Microeconomics I (For University of Delhi)

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Cover Syllabus Contents Preface About the Author Part I: Introduction Chapter 1: Introduction to Microeconomics What is Economics? Economics Is a Social Science Why Economizing Behaviour? Two Major Branches of Economics What is Microeconomics? Is Microeconomics a Positive or a Normative Science? Microeconomics As a Positive Science Microeconomics As a Normative Science Methodology of Positive Economics: Model Building and Theorization The Uses and Limitations of Microeconomic Theories The Uses of Microeconomic Theories Limitations of Microeconomic Theories Limitations Do Not Matter Much Review Questions and Exercises Endnotes Further Readings Chapter 2: The Economy: Its Basic Problems and Working System What is an Economy? Economic Activities Are Interrelated and Interdependent The Economic System Works Automatically How an Economy Works? The Circular Flow Model of a Simple Economy The Basic Problems of an Economy Problems in Maximizing Production and Optimizing Distribution How Market Mechanism Solves the Basic Economic Problems? Drawbacks of the Free Enterprise System The Government and the Economy The Mixed Economy System Is the Order of the Day The Production Possibility Frontier Some Implications of PPF Implications of Points Away from PFF The Opportunity Cost Increasing Opportunity Cost and Concavity of PPF Why Does Opportunity Cost Increase? Shift in PPF Review Questions and Exercises Endnotes Further Readings Part II: Market Mechanism: How Markets Work Chapter 3: The Market Forces: Demand and Supply The Concept of Market The Demand Side of the Market Meaning of Demand The Law of Demand The Demand Schedule The Demand Curve The Factors Behind the Law of Demand Exceptions to the Law of Demand The Market Demand Determinants of Market Demand Demand Function Shift in Demand Curve The Supply Side of the Market Market Supply The Law of Supply The Supply Schedule and Supply Curve Shift in the Supply Curve Supply Function The Market Equilibrium: the Equilibrium of Demand and Supply Determination of Price in a Free Market The Concept of Market Equilibrium Determination of Market Price Market Mechanism: How Market Brings About Balance Graphical Illustration of Price Determination Price Determination by Demand and Supply Functions Shift in Demand and Supply Curves and Market Equilibrium Shift in Demand Curve Shift in Supply Curve Parallel Shift in Demand and Supply Curves Stability of Market Equilibrium Market Equilibrium Under Dynamic Conditions Conclusion Review Questions and Exercises Endnotes Further Readings Chapter 4: Elasticity of Demand and Supply The Elasticity of Demand Price Elasticity of Demand The Arc and Point Elasticity Measuring Arc Elasticity Measuring Point Elasticity Price Elasticity Varies Along the Demand Curve The Slope of Demand Curve and Price Elasticity Determinants of Price Elasticity of Demand Measuring Price Elasticity from a Demand Function Measuring Price Elasticity from a Linear Demand Function Price Elasticity from a Non-linear Demand Function Price Elasticity and Sales Revenue Price Elasticity and Marginal Revenue Relation Between MR and AR Price Elasticity and Total Revenue Price Elasticity and Consumption Expenditure Other Elasticities of Demand Cross-Elasticity of Demand Income Elasticity of Demand Application of Demand Elasticity Price Elasticity of Supply Definition and Measurement Determinants of the Price Elasticity of Supply Review Questions and Exercises Endnotes Further Readings Chapter 5: Application of Market Laws and Elasticities Excise Tax: Its Effects and Incidence Lump-Sum and Ad Valorem Excise Tax The Effects of Excise Tax on Production and Price Who Bears the Tax Burden? Production Subsidy and Its Effects The Effect of Production Subsidy Who Benefits from Production Subsidy? Import Tariffs and Export Subsidies Import Tariffs Export Subsidy Review Questions Endnotes Further Readings Part III: Theory of Consumer Demand Chapter 6: Theory of Consumer Demand: Cardinal Utility Approach Introduction Cardinal Utility Approach to Demand Analysis The Concept of Cardinal Utility and Its Measurement The Total and Marginal Utility The Law of Diminishing Marginal Utility Numerical Example Graphical Illustration Assumptions Consumers’s Equilibrium: Cardinal Utility Approach Assumptions Consumer Equilibrium: A Single Commodity Case Consumer Equilibrium: The Multiple