Teaching Booklet Microeconomics

EAD FACULT DECONOMIE-UPMF-2014/2015

MICROECONOMICS

TEACHING BOOKLET

Professor: Christophe BRAVARD

Level : Undergraduate 2nd year

Semester Semester 4

Universit Pierre Mendes France

2I Scope of the Course.

Microeconomics studies the factors that influence the individual choices. It

also examines how the individual decisions merge to determine the working

of the entire economy.

In this course, we are interested in the role played by markets and prices on

the individual choices. Here, market refers to the interplay of all potential

buyers and sellers involved in the production, sale, or purchase of a particular

good or service.

To analyze markets, we must focus on factors which influence the buyers and

the sellers. Prices will play a special role. Indeed, they are the result of

market transactions, but they also influence the behavior of the buyers and

sellers in the market.

In Chapter 2, we deal with the consumer theory. In this chapter we examine

the role played by the price on the buyers choices.

In Chapter 3, we deal with the producer theory. In this chapter we examine

the role played by the price on the sellers choices.

In Chapter 4, we focus on market equilibrium with perfect competition.

In Chapter 5, we provide a method which allows to measure the social wel-

fare. It is useful in order to examine the eciency of price variation associated

with public policies.

In Chapter 6, we examine situations with imperfect competition.

EAD FACULTE DECONOMIE-UPMF-2012

3II. References.

[1] Intermediate Microeconomics: A Modern Approach, Hal R. Varian, 2010.

[2] Microeconomics, Robert S. Pindyck and Daniel L. Rubinfield,

[3] Microeconomics: Theory and Applications, Edgar K. Browning, Jacque-

lene M. Browning and Mark Zupan, 2001.


4III. Microeconomics I: Contents.

Chapter 2. Consumer Theory

Summary.

The theory of consumer choice is designed to explain why consumers pur-

chase the combinations of goods they do. The theory emphasizes two fac-

tors: the consumer budget line, which shows the market bundles that can

be bought, and the consumers preferences, which indicate the subjective

ranking of dierent market bundles. Consumers preferences are represented

by indierence curves. These curves are decreasing and convex. The slope

of an indierence curve measures the marginal rate of substitution (MRS).

The consumer chooses an equilibrium bundle which maximizes her level of

satisfaction given the bundles that the consumer can purchase. Graphically,

an equilibrium bundle of a consumer is obtained at the point of tangency be-

tween her budget line and one of her indierence curve. Finally, we examine

the theory of consumer choice in the labor market where she has to choose

the time she spends to work.

Outcomes

A student:

1. demonstrates understanding of economic terms: preferences, utility

function, budget constraint, marginal utility, MRS, income and income


5and substitution eect, line budget, indierence curve, normal good,

gien good, . . . ;

2. is able to find the optimal bundle of the consumers (using graphics or

calculations);

3. is able to measure the income and substitution eect;

4. is able to find the labor supply of the consumer.

Chapter 3. Production Theory

Summary.

In this chapter, we deal with the relationships between the quantities of

inputs used and the amount of output produces. First, we present several

types of production functions. Then we present the counterpart of the MRS

in the production theory: the technical rate of substitution (TRS). We deal

with two kinds of question.

1. What is the optimal combination of inputs which allows to obtain a

given output?

2. How does the firm determine its optimal output?

Outcomes

A student:


61. demonstrates understanding of economic terms: production function,

marginal product, TRS, returns to scale, the cost functions, . . . ;

2. is able to find the optimal demand of factors and the supply of the firm

(using graphics or calculations).

Chapter 4. Equilibrium Market Price

Summary.

In this chapter, we first deal with the short run equilibrium. We focus on

its characterization and its stability using the Cobb-Web model. Then, we

illustrate with an example the characterization of long run equilibrium.

Outcomes

A student:

1. demonstrates understanding of economic terms: short run equilibrium,

long run equilibrium, market demand, aggregate supply, . . . ;

2. is able to find the short run equilibrium and the long run equilibrium.

Chapter 5. Welfare

Summary.


7In this chapter, we first present the consumer surplus, that is a method

to estimate the satisfaction that an agent obtains thanks to the consumption

of a good. It is a monetary estimation.

Then we present a method to compute the profit obtained by the firms.

Finally, we combine these measures to estimate the social Welfare obtained

in an economy.

Outcomes.

A student:

1. demonstrates understanding of economic terms: short run equilibrium,

long run equilibrium, market demand, aggregate supply, . . . ;

2. is able to find the short run equilibrium and the long run equilibrium.

Chapter 6. Market Power

Summary.

In this chapter, we present several situations with imperfect competition.

