MICROECONOMIC THEORY FOR PUBLIC POLICY
2015/2016, Semester 2
Lee Kuan Yew School of Public Policy (Lee Kuan Yew School Of Public Policy)
Modular Credits: 4
The course will introduce students to the way economists use theories of consumer and producer behaviour, and welfare analysis to analyze complex public policy issues. We begin by formulating the assumptions and basic structure underlying the competitive model. In the process we will point out the strengths and weaknesses of each assumption as a description of the way economic decisions are made. We then proceed to create more realistic models by relaxing some of those assumptions. The emphasis in this class will be primarily theoretical, although how the theoretical models get applied to policy analysis will be continuously stressed.
PP5403 Economic Foundations for Public Policy or Principles of Microeconomics
PP5170 – Microeconomic Theory for Public Policy
Lee Kuan Yew School of Public Policy, National University of Singapore
Prof. Ron Shadbegian: firstname.lastname@example.org
Thursday, 2:00 pm 5:00 pm
: This class provides an in-depth analysis of intermediate microeconomics. The course is designed to introduce you to the way economists formulate and use theories of consumer and producer behavior, and welfare analysis to analyze complex economic and public policy issues. We will begin by formulating the assumptions and basic structure underlying the competitive model. In the process we will point out the strengths and weaknesses of each assumption as a description of the way economic decisions are made. We will then proceed to create a more realistic model by relaxing some of those assumptions.
The emphasis in this class will be primarily theoretical, although I will continuously stress how the theoretical models get applied to policy analysis.
: Microeconomics: An Integrated Approach 5
edition by Bensanko and Braeutigam
: Homework/Quiz 30%
Non-Cumulative Final Exam 35%
By the end of the semester students:
Should be well-informed about the theory of: supply and demand; consumer and firm behavior; and welfare analysis;
Will understand how fundamental economic tools and reasoning are used to analyze public policy decisions;
Will have gained an appreciation for how economic analysis is relevant for understanding the world around us.
This course does not require you to be proficient in mathematics, but it is assumed that you have a working knowledge of basic calculus (i.e., the use of derivatives) & algebra (i.e., solving systems of equations) and that you are comfortable with equations and graphical analysis. We will do a brief review of basic calculus and algebra as found in the mathematical appendix (pp. 621-642) in Besanko & Braeutigam.
KEYS FOR SUCCESS:
Microeconomics is at the very foundation of much public policy analysis (e.g. how environmental regulation impacts electricity prices; how worker training programs affect wages) and as such will be one of the most important classes you take in this program. It may may also be one of the most difficult. Mastering this course will be of tremendous value to you — not only in the program but also in your careers. Some people find the analytical approach taken by economists difficult and challenging to follow. Here are some ideas to keep in mind during the semester to help overcome some of the difficulties and challenges:
Always attend class and be an engaged active listener – do not just sit and passively listen and take notes.
Take good notes
Review your notes immediately after class if at all possible and work with your classmates to fill in any missing gaps (or note questions to ask me during office hours). Also review your class notes before the next class.
Periodically (e.g., after a problem set, after reading a chapter, after a few lectures) spend some time thinking about what you have learned and try explaining it to your classmates and friends (this is a great way to enhance your friendships!). By simply reflecting on what you have learned and trying to explain it to others can help identify questions and can sharpen your understanding of what we are doing and why we are doing it.
Try to analyze counter cases as you review the material — if I present an analysis of the effects of
an increase in demand, then you should try analyzing the effects of a decrease in demand.
You should always read the assigned chapter before class and then again after class. Read very slowly with highlighter, pencil and paper in hand — reading economics is much more like reading math than reading a novel. Note that the chapters in the book are very short (and they are designed that way to make it easier for you to assimilate new material), but it should still take a substantial amount of time to work through them.
The best method for learning the material is by actively using it. You should practice problems on a regular basis. Get together in groups and have one person go to a white board and explain how to solve the problem, while the others take notes and ask questions.
