E521 | 1746 | Chang

Economics , Theory of Prices and Markets I E521 , 1746 , Chang Economics 521 Theory of Prices and Markets I Instructor: Professor Fwu-Ranq Chang Office: Wylie Hall 302 This is the first course of our price theory sequence. The purpose is to develop the methodology of economic analysis and teach the tools and language of price theory. The course has four parts: the methodology of positive economics, consumer theory, producer theory and economics of uncertainty. For methodology and general issues, the student is introduced to Milton Friedman's classic paper and the so-called "as if" principle. Gary Becker's economic approach to human behavior, including his classic "irrational" behavior paper, is also discussed. In consumer theory the emphasis is on comparative statics of demand or inverse demand functions. Elasticity formulae, including the Slutsky equations, are investigated in detail. Familiarity with the indirect utility function, the expenditure function and the duality theory is an essential part of the course. Topics such as consumer surplus, theory of price indices, quality of goods and revealed preferences are also covered. In producer theory various production technologies and the concept of returns to scale are studied. Special emphasis is placed on homogeneous and homothetic functions. Familiarity with the profit function, the cost function and, again, the duality theory is essential. The theory of derived demand, which dates back to Marshall and completes with Hicks' formula, is also covered. In economics of uncertainty, the basics of the expected utility theory, well-known paradoxes, and the limitations of the theory are covered. The attitude toward risk (such as risk premium, probability premium, risk aversion and prudence) and various measures of riskiness are introduced. The course closes with the problems of insurance and portfolio selection, among other uncertainty applications. The textbook is Microeconomic Theory by Mas-Colell, Whinston and Green, Oxford University press, Oxford, 1995. Supplemented are materials from Angus Deaton and John Muellbauer's Economics and Consumer Behavior (Cambridge University Press, Cambridge, 1980), Hal Varian's Microeconomic Analysis (3rd edition, W.W. Norton & Company, Inc, 1992), and other references. The most efficient way to learn economic theory is to solve many problems that test one=s understanding. To this end, homework problem sets are assigned for practice, some of them may be open-ended. The students are encouraged to form study groups. For those of you who take this course for grades, a midterm exam and a final exam are required. The weights for the midterm and final exams are 40% and 60% respectively.