First, we deal with a monopoly. We present the equilibrium in that situa-

tion and we study the consequences of such market structure on the social

welfare.

Then we examine several market structures with two competitors:


81. In the Cournot duopoly, firms choose simultaneously their quantities.

2. In the Bertrand duopoly, firms choose simultaneously their prices.

3. In the Stackelberg duopoly, firms choose sequentially their quantities.

Outcomes.

A student:

1. is able to find the monopolists optimal solution, to show that this so-

lution is not ecient.

2. is able to solve the Cournot and Stackelberg duopolies.

3. is able to prove the Bertrand paradox.


Contents

1 Introduction 11

2 Consumer Theory 15

2.1 Preference and Utility . . . . . . . . . . . . . . . . . . . . . . 16

2.1.1 Consumer preferences . . . . . . . . . . . . . . . . . . . 16

2.1.2 Utility Function . . . . . . . . . . . . . . . . . . . . . . 17

2.1.3 Marginal Utility . . . . . . . . . . . . . . . . . . . . . . 18

2.1.4 Marginal Rate of Substitution (MRS) . . . . . . . . . . 20

2.1.5 Indierence Curves . . . . . . . . . . . . . . . . . . . . 23

2.1.6 Some Examples of Utility Functions . . . . . . . . . . . 26

2.2 The Budget Constraint . . . . . . . . . . . . . . . . . . . . . 27

2.3 Optimal Choice of the Consumer . . . . . . . . . . . . . . . . 28

2.3.1 Graphical Analysis . . . . . . . . . . . . . . . . . . . . 28

2.3.2 Constraint Maximization . . . . . . . . . . . . . . . . . 30

2.4 Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

2.4.1 Income Changes . . . . . . . . . . . . . . . . . . . . . . 34

2.4.2 Price Changes . . . . . . . . . . . . . . . . . . . . . . . 36

2.5 Labor Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2.5.1 Model Setup . . . . . . . . . . . . . . . . . . . . . . . . 42

