Economics 514G: Microeconomic Theory

Economics 514G: Microeconomic Theory

GISMA, Module 1, MBA Class 2009

Professor Ralph Siebert

Purdue University

Department of Economics

Krannert School of Management

Office at GISMA: 14a

Office Hours: Tuesday and Thursday afternoon, or contact me by e-mail for appointment

e-mail: or

Lectures: Tuesdays and Thursdays, 2 sections 9.00-10.30 am and 11.00-12.30 am

Course Description

Microeconomics studies the economic behavior of individual economic decision-makers such as consumers, workers, firms, or managers. It also analyses the interaction and behavior of groups of these individuals such as firms, households, industries, markets, labor unions, and trade associations. The most important economic institution is the market. Markets coordinate the activities of economics agents, match production and consumption, and relate households and firms to each other. Microeconomic analysis provides a coherent theory about how decisions are made in each sector of the economy, how economic competition takes place through the mediation of the market, how markets coordinate their decisions by way of equilibrium, and how markets allocate economic resources.

Goal of the Course

This course covers basic microeconomic concepts and principles. My main goal of this course is to provide a basis for a good understanding of basic concepts and of the logical mechanics, provide good intuition and accurate understanding of some principles and able to follow upon a broad variety of topics.

We mostly use graphs and calculus in order to illustrate the main mechanisms as well as to provide some intuition.

Textbooks

We use a managerial economics textbook that emphasizes business examples and applications with lots of exercises. It offers 3 different modes: verbal, graphical, and calculus mode.

The textbook we will be using in this course is:

1. D. Besanko and R. Braeutigam, 2007, Microeconomics, ISBN 978-0-470-04924-2, John Wiley & Sons, Inc.

You will find two copies on reserve in the library.

For further readings, I can recommend the following textbooks:

For the ‘priniciples’ level:

1. Mankiw, G., 1997, Priniciples of Microeconomics, ISBN 0030245028.

For the ‘intermediate’ level:

1. J. Barron, G. Lynch, and K. Blanchard, 2003, Economics: A Survey, ISBN number 1-933005-21-1, Bent Tree Press.

2. H. Varian, 1999, Intermediate Microeconomics, Fifth Edition, ISBN 0-393-97370-0, W. W. Norton and Company.

3. W. Nicholson, 2004, Intermediate Microeconomics, ISBN 0-324-17163-3, South-Western, Thomson Learning.

4. M.L. Katz and H.S. Rosen, 1998, Microeconomics, Irwin/McGraw-Hill.

For the ‘graduate’ level:

1. A. Mas-Colell and M. D. Whinston and J. Green, 1995, Microeconomic Theory, ISBN 0-19-510268, Oxford University Press.

2. H. Varian, 1992, Microeconomic Analysis, Third edition, ISBN 0-393-95735-7, Norton & Company, Inc.

Course Outline

The course is classified into three sections:

In the first section, I will teach the equilibrium behavior of competitive markets. The main tools that economists use to analyze the behavior of such markets are the demand curve, the supply curve and the notion of market equilibrium, which characterizes the interaction of the forces of demand and supply. The goal is to provide an understanding of how market demand curves and market supply curves come about, and how the interaction of those determines prices and profits. In this context, we will discuss applications of those concepts, such as intertemporal consumption and production plans etc.

Week 1:

a) Introduction to Economics (Chapter 1)

Definitions, Opportunity Cost, Marginal Concept, Gains to Specialization

b) Demand and Supply Analysis (Chapter 2)

Law of demand, Elasticities, Demand Curve, Supply Curve, Shifts in Demand and Supply

Week 2:

a) Consumer Choice (Chapter 4)

Indifference Curves, Budget Constraints, Consumer Choices and Applications

Week 3:

a) Production and Cost Theory (Chapters 6 and 7)

Marginal Costs, Average Costs (short and long-run), Fixed Costs, Supply Function

b) Perfectly Competitive Markets (Chapter 9)

Supply Curve, Prices and Quantities, Profit Maximization

The second section of the course will introduce different types of market structures and show how firms maximize profits. We further analyze the impact of government policies.

We begin with studying perfectly competitive markets and analyze the impact of taxes, subsidies, price ceilings, price floors, quotas etc. on prices and consumer welfare and profits.

Week 4:

a) Government Policies and Applications (Chapter 10)

Price Floors, Price Ceilings, Quotas, Subsidies, Taxes, Tariffs

b) Market Power and Monopoly (Chapter 11)

Prices, Quantities, Surplus, Deadweight Loss, Multiplant Production

Next, we analyze how a monopoly maximizes profits and how price discrimination at various degrees.

I will also provide insight into different forms of markets such as oligopolies and cartels, and how they compare to each other.

Week 5:

Midterm Exam, Sept. 23, Tuesday 9.00-10.00 am, 60 minutes, both sections, practice exam will be issued

b) Capturing Surplus (Chapter 12)

Price Discrimination of various degrees, Bundling, Tying

The third section focuses on game theory, auctions, and innovation such as intellectual property rights, patents, and licenses.

Week 6:

a) Market Structure and Competition (Chapter 13)

Oligopoly, Cournot and Bertrand with homogenous and differentiated Products

b) Game Theory and Strategic Behavior (Chapter 14)

Nash Equilibrium, Prisoner’s Dilemma, Sequential Move Games

Week 7:

Auctions and Innovation (Experiments)

Final Exam (Oct. 15), 9.00-11.00 am, 120 minutes, both sections, practice exam will be issued

Course Requirements/Grades

Students will be evaluated on the basis of multiple choice questions, drawing figures, and applying some calculus.

four take home quizzes: Each quiz has a max of 100 points, every team jointly works on 1 take home problem set facing a deadline of a couple days. I will not accept any work after the deadline, and the set will be evaluated with 0 points.
1 midterm exam: a one hour exam, has a max of 200 points, individual task.
1 final exam: a two hour exam, covering all material in the class and counts 400 points, individual task.

You will find the problems sets, the solutions to the midterm and final as well as the grades on the course webpage.

I expect you to come to class. If you come to class I expect you to concentrate, listen and participate in class when questions are asked. If you want to talk to other students or read the newspaper, you better leave the classroom, in order to avoid destructing other students’ concentration. I would like you to avoid switching between sections.

Class participation may be counted for your grade at the margin. Your course grade will be based on a curve determined at the completion of the course. Final course grades will be curved, with approximately 35-40% A

55-65% B

0-5% C

I am looking forward to teaching the course and hope you will enjoy the course!!!