Microeconomics 2

Semester and Year Offered: 2nd Semester, 1st year

Course Coordinator and Team: Taposik Banerjee

Email of course coordinator: taposik@aud.ac.in

Pre-requisites: Graduation level Microeconomics and Mathematics along with the Microeconomics 1 course offered in 1st semester MA Economics programme.

Aim: The two courses, Microeconomics 1 and 2 together will help students learn the fundamental theories of microeconomics. The course introduces students to the general equilibrium theory and welfare economics. The course was designed in a way so that students who have learnt the basic microeconomic theories can now learn how microeconomic theories have made further advancements over the years. The course introduces students to models of how economic agents like consumers and firms interact in market, what happens when market fails, how government policy may improve outcome in a society. The course also leads students to the doorsteps of two subdisciplines, namely, “Social Choice" and “Law and Economics" which throws open new research opportunities for them.

Course Outcomes:

On successful completion of this course students will be able to:

1. Describe the journey of the theory of microeconomics over the century and would be able to explain how the theory evolved to its present state.
2. Develop and sustain an argument using the concepts that are commonly used by economists.
3. Apply general equilibrium framework to address an economic problem.
4. Analyse the implications of and contradictions between different democratic values in the process of aggregating individual preferences into social/collective preference.
5. Apply microeconomic principles and models to define and address the problem of market failures in the presence of externalities.
6. Explain how government policy may improve outcome in a society.
7. Discuss the limitations and the domain of application of standard economic theories.

Brief description of modules/ Main modules:

The course introduces students to the general equilibrium theory and welfare economics. The course introduces students to the price determination process in an exchange economy. It analyses the relationship between a ‘core’ and a ‘competitive equilibrium’. The conditions for existence, uniqueness and stability for a Walrasian equilibrium will be discussed. The course will introduce students to the fundamental theorems of welfare economics. Limitations of a market economy will be taught and concepts of externalities and public goods will be discussed. Concept of a Social Welfare Function and Arrow's Impossibility Theorem will be taught. The course will also allow students to learn and critically evaluate the Coase Theorem. The following would be the broad outline of the course.

1. Exchange

• Problem and solution: Walras and Edgeworth
• Excess Demand: Equilibria in Simple Models; Existence and Stability
• Core and Equivalance Theorem

2. WalrasianEquilibrum

• Existance
• Uniqueness
• Stability
• Comparative Statics

3.Welfare Economics

• Fundamental Theorems of Welfare Economics
• Compensation tests - Kaldor, Hicks, Scitovsky
• Social Welfare Functions and Arrow's Impossibility Theorem
• Externalities and Public Goods: Market failure
• Coase Theorem and Critique

Assessment Details with weights:

Three class tests with following weights: Test 1 (25%), Test 2 (35%) and Test 3 (40%).

Test 1 will be a class test based on material covered during first half of the semester.

Test 2 will be a class test based on material covered during second half of the semester.

Test 3 will be an end of semester class test based on all material covered in the course.

Reading List:

• Arrow, K. J., 1963. Social Choice and Individual Values, second edition, Wiley, New York.
• Mukherji, A., 2002. Introduction to General Equilibrium Analysis: Walrasian and Non-Walrasian Equilibria, Oxford University Press.
• Sen, A., 1970. Collective Choice and Social Welfare, Holden-Day.
• Jehle, G. A. and P. J. Reny, Advanced Microeconomic Theory, Addison-Wesley Longman, Inc.
• Mas-Colell, A., M. D. Whinston, and J. R. Green (1995). Microeconomic Theory. Oxford: Oxford University Press.
• Varian, H. R., (1984). Microeconomic Analysis. 3rd edition. New York: Norton
• Bator, F. M., 1957. The Simple Analytics of Welfare Maximization. The American Economic Review, Vol. 47, No. 1 (Mar., 1957), pp. 22-59.

ADDITIONAL REFERENCE:

• Walras, L., 1954. Elements of Pure Economics, George Allen and Unwin.
• Debreu, G. and H. Scarf, 1963. A Limit Theorem on the Core of the Economy. International Economic Review.