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MICROECONOMICS 1
CONSUMER AND PRODUCER THEORY
Lecturers: Marcel Kohler & Devi Tewari Rooms: Westville, J-Block, Room 367 & 362

Objectives:
This course aims to develop students’ understanding and ability to explain real-world economic phenomena with the help of microeconomic principles. In this first module, we try to establish what drives the behaviour of consumers and producers in an economy by focussing on explanations of how they attempt to maximise their well-being, subject to certain constraints.

References:
Your prescribed text is as follows:  J M. Perloff, Microeconomics, 6th Edition, Addison Wesley Longman, Boston, 2011. [abbreviated to Perloff in the module outline] Appendices, which cover additional references and applications of the theory included in the module, are taken from the supplementary materials accompanying the Perloff text. Note that these references and applications are an essential component of the course and are included in this module guide. Refer to the end of the session outline for these appendices.
Microeconomics One Econ 202: 2012 Page: 1

SESSION OUTLINE:
CONSUMER THEORY
SESSIONS: 1-5
References:

CONSUMER CHOICE Preferences, Utilities and Budget Constraints
Perloff, chapter: 4. (See: student resource kit, solved problem no.1)

According to economists, consumers maximise their utility (well-being) subject to constraints based on their income and the prices of goods. To predict consumers’ responses to changes in these constraints, economists use a theory about individuals’ preferences, which assumes that consumers are rational maximisers. The introductory sessions explore the characteristics of rational maximising consumers and develop a set of tools to analyse their decision-making process. Applications: Refer to Handbook Appendices for more detail.  “Payments in kind” versus cash grants

Key concepts:         properties of consumer choice: completeness, transitivity & insatiability (“more is

References: THE COST OF PRODUCTION Review of Costs: short run -vs- long run Perloff, chapter: 7 (See: student resource kit, concepts review: theory of costs) In seeking to maximise output, a firm is constrained by the cost of its inputs into production. These sessions revise some fundamental and important costing concepts as well as introduce the costminimising input choice of a firm. Furthermore, we examine the impact of economies and diseconomies of scale on the costs of the firm, together with the effects of learning-by-doing and economies of scope. Applications: Refer to Handbook Appendices for more detail.   Changes in Factor Prices and the Expansion Path. Output Maximisation as an alternative to Cost Minimisation. Key concepts:       Long-run versus Short-run Costs: **Revision**. The Isocost Line: 1. choosing the cost minimising input combination. 2. the impact of factor price changes. The Firm’s Expansion Path. Economies and Diseconomies of Scale. Learning-by-Doing. Economies of Scope. Concept Review:    Opportunity cost (economic cost): value of the best alternative use of resources. Isocost line: plots capital and labour combinations requiring the same total expenditure. Maximizing profits requires economic efficiency; that is, choosing the lowest-cost way to produce a given level of output. Equivalent ways to do this: (1) use the combination if inputs on the isoquant that is on the lowest isocost line touching the isoquant; (2) choose the input combination where the relevant isoquant is tangent to an isocost line; and (3) pick capital and labour so that MPL/w = MPK/r. Long-run average cost curve: the lower bound of all the short-run average cost curves. Its shape is tied closely to returns to scale. Economies of scale: long-run average costs fall as output rises. Diseconomies of scale: long-run average costs rise as output rises. Economies of scope: less expensive to produce goods jointly than separately.     Microeconomics One Econ 202: 2012 Page: 5