Do NOT fall behind in this class, new material tends to build on older material, much like a math class and hence trying to play catch-up is very difficult (maybe impossible!).
Do not procrastinate – start the problem sets early. Then if you have problems (pun intended) you will have time to consult with me and/or your classmates.
You must be prepared to work quite hard this semester. What you end up getting out of this class is a direct function of the effort you put into it. If you do not like to work hard and push yourself, then we are probably not good matches for one another.
Students in this class should adhere to NUS Honour Code, which can be found at
. In addition, the LKY School’s Code of Conduct (
) lists academic integrity as one of its six important values. Violations of these codes in any form, including cheating in exams and plagiarism, will not be tolerated and will immediately lead to the student getting zero marks and follow-up action.
Plagiarism includes copying all or any part of your classmate’s assignments. To avoid giving the impression that you are passing off other people’s work as your own, you will need to acknowledge conscientiously the sources of information, ideas, and arguments used in your paper. For this purpose, you will use the ‘footnote style’ according to the Chicago Manual of Style, the guidelines for which can be found online at
in the companion website for Diana Hacker’s A Writer’s Reference. Please also refer to the handout that was given to you at the Workshop on Plagiarism conducted during the Orientation period.
Use of laptops is discouraged during lectures unless its purpose is related to this course. Instructor reserves the right to ban laptops if their use distracts students. Using cell/smart phones is prohibited during lectures and exams.
PART I Brief Math Review and Introduction
Slope of a function
Differentiation of a function: Rules of Differentiation and Partial differentiation
Exogenous vs endogenous variables
Brief Review of Demand, Supply and Market Equilibrium
B&B: Mathematical Appendix and Ch.s 1 & 2
PART II Consumer Theory
Decisions under certainty: Utility maximization with indifference curves
Marginal Utility and Marginal Rate of Substitution
Derivation of individual demand curves
B&B Ch.s 3 & 4
PART III Theory of Demand
Individual demand and market demand
Indirect utility function and Roy’s Identity
Slutsky Equation: Income and substitution effects
Inverse demand curves
Compensated demand functions
Consumer welfare: Consumer surplus and compensating and equivalent variation
PART IV General Equilibrium with Pure Exchange
Algebra of equilibrium
Pareto efficiency and Welfare Economics
B&B Ch. 16 (pp. 560, 565-572, 575-578)
PART V Technology, Costs, and Supply
Profit maximization and cost minimization
Shephard’s Lemma and Duality
Costs: Total, average, and marginal
B&B Ch.s 6-8
PART VI Production Theory
A. The Robinson Crusoe Model
Derivation of the supply of labor (
review B&B ch.5 pp. 152-156
Derivation of the demand for labor
Utility maximization, profit maximization and the equilibrium wage
Firm and market supply
B. General Equilibrium with Production: An Extension of the Robinson Crusoe Model
Simultaneous efficiency in consumption and production (
review B&B pp. 565-572)
Marginal rate of transformation
B&B Ch. 15 (pp. 571-575)
PART VII Market Structures
Pure monopoly versus Natural monopoly
Price Elasticity of Demand and the Profit Maximizing Price
Welfare loss under monopoly
B&B Ch. 11
B. Monopolistic Competition and Oligopoly
Cournout, Stackelberg and Bertrand Equilibria
B&B Ch. 13
C. Game Theory and Strategic Behavior
Game Theory: Cooperative versus Non-cooperative
Nash equilibria and the Prisoners Dilemma
Real World Illustration: International Pollution Control: A Game Theoretic Approach
B&B Ch. 14
PART VIII Externalities and Public Goods
Negative and Positive Externalities and Economic Efficiency
Property Rights and the Coase Theorem
Efficient Provision of Public Goods
Workload Components : A-B-C-D-E
A: no. of lecture hours per week
B: no. of tutorial hours per week
C: no. of lab hours per week
D: no. of hours for projects, assignments, fieldwork etc per week
E: no. of hours for preparatory work by a student per week