Mikroeconomics

Syllabus

Thematic definition of lectures: 1. Introduction to microeconomics Definition of the basic conceptual apparatus of Microeconomics, explanation of contras of the two main branches of economics – microeconomics and macroeconomics. Describing the three main analytical tools of microeconomic analysis – constrained optimization, equilibrium analysis and comparative statistics. The lecture also includes explanation of the difference between positive and normative analysis as well as examples based on real market conditions for all the concepts and tool presented. 2. Demand and supply on the goods and services market Describing of three building blocks of supply and demand analysis – demand curves, supply curves and the concept of market equilibrium. Analyzing how changes in exogenous variables shift the demand and supply curves and thus change the equilibrium price and quantity. 3. Consumer´s theory part I – consumer´s preferences Introduction to consumer´s decision making. Explanation of basic assumptions about consumer preferences: preference are complete, transitive, more is better, as well as utility function construction. Cardinal and ordinal ranking of preferences. Application of utility function and marginal utility in the analysis of consumer´s preferences for single and multiple goods consumption. The concept of the marginal rate of substitution and its use in consumer´s preference analysis. 4. Consumer´s theory part II – optimal consumption strategy Consumer´s constraints on the field of utility maximization. Construction and importance of budget constraint, factors influencing the shift and slope of budget constraint, identification of consumer´s basket which are permissible in the field of consumer´s budget. Linking consumer´s utility and budget constraint in the design of an optimal consumption strategy, its calculation and graphic interpretation. Derivation of the individual demand function. 5. Consumer´s demand analysis and concept of demand elasticities The impact of changes in exogenous variables (prices and income) on optimal consumer´s strategy. Derivation, interpretation and meaning explanation of the Price-Consumption Curve (PCC), Income-Consumption curve (ICC) and Engel Curve (EC). Explanation of the concept of elasticity, computation of price, cross-price and income elasticities and their relevance to decision making. Explanation how price elasticity of demand is related to total revenue. Describing the factors influencing the elasticity of demand, indicating why the short-run price elasticities of demand may differ from the long-run price elasticity of demand. 6. Production theory part I – Production function with one variable input Explanation of short and long-run time period in the field of fix and variable production inputs. Productions technologies and production functions definition. Identification and definition of total, marginal and average production with one variable production input. Describing the relations between these functions. The concept of diminishing marginal returns, identification of the three stage of production and their importance in deciding about level of variable input used in production process. 7. Production theory part II – Production function with more variable input Describing the production function with two variable input, demonstrating how a production function with two variable inputs can be represented by isoquants. Properties of production isoquants, and their derivation from production function. An explanation of both the marginal rate of technical substitution and its relation to the marginal product of variable input. Derivation and meaning of the isocost line, influence of exogenous variables on the isocost line. Optimization of variable production input in the field of output maximization, cost minimization and profit maximization. 8. Cost theory Identifying and application of different cost concepts that figure in a firm´s decision making, including explicit versus implicit costs, opportunity costs, economic versus accounting costs, and sunk versus nonsunk costs. The difference between the long-term and short-term costs, their interconnection and the relationships between them. Linking the costs on production inputs, production function and total cost function. Pointing out and explaining the difference between average and marginal costs, identifying the economies of scales. 9. Perfectly competitive market part I – Introduction in competitive markets Explaining both the conditions of competitive market structure and consequences of its failure. Profit maximization in a perfectly competitive market, determination of the price from which the firm makes a profit, loss and stops its production together with graphical interpretation of the above situations. Derivation of the firm´s individual supply function and formation of the market supply. Demonstration the link between consumer theory, theory of the firm and equilibrium in a perfectly competitive market. 10. Perfectly competitive market part II – Perfect competitive market application An analysis of the consequences of different types of government intervention in a perfectly competitive market. Clarification of the concept of producer´s surplus, consumer´s surplus, deadweight loss and reallocation of resources following different types of government inventions. 11. Monopoly – Characteristics and application of the monopoly market structure Characteristics of monopoly market, explanation how a monopoly chooses output (and price) from short and long run in maximizing its profit. Determination of monopoly output volume (and price) in case of government regulation of monopoly – taxation of monopoly by sales tax, production volume tax and profit tax. Price differentiation of monopoly – its meaning and forms. Expression of the monopoly equilibrium point through the relationships between market price, marginal revenue and elasticity of demand – the Amonos-Robinson relationship. Comparison of a perfectly competitive market and a monopoly market. 