertainty – Imperfect Information Asymmetric information, adverse selection, moral hazard and signalling – (Pages 261-280) Applications to insurance and lemons markets. CONTENTS INTRODUCTION 1-2 UNIT 1 CONSUMER’S CHOICE UNDER CERTAINTY 3-39 1.0 Introduction 1.1 Unit Objectives 1.2 Preference Ordering and Utility Function 1.2.1 Utility Functions (Numerical Preference Rankings) 1.3 Utility Maximization and Marshallian Demand Function 1.3.1 Cardinal Utility Approach to Consumer Demand (Marshallian Approach) 1.3.2 Total and Marginal Utility 1.3.3 Consumer Equilibrium 1.3.4 Derivation of Individual Demand Curve for a Commodity 1.4 Indirect Utility Function and Cost/Expenditure Function Duality between Constrained Utility Maximization and Constrained Cost Minimization 1.4.1 Slutsky Equation 1.5 Hicksian Demand Function 1.5.1 Assumptions of Ordinal Utility Approach 1.5.2 Meaning and Nature of Indifference Curve 1.5.3 Marginal Rate of Substitution (MRS) 1.5.4 Properties of Indifference Curves 1.6 Properties of Budget Line and Demand Function 1.6.1 Engel Aggregation and Cournot Aggregation 1.7 Linear Expenditure System 1.8 Overview of Estimation of Demand Functions 1.8.1 Linear Demand Function 1.8.2 Non-Linear Demand Function 1.8.3 Multi-variate or Dynamic Demand Function: Long-Term Demand Function 1.9 Summary 1.10 Key Terms 1.11 Answers to ‘Check Your Progress’ 1.12 Questions and Exercises 1.13 Further Reading UNIT 2 THEORY OF PRODUCTION 41-70 2.0 Introduction 2.1 Unit Objectives 2.2 Production Function 2.3 Returns to Scale and Returns to a Factor 2.3.1 Short-run Laws of Production: Production with One Variable Input 2.3.2 Isoquants 2.3.3 Law of Returns to Scale 2.3.4 Elasticity of Factor Substitution 2.4 Types of Production Function 2.4.1 Homogenous Production Function 2.4.2 Cobb-Douglas Function and Derivations 2.4.3 CES Production Function and its Properties and Derivation of Leontief Function 2.5 Summary 2.6 Key Terms 2.7 Answers to ‘Check Your Progress’ 2.8 Questions and Exercises 2.9 Further Reading UNIT 3 THEORY OF COST AND FACTOR PRICING 71-100 3.0 Introduction 3.1 Unit Objectives 3.2 Derivation of Cost Function from Production Function 3.2.1 Short-run Cost-output Relations 3.2.2 Cost Curves and the Law of Diminishing Returns 3.2.3 Output Optimization in the Short-run 3.3 Technical Progress: Hicksian Version 3.3.1 Harrodian Version of Technical Progress 3.4 Theories of Distribution 3.4.1 Marginal Productivity Theory 3.4.2 Euler’s Theorem 3.4.3 Ricardian Theory of Income Distribution 3.4.4 Kalecki’s Theory 3.4.5 Kaldor’s Saving Investment Model of Distribution and Growth 3.5 Summary 3.6 Key Terms 3.7 Answers to ‘Check Your Progress’ 3.8 Questions and Exercises 3.9 Further Reading UNIT 4 THEORY OF MARKET 101-139 4.0 Introduction 4.1 Unit Objectives 4.2 Critique of Perfect Competition as a Market Form 4.2.1 Price Determination under Perfect Competition 4.2.2 Equilibrium of the Firm in Short-run 4.2.3 Derivation of Supply Curve 4.3 Actual Market Forms: Monopolistic Competition, Oligopoly and Duopoly 4.3.1 Price Determination under Pure Monopoly 4.3.2 Pricing and Output Decisions under Oligopoly 4.3.3 Cournot and Stackleberg’s Model of Duopoly 4.4 Collusive Oligopoly: Cartel 4.4.1 Joint Profit Maximization Model 4.4.2 Cartel and Market-sharing 4.5 Summary 4.6 Key Terms 4.7 Answers to ‘Check Your Progress’ 4.8 Questions and Exercises 4.9 Further Reading UNIT 5 GAME THEORETIC APPROACH TO ECONOMICS 141-156 5.0 Introduction 5.1 Unit Objectives 5.2 Two-person Zero-sum and Non-zero Sum Game 5.2.1 Non-Zero-Sum Games 5.3 Pure Strategy, Maximin and Minimax 5.3.1
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