201LECT - UNIVERSITY OF WATERLOO, Department of Economics...

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UNIVERSITY OF WATERLOO, Department of Economics ECONOMICS 201 (Microeconomic Theory) SUBJECT OUTLINE Not all the topics listed below can be covered in the limited lecture time available for this course. Some of the topics belong in Economics 101 and/or will be assigned for independent review. The subjects that are NOT covered in the Professor's Course Notes are indicated below with an asterisk (*). I. DEMAND, SUPPLY, AND PRICE: A REVIEW ( Perloff, 2nd ed., Chapters 2 and 3 ) A. Market Demand and Related Concepts 1. Quantity demanded: definition and determinants 2. Demand Schedule and Market Demand (D) 3. Distinction between Market Demand (D) and quantity demanded (q) - Movement along Market Demand and shift in Demand: examples 4. Price elasticity of Demand: definition, determinants, and graphical representation 5. Special case: price elasticity along a straight-line Demand 6. Shift in Demand and price elasticity 7. Income elasticity of Demand and Engel curves for normal goods (necessities or luxuries) and inferior goods 8. Cross elasticity of Demand as a measure of substitutability 9. Derivation of Total Revenue (TR) and Marginal Revenue (MR) from Market Demand 10. Analytical relationship between marginal revenue, price, and price elasticity of Demand 11. Practical importance of the relationship between total revenue and the price elasticity of Demand: examples 12. Market Demand (D) as the horizontal summation of the individual consumers' demand curves (d) B. Market Supply and Related Concepts 1. Quantity supplied: definition and determinants 2. Supply Schedule and Market Supply (S) 3. Movement along Market Supply and shift in Supply: examples 4. Price elasticity of Supply: definition, determinants, and graphical representation C. Demand, Supply, and Price 1. Equilibrium Price and market adjustment 2. The short run and the long run 3. Static and dynamic analysis D. Some applications of the basic market model 1. Incidence of a specific sales tax per unit of output on producers: "it pays to be elastic" ( Perloff, 2nd ed., pp. 59-67 ) 2. Minimum prices or price floors ( Perloff, 2nd ed., pp. 39-40 ) 3. Maximum prices (or price ceilings) and black markets ( Perloff, 2nd ed., pp. 36-38 ) II. THEORIES OF CONSUMER BEHAVIOUR
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A. Cardinal Utility Theory 1. Assumptions 2. Consumer Equilibrium, i.e., conditions for Total Utility maximization a. Single commodity case (1) Consumer equilibrium (TU maximum when MUx = Px) (2) Derivation of the demand curve (d) b. Two or more commodities (1) Two-stage proof (TU maximum when MU x /P x = MU y /P y ) (2) Derivation of the demand curve (d) 3. The concept of consumer's surplus ( Perloff, 2nd ed., pp. 266-272 ) 4. Critique of the cardinal approach to demand theory B. Indifference Curves Approach ( Perloff, 2nd ed., Chapter 4 ) 1. Assumptions and derivation of indifference curves a. Axioms of consumer behaviour b. Definition and derivation of indifference curves c. The assumption of diminishing Marginal Rate of Substitution (MRS)
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201LECT - UNIVERSITY OF WATERLOO, Department of Economics...

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