Microeconomic Theory

Professor Benjamin Shiller (Brandeis University)


Description

This course is designed to provide a thorough understanding of core microeconomic theory. The course includes core analytical skills and delves into topics critical to firm strategy and optimal government policy design.

About Professor Shiller

Professor Benjamin Shiller is an Associate Professor in the Department of Economics at Brandeis University. His research has been published in top academic journals and featured in notable press publications such as The Economist, VOX EU, The Atlantic, The Conversation, Forbes, The Guardian, and The Washington Post. His qualifications are available on his website.

Logistics

Supplementary Materials

The videos in collapsible sections (below) fully explain the core material. Students may also benefit from reading the material in textbook form. Several recommended textbooks are:

• "Microeconomics" (Pindyck and Rubinfeld)

•"Microeconomics" (Goolsbee, Levitt, and Syverson)

• [Free] "Principles of Microeconomics" (Taylor et. Al)

Hints

Unlike in a traditional classroom, with prerecorded videos you can rewind, fast forward, or watch at a different speed (e.g., 1.25 times as fast).


Course Content

Partial equilibrium analyses, elasticities, price controls, taxes

Introduction / grand overview

Partial equilibrium, calculating welfare, elasticities.

Finding equilibrium, both graphically and analytically, under partial equilibrium analyses.

Shifts in vs. movement along demand curve.

Elasticity of demand. Using elasticities.

Inferring linear demand from elasticity of demand.

Price floors, price ceilings, quotas, and taxes. These videos explore the potentially unintended consequences of various government interventions graphically, and analyzes which party---consumer or firms---ends up bearing the implied costs of a tax.

This video explains consumer surplus and producer surplus, graphically.

This video examines the impact of various price controls. A common example of a price control is a minimum wage, which makes it illegal for workers to sell their labor below a set price.

This video explores the impacts of taxation, and who bears the brunt of taxes.

This section examines consumer and producer theory. After a short math review, this sequence explores models of consumer decisions (using indifference curve maps with budget lines), income and substitution effects, and firm cost minimization. It explains how consumer preferences imply demand curves, why upward sloping demand curves are theoretically feasible for a subset of inferior goods (Giffen goods), and how a firm's cost function can be found when firms can substitute one input for another in the production process. It also reviews important cost concepts, like marginal costs, economies of scale, learning by doing, etc.

In subsequent topics, calculus methods are used to maximize or minimize functions. This will be helpful, not only for maximizing a given agent's objectives, but also for predicting the actions of various economic agents. For example, to predict how breaking up a monopoly will impact market prices, we need to be able to predict how firms will behave in the new environment. We do so by finding the price for each firm that maximizes its profits, given the actions of other firms. Calculus skills are needed for such analyses.

This video explains how to find the maximum or minimum of a single variable function, as well as the corresponding value of the variable that maximizes/minimizes it. It also explains the necessary and sufficient conditions for this method to work.

This video explains how to find the maximum or minimum of a function with multiple variables, as well as the corresponding values of the input variables that maximize/minimize the function.

This video explains how to maximize or minimize a function when subject to a constraint which prevents certain combinations of the input variables.

This sequence explains the theory behind consumers' choices, how consumers maximize utility, and how this leads to a market demand function. These concepts are taught both graphically (with indifference curves and budget lines) and using calculus methods.

This video explains the assumptions typically made about consumer preferences, and how they make graphical and numerical analysis more tractable. It also utilizes indifferences curves and budget lines to explain which bundle of goods maximizes a consumer's utility (happiness) subject to their budget constraint (which prevents them from buying more than their income allows).

This video explains the marginal rate of substitution and why it should be equal to the ratio of consumer prices. It also explains how to find its value using calculus methods.

This video shows how one can derive a consumer's optimal consumption basket using calculus.

This video explains how you can use calculus methods to derive a consumer's demand function for a particular good from their utility function and budget constraint. Hence, it explains the mapping from core utility theory to the demand curve.

This sequence introduces the concepts of income and substitution effects, as well as related topics of inferior goods and Giffen goods.

Income and substitution effects, graphical analyses.

This video explains the difference between a normal and inferior good, and how in extreme cases (when the income effect is larger than the substitution effect) inferior goods can in theory have (locally) upward sloping demand curves.

