Contents. Introduction

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1 Contents Chapter 1 Introduction Introduction to Economics... 1 Meaning of Economics... 1 Definitions of Economics... 2 Introduction to Economic Theory... 3 The Structure of Theories... 5 Importance of Assumptions... 7 Problem of Scarcity... 9 Scarce Resources of Production Thinking in Terms of Scarcity s Effects Three Fundamental Economic Questions Opportunity Cost The Production Possibilities Curve Marginal Rate of Transformation (MRT) The Law of Increasing Opportunity Costs Constant Opportunity Cost Shift in Production Possibility Curve (PPC) and Economic Growth.. 21 Introduction to Microeconomics and Macroeconomics Microeconomics Macroeconomics Function of Microeconomic Theory Importance of Microeconomics Interdependence between Microeconomics and Macroeconomics Dependence of Macroeconomics on Microeconomics Dependence of Microeconomics on Macroeconomics Comparative Statics and Dynamics Static and Comparative Statistics Comparative Statics Dynamic Equilibrium Positive and Normative Economics Positive and Normative Statements The Relation between Positive and Normative Economics Fundamental Principles of Economics Chapter Questions... 52

2 Chapter 2 Theory of Consumer Behavior Part A: Demand, Supply and Equilibrium Meaning and Concept of Demand Law of Demand Exceptions of the Law of Demand Determinants of Demand Individual Demand Schedule and Derivation of Individual Demand Curve Movement along and Shift of a Demand Curve Theory of Supply Law of Supply Derivation of Single Producer's Supply Curve Movement along and Shift of a Supply Curve Market Equilibrium and Determination of Equilibrium Price Sample Numerical Problems and Solution Chapter Questions Part B: Measurement of Elasticity of Demand and Supply Concept of Elasticity Types of Elasticity of Demand Methods of Measurement of Price Elasticity of Demand Total Outlay or Expenditure Method Point Method of Measuring Elasticity of Demand Arc Elasticity of Demand Determinants of Price Elasticity of Demand Uses of the Concept of Elasticity of Demand Price Elasticity of Supply Measurement of Elasticity of Supply (Geometry of Elasticity of Supply) 126 Factors that Determine Elasticity of Supply Sample Numerical Problems and Solution Chapter Questions Part C: Theory of Consumer Behaviour Concept of Utility Consumer s Utility Analysis Cardinal Approach Basic Assumptions of Cardinal Utility Analysis Law of Diminishing Marginal Utility

3 Derivation of Demand Curve from the Law of Diminishing Marginal Utility Law of Equi-Marginal Utility: Consumer s Equilibrium Derivation of Demand Curve from Equi-marginal Utility Approach. 152 Ordinal Approach to Utility Analysis Assumptions of Ordinal (Indifference Curve) Approach The Indifference Curve (IC) Approach to Utility Analysis Marginal Rate of Substitution (MRS) Indifference Map Properties of Indifference Curves of Two Goods Budget Constraint or Budget Line Budget Line Gymnastics (Change in the Budget Line) Consumer s Equilibrium under Ordinal Utility: Consumer s Equilibrium under Indifference Curve Approach Income Effect and the Income Consumption Curve The Case of Normal Goods Income Effect in the Case of an Inferior Good The Case of Neutral Goods Income Effect and Derivation of Engle Curve Price Effect and Price Consumption Curve (PCC) Price Effect in Case of Giffen Good Separation of Price Effect into Substitution and Income Effects Hicks and Slutsky Decomposition of Income and Substitution Effects Income and Substitution Effect for Inferior Goods Income and Substitution Effect for Giffen Goods Price Effect and Derivation of Demand Curve: Normal Good Engel Curve vs. Demand Curve Comparison of Cardinal Utility Analysis with Ordinal Utility Analysis Superiority of Ordinal Utility Approach Criticisms of Indifference Curve Sample Numerical Problems and Solution Chapter Questions

4 Chapter 3 Production and Cost Part A: Theory of Production Meaning of Production Fixed and Variable Factors of Production Production Function Total Product, Average Product and Marginal Product Short Run and the Long Run in Production Activities Laws of Production Function Law of Variable Proportion Importance of the Law of Diminishing Returns Production with Two Variable Inputs: The Concept of Isoquant Isoquant Map Marginal Rate of Technical Substitution (MRTS) Diminishing Marginal Rate of Technical Substitution Properties of Isoquant Exceptions to the General Properties Isocost Line Shift in Iso Cost Line Least Cost Combination of Factors Expansion Path or Scale Line of the Firm Laws of Returns to Scale: Long Run Production Behaviour Increasing Returns to Scale (IRS) Constant Returns to Scale (CRS) Decreasing Returns to Scale (DRS) Sample Numerical Questions and Solution Chapter Questions Part B: Cost and Cost Curves Concept of Cost of Production Explicit Cost Implicit Cost Opportunity Cost Accounting Cost Economic Cost Sunk Cost Short Run Cost Short-run Total Costs Geometry of Short-run Total Costs

5 Short-run Per-Unit Costs Geometry of short-run Per-Unit costs Relationship between AC and MC Derivation of Short-run Per-Unit Cost Curves from Total Costs Long Run Cost Curves Long-run Total Cost (LTC) Long-run Average Cost (LAC) Long-run Marginal Cost (LMC) Economies of Scale Types of Economies of Scale Optimum Firm Factors Affecting the Optimum Size of the Firm Sample Numerical Questions and Solution Chapter Questions Part C: Revenue Curves Concept of Revenue Concepts of Total, Average and Marginal Revenues Relation between AR and MR Relation under Perfect Competition Relation under Imperfect Competition Relation between AR and MR Curves in Imperfect Competition Market Chapter Question Chapter 4 Market Structures and Pricing Introduction to the Concept of Product Pricing Market Structure and Product Pricing Product Pricing in a Market of Perfect Competition Price and Output Determination under Perfect Competition Marginal Revenue-Marginal Cost (MR-MC) Approach Short Run Equilibrium of the Industry Short-Run Equilibrium of the Firm Long Run Equilibrium of Firm Product Pricing in Monopoly Market Reasons for Monopoly Price and Output Determination under Monopoly Short-Run Equilibrium of the Monopoly

6 Long Run Equilibrium of Firm under Monopoly Price Discrimination under Monopoly Dumping Product Pricing in Monopolistic Competition Characteristics of Monopolistic Competition Equilibrium Output and Price Determination of a Firm under Monopolistic Competition The Short Run Equilibrium The Long Run Equilibrium Difference between Perfect Competition and Monopolistic Competition Introduction to Oligopoly Business Market Characteristics of Oligopoly Main Attributes of Market Structure Price and Non-price Competition Price Competition Non-price Competition Market Structure and Degree of Firm s Market Power The Lerner Index (LI) The Herfindahl- Hirschman Index (HHI) and Market Power Sample Numerical Questions and Solution Chapter Questions Chapter 5 Theory of Distribution Meaning of Factor Pricing Factor Market Structures Factor Pricing In Perfectly Competitive Markets The Demand Curve of a Firm for a Single Variable Input Shape of MRP and VMP Curves Optimum Condition for Hiring a Factor (Labour) by a Firm Demand for a Factor Input when Several Inputs are Variable The Market/Industry Demand for a Factor The Supply of Labour (a Variable Factor) in Perfectly Competitive Markets The Work-Leisure Trade Off: Backward-Bending Labour Supply Curve Market Supply Curve for an Input (Labour)

7 The Determination of the Factor Price in Perfectly Competitive Market Factor Pricing in Imperfect Competition Market Demand for a Variable Factor by a Monopolistic Firm when Many Factors are Used The Market Demand for and Supply of Labour Bilateral Monopoly Theories of Rent Modern Theory of Rent The Concept of Quasi Rent Theories of Interest Rate Loanable Funds Theory of Interest Liquidity Preference Theory of Interest Theories of Profit Dynamic Theory of Profit Innovation Theory of Profit Concept of Wage Differential Wage Differentials Due to Heterogeneity of Labour The Nature and Causes of Persisting Wage Differentials Minimum Wages and Brain Drain Effects of Minimum Wage Brain Drain Chapter Questions Pokhara University Board Exam Questions Bibiliography

Faculty of Economics, Thammasat University EE 211 Principles of Microeconomics (3 credits)

Faculty of Economics, Thammasat University EE 211 Principles of Microeconomics (3 credits) Semester 1/2014 ----------------------------------------------------------------------------------------------