MICROECONOMIC THEORY
John S. Earle
Autumn, 1994
Department of Economics
CENTRAL EUROPEAN UNIVERSITY



"The same persons who cry down Logic will generally warn you against Political Economy. It is unfeeling, they will tell you. It recognises unpleasant facts. For my part, the most unfeeling thing I know of is the law of gravitation: it breaks the neck of the best and most amiable person without scruple, if he forgets for a single moment to give heed to it. The winds and waves too are very unfeeling. Would you advise those who go to sea to deny the winds and waves--or to make use of them, and find the means of guarding against their dangers? My advice to you is to study the great writers on Political Economy, and hold firmly by whatever in them you find true; and depend upon it that if you are not selfish or hard-hearted already, Political Economy will not make you so."

John Stuart Mill
1867

Course Description


This course is the first half of a 12-week sequence in neoclassical microeconomic theory, sometimes known as "price theory." We will analyze the behavior of consumers and firms, market demand and supply, and general competitive equilibrium (with "perfect markets"). The second half, to be taught by Professor Luigi Luini, will consider consequences of different market structures, topics in the economics of information and uncertainty, and problems of market failure. Together, they should provide you with a set of analytical tools relevant to a wide range of problems, for instance in the evaluation of public policies, as well as prepare you for the applied fields in the second trimester.

The main text for the course is Brian R. Binger and Elizabeth Hoffman, Microeconomics with Calculus, Harper-Collins, 1988, referred to below as BH. Class meetings and assigned readings should be regarded better as complements rather than as substitutes: lectures will sometimes reinforce topics covered in the textbook, but other aspects will often be emphasized.. Examinations and problem sets will include material from both.

Grading will be determined as a weighted average of a short essay (5 percent), a midterm examination (45 percent), and a comprehensive final exam (50 percent). Further guidelines for the essay will be distributed presently. The midterm will be given in class on October 26 or 28, depending on the Czech National Holiday schedule. The final will be given during the first trimester final examination period in December. In addition, there will be problem sets distributed weekly and reviewed in the Friday discussion sections. These will not be graded but assigned a "0" for little or no effort, a "check" for strong effort, and a "check-plus" for outstanding results; in borderline cases, they may influence the course grade.

Course outline
(The approximate number of class meetings to be devoted to each topic appears in parentheses.)

I. Introduction to key concepts in price theory (2)
Reading: BH, Chapter 4.
A. What is economics? Why (not) study it?
B. Demand, supply, and equilibrium
C. Exchange, prices, and costs

II. Theory of the consumer (5)
A. Preferences and constraints
Reading: BH, Chapter 5
B. Consumer demand
Reading: BH, Chapter 6 and 8
C. The pure exchange economy
Reading: BH, Chapter 7
D. Market demand
Reading: BH, Chapter 9

III. Theory of the firm under perfect competition (5)
A. Production and cost functions
Reading: BH, Chapters 10 and 11
B. Profit maximization and supply decisions
Reading: BH, Chapter 12
C. Market supply
Reading: BH, Chapter 13

IV. General competitive equilibrium (2)
Reading: BH, Chapter 14



CRC-Curriculum Resource Center
CEU Budapest, Hungary
Modified: May, 1996

Ear_MicrTheo.F94Econ.v3

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