This sequence explores the theory of production, firm cost minimization both in the short and long run, and how to derive the firm's cost function which relates output to cost when using the efficient set of inputs.

This video explains how one can derive the short-run cost function, i.e. the cost function in a short enough period such that the firm is unable to adjust the amount it uses of one of the inputs. This is substantially different than the cost function in the long run, when the firm can raise output by increasing any one of multiple inputs (e.g., machinery or labor), or a combination of them.

This video uses graphical analyses to explain how firms can tradeoff between two substitutable inputs in the production process. Specifically, it explains the conditions necessary for the chosen combination of inputs to minimize the cost of final products (output). This prepares us for the next topic, deriving the cost function (cost in terms of quantity of output, rather than the quantities of inputs).

This video explains the methods from calculus used to derive the long-run cost function, which gives the total cost of a given amount of output, assuming the firm uses the combination of inputs to produce said output at lowest cost.

This sequence introduces various cost concepts, such as economic vs. accounting costs, learning by doing, economies of scale/scope, marginal costs, average costs, and fixed vs. variable costs. It also explains how to determine if/when there are economies of scale.

This video explains crucial differences between economic costs and accounting costs, sunk costs, and why financial reports often provide information in a way that is NOT most useful for managerial decisions.

This video explains the difference between fixed/variable costs, and the cost concepts of average costs and marginal costs.

This video covers a variety of cost concepts relevant for managers and antitrust authorities, specifically: economies of scale, scope, and learning by doing. It also explains how to determine if/when there are economies of scale, from the cost function

This section examines firm strategies and the impact of market structure on outcomes of interest, often using game theory. Topics include (I) types of market structures: perfect competition, monopolistic competition, oligopoly, monopoly, and collusion, (II) price discrimination/targeted pricing, and (III) game theory: Nash equilibrium, payoff matrices, and mixed strategy Nash equilibria.

This sequence uses graphical analyses to explain the differences between perfect competition, monopolistic competition, and monopoly. It also explains market outcomes under perfect competition and monopolistic competition.

This video explains the differences between perfect competition and monopoly, and why differences arises. Hint: it is NOT because perfectly competitive firms forgo profits

This video explains how firms under perfect competition maximize profits, both in the short and long run. It also explains the relationship between the firm's cost functions and the supply curve.

This video explains the concept of monopolistic competition, which shares some features of perfect competition (zero economic profits in the long run) and some features of monopoly (price above marginal cost).

This sequence uses graphical theory and calculus to derive the profit-maximizing price for a monopoly firm, and the optimal wage for a monopsony firm.

This video explains how to maximize a firm's profit in a monopoly market, which is not only useful for managers, but also useful for others (e.g., regulators) attempting to predict actions of monopoly firms.

This video explains the Lerner Index, and how it can be used to infer the marginal cost of a firm.

This video explains the theory behind a monopsony firm, and why price controls (like a minimum wage) may actually increase efficiency in monopsony markets.

This sequence uses a variety of approaches to explain how and why firms might offer different prices to different consumers (or different per unit prices for varying package sizes) to extract a greater share of surplus as profits. Topics include: 1st-, 2nd-, and 3rd-degree price discrimination, which includes both direct price discrimination (in which consumers are explicitly offered different prices) and indirect price discrimination under which firms offer the same menu of products, but consumers end up paying different per unit prices based on the package size they select.

This video introduces the concept of price discrimination, what conditions are necessary for it to be useful for firms, and briefly introduces Pigou's (1920) classification: 1st-, 2nd-, and 3rd-degree price discrimination.

This video explains 1st-degree price discrimination, also known as personalized pricing.

This video explains how firms optimally implement third-degree price discrimination, also known as group pricing. For example, a firm might offer different prices to students, seniors, or by gender.

This video explains how firms can still price discriminate even when they do not know which consumers are willing to pay more. Specifically, the firm offers a variety of different sizes (or qualities), with different per-unit prices, and through self-selection consumers end up paying different prices per unit.

This sequence explains two advanced forms of indirect (2nd-degree) price discrimination: bundling and two-part tariffs.

This video explains how and when using a two-part tariff---A fixed fee plus a fee per unit consumed---can raise profits, as well as the impact on consumers.

