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Introductory Microeconomics (ES10001) Semester: Michaelmas 2017 Credits: Six Contact: Professor John G. Sessions Room: 3E 4.41, ext: 4517 Email: j.g.sessions@bath.ac.uk Web: http://staff.bath.ac.uk/ecsjgs/

Office Hours: Monday 14.15-15.15 Thursday 13.15-14.15 Or by appointment

Level: Level 1 Assessment Method: 60% End of Term Examination 20% Coursework Test 1

20% Coursework Test 2 Pre-Requisites: None

Organisation 2 x 1 hour lectures per week: Monday 13.15-14.05 2W UN HALL Thursday 14.15-15.05 2W UN HALL 1 hour (occasional) workshop: Wednesday 08.15-09.05 2W UN HALL

10 x 1 hour classes starting in Week 2 See Level 1 Noticeboard (3rd Floor, 3 East) and web for details.

Notes:

1. Although it will not be the case, you should timetable the workshop as if it will take place every Thursday - I will announce in the Monday lecture if we are to meet on the Thursday.

2. There will be no lectures or seminars in week 6 (i.e. 6th-10th November).

3. The two coursework tests will take place as follows:

Coursework Test 1: Friday 3rd November 17.15-19.05 2W UN Hall Coursework Test 2: Friday 8th December 17.15-19.05 2W UN Hall

The tests will follow the format of the final exam, comprising a series of true/false and multiple-choice questions.

Aims and Learning Objectives The unit is designed to provide an introduction to the methods of microeconomic analysis, including the use of simple economic models and their application. The aims of the course are to enable students to derive conclusions from simple economic models and evaluate their realism and usefulness. Together with ES20011 Intermediate Microeconomics (to be taken in the second year), we aim to provide students with a thorough grounding in the basic principles of microeconomics and exposure to a range of applications. The learning objectives are that, on completion of the module, students should be able to understand and apply basic microeconomic principles to the economic decisions of households and firms under a variety of market conditions. Students should be able to use these principles both to describe and to appraise these decisions, and should be competent in the verbal, diagrammatic and basic mathematical concepts and techniques used in introductory microeconomics. The second year unit, ES20011 further develops the theoretical toolkit, so that students will have a firmer and more formal grasp of both theoretical material and applications.

Reading You should purchase at least one of the following text books:

Begg, D., G. Vernasca, R. Dornbusch and S. Fischer (BVDF). Economics. McGraw Hill,. Cullis, J. and P. R. Jones (CJ). Microeconomics: A Journey Through Life’s Decisions. Pearson Education. Lipsey, R. G. and K. A. Chrystal (LC). Economics. Oxford University Press. Parkin, M., M. Powell and K. Mathews (PPM). Economics. Addsion Wesley. Stiglitz, J. E. and J. Driffill (SD). Economics. W. W. Norton and Company. Witzum, A (W). Economics: An Analytical Introduction. Oxford..

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The course will be based predominately on BVDF and LC, the latter of which is also the core text for Introductory Macroeconomics (ES10002). Some students may, however, prefer the, PPM, or SD expositions. PPM is particularly good in terms of graphs and basic algebra. The most rigorous texts, intellectually (and certainly my favourites) are W and CJ, and we will be using these for some topics.1

Students without A-Level Economics might also like to consult John Sloman Economics (eighth edition) and a good dictionary of Economics (e.g. Collins or Penguin). The Oxford Dictionary of Economics is available online at http://www.oxfordreference.com/views/BOOK_SEARCH.html?book=t19&subject=s6.

Supplementary texts, which students with A-Level Economics might like to consult are Frank Microeconomics and Behaviour, Katz and Rosen Microeconomics and Pindyck and Rubinfeld Microeconomics. For basic background information on the UK economy you should consult Griffiths and Wall (eds) Applied Economics (twelfth edition), the Economist, and the Financial Times. The course will be supported by lecture handouts and resources that may be downloaded from my web page - http://staff.bath.ac.uk/ecsjgs/.

Much of the work on the course will involve completion of tutorial exercises. These will be of varying difficulty, and you can work together to solve them. Typically they will require you to consult the textbooks very closely, to think clearly and to be accurate in your reasoning. The last two requirements are indispensable for microeconomics!

Module Structure Microeconomics is concerned with how economic systems operate to allocate resources, distribute income, and organise production through the decisions of individual economic agents (e.g. firms and consumers). We will focus soley on the operation of a market economy in this endeavour. In such an economy, markets determine society's production and consumption decisions by transmitting information about the plans of buyers and sellers (consumers and firms). This information appears in the form of market prices, on the basis of which economic agents make decisions regarding the allocation of economic resources between the production of different goods and services: much of microeconomics is concerned with analysing the efficiency with which such decisions are made.

Content

1. Introduction to Markets BVDF Chapters 1-4 LC Chapters 1-4 PPM Chapters 1-6 SD Chapters 1-5 W Chapter 2

To present students with an introduction to the basic concepts of microeconomics and the economy in general. To give students a basic understanding of the role of various different participants in the market mechanism and the equilibrium (or disequilibrium) process which exists in markets, with an emphasis on prices. To illustrate the establishment of the demand/supply schedules and the impact of different factors on the slope and/or position of the demand/supply schedules (e.g. elasticities).

2 Consumer Theory BVDF Chapter 5 LC Chapters 5 PPM Chapters 7-8 SD Chapters 8-9 W Chapter 2

Introduction to preferences and utility and their representation through indifference curves; establishing consumer utility maximisation subject to a budget constraint; understanding the role of changing price and/or income (income and substitution effects) on consumption decisions; establishing the derivation of demand schedules from indifference curves; the importance of indifference curves in illustrating consumption and saving decisions; the use of indifference curves in illustrating labour supply equilibria, with an emphasis on income and substitution effects and the role of tax cuts.

3. Risk and Uncertainty BVDF Chapter 13 LC Chapter 12 SD Chapter 6

Attitudes towards risk; the markets for insurance and gambling

4. Production and Costs BVDF Chapters 6-7 LC Chapter 6 PPM Chapter 9-10 SD Chapters 10-11

To present students with an understanding of the importance of different production methods on the cost schedule; the importance and role of different types of costs schedules (marginal, average, total), their differences over time (long-run and short-run schedules) and their derivation (the role of isocost

1 Whilst you should try to purchase the latest edition of a textbook, buying one that is 2-3 editions earlier is not a major problem.

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W Chapter 3 and isoquant schedules); the role of different types of business organisations (e.g. sole trader, PLCs) and the consequences of business organisation on cost schedules through the importance of economies of scale; introducing the role of costs in determining a firm’s equilibrium out put level.

5. Perfect Competition and Monopoly BVDF Chapter 8 LC Chapters 7-8 PPM Chapters 11-12 SD Chapters 12-13 W Chapter 4

Introducing the two extreme forms of industrial structure; deriving an equilibrium in the long-run and the short-run in both types of structure; introducing efficiency differentials in both structures; comparing equilibrium across structures; illustrating monopoly price discrimination and its impact on efficiency; introducing monopolistic competition as an industrial structure (a hybrid of monopoly and perfect competition) and examining long-run and short-run equilibrium in monopolistic competition; comparing the different types of industrial structure.

6. Imperfect Competition BVDF Chapter 9 LC Chapter 9 PPM Chapter 13 SD Chapter 14 W Chapter 4

Introduction to imperfect competition, oligopoly and different types of oligopolistic equilibria; the importance of cartels and cheating and collusion within them; introducing game theory with illustrative examples (Prisoner’s dilemma, price wars, entry deterrence, threats in repeated games); illustrating different types of oligopoly models (Bertrand, Cournot, kinked-demand curve) and the differences and similarities between them.

7. Factor Markets - Labour BVDF Chapter 10-11 PPM Chapter 14 LC Chapters 14-15 SD Chapters 17-18 W Chapter 5

To illustrate the ‘flip-side’ of firm and household behaviour in a market economy, namely as buyers and sellers of labour factor serves respectively; short- and long-run labour demand; firm and industry labour demand; labour supply; equilibrium; transfer earnings and rents; wages and employment; minimum wage

8. Welfare Economics BVDF Chapters 15-18 PPM Chapter 15-18 LC Chapters 18-19 SD Chapters 19-20 W Chapters 6-7

To illustrate the role of value judgements in economics (what should we do); examining the importance of welfare maximisation and the role of the Pareto optimal equilibrium position; deconstructing the Pareto optimal equilibrium to examine efficiency in production and consumption (productive and allocate efficiency); re-evaluating perfect competition and monopoly with an emphasis on welfare criteria; introducing applications of welfare economics (competition policy, taxation, externalities)