Economics | Theory of Prices & Markets
E521 | 1746 | Chang
Economics , Theory of Prices and Markets I
E521 , 1746 , Chang
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
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%