This video explains a simple but useful pricing technique, bundle pricing (where goods are sold as a package instead of individually). Bundle pricing, interestingly, can sometimes increase both firm profits and aggregate consumer welfare simultaneously.

This sequence introduces the game theory concept of Nash Equilibrium to examine market outcomes when a small number of firms (e.g., 2) compete in a market. Outcomes can depend on a variety of assumptions, including whether firms decide the amount to produce (selling that quantity at the price determined by the market) or the price to set (selling whatever quantity is demanded at that price). This section analyzes oligopoly models in which firms choose quantity.

This video teases the differences between different oligopoly models: slightly different assumptions can lead to drastically different conclusions.

This video details the Stackelberg oligopoly model, and in the process, a firm's reaction function (which is also used in other oligopoly models). The Stackelberg oligopoly model assumes one firm (the leader) decides on its output level first. Then the other firm (the follower) chooses its output after knowing the amount produced by the leader. Both firms then sell their output in the market at the same time.

This video presents the Cournot oligopoly model, under which firms simultaneously decide the amount of output to produce (prior to directly observing the amount produced by the other).

This video compares and contrasts the two quantity setting oligopoly models: Cournot and Stackelberg.

This sequence investigates outcomes in oligopoly markets when competing firms set prices, rather than quantities. The lectures describe the difference in outcomes when products produced by the firms are identical (classic Bertrand model) or differentiated.

This video explains the surprising outcome when two firms producing identical products (perfect substitutes) compete by setting price.

This video explains how the results change when firms produce differentiated products (imperfect substitutes), and uses the concept of Nash Equilibrium to solve for the prices that should result in the market when firms maximize their own profits. The solution steps end up being similar to the ones used for Cournot oligopoly models.

This sequence discusses collusion and presents a game theory construct (payoff matrices) to analyze outcomes in a series of games, starting with the prisoner's dilemma. The last video introduces an advanced concept from game theory: mixed strategy equilibria.

This video explains how firms might still manage to collude even when they cannot explicitly coordinate (which is illegal).

This video introduces the payoff matrix, and explains how to determine the Nash equilibrium or equilibria.

This video introduces a different type of equilibrium strategy, where each firm's strategy is the probability of choosing an action, rather than the strategy being the action itself. This equilibrium concept is useful in many contexts, including sports.

Interest, discounting, and modeling preferences for risk / certainty.

This sequence explains the concept of time discounting, and explains how to find the present discounted value or net present value of a stream of payments/costs.

This video covers investment growth and the present discounted value for a single payment in the future

This video explains how to find the present discounted value of a stream of payments.

This video explains the net present value, which gives the present discounted value of a series of costs and payments received. It is often used to compare various investment alternatives.

This sequence explains how we can model consumers' risks preferences. Specifically, it explains how the utility model can be used to understand and predict which alternative consumers will choose when the choices offer different expected incomes and income riskiness/variability.

Why we need to model risk preferences, and the difference between expected income and expected utility.

This video explains the certainty equivalent and risk premium, and how to find each.

General equilibrium, efficiency and social welfare

This series explains general equilibrium, why it leads to different predictions than partial equilibrium even when we are only focused on a market for a single good, and how to find equilibrium with demand and supply linkages across markets.

This video explains why general equilibrium models yield correct predictions which slightly differ from predictions from simpler partial equilibrium models, using the example of partially substitutable goods.

This video extends the tools from the prior video to examine impacts of demand linkages for complements and supply linkages.

This video explains how to find price and quantities in general equilibrium, mathematically.

This series explains the difference between social welfare and efficiency, why we focus on efficiency despite its limitations (allowing 'unfair' allocations). It also examines the conditions necessary for overall efficiency in the marketplace.

This video explains the difference between 'efficiency' and 'social welfare' and why economists focus on efficiency, despite its limitations.

This video describes exchange efficiency (when allocations of existing goods across consumers are efficient). It uses an Edgeworth Box Diagram to depict and convey conditions for allocative efficiency, and explains the set of efficient allocations (called the consumption contract curve).

This video describes input efficiency (when allocations of input types are efficiently allocated across firms). It uses an Edgeworth Box Diagram to depict and convey conditions for input efficiency.

This video conveys the intuition for output efficiency, which occurs when the set of products produced is efficient (vs. some other set of products that could be produced with the same aggregate set of inputs).