Intermediate Microeconomics

A Tool-Building Approach

Samiran Banerjee

• Publisher: Routledge
• Year: 2014
• Print ISBN: 9780415870054, 9780415870047
• eBook ISBN: 9781136001840
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Intermediate Microeconomics: A Tool-Building Approach is a clear and concise, calculus-based exposition of current microeconomic theory essential for students pursuing degrees in Economics or Business. This beautifully-presented and accessible text covers all the essential topics that are typically required at the intermediate level, from consumer and producer theory to market structure (perfect competition, monopoly and oligopoly). Topics covered include risk, game theory, general equilibrium and externalities, asymmetric information, and public goods.

Using numerical examples as well as sophisticated and carefully designed exercises, the book aims to teach microeconomic theory via a process of learning-by-doing. When there is a skill to be acquired, a list of steps outlining the procedure is provided, followed by an example to illustrate how this procedure is carried out. Once the procedure has been learned, students will be able to solve similar problems and be well on their way to mastering the skills needed for future study.

Intermediate Microeconomics presents a tremendous amount of material in a concise way, without sacrificing rigor, clarity or exposition. Through use of this text, students will acquire both the analytical toolkit and theoretical foundations necessary in order to take upper-level courses in industrial organization, international trade, public finance and other field courses.

Instructors that would like to consider Intermediate Microeconomics: A Tool-Building Approach for course adoption will have access to the book's free companion website featuring:

• Detailed answers to end of chapter questions
• All figures used in the book as PDF files suitable for inclusion in PowerPoint slides
• Chapter-by-Chapter zipped files of worksheets/quizzes suitable for classroom use

Problem sets are available on WebAssign for instructors who wish to use them. These arelocated at http://www.webassign.net/features/textbooks/banerjeeecon1/details.html?l=publisher.

Please contact the author at [email protected] for details, or visit his website athttp://banerjeemicro.com/

Chapter 1

Markets

As a segue into the material of intermediate-level microeconomics, we begin with some familiar material from your introductory microeconomics class: market demand, supply, and equilibrium. We cover the same material but utilize algebra in addition to graphs. Then, we take up taxes and subsidies, topics which should also be somewhat familiar to you. Finally, we look at various elasticity concepts in greater detail than is usual in a principles-level class.

1.1 Market Demand and Supply

Consider a single product (say, the market for steel) over a specific geographical area and a relatively short time period, such as a few months.

1.1.1 Plotting a market demand function

A market demand function shows how much is demanded by all potential buyers at different prices and is written generically as Q^d = D(p). Here, Q^d is the total quantity demanded and is the dependent variable, while the per-unit price, p, is the independent variable. An example of such a market demand function is given by the equation

where Q^d is measured in thousands of tons and p in dollars per ton. The fact that the derivative dQ^d/dp is negative means that this market demand embodies the so-called ‘Law of Demand’: keeping all other factors fixed, as the price of a product increases, its quantity demanded decreases.¹

Figure 1.1 Market demand

Since an independent variable is measured along the horizontal axis and the dependent variable along the vertical, the variable p ought to be on the horizontal axis and Q^d on the vertical. However, economists customarily put p on the vertical axis and Q^d on the horizontal axis, thereby depicting the inverse market demand by switching the variables in equation (1.1) and writing the price as a function of the quantity demanded:

This tradition follows Alfred Marshall’s classic text, Principles of Economics, which was published in 1890 and was very influential in educating generations of economists worldwide over eight editions spanning 30 years. Marshall’s interpretation of the inverse demand is that it shows the maximum price (the dependent variable) that someone is willing to pay for a certain quantity (the independent variable). The inverse market demand given by equation (1.2) is therefore linear with a vertical intercept of 60 and slope of ‒0.5,² as shown in Figure 1.1.

Figure 1.2 Aggregate demand

1.1.2 Aggregating demand functions

Suppose we are given the market demand curve for steel in the US as

while the demand for steel in the rest of the world (ROW) is given by

The corresponding inverse demand curves then are

shown in Figure 1.2 by the thin blue lines. For a price between $45 and $60, the only demand for steel in the world comes from the US as the ROW demands zero at such a high price. But for 0 ≤ p < 45, there is a positive demand from both the US and the ROW — for instance, at a price of $30, the US demands 50 thousand tons as does the ROW, for a total world demand of 100 thousand tons.

Then in the global market for steel, the quantity demanded by the entire world, Q^d, can be graphically derived as the piecewise-linear heavy blue line shown in Figure 1.2. For 45 ≤ p ≤ 60, the world demand follows the US demand, but for 0 ≤ p ≤ 45, the aggregate demand is given by the horizontal sum of the US and ROW demands:

Thus the world demand is found by aggregating the demand functions of the US and the ROW and can be written as

while the corresponding inverse aggregate demand is

Note that the first line of the inverse aggregate demand is the equation for the linear segment that overlaps exactly with the US demand for prices above $45, while the second line is the equation for the flatter linear segment that consists of the horizontal sum of the US and ROW demands for prices below $45. For plotting purposes, note that the vertical intercept of the flatter linear segment of the inverse aggregate demand is at 50, as given b...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• Acknowledgements
• 1 Markets
• 2 Budgets
• 3 Preferences
• 4 Individual Demands
• 5 Consumer Comparative Statics
• 6 Exchange Economies
• 7 Technology
• 8 Costs
• 9 Competitive Firms
• 10 Monopoly
• 11 Risk
• 12 Game Theory
• 13 Oligopoly
• 14 Externalities
• 15 Asymmetric Information
• 16 Public Goods
• Mathematical Appendix
• Index