2.5.2 Opimal Choice . . . . . . . . . . . . . . . . . . . . . . 44

9


10 CONTENTS

3 Production Theory 47

3.1 Technology and Production Function . . . . . . . . . . . . . . 48

3.1.1 Technological Constraints . . . . . . . . . . . . . . . . 48

3.1.2 Production Function . . . . . . . . . . . . . . . . . . . 49

3.1.3 Examples of Production Functions . . . . . . . . . . . 50

3.2 The Marginal Product . . . . . . . . . . . . . . . . . . . . . . 51

3.3 The Technical Rate of Substitution . . . . . . . . . . . . . . . 53

3.4 Returns to scale . . . . . . . . . . . . . . . . . . . . . . . . . . 54

3.5 Demand of Production for Factors . . . . . . . . . . . . . . . . 56


3.5.2 Algebraic Analysis . . . . . . . . . . . . . . . . . . . . 58

3.5.3 The Cost Functions . . . . . . . . . . . . . . . . . . . . 59

3.5.4 Average Costs . . . . . . . . . . . . . . . . . . . . . . . 60

3.5.5 Marginal Costs . . . . . . . . . . . . . . . . . . . . . . 63

3.6 Firm Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

3.6.1 Firm Environment . . . . . . . . . . . . . . . . . . . . 64

3.6.2 The Supply Decision of a Competitive Firm . . . . . . 65

4 Equilibrium Market Price 68

4.1 Short Run Equilibrium . . . . . . . . . . . . . . . . . . . . . . 69

4.1.1 Short Run Market Supply . . . . . . . . . . . . . . . . 69

4.1.2 Short Run Market Demand . . . . . . . . . . . . . . . 70

4.1.3 Equilibrium Analysis . . . . . . . . . . . . . . . . . . . 73

4.1.4 Equilibrium Stability . . . . . . . . . . . . . . . . . . . 74

4.2 Long Run Equilibrium . . . . . . . . . . . . . . . . . . . . . . 78

5 Welfare 82

5.1 Consumer Surplus . . . . . . . . . . . . . . . . . . . . . . . . . 83


CONTENTS 11

5.1.1 Consumer Surplus for a discrete good . . . . . . . . . . 83

5.1.2 Good Available in Continuous Quantities . . . . . . . . 89

5.1.3 Consumers Surplus and Consumers Surplus . . . . . . 93

5.2 Producers Surplus . . . . . . . . . . . . . . . . . . . . . . . . 93

5.3 Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

6 Market Power 96

6.1 Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

6.1.1 Maximizing Profits . . . . . . . . . . . . . . . . . . . . 97


6.1.3 Lerner Index . . . . . . . . . . . . . . . . . . . . . . . 102

6.1.4 Welfare Analysis . . . . . . . . . . . . . . . . . . . . . 104

6.1.5 Discriminating Monopoly . . . . . . . . . . . . . . . . . 107

6.2 Duopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

6.2.1 The Cournot Model of Quantity Competition . . . . . 110

6.2.2 The Bertrand Model of Price Competition . . . . . . . 114

6.2.3 Model Setup . . . . . . . . . . . . . . . . . . . . . . . . 115

6.2.4 The Stackelber Model of Quantity Competition . . . . 118


12 CONTENTS

IV. Indicative course time

Chapters (60-90 indicative hours) % of course time Indicative Hours

Chapter 2. Consumer Theory 30 18-27

Chapter 3. Production Theory 20 12-18

Chapter 4. Equilibrium Market Price 15 9-13

Chapter 5. Welfare 15 9-13

Chapter 6. Market Power 20 12-18

V. Examination

The student will obtain an examination mark derived from the final ex-

amination.

This examination consists in definitions and questions.


We assume that all firms are identical: they have the same costs functions.

1. (1 point) Define and find the marginal cost function and the average variable cost func-tion.

2. (1 point) Define and find the shutdown condition.

3. (1 point) Find the individual supply function, f(p), of a firm.

4. (1 point) Consider there are n firms in the industry. Find the market supply, Y (p).

5. (1 point) Consider that there are m identical consumers which have the following indi-vidual demand function:

d(p) =200

p.

Find the aggregate demand function, D(p).

6. (1 point) Find the market price equilibrium.

Page 2


The cost function is given by

C(qi) = cqi,i {1, 2}.

In the following, we assume a game with two stages. In the first stage, firm 1 chooses thequantity produced. In the second stage, firm 2 chooses how much to produce after observingthe level of output chosen by firm 1 in the first stage. Then each firm collects its profit giventhe levels of output chosen.

1. (1 point) What is the name of this game?

2. (3 points) Find the equilibrium of this game.

3. (2 points) What would be the Cournot game situation.

4. (2 points) Does Firm 1 have an incentive to be the first mover (compare with theCournot situation).

II. Duopoly (B)

(3 points) Explain the Bertrand paradox.

Page 2


1

Distance Learning Department Grenoble Faculty of Economics

How to put an assignment/homework on Moodle?

In each fundamental course, assignments can be done. You can give a maximum of two assignments for

each fundamental course.

Your assignment has to be given back directly on Moodle, it cant be sent to the responsible of your

convention. You have to use the assignment form (see explanation below) to write your assignment and

post it on the Moodle platform in PDF by clicking on the icon of the assignment.

These assignments are optional. Nevertheless, it is recommended to do at least one in each course.

Evaluation will give you information about your knowledge level and help making progress. Moreover,

realizing these assignments can help you to pass by giving you some jurys points if the sovereign

members of the jury decide it.

Assignments will be mark in maximum three-week. Waiting for the correction of the first one to give back

the second one is the best way.

The evaluation form (below) is to be downloaded on the General information page. It helps us to

identify you and give space for professors comments. You will have to write your surname, name, the

year youre studying in, the course and the professor. Then, you directly write on this document under

the comment Begin to write your assignment here on the second page.

If you already have this assignment form, you need to download the upgraded form.

2

Distance Learning Department Grenoble Faculty of Economics

Particular case: if you dont use Microsoft Office, (Word, Excel, Power Point) you can install

LibreOffice for free. You will find websites where it is possible to download it. Nevertheless, you still

have to give your assignment back in PDF.

To generate a PDF file, you can install a virtual printer such as PDF Maker. It is also important to give

back one PDF file for an assignment. Some free websites propose to transform several PDF files in one

(for example, http://www.pdfmerge.com/).

HELP TO POST ASSIGNMENT ON MOODLE

Use the assignment form to write your work and post it directly in PDF, by clicking on the icon .

Click on:

Add submission, then drag and drop your file

Submit assignment

Continue

Your file is now on the platform! If you have any problem, dont hesitate to send an email to: scolarite-

[email protected]

Warning! If you do not follow all these steps, your work will still appear as an unfinished draft which will

make the correction impossible.

EAD FACULT DECONOMIE-UPMF-2014-2015

Ce document n'est utilisable que dans le cadre de l'enseignement distance organis par le Dpartement EAD de la Facult dEconomie de Grenoble"

de l'Universit Pierre Mends France.

Toute autre utilisation ou toute reproduction, mme partielle,

sont interdites.

Dpartement E.A.D. Facult dECONOMIE

Universit Pierre Mends France B.P. 47

38040 Grenoble CEDEX 09 France

Documents

Teaching Booklet Microeconomics