Microeconomics Textbooks Research Articles

The citation performance of the references in the standard graduate-level microeconomics textbook: Mas-Collel et al. (1995)

The citation performance of the references in the standard graduate-level microeconomics textbook: Mas-Collel et al. (1995)

On the uniqueness of the solution of the cost minimization problem with generalized Sato production function

Whenever a firm is maximizing its profit, it necessarily has to minimize its cost. Thus, the cost minimization problem is one of the central problems in the theory of the firm. When presenting this problem, the majority of microeconomic textbooks use very well-known production functions, such as Leontief, Cobb-Douglas, or other CES production functions. The goal of this paper is to analyze the cost minimization problem with the generalized Sato production function. The generalized Sato production function is one of the non-standard production functions with variable elasticity of substitution. First, we show that the generalized Sato production function is continuous, strictly monotone, strictly quasiconcave and that a positive amount of output requires positive amounts of some of the inputs. Next, by using mathematical programming we show that the cost minimization problem with generalized Sato production function has a unique solution. This result is very important since it implies the existence of the corresponding cost function and conditional input demands.

On the Origins and Legacies of Really Existing Capitalism: In Conversation with Kari Polanyi Levitt

On the Origins and Legacies of Really Existing Capitalism: In Conversation with Kari Polanyi Levitt

The value of flexibility in power markets

The concept of flexibility is not one you find in standard microeconomics textbooks, yet it already plays a major role in the remuneration of the resources that generate and consume electricity every day and is likely to play an even larger role with the penetration of large intermittent renewable capacities. In this paper we attempt to quantify the net revenues that can be captured by a flexible resource able to react to the short term price variations on the day-ahead and intraday markets in Germany. We find that the difference between day-ahead and intraday revenues for a flexible resource has been increasing (although the profitability has been decreasing on both markets). This difference is more pronounced once 15 mn price variations can be captured by a flexible resource. The net revenues from the local 15 mn auction (which is held 3 h after the hourly “coupled” day-ahead auction) are more than eight times higher than the day-ahead hourly auction but below the net revenues that can be captured with the high prices from the continuous market. The results of the backward-looking empirical estimations allow us to distinguish and quantify two components of flexibility: (1) the “immediacy” value as we are approaching real-time and the urgency of the delivery increases (this value is revealed during the continuous intraday process and is highly linked to the stochastic nature of power supply and demand (i.e., wind/solar forecasts, forced outages of thermal generation,…) forecast error risk), and (2) the “ramping capability” component based on the technical characteristics as a resource can react to variations of shorter granularity (15 mn vs. 60 mn). We model and quantify the ramping capability component using a geometric brownian motion with jumps.

On repeated myopic use of the inverse elasticity pricing rule

We examine the effects of repeated myopic use of the inverse elasticity pricing rule. By myopic, we mean ignoring that elasticity and marginal cost may vary with output and price. It is known that myopic use of the rule leads to price changes which are too large relative to the optimal price change (Fjell, 2003). While some microeconomics textbooks suggest that the rule may be used repeatedly to reach optimal price, they are vague about the conditions for when this works. We show that repeated myopic use leads to convergence if demand is sufficiently convex, and specify an exact condition.

Общая экономика: новый подход к анализу спроса и предложения

Demand and supply — categories with a rich history, introduced into scientific circulation 250 years ago, comprehensively investigated from the positions of quantitative analysis. But it turns out that the glossaries of microeconomic textbooks do not give either the definition of demand (there is a reference — see the demand curve) or the units of demand measurement (there are no units of measurement between the price and quantity) and, accordingly, supply that restricts their practical application. The model of the general economy — the synthesis of the “Capital” of Marx, micro- and macroeconomics — allows us to supplement the quantitative analysis of all market categories with qualitative analysis and, in particular, to define demand and supply through two factors of the commodity–use value and cost. The definition of categories and units of their measurement makes it possible to expand the field of application of theory (the demand for a set of goods and the supply of a set of goods) and formulate an algorithm for their use in business practice.

Simple and practical efficiency lessons

ABSTRACTThe derivation of conditions necessary for Pareto efficient production and exchange is a lesson frequently showcased in microeconomic theory textbooks. Traditional delivery of this lesson is, however, limited in its scope of application and can be unnecessarily convoluted. The author shows that the universe of application is greatly expanded and a more transparent logic is embraced by noting that definition of Pareto efficiency directly implies the tangency of aggregate production/endowment and aggregate weakly preferred sets. This tangency condition can itself serve as a necessary condition for Pareto optima. For convex, but not necessarily differentiable, environments this tangency condition implies nonempty intersection of multi-valued marginal rates of substitution and transformation rather than outright identity.

Blasphemy in the classroom: in search of microeconomics textbooks for heterodox instructors*

In this review of introductory-level college textbooks for microeconomics we begin with the premise that heterodox economics is to be taken as independent from, and alternative to, the neoclassical mainstream. We argue that pluralistic curricula and pedagogical strategies should reflect this, rather than the too-common relegation of heterodoxy to a critical fringe or to nascent, yet fundamentally consistent, lines of inquiry. After defining common elements that we believe would be essential to a suitable introduction to heterodox economics, we review each of the four textbooks in search of a volume that is not just heretical to neoclassical economics, but truly blasphemous.

A model to teach non-rival and excludable goods in undergraduate microeconomics

Non-rival and excludable goods, often referred to as artificially-scarce goods or club goods, are discussed in principles of microeconomics textbooks, but they are not given a rigorous graphical analysis. This paper presents a model for non-rival and excludable goods that aligns with the intuition conveyed in introductory microeconomics textbooks. The model enables students to develop a rigorous understanding of the theory of non-rival and excludable goods, and it includes an allocatively efficient outcome, a private outcome, and a second-best solution outcome to exhibit the relative prices, quantities, profits, and welfare results that emerge in different regulatory frameworks. A numerical exercise solidifies the concepts presented in the theoretical model.

Marginal Productivity Theory : What Does it Explain – Distribution or Employment?

Marginal productivity theory occupies a prime and significant place in the section on distribution in almost all microeconomics textbooks, explaining the determination of factor prices. In fact, historically and logically, it stands as the tallest theory in this group. This paper tried to examine the validity of marginal productivity theory as the theory of distribution. After a series of logical arguments advanced herein, I came to a conclusion that marginal productivity theory explains employment at the micro as well as macro levels, but fails to provide a satisfactory answer to the question of factor pricing.

Accounting for Changing Tastes: Approaches to Explaining Unstable Individual Preferences

AbstractStandard economic theory assumes individual preferences to be fixed and exogenously given. This view has been challenged by numerous empirical observations. In reaction to those challenges, economic theory has been modified, mostly by including additional arguments into individuals’ utility functions. Among the approaches that tackle preference change are new consumer theory, habit formation, interdependent and status preferences, social and emotional influences, and reference point-dependent preferences. Hence, while standard economics largely abide by their assumption of stable preferences, an array of alternative approaches is now available to account for changing tastes. Some of these approaches are old and have been discussed in the literature for many decades while others are younger. However, all approaches have in common that they, in some cases surprisingly, have not made it to standard microeconomics textbooks. This survey aims at putting the approaches in perspective. For each of them, empirical evidence as well as methodological issues are discussed.

How to Build an Economic Model in Your Spare Time

Editor’s Introduction Originally published in Volume 41, Number 2, Fall 1997, pages 3-10. Hal Varian (born 1947) is widely known by professional economists for his pathbreaking work in the economics of information and networks. Many more know him as the author of two bestselling microeconomics textbooks, one written for undergraduate college students and one designed for advanced graduate students. Through his research and his books, Professor Varian’s ideas have influenced a generation of economists. In this paper, Professor Varian outlines how he approaches the task of building an economic model to explain an observed phenomena or solve a problem. His words are encouraging advice for graduate students and young economists learning how to “practice the art” of economics. Professor Varian offers a number of tips ranging from how to choose a topic, when to read the literature, and even to how to effectively manage your bibliographic citations. Professor Varian’s advice has passed the market test as this paper remains one of the most referenced and downloaded papers in The American Economist’s backfile. However, after including the paper on a course reading list several years ago, one doctoral student pointed out to this editor that Professor Varian fails to explain how to find the “spare time” that he references in the title!

Microeconomic Natural Law, Portfolio Principle and Economics Textbooks

This study explains that, after combining the microeconomic natural law with the portfolio principle and a few bases in general economic analyses, the capability of managing all fundamental challenges in business operation, financing, and marketing can be directly established in economics textbooks. It is impossible to cover all critical topics; however, restoring economics as the foundation of all major disciplines for economic management can still be practically achieved. More crucially, by endogenizing the economic environment, such new economic textbooks can guide the chaotic economic world back to its normal conditions. The illustrated methodology is still far from perfect because the real synergistic effects cannot be quantitatively studied, and natural and social environments are still treated as exogenous factors in the analytical framework. Clearly, economics still has numerous challenges to overcome.

A Sparsity-Based Model of Bounded Rationality *

AbstractThis article defines and analyzes a “sparse max” operator, which is a less than fully attentive and rational version of the traditional max operator. The agent builds (as economists do) a simplified model of the world which is sparse, considering only the variables of first-order importance. His stylized model and his resulting choices both derive from constrained optimization. Still, the sparse max remains tractable to compute. Moreover, the induced outcomes reflect basic psychological forces governing limited attention. The sparse max yields a behavioral version of basic chapters of the microeconomics textbook: consumer demand and competitive equilibrium. I obtain a behavioral version of Marshallian and Hicksian demand, Arrow-Debreu competitive equilibrium, the Slutsky matrix, the Edgeworth box, Roy’s identity, and so on. The Slutsky matrix is no longer symmetric: nonsalient prices are associated with anomalously small demand elasticities. Because the consumer exhibits nominal illusion, in the Edgeworth box, the offer curve is a two-dimensional surface rather than a one-dimensional curve. As a result, different aggregate price levels correspond to materially distinct competitive equilibria, in a similar spirit to a Phillips curve. The Arrow-Debreu welfare theorems typically do not hold. This framework provides a way to assess which parts of basic microeconomics are robust, and which are not, to the assumption of perfect maximization.

How Textbooks Create Knowledge and Meaning: The Case of the Coase Theorem in Intermediate Microeconomics

It is now a commonplace to include a discussion of the Coase theorem in one’s intermediate microeconomics textbook, generally in a chapter devoted to externalities or externalities and public goods. But this was not always the case. As the present paper demonstrates, it took nearly two decades after the publication of “The Problem of Social Cost” for the theorem to become even a reasonably a well-established part of the intermediate textbook literature. Its introduction into this literature raises a host of issues for examination: When did the theorem first appear? How was it stated? Are there variations in the statements of the theorem and its attendant assumptions across authors? When did treatment of it become commonplace? How long did it take the authors of textbooks that did not initially include it to bring the theorem into the discussion? What are the backgrounds (e.g., graduate training, faculty affiliations, research fields, etc.) of authors who incorporated the theorem early on? How was the theorem treated? As a surprising result? A useful one? Negatively? What degree of relevance or applicability was ascribed to it? A host of issues and contrasts emerge from the textbook treatments of the theorem, many of which appear to go to problems entailed in presenting a new and controversial idea, one with a number of nuances that were being teased out in the scholarly literature over the same period — nuances that could be helpful or harmful for the presentation of the theorem to a student audience.

A Note on the Correct Diagrammatic Presentation of the Case of Perfectly Elastic Demand and Supply

This short note tries to highlight an egregious error present in the diagrams of perfectly elastic demand and perfectly elastic supply in microeconomic textbooks. Both these diagrams are incomplete in most of the books as far as the second price is concerned. It should have been taken to show the infinite change in demand and supply, which is missing in the diagram. The subject having been accorded the status of science, this mistake needs to be rectified on an immediate basis, at least by teachers dealing with the instruction of microeconomics, for the purpose of maintaining academic purity and mathematical consistency in the treatment of this topic. I have presented the correct diagrams of perfectly elastic demand and supply along with the necessary mathematical explanation in the concluding part of this paper.

The Irrelevance of Conventional Microeconomic: A Revision of the Traditional Industrial Models

Except in markets for standardized commodities, most markets for industrial products and services do not meet the assumptions of industrial models of conventional microeconomics. Firms, far from being price-takers and competitive, are “price-setters” and contend with a limited number of important but differentiated competitors on unequal size. As industrial economics is the study of rivalry among heterogeneous firms rather than the study of perfect or imperfect competition, conventional microeconomics is inappropriate and requires mayor amendments to analyze real-world industries. Most criticisms about the irrelevance of textbook microeconomics have focused on the limitations of the assumption of perfect rationality, but conventional microeconomics is based on many other assumptions that entail to be relaxed to build a better theoretical model capable to analyze actual industrial sectors. This paper discusses the explicit and implicit assumptions that bound the explanatory capacity of conventional microeconomics to describe modern industrial sectors. This paper also argues that it is possible to relax these assumptions by introducing a number of increasing returns mechanisms. The integration of these increasing-returns mechanisms in a theoretical framework results in an increasing- returns microeconomics that, in a sharp contrast with the traditional decreasing-returns microeconomic theory, it is more suitable to explain complex markets.

Is Product of Two Convex Functions Necessarily Convex? A Case of the MRP Curve

The curvature of the marginal revenue product curve plays an important role in most theoretic microeconomic models since it determines the size of profit contribution to an employer and optimality conditions of solutions. There are many well established introductory and intermediate microeconomic textbooks portray marginal revenue product curves as linear or concave to the origin. In nearly all cases, the MRP cannot be linear, nor can it be concave. In this analysis, most of the well-known production functions generate convex MRP curves.

Targeting Teaching: The Welfare Costs of Market Restrictions

In most introductory and intermediate microