Indraprastha Institute of Information Technology Delhi

ECO101 -Microeconomics (Monsoon Semester 2020)

Instructor: Souvik Dutta Class Time: See Schedule

Office: R&D Block, B-203 Class Room: See Schedule

Email: souvik@iiitd.ac.in Midterm and Final Exam: See Schedule

Office Hours: By Appointment Only

Course Webpage: https://www.usebackpack.com/iiitd/m2020/eco101/info

COURSE DESCRIPTION

This course involves formal introduction to the fundamentals of microeconomic theories of

consumer and firm behavior. We will develop an understanding of the optimal decisions subject
to limited budgets, technological barriers, and capacity constraints in production. We will gain an
appreciation for the role of markets in resource allocation and learn the necessary conditions for
markets to foster efficient allocation of scarce resources. We will study the role of government
policies regarding tax/subsidy and the response of consumers and firms that may raise or lower
market efficiency.

COURSE PEDAGOGY

A variety of approaches will be used – lectures, critiques, newspaper articles, in class exercises,
and problem solving, assignments, and exam. Performance in this course will depend on how
well you do on ALL these components, including, how effectively you contribute to the class
discussions.

Classes will be held virtually over the ZOOM platform and the meeting link has been shared.
Please do not post the meeting link over any social media platform and share with anyone
outside IIITD. All lectures will be recorded and will be available to view for the next 7 days.

There is a course webpage on backpack and all material and slides will be posted on the course
webpage.

READINGS

1. Hal R.Varian (Third Edition) Microecoomic Analysis

2. Hal R.Varian (Latest Edition) Intermediate Microeconomics - A Modern Approach

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 3. Required other articles – can be obtained free; as and when a relevant topic is discussed.

CLASS DISCUSSIONS

Each student is required to contribute regularly to class discussion, as called upon by the
instructor (a.k.a. ‘warm’ calling) and on a voluntary basis. To a substantial extent, the benefit
that a student derives from the course is related to his/her willingness to expose his/her viewpoint
to the critical judgment of the class, and to his/her active participation in building upon the ideas
of others. To a considerable degree the quality of your alert class participation will provide me
with information about your individual understanding of the material. To contribute to the class
you must RAISE your hands before speaking.

EVALUTAION

Quiz 1 : 15%
Quiz 2 : 15%
Mid Term Exam : 35%
Final Exam : 35%

There will be two in-class quizzes held. The dates for the quizzes will be communicated to you.
There will be no make-ups for quizzes.

PLAGIARISM AND CHEATING

Significant amount of learning happens outside class room by interaction among your class
mates. However, the same MUST not be carried forward during exams and quizzes. You must
not be found talking with any class mate, looking at books/notes or chits of any kind during
exams and quizzes even when the exams are being held virtually. Failure to do so would imply a
case of cheating and a penalty will be imposed as per institute norms.

Personal Note: I rely on full cooperation from every member in the class to make this course a
mutually rewarding course for everyone. Effective learning is a joint effort of students and
faculty. Violation of rules and norms would imply heavy penalty as per the discretion of the
instructor. I will try hard to ensure that this course adds tremendous value to your learning
experience at IIIT Delhi.

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 CLASS SCHEDULE

Week Topic

1 Introduction to Micro Economics and Review of Mathematical Tools

What is economics? Difference between Micro and Macro Economics.

Microeconomics is everywhere.

Module 1: Demand and Supply

This module provides an understanding of the determinants of demand and supply, the nature of
demand and supply curves and their interaction in the market, and important concepts such as
price elasticity of demand and supply and market equilibrium.

2 Demand and Supply

What is Demand? What influences Demand?

What is Supply? What influences Supply?

Movement along and shift in demand and supply curves

3 Market Equilibrium and Elasticity

What is an equilibrium price? What determines the price?

Solving equations of supply and demand to get market equilibrium;

Consumer and producer surplus and welfare loss in interfering in markets;

Definition; point and arc elasticity; implication to pricing decisions;

Elasticity and Revenue;

Factors affecting demand elasticity, elasticity of supply, other measures of elasticity

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 Module 2: Consumer Behavior

This module acquaints students with the basic concepts and theories relating to consumer
behavior under certainty. It introduces important concepts such as utility maximization,
preferences, indifference curves, budget constraints and consumer choice. The link between
consumer theory and demand curves is also explained.

4 Consumer Preferences

How to represent consumer preferences?

Assumptions on preferences

Utility, Indifference curves, Properties of Indifference Curves

Law of Diminishing Marginal Utility

5 Consumer Choice and Budget Constraint

How to represent Budget Constraints?

What affects changes in Budget Constraints? How?

How consumers choose how much to consume?

Substitutes and complements; Normal, Inferior and Giffen goods

6 Demand Curve, Indirect Utility Function and Consumer Surplus

Endowments in the budget constraint

Aggregating across consumers

Module 3: Decision Making Under Uncertainty

7 Decision making and its analysis under uncertainty.

Representing Uncertainty: Concepts of Lottery and Expected Value

Expected Utility Risk Aversion, Certainty Equivalent, Risk Premium

Module 4: Production and Costs

The focus of this module is to explain the main concepts in production theory. These include a
wide range of concepts, such as, total and marginal product, diminishing returns, input
substitution, choice of optimal input combinations, returns to scale, costs, revenues, profits, and
short run and long run decision making by firms. The link between production theory and the
supply curve is explained.

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8 Production

Firm’s problem of how to produce? Concept of Short Run and Long Run

Short Run: Total Product, Average Product and Marginal Product

What are returns to scale, expansion path?

What are law of diminishing returns?

9 Cost Concepts

What are the different types of costs that firms incur?

Marginal cost, opportunity cost; sunk and relevant costs. Fixed and variable costs; AVC, AFC,
ATC; MC;

When should a firm stop producing? Break even and shut down points, minimum efficient scale.

Derivation of cost function from producer’s choice of optimal inputs

Economies of Scale and Scope, Learning Curve

Module 5: Market Structures and Firm Behavior

This module considers different kinds markets structures. It first looks at benchmark market
structures: perfect competition, and monopoly. Next, it introduces a more realistic market
structure of strategic interaction: Oligopoly.

It highlights the sources of differences in these various market structures and the implications for
firm and industry output, prices, efficiency, and profits. In the course of discussing these
different market structures, the module also touches upon important topics such as pricing
strategies of firms and government interventions

10 Monopoly and Price Discrimination

How does a monopolist operate? How does it decide how much to produce? Decision of a firm
with multiple plants?

How to measure Monopoly Power: Rule of Thumb of Pricing- Relation between elasticity of
demand and Mark Up, Learner’s Index

Is Monopoly Efficient? Costs of Monopoly? Antitrust Laws

Price as an instrument to extract consumer surplus.

Different types of Price Discrimination- First, Second and Third Degree Price Discrimination.

Conditions for Price Discrimination

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 Economics of Coupons and Rebate

11 Perfect Competition and Government Intervention

Assumptions and implications of perfect competition.

Is Perfect Competition efficient?

Optimal behavior of a firm in perfect competition. Supply function of a firm in perfect

competition.

Inefficiencies created by Monopoly- Deadweight Loss

Price ceiling and price floor

The Impact of a Tax or Subsidy

12 Oligopoly

Understanding strategic market structures

Firms compete in quantities (Cournot); prices (Bertrand)

Module 6: Market Failure:

This module deals with how externalities and public goods are important sources of market
failure and thus raise serious public policy questions. Next it discusses what happens when some
parties know more than others – i.e., when there is asymmetric information

13 Externalities and Public Goods; Markets with Asymmetric Information

Externalities and Property Rights

Common Property Resources

Quality Uncertainty and the Market for Lemons

Moral Hazard and Market Signaling

The Principal-Agent Problem

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