Chapter 6 - Microeconomic theory in a static environment

Abstract

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (An Essay on the Nature and Significance of Economic Science, chapter I, p. 15, Lionel Charles Robbins). Economics can be seen as the science that studies the always present trade-off between the benefits and the sacrifices that human beings have to face and compare, when they are called to make decisions and act in the economic areas (e.g., labor, consumption, production, wealth distribution, etc.). Economics is therefore studying how best to allocate scarce resources among competing uses. The goal of this chapter is to cover the core concepts of microeconomics applied with Excel, using the techniques of optimization seen in Chapter 5. We will cover therefore the theory of consumption, the theory of production, and the four types of market competition, i.e., perfect competition, monopolistic competition, monopoly, and oligopoly (duopolistic Cournot model). Demand and supply curves are also examined. The last paragraph is dedicated instead to the game theory, which is now considered a standard subject in all microeconomics undergraduate courses. Along the numerical and quantitative development, the qualitative features of the theory of microeconomics have been recalled, together with the name of the economists, who developed the theory, in order to have always in mind the theoretical framework in which we are working. It is worth highlighting that today the standard theory of microeconomics (mainstream microeconomics) is somehow still based on models created within the neoclassical revolution of the 20th century, or even before (e.g., the Cournot model).