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MICROECONOMICS–1 1 Microeconomics–1 MICROECONOMICS–1 1 Microeconomics–1 Lecturer: Vladimir A. Bragin Class teachers: Vladimir A. Bragin, Olga V. Rozanova, Evgeny V. Andreev, Alexey O. Charkov Course description Microeconomics is a one-semester course for the second-year students basically taught in the third semester. The assessment of the students will be by the Uni- versity of London (UL) examinations at the end of the fourth semester. During the fourth semester students are specially prepared to the University of London examination in the course of supporting classes. Students are supposed to be competent in basic economic analysis up to the level of the Introductory Mi- croeconomics taught in the first year of studies. Intermediate Microeconomics is a core discipline under world standards. It forms the basis of further eco- nomic studies in applied disciplines such as: courses in industrial organization, public finnance, labour economics, international economics, corporate finance, development economics, etc. The course is taught in English. Teaching objectives The objectives of the course are: • to expand the students’ knowledge in the field of microeconomics and to train them to analyze real economic situations; • to provide students with the knowledge of basic microeconomic models’ assumptions, internal logic and predictions, grounding the explanations mostly on intuitive and graphical approaches, if necessary, adding some simple algebra; • to develop the students’ ability to apply the knowledge acquired to the analysis of specific economic cases, recognizing the proper framework of analysis and constructing the adequate economic models within this framework. Teaching methods While teaching the course the following teaching methods and forms of study and control are used: • lectures; • classes; 2 • weekly written home assignments, regularly checked and marked by the class teacher and discussed in detail in class; • essays writing in one of the course topics; • teacher’s consultations; • self-study; • intermediate control: one examination paper in the middle of the third semester and a Mock exam in the University of London examination format not long before the end of the fourth semester; • final control: an examination paper in the University of London exami- nation format following the third semester and the University of London examination. Self-study is a very important component for the course. Assessment The students sit the interim written exam in the middle and the final written exam in the end of the third semester. Each of the exams is in the University of London format, that is, includes only the free response questions, with choice for the students. Grade determination The grade given after the end of the third semester is determined according to the following scheme: the Final exam gives 50% of the grade, the interim exam and home assignments 25% of the grade each. Final grading under the Higher School of Economics degrees takes place after the University of London written exam, according to the following scheme: the University of London exam accounts for 30%, the third semester grade for 40%, the Mock exam for 20%, essays and home assignments written in the fourth semester for the remaining 10% of the final grade. The April Mock exam is held and marked by Russian professors in the UL exam format. Main reading 1. David Laidler, Saul Estrin. Introduction to Microeconomics. Fourth edition. Cambridge University Press, 1995. [L&E] 2. Hal R. Varian. Microeconomics. Fourth or fifth edition. W.W. Norton and Company, 1996, 2000. [HV] MICROECONOMICS–1 3 3. Хэл Р. Вэриан. Микроэкономика. Промежуточный уровень. Современный подход. Пер. с англ. 4-ого изд. М.: ЮНИТИ, 1997. 4. Amos Witztum. Economics. An Analytical Introduction. Oxford Uni- versity Press, 2005. [AW] Additional reading 1. Jack Hirshhleifer, Amihai Glazer. Price Theory and Applications. Fifth edition. Prentice-Hall Inc., 1992. (H&G) 2. Robert H. Frank. Microeconomics and Behaviour. Second edition. McGraw- Hill. 1994. 3. Гальперин В.М., Игнатьев С.М., Моргунов В.И. Микроэкономика. В 2-ух тт. Спб: Экон. шк., 1996, 1997.(Г&И&М) 4. Чеканский А.Н., Фролова Н.Л. Микроэкономика. Промежуточный уровень (учебник). М., ИНФРА-М, 2005 [Ч&Ф - уч.]. 5. Чеканский А.Н., Фролова Н.Л. Микроэкономика. Промежуточный уровень (учебное пособие). М., ИНФРА-М, 2005 [Ч&Ф - уп.]