Microeconomics

Module description

Summary:

Economics emphasizes the importance of incentives and tradeoffs in choices, the strategic interaction of individual, households, firms, and governments, and the coordination of individual decisions through market mechanisms. The insights provided are relevant for decision-makers in industry, finance, government, and households themselves. Starting with the classic theory of consumer behaviour and market equilibrium, the module traces the role of incentives and its consequences for social welfare in a variety of economic situations, and explores extensions of the classical model.

Additional Information:

Internationalisation

This is a basic and applied theory course, but the content is applicable in every country. The examples used in this module can be applied to any firm or decision.

Sustainability

All of the resources for this module are available on the ELE (Exeter Learning Environment).

Full module specification

Module aims

ILO: Module-specific skills

• 1. represent the key ingredients of microeconomic problems in the form of tractable models
• 2. solve the models
• 3. derive testable implications of the models
• 4. critically discuss the adequacy of the models

ILO: Discipline-specific skills

• 5. apply economic reasoning to decision problems
• 6. use economic analysis to construct explanations for observed economic actions
• 7. understand the nature of incentives, game theory and opportunity costs in decision-making

ILO: Personal and key skills

• 8. engage in abstract thinking by extracting the essential features of complex systems to facilitate problem solving and decision-making
• 9. engage in deductive and inductive reasoning to enhance problem solving and decision-making skills
• 10. plan and manage their time effectively in relation to deadlines
• 11. demonstrate a logical argument, analyse and interpret data and evaluate alternative perspectives on the basis of objective reasoning
• 12. communicate and present complex arguments in oral and written form with clarity and succinctness
• 13. communicate these models, their results and limitations, both to other economists and to nonspecialists
• 14. consider how to reasonably apply these models to questions of government policy, business, and household behaviour

Learning activities and teaching methods (given in hours of study time)

Details of learning activities and teaching methods

Formative assessment

Summative assessment (% of credit)

Details of summative assessment

Details of re-assessment (where required by referral or deferral)

Syllabus plan

We will first review basic economic concepts. Next, we will build and consider each element of the classical model of consumers and producers under perfect competition, gaining an intuitive and logical understanding of the assumptions and how the parts fit together. This leads to demand and supply curves, firms' entry and input/output, and households' consumption choices. We put this together to consider the theoretical ideal of an equilibrium and how well it 'works'.

We next relax some of the underlying assumptions of this model and see how this changes the outcomes. We introduce uncertainty (allowing us to consider key concepts from finance). We next consider three possibilities that can lead the unregulated market system to perform sub-optimally: asymmetric information, public goods, and market power (monopolies). We also consider how the harm from these 'market failures' can be reduced, including government policies and business innovations/tools.

Finally, we will learn about two modern extensions to the classical model. Game theory considers how people act when their best choice *may depend* on what others do; particularly relevant for small-group interactions such as international negotiations and competition between large firms. Behavioral economics relaxes classical assumptions such as unbounded cognition and willpower and pure self-interest, incorporating models and evidence from psychology such as loss-aversion, hyperbolic discounting, and concerns for fairness. We will consider the evidence for these models, particularly from lab and field experiments, and the implications for economic models and policy.

An indicative weekly plan is as follows:

Weeks 1-2: Economic basics

• 'Start thinking like an economist': Economic models and basic maths tools, introduction'
• 'How do economists think about choices?': Utility, preferences, indifference curves, budget constraints

 Weeks 3-6: Building the model, putting it together, examining it

•  Demand curves: Individual and market demand
• 'Who is making this stuff, and what are they putting in?': Production, costs, returns to scale, choice of inputs
• 'How do firms know how much to charge, and how much do they earn?': Profit maximisation and supply, perfect competition in a single market
• 'What are the outcomes of all this? Is this the best possible system?': Supply curves, entry/exit, CS and PS, tax incidence, general equilibrium and welfare (brief)

 Weeks 7-8: ‘How the market can go wrong (and how to fix it)

•  'What if we don't know what will happen?': Uncertainty (basic concepts, EU, risk aversion, investment choices)
• 'What if some people know more than others?': Market failures -- Asymmetric information (brief)
• 'Who pays for the things we all benefit from?: Market failures -- Public goods

 Weeks 9-10: ‘But what do real people do?' (extensions)

•  'How do we interact with others?': Game theory; experimental evidence on this
•  Behavioral economics: limits to cognition, willpower, self-interest; applications and evidence

 Week 11: Revision

Indicative learning resources - Basic reading

The main source for this course is:

• (A special discounted edition of) "Intermediate Microeconomics and Its Application" (12th ed.), by Walter Nicholson and Christopher M. Snyder, Cengage Learning

-       Earlier editions are also acceptable

-       Note that any intermediate or advanced textbook in Microeconomics will cover virtually the same material, with varying degrees of mathematical rigour. There are now texts available for free, legally, online, such as “Introduction to Economic Analysis”, by Preston McAfee, Caltech and  Tracy Lewis, Duke University, available at https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=47

ELE – http://vle.exeter.ac.uk/course/view.php?id=192

Module has an active ELE page?

Yes

Origin date

16/07/2014

Last revision date

30/10/2018