Commodity Derivation of Demand Curve Drawbacks of Cardinal Utility Approach Review Questions and Exercises Endnotes Further Readings Chapter 7: Theory of Consumer Demand: Ordinal Utility Approach Ordinal Utility Concept and Its Assumptions Assumptions of the Ordinal Utility Theory Indifference Curve Indifference Map The Concept of Marginal Rate of Substitution (MRS) Postulates of Diminishing MRS Why the MRS Declines Properties of Indifference Curves Indifference Curves Have a Negative Slope Indifference Curves Are Convex with Reference to the Origin Indifference Curves Neither Intersect Nor Are Tangential to One Another Higher Indifference Curves Represent a Higher level of Satisfaction than the Lower Ones Other Types of Indifference Curves Perfect Substitutes Complementary goods Goods, Cue and Neuters What Are the Cue and the Neuters? Indifference Maps for Goods, Cue and Neuters Budgetary Constraint and the Budget Line What Causes Shifts in the Budget Line Slope of the Budget Line Consumer Equilibrium: The Ordinal Utility Approach Corner Solution: The Extreme Choice Composite Goods Case Changes in Income and Consumer Behaviour Income Effects on Consumer Behaviour Towards Normal Goods Inferior Goods Income and Consumption: The Engel Curve5 Engel and Demand Curves Engel Curve and Income Elasticity of Demand Changes in Prices and Consumer Behaviour Changes in Price and Consumer Behaviour: Case of Normal Goods Derivation of Consumer Demand Curve Graphical Derivation of Demand Curve Income and Substitution Effects of Pricechange: Normal Goods Case Hicksian Approach Slutskian Approach Comparison of the Hicksian and Slutskian Methods Measurability of Income and Substitution Effects Income and Substitution Effects: Inferior Goods Effect of Rise in Money Income Income and Substitution Effects of Price Change: Case of Inferior Goods Giffen Paradox Comparison of Cardinal and Ordinal Utility Approaches Similarity Between the Two Approaches Superiority of the Indifference Curve Approach Drawbacks of Indifference Curve Approach Appendix Explanatory Note on Giffen Paradox Review Questions and Exercises Endnotes Further Readings Chapter 8: Application of Indifference Curve Analysis Introduction Measuring Welfare Effects of Income and Excise Taxes Choice Between Taxes Measuring Effects of Excise and Income Subsidies Measuring the Financial Cost of Excise Subsidy Measuring the Financial Cost of Lump-Sum Income Subsidy Making Choice of Policy Measuring Welfare Effect of Commodity Exchange Between Individuals Derivation of Labour Supply Curve Income–Leisure Choice Wage–Labour Offer Curve and Labour Supply Curve Evaluating Rationing of Consumer Good Rationing of One Commodity Rationing of More Commodities Review Questions and Exercises Endnotes Further Readings Chapter 9: Revealed Preference Theory Introduction Revealed Preference: Assumptions and Axioms Assumptions Revealed Preference Axiom Decomposition of Substitution and Income Effects and Derivation of Demand Curve Derivation of Indifference Curve Appraisal of Revealed Preference Theory Review Questions and Exercises Endnotes Further Readings Chapter 10: Consumer Surplus Introduction Marshallian Concept of Consumer Surplus and Its Measurement Assumptions Critical Appraisal Hicksian Method of Measuring Consumer Surplus Measuring Consumer Surplus under Constant MU of Money Measuring Consumer Surplus under Variable MU of Money Extentions of Hicksian Approach to Consumer Surplus Hicks’ Four Concepts of Consumer Surplus Application of Consumer Surplus The Deadweight Loss of Commodity Taxation Deadweight Loss from Sales Tax: Tax on Consumers Measuring Gains of Subsidy Deadweight Loss of Price Control Deadweight Loss of Trade Barriers Review Questions Endnotes Further Readings Part IV: Theory of Production and Analysis of Cost Chapter 11: Theory of Production: Laws of Returns to a Variable Input Introduction Some Basic Concepts Meaning of Production Input and Output Short Run and Long Run Production Function Short-run and Long-run Production Function Assumptions Production with One Variable Input: The Short-run Laws of Production The Laws of Returns to Variable Input (Labour) Assumptions Marginal Productivity of Labour Average Productivity of Labour The Three Stages in the Law of Diminishing Returns Factors Behind the Laws of Returns Applicability of the Law of Diminishing Returns Graphical Derivation of Marginal and Average Product Curves Derivation of Marginal