Microeconomic

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Draft Economics Textbook - Version Dec 22, 2012
by Petr Mach
Students of my classes of Microeconomics who want to pass exams can use this draft textbook as a useful study material. Comments and recommendation let be sent to mach@svobodni.cz -------------------------------------------------

Textbook of Economics
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---Still a Draft---
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[Shaking hands – symbol of a voluntary contract]
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Petr Mach
Contents
Preface3
Part A: Microeconomics4
Lesson 1: What is Economics4
Master’s Extension: Private and Public goods10
Lesson 2: Comparative Advantage and Opportunity Cost13
Master’s Extension: Comparative Advantage in Foreign Trade15
Lesson 3: Utility16
Master’s Extension: Decision Making under Risk21
Lesson 4: Consumer Choice21
Master’s Extension: Inter-Temporal Choice22
Lesson 5: Demand and Supply23
Master’s Extension: State Interventions to the Demand and Supply30
Lesson 6: Income, Goods, and Tastes, and Fashion34
Master’s Extension:35
Lesson 7: Means of Production35
Master’s Extension: Pareto Efficiency of a Loan35
Lesson 8: Market Models36
Master’s Extension:38
Lesson 9: Profit maximization in the short run38
Master’s Extension: Price Discrimination41
Lesson 10: Production Function42
Master’s Extension:42
Lesson 11: General Equilibrium42
Master’s Extension: Production Possibilities Frontier42
Part B: Macroeconomics42
Lesson 1: Price Level42
Master’s Extension: Costs of Inflation46
Lesson 2: Aggregate Production47
Master’s Extension: Long Term Economic Growth50
Lesson 3: Money52
Master’s Extension:52
Lesson 4: Money Supply52
Master’s Extension: Hoarding55
Lesson 5: Quantity Theory of Money58
Master’s Extension: Demand for Money60
Lesson 6: Aggregate Demand and Aggregate Supply60
Master’s Extension: Business Cycle61
Lesson 7: Aggregate Supply in the Short Run61
Master’s Extension: Business Cycle62
Lesson 8: Foreign Exchange Market62
Master’s Extension: Exchange Rate Theories64
Lesson 9: Monetary Policy64
Master’s Extension: Theory of Seigniorage64
Lesson 10: Fiscal Policy and Public Debt64
Master’s Extension:64
Lesson 11: Currency Unions and Currency Separations64
Master’s Extension: Optimum Currency Area Theory64

Preface
This book has been prepared for both bachelor’s level and master’s level college or university students of economics courses. For most bachelor students this book will probably be their first encounter with the economic science. No previous knowledge of economics is therefore required. It is explained from the groundings. Each chapter includes Master’s Extension, which is intended for the master’s level only. For the graduate students all parts preceding Master’s Extension are prerequisite. The book covers both microeconomics and macroeconomics. It starts with microeconomics (Part A) and continues with macroeconomics (Part B). Both parts are however independent so that the parts can be read or taught in the opposite order. The book includes 11 chapters in each part. It thus covers standard semester courses of microeconomics and macroeconomics consisting of 11 lectures of 90 minutes each. Selected chapters of the book can be used also for the basic courses of money and finance as it includes micro- and macroeconomic fundamentals of finance. The eight chapters that can make up basis for a bachelor’s course of finance are denoted (F1)-(F8) Economics is not about counting. Economics is a science about human behaviour. Authors are aware that many students have deficiencies in mathematics as many of them had finished high school years ago. Therefore where mathematics is necessary a Math Box is included. Each chapter is followed by Numerical Examples that can be used in...
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