12. Oligopoly part I – Definition of oligopoly markets Describing the conditions that characterize different types of market structures, including oligopoly markets, dominant firm markets, and monopolistically competitive markets. Explanation of importance and derivation of reaction functions in duopolist profit maximization. Cournot´s oligopoly model – its characteristics, meaning, solution and graphical interpretation via reaction functions and iso-profit curves. Stackelberg´s oligopoly model in the case of quantitative leadership of one of the firms operating in the market, identification of Stackelberg´s disequilibrium. 13. Oligopoly part II – Oligopoly model´s application and comparison Describing the oligopoly price competition when each firm chooses a profit-maximizing price, given the price set by the other firm. Bertrand model of oligopoly – its construction, advantages, disadvantages, identification of Bertrand equilibrium in the case of homogeneous production of oligopolists. Oligopoly equilibrium in the case of price leadership. Comparison of Cournot, Bertrand and Stackelberg oligopoly equilibria. Thematic definition of exercises: 1. Familiarization of students with the system of work on the exercises, with the required literature, conditions for successful completion of the course. Part of the exercise is also a repetition of basic mathematical concepts, relations and principles that will be necessary for the creation of microeconomic analyses during the semester. 2. Identification of requirements for the economic system, creation of equilibrium in the market of goods and services, analysis of market equilibrium in changes of exogenous influences on demand and supply. Foreign exchange possibilities, conditions for export and import of goods, derivation of export and import function, equilibrium in the international market. 3. Interpretation of total and marginal utility functions, construction of indifference curves and their properties, identification of consumer preference properties for different types of utility functions, calculation and interpretation of the marginal rate of consumer substitution and its link to consumer preferences. 4. Calculation and interpretation of the consumer´s optimal consumption strategy in multiple goods consumption, using of the concept of marginal utility in the search for the optimal consumption strategy, changing in consumer decision making when exogenous variables (prices and income) changes. Possibilities of deriving the individual consumer demand curve, its interpretation and importance in the formation of market demand. The impact of the introduction of taxes and subsidies on the optimal consumption strategy. 5. Derivation of the price-consumption (PCC), income-consumption (ICC) and Engel curves (EC) from individual consumer demand. Calculating and interpreting own-price, cross-price and income elasticities of demand. Identifying the type of demand and goods based on the elasticity values and the shape of the demand function, PCC, ICC and EC curves. Demonstration of the linkage and dependence of the shapes of the above curves and demand elasticities. 6. Production function with one variable input. Derivation and interpretation of the total, marginal and average production function of a variable input. Interpretation and calculation of the elasticity of production, the relationship between its value and the three stages of production. A case study focusing on the path of total, marginal and average variable production input, their graphical representation, identification of increasing, diminishing marginal returns, diminishing total returns and the three stages of production, their interpretation and importance in firm decision making. 7. Solving case studies for production functions with two variable inputs - the importance of minimizing the cost of a given volume of output, maximizing output at a given level of cost spent on inputs, maximizing profit with respect to inputs in the production process. Interpretation, meaning and calculation of returns to scale for different types of production functions. Comparison of some special types of production functions used in microeconomic analysis - linear, Cobb-Douglas, Leontief production function and production function with constant elasticity of substitution. 8. Identification of the short-run cost of output from the production function. Explaining the progression and deriving the shapes of a firm's average and marginal costs. Solving a case study focusing on a firm's short-run costs, identifying the relationship between returns to scale and long-run costs. Identifying opportunities for economies of scale for different cost functions. 9. Case studies to determine the firm's profit-maximizing output volume in a perfectly competitive market, identify the firm's short- and long-run supply, determine the price at which the firm stops production, at which it makes a profit, and at which it stays in the market even at a loss. Explaining the reasons and causes for staying in the market even if it makes a loss. Determination of the equilibrium quantity of output supplied to the market by an individual firm and the volume of output at the market level. 10. Solving a case study aimed at calculating the equilibrium point in a perfectly competitive market before and after different types of government intervention. Calculation of producer, consumer surplus and deadweightloss, demonstration of resource reallocation and evaluation of the effectiveness of government intervention in market equilibrium. Graphical interpretation of the analyzed problems. 11. Graphical and analytical solution of short- and long-term price and quantity of a monopoly firm. Equilibrium point of monopoly in the case of sales tax, production volume tax and profit tax. Share of monopoly and consumers in government tax revenues. Calculation of the monopoly's output when price differentiation is applied. Comparison of perfectly competitive and monopoly markets. 12. Case studies focusing on Cournot and Stackelberg oligopoly equilibria. Derivation of response functions of oligopolistic firms, computation of profit maximizing output of oligopolists in both types of equilibria, identification of Stackelberg equilibrium and equilibrium in the case of collusive behavior of oligopolists. 13. Identification of the Bertrand equilibrium and its comparison with the Cournot equilibrium. Explaining and showing why and how the Bertrand and Cournot equilibria differ. Identifying the equilibrium in an oligopolistic market with a dominant firm.