. Course outline Theory of consumer choice and market 1. Assumptions of consumers’ behavior analysis and their role in the consumer choice theory General assumptions: principle of rationality. Cost-benefit criterion of ratio- nality: self-interest standard versus present-aims standard. Choosing the best of the available criterion of rationality. Causes of a consumer’s possible irra- tionality. Sovereignty of a consumer. Other general assumptions of consumers’ behavior analysis: ceteris paribus, certainty and complete information. Specific assumptions (axioms of consumer choice) and their implications for preference ordering. The problem of bundles ranking and properties of consumption bun- dles. Axioms of completeness, transitivity and reflexivity: content and impli- cations. Non-satiation axiom: content and implications. The notion of the marginal rate of substitution. Axioms of continuity and strict convexity (di- minishing marginal rate of substitution): content and implications. Properties of standard indifference curves maps. 4 2. Linking preferences and utility Comparing the cardinal and ordinal approaches to the preferences analysis: historical and logical aspects. Properties of preferences presented as properties of a utility function. Types of utility functions and properties of indifference maps. The notion and examples of homothetic preferences: Cobb-Douglas pref- erences, perfect substitutes, perfect complements. Examples of non-homothetic preferences: quasilinear preferences, preferences in respect of a good and a bad. 3. Budget constraint Budget constraint for income in cash: graphical presentation and alge- braic description. Economic meaning of the budget line slope. The impacts of changes in income and prices. Budget constraint for income in kind: graphical presentation and algebraic description. The impact of changes in endowment structure and prices. Budget constraints for “mixed” income. 4. Consumer’s choice Interior optimum of a consumer. Economic meaning of equalizing the marginal rate of substitution with the goods’ price ratio. Algebraic solution for the optimum of a consumer with Cobb-Douglas preferences. Solution for the optimum in the case of perfect complements. Boundary optimum of a con- sumer. Economic meaning of the inequality of the marginal rate of substitution and the goods’ price ratio. Examples: choice with perfect substitutes, neutrals, mutually exclusive goods, “good/bad” cases. 5. Individual demand function, comparative statics of individual demand and economic goods typology Determinants and properties of an individual demand function. Homo- geneity of degree zero in prices and income. Deriving “income-consumption” and Engel curves. Engel expenditure curves. The difference between normal and inferior goods, .necessity and luxury goods in respect of marginal propen- sity to consume and income elasticity values. “Income-consumption” and Engel curves for homothetic preferences cases: Cobb-Douglas preferences, perfect sub- stitutes, perfect complements. Quasilinear preferences case. Deriving “price- consumption” and individual demand curves. The difference between ordinary and non-ordinary goods. The notion of a Giffen good. Gross substitutes and complements. The two notions of real income: in terms of Hicks and in terms of Slutsky. Substitution effect under Hicks and under Slutsky. Explanation of the sign of a substitution effect. Diagrams explaining price effect signs and derivations of individual demand curves for: a normal good, an inferior and ordinary good, a Giffen good. 6. Slutsky identity and Slutsky equation Derivation of the Slutsky identity in absolute increments and increment ra- tios forms. Intuitively-logical derivation of the Slutsky equation on the basis of MICROECONOMICS–1 5 a diagram presenting Slutsky substitution and income effects of a price change for a normal good. Economic meaning of the Slutsky identity. Slutsky identity and equation with cross effects. Explanation of a cross substitution effect sign, net substitutes. Sign of the cross price effect. Gross and net substitutes, com- plements, independent goods. Asymmetry of the cross price effect. Solving for a price effect and for substitution and income effects under Hicks and under Slutsky. 7. Measuring consumer benefit Marshallian consumer surplus, economic meaning and graphical presenta- tion. 8. Revealed preference approach in the consumer choice theory Principle of revealed preference. Principle of rationality under revealed pref- erence concept. Explaining the sign of substitution effect. Deriving indifference curves. Explaining the convexity of indifference curves. Advantages and disad- vantages of the revealed preference concept versus the ordinal approach. 9. Market demand. and elasticity Aggregation of demand. Origins of the price elasticity concept: the rela- tion between the change of a good’s price and total expenditure on this good. Graphical and algebraic approaches. Comparative analysis of different regula- tory measures on consumers’ choice and welfare: the impact of lump-sum and per unit taxes and subsidies, of subsidies in kind. Explaining the lump-sum taxes and subsidies advantage principle. L&E pp. 7–36, 38–41, 47–55; HV Сh. 2–8,
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