Product Curve (MPL) Derivation of Average Product Curve (APL) The Three Stages of Production The Three Stages of Production and Production Decisions What About Stage II? Review Questions and Exercises Endnotes Further Readings Chapter 12: Theory of Production: Laws of Returns to Two Variable Inputs Introduction The Isoquant Curve Derivation of Isoquant Curve Assumptions Properties of Isoquant Curves Isoquants Have a Negative Slope Isoquants Are Convex to the Origin Isoquants Do Not Intersect or Are Tangent to Each Other Upper Isoquants Represent a Higher Level of Output Marginal Rate of Technical Substitution (MRTS) Isoquant Map and Economic Region of Production Isoquant Map Economic Region of Production Other Forms of Isoquants Perfect Substitutes and Linear Isoquants The Fixed Factor Technology and L-shaped lsoquant The Kinked or Linear Programming Isoquants Elasticity of Technical Substitution The Laws of Returns to Scale Three Laws of Return to Scale The Law of Increasing Returns to Scale The Law of Constant Returns to Scale The Law of Decreasing Returns to Scale Production Function and Returns to Scale Cobb–Douglas Production Function7 and Returns to Scale Laws of Variable Proportions and Returns to Scale Compared Graphic Comparison Are the Laws of Returns Compatible? Can the Two Kinds of Laws Operate Simultaneously? Appendix Properties of Cobb–Douglas Production Function Review Questions and Exercises Endnotes Further Readings Chapter 13: Optimum Combination of Inputs Introduction Derivation of Isocost The Least Cost Criteria of Optimum Input Combination Criterion in Value Terms Choice of Optimal Expansion Path Effects of Change in Input Prices Change in Input Prices and Isocosts Change in Input Prices and Expansion Path Change in Relative Price of Inputs Substitution and Resource Effects of Change in Input Prices Review Questions and Exercises Further Readings Chapter 14: Theory of Cost Introduction Cost Concepts Accounting Cost Concepts Analytical Cost Concepts Policy Related Cost Concepts: Private and Social Costs Theory of Cost: An Overview Theory of Short-Run Cost Short-run Cost Measures The Short-run Cost–Output Relationship Short-run Cost Function and Cost Curves Numerical Example Derivation of Behavioural Cost Equations Long-run Cost–Output Relationship Derivation of Total Long-run Cost (LTC) Curve Derivation of Long-run Average Cost (LAC) curve Derivation of Long-run Marginal Cost (LMC) Curve Optimum Size of the Firm in the Long Run Economies and Diseconomies of Scale: Factors Behind Cost Behaviour The Economies of Scale: Factors Causing Decrease in LAC Diseconomies of Scale: Why LAC Increases Modern Approach to the Theory of Cost Modern Approach to Short-run Cost Behaviour What Happens to the Average Variable Cost (AVC)? The SAVC and SMC Curves The Short-run Average Cost (SAC) Curves Modern Approach to Long-run Cost Behaviour: The L-shaped Scale Curve Derivation of the LAC Curve Review Questions and Exercises Endnotes Further Readings Part V: Theory of Firm: Determination of Priceand Output Chapter 15: The Objectives of Business Firms and Their Market Powers The Objectives of Business Firms Profit Maximization as Business Objective Profit-Maximization Conditions Numerical Illustration Graphical Instruction Controversy on Profit-Maximization Objective Alternative Objectives of Business Firms Conclusion The Market Structure and Power of Firms Perfect Competition Imperfect Competition Monopoly A Prelude to the Theory of Firm Review Questions and Exercises Endnotes Further Readings Chapter 16: Price and Output Determination under Perfect Competition Characteristics of Perfect Competition Perfect versus Pure Competition Role of a Firm in a Perfectly Competitive Market What Are the Firm’s Options Short-run Equilibrium of the Firm Assumptions Does a Firm Always Make Profit in the Short-run? Shut-down or Close-down Point Derivation of Supply Curve: A Digression Derivation of Firm’s Supply Curve Derivation of Industry Supply Curve Short-Run Equilibrium of Industry and Firm Link Between Short-run Equilibrium of the Industry and the Firm Long-run Equilibrium of the Firm and Industry Equilibrium of the Firm in the Long-run Equilibrium of Industry Long-run Supply Curve of a Competitive Industry Constant Cost Industry Increasing Cost Industry Decreasing Cost Industry Whether Decreasing Cost Conclusion Review Questions and Exercises Endnotes Further Readings University Question Papers