Microeconomics and Optimization

Course goals

Learning objectives

The purpose of the course is to introduce the essential elements of microeconomic theory, which is central to economic science, in an analytically rigorous way. We start by explaining that the starting point of microeconomics is that each individual agent in the economy when making any decision weighs benefits against costs, and therefore mathematically speaking solves an optimisation problem. The relevance to microeconomic theory of calculus is thereby shown.

At the end of the course the student is able to:

• understand the relevance of optimisation to economics;
• build up supply and demand from consumers’ and firms’ optimisation problems;
• understand economic models of perfect competition, monopolistic competition and monopoly;
• understand the relevance of game theory for analysing oligopoly.

Content

In the first part of the course, we use this starting point to analytically underpin how supply and demand interact in a market with perfect competition. First, we model consumers as making consumption decisions that maximise their utilities, given the budget constraints that they face. Next, we show how individual and market demand can be derived from consumers’ solutions to their optimisation problems, and we analyse how sensitive these demands are to price changes. Second, we focus on the optimisation problem of firms. The firm may be seen as miminising the costs at which they produce any given quantity. This cost minimisation problem allows one to derive the cost function of the firm. Once this cost function has been derived, we can solve the firm’s profit maximisation problem, which allows us to derive firm supply, and industry supply. Third, having derived both market demand and industry supply, we show how these interact in case of perfect competition, and determine equilibrium price and output. We then go on to show the welfare properties of perfect competition.
The second part of the course extends the basic framework of the first part to include the several ways in which real markets may deviate from perfect competition (market imperfections). Firms may have market power and not consider output prices as given. Both production and consumption may cause negative externalities to others, which individuals do not take into account in their optimisation problems. It may not be possible to exclude consumers from consumption, as is implicitly assumed the first part of the course. We will see how we can modify our models to take such considerations into account.

Academic skills
This course focuses on the following academic skills:
 
Analytical skills

• Being able to solve problems (identifying the problem, devising a path towards the solution, follow this path, verify the outcome), independently and for complex problems.
• Being able to identify, interpret and critically evaluate the main line of reasoning, independently and for complex problems.
• Being able to evaluate evidence in text and presentations independently and for complex problems.

Academic reasoning

• Thinking conceptually, thinking in terms of theory.

Effort requirements
Sufficient preparation for and active participation in at least 80% of all tutorials.

In case online access is required for this course and you are not in the position to buy the access code, you are advised to contact the course coordinator for an alternative solution. Please note that access codes are not re-usable meaning that codes from second hand books do not work, as well as access codes from books with a different ISBN number. Separate or spare codes are usually not available.