Microeconomic Principles

Beginning with a discussion of the basic structure of the economy and ending with an examination of economic applications, this book offers thorough coverage of the fundamental principles that underlie standard modern theoretical and applied microeconomics. Among the topics covered are production, the firm, the consumer, households and workers, aggregation, equilibrium, efficiency, uncertainty, incentives, and welfare. In addition to algebraic and verbal presentation of results, many of the basic ideas are illustrated using clear diagrams and charts. Throughout, Cowell provides exercises with answers to help students understand and apply the analytic techniques presented in the book. Contents......Page 3 List of Tables......Page 13 List of Figures......Page 15 Preface......Page 23 1.1 The rôle of microeconomic principles......Page 25 1.2.3 Motivation......Page 26 1.2.4 The economic environment......Page 27 1.2.6 “Testing” a model......Page 28 1.3.2 The comparative statics method......Page 29 1.4.2 Mathematics......Page 30 1.5.2 Some tips......Page 31 2.1 Basic setting......Page 33 2.1.1 The firm: basic ingredients......Page 34 2.1.2 Properties of the production function......Page 36 2.2 The optimisation problem......Page 43 2.2.1 Optimisation stage 1: cost minimisation......Page 44 2.2.2 The cost function......Page 47 2.2.3 Optimisation stage 2: choosing output......Page 49 2.2.4 Assembling the solution......Page 50 2.3 The firm as a “black box”......Page 51 2.3.1 Demand and supply functions of the firm......Page 53 2.3.2 Comparative statics: the general case......Page 55 2.4 The short run......Page 59 2.5 The multiproduct firm......Page 63 2.8 Exercises......Page 68 3.1 Introduction......Page 73 3.2 The market supply curve......Page 74 3.3 Large numbers and the supply curve......Page 77 3.4 Interaction amongst firms......Page 79 3.5 The size of the industry......Page 80 3.6.1 Simple monopoly......Page 82 3.6.2 Discriminating monopolist......Page 84 3.6.3 Entry fee......Page 85 3.7 Product variety......Page 86 3.10 Exercises......Page 88 4.1 Introduction......Page 93 4.2 The consumer's environment......Page 94 4.3 Revealed preference......Page 96 4.4 Preferences: axiomatic approach......Page 99 4.5 Consumer optimisation: fixed income......Page 104 4.5.1 Cost-minimisation......Page 106 4.5.2 Utility-maximisation......Page 107 4.6 Welfare......Page 111 4.6.1 An application: price indices......Page 116 4.8 Reading notes......Page 117 4.9 Exercises......Page 118 5.1 Introduction......Page 123 5.3 Supply by households......Page 124 5.3.1 Labour supply......Page 127 5.3.2 Savings......Page 128 5.4 Household production......Page 131 5.6 Aggregation of consumers......Page 136 5.7 Summary......Page 140 5.9 Exercises......Page 141 6.1 Introduction......Page 145 6.2.1 Processes and net outputs......Page 146 6.2.2 The technology......Page 148 6.2.4 Externalities and aggregation......Page 152 6.3 The Robinson Crusoe economy......Page 153 6.4 Decentralisation and trade......Page 156 6.7 Exercises......Page 163 7.1 Introduction......Page 167 7.2 A more interesting economy......Page 168 7.2.1 Allocations......Page 169 7.2.3 An illustration: the exchange economy......Page 171 7.3 The logic of price-taking......Page 173 7.3.1 The core of the exchange economy......Page 175 7.3.3 Competitive equilibrium and the core: large economy......Page 176 7.4 The excess-demand approach......Page 180 7.4.1 Properties of the excess demand function......Page 181 7.4.2 Existence......Page 184 7.4.3 Uniqueness......Page 186 7.4.4 Stability......Page 187 7.5 The rôle of prices......Page 190 7.5.2 Decentralisation again......Page 191 7.6 Summary......Page 195 7.8 Exercises......Page 196 8.2 Consumption and uncertainty......Page 201 8.2.1 The nature of choice......Page 203 8.2.2 State-space diagram......Page 204 8.3 A model of preferences......Page 208 8.3.1 Key axioms......Page 209 8.3.2 Von-Neumann-Morgenstern utility......Page 212 8.3.3 The “felicity”function......Page 213 8.4 Risk aversion......Page 214 8.4.1 Risk premium......Page 215 8.4.2 Indices of risk aversion......Page 216 8.4.3 Special cases......Page 219 8.5 Lotteries and preferences......Page 221 8.5.1 The probability space......Page 222 8.5.2 Axiomatic approach......Page 223 8.6 Trade......Page 226 8.6.2 Financial assets......Page 227 8.7.1 The attainable set......Page 229 8.7.2 Components of the optimum......Page 233 8.7.3 The portfolio problem......Page 235 8.7.4 Insurance......Page 241 8.8 Summary......Page 243 8.10 Exercises......Page 244 9.1 Introduction......Page 251 9.2 The constitution......Page 252 9.3 Principles for social judgments: efficiency......Page 258 9.3.1 Private goods and the market......Page 261 9.3.2 Departures from efficiency......Page 266 9.3.3 Externalities......Page 270 9.3.4 Public goods......Page 274 9.3.5 Uncertainty......Page 275 9.3.6 Extending the efficiency idea......Page 278 9.4.1 Fairness......Page 281 9.5 The social-welfare function......Page 282 9.5.1 Welfare, national income and expenditure......Page 283 9.5.2 Inequality and welfare loss......Page 285 9.7 Reading notes......Page 288 9.8 Exercises......Page 289 10.1 Introduction......Page 295 10.2.1 Players, rules and payoffs......Page 296 10.2.2 Information and Beliefs......Page 297 10.2.4 Representing a game......Page 298 10.3 Equilibrium......Page 300 10.3.1 Multiple equilibria......Page 302 10.3.2 Efficiency......Page 303 10.3.3 Existence......Page 305 10.4 Application: duopoly......Page 309 10.4.1 Competition in quantities......Page 310 10.4.2 Competition in prices......Page 315 10.5 Time......Page 317 10.5.1 Games and subgames......Page 319 10.5.2 Equilibrium: more on concept and method......Page 321 10.5.3 Repeated interactions......Page 324 10.6.1 Market leadership......Page 329 10.6.2 Market entry......Page 330 10.6.3 Another look at duopoly......Page 333 10.7 Uncertainty......Page 334 10.7.1 A basic model......Page 335 10.7.2 An application: entry again......Page 338 10.7.4 A “dynamic” approach......Page 341 10.8 Summary......Page 342 10.9 Reading notes......Page 343 10.10 Exercises......Page 344 11.1 Introduction......Page 351 11.2 Hidden characteristics: adverse selection......Page 352 11.2.2 One customer type......Page 353 11.2.3 Multiple types: Full information......Page 357 11.2.4 Imperfect information......Page 360 11.2.5 Adverse selection: Competition......Page 369 11.2.6 Application: Insurance......Page 370 11.3.1 Costly signals......Page 376 11.3.2 Costless signals......Page 384 11.4.1 The issue......Page 385 11.4.3 A simplified model......Page 386 11.4.4 Principal-and-Agent: a richer model......Page 391 11.5 Summary......Page 397 11.7 Exercises......Page 398 12.1 Introduction......Page 405 12.2 Social choice......Page 406 12.3.1 Markets: another look......Page 409 12.3.2 Simple trading......Page 410 12.3.3 Manipulation: power and misrepresentation......Page 411 12.4 Mechanisms......Page 412 12.4.1 Implementation......Page 414 12.4.2 Direct mechanisms......Page 415 12.4.3 The revelation principle......Page 416 12.5 The design problem......Page 417 12.6.1 Auctions......Page 419 12.6.2 A public project......Page 427 12.6.3 Contracting again......Page 433 12.6.4 Taxation......Page 439 12.7 Summary......Page 446 12.9 Exercises......Page 448 13.1 Introduction......Page 455 13.2 Market failure?......Page 456 13.3 Nonconvexities......Page 457 13.3.2 Interactions and convexity......Page 459 13.3.3 The infrastructure problem......Page 460 13.3.4 Regulation......Page 462 13.4 Externalities......Page 466 13.4.2 Corrective taxes......Page 467 13.4.3 Production externalities: Private solutions......Page 468 13.4.4 Consumption externalities......Page 471 13.5 Public consumption......Page 472 13.5.2 Club goods......Page 473 13.6.1 The issue......Page 475 13.6.2 Voluntary provision......Page 476 13.6.3 Personalised prices?......Page 478 13.6.4 Public goods: market failure and the design problem......Page 481 13.6.5 Public goods: alternative mechanisms......Page 482 13.7 Optimal allocations?......Page 484 13.7.1 Optimum with lump-sum transfers......Page 485 13.7.2 Second-best approaches......Page 488 13.8 Conclusion: Economic Prescriptions......Page 491 13.10 Exercises......Page 492 Bibliography......Page 497 A.1 Introduction......Page 509 A.2.1 Sets in Rn......Page 510 A.3.1 Linear and affine functions......Page 511 A.3.2 Continuity......Page 512 A.3.3 Homogeneous functions......Page 514 A.3.4 Homothetic functions......Page 515 A.4.1 Function of one variable......Page 516 A.4.3 Function-of-a-Function Rule......Page 517 A.4.6 Elasticities......Page 518 A.5.1 Fixed-point results......Page 520 A.5.2 Implicit functions......Page 521 A.6.1 Convex sets......Page 523 A.6.3 Separation results......Page 524 A.6.4 Convex and concave functions......Page 527 A.6.5 quasiconcave functions......Page 529 A.7 Maximisation......Page 531 A.7.1 The basic technique......Page 532 A.7.2 Constrained maximisation......Page 534 A.7.3 More on constrained maximisation......Page 535 A.7.4 Envelope theorem......Page 538 A.8 Probability......Page 539 A.8.1 Statistics......Page 540 A.8.3 Probability distributions: examples......Page 542 A.9 Reading notes......Page 543 B.2 The firm......Page 545 B.3 The firm and the market......Page 552 B.4 The consumer......Page 553 B.5 The consumer and the market......Page 559 B.6 A simple economy......Page 563 B.7 General equilibrium......Page 566 B.8 Uncertainty and risk......Page 572 B.9 Welfare......Page 580 B.10 Strategic behaviour......Page 585 B.11 Information......Page 594 B.12 Design......Page 607 B.13 Government and individual......Page 622 C.1.1 Marginal cost and the Lagrange multiplier......Page 631 C.1.2 Properties of the cost function (Theorem 2.2)......Page 632 C.1.3 Firm's demand and supply functions (Theorem 2.4)......Page 635 C.1.4 Firm's demand and supply functions (continued)......Page 636 C.1.5 Properties of profit function (Theorem 2.7)......Page 637 C.2.1 The representation theorem (Theorem 4.1)......Page 638 C.2.3 Quasiconvexity of the indirect utility function......Page 639 C.3.2 The representative consumer (Theorem 5.2):......Page 640 C.5.1 Competitive equilibrium and the core (Theorem 7.1)......Page 641 C.5.2 Existence of competitive equilibrium (Theorem 7.4)......Page 642 C.5.4 Valuation in general equilibrium (Theorem 7.6)......Page 643 C.7.1 Arrow's theorem (Theorem 9.1)......Page 644 C.7.2 Black's theorem (Theorem 9.2)......Page 646 C.7.3 The support theorem (Theorem 9.5)......Page 647 C.7.4 Potential superiority (Theorem 9.10)......Page 649 C.8.1 Nash equilibrium in pure strategies with infinite strategy sets (Theorem 10.2)......Page 650 C.8.3 The Folk theorem......Page 651 C.9.1 Revenue equivalence (Theorem 12.6)......Page 652 C.9.2 The Clark-Groves mechanism (Theorem 12.7)......Page 654 Index......Page 656