4
Borrowing and Saving
Instead of rushing immediately into traditional demand theory we now move to an application. The point of this is to show that the model of consumer behavior just set up is a
very rich model in the sense that it can help us understa
16
Oligopoly
Oligopoly refers to a situation with a few rms on the market and the central assumption
that diers from the competitive model is that the rms understand that their actions aect
the market price. There is an industry of dierent models, but mos
8
Equilibrium Analysis in a Pure Exchange Model
So far we have only discussed decision theory. That is, we have looked at consumer choice
problems on the form
max u (x1 ; x2 )
x1 ;x2
s.t. p1 x1 + p2 x2
m:
The consumer choice problem generates demand funct
14
Monopoly
Varian: Read the chapter on Monopoly. You may also want to go back and review elasticities.
Up to this point we have studied rms that take all prices as given. While this may be a
reasonable approximation in highly competitive markets (which w
15
Game Theory
Varian: Chapters 28-29.
The key novelty compared to the competitive (Walrasian) equilibrium analysis is that
game theoretic analysis allows for the possibility that utility/prot/payos depend
directly on what other people do. Moreover, all p
14 Cost Minimization
Optional Reading: Varian, Chapters 20, 21.1-21.3 & 22.1-22.7.
In principle, everything we want to know about competitive rms can be derived from
pro t maximization problem. One can derive:
Factor demands
Firm supply
Adding over all rm
1
Rational Preferences.
1.1
Preference Relations
While alternative theories are starting to challenge the standard approach, it is still the
case that we in most economic theory assume that individual behavior is driven by rational
decisions. This means i
3
The Utility Maximization Problem
We have now discussed how to describe preferences in terms of utility functions and how to
formulate simple budget sets. The rational choice assumption, that consumers pick the best
aordable bundle, can then be described
9
Technology
Optional Reading: Chapter 18 & 19 in Varian
Our next topic is to think about rm behavior. Exactly as with consumer theory we then
need to specify:
What the rms can do (describe the feasible set, possible production plans)
How rms evaluate t
6
Traditional Demand Theory
We have already discussed some examples of comparative statics in pervious lectures and
homework exercises. However, we have spent a big share of our energy discussing how to
formulate and solve problems of rational choice in d
2
The Elements of a Canonical Model of Rational Consumer Choice
The most fundamental building block in microeconomic theory is the theory of the consumer.
In essence, this theory simply says that the consumer picks whatever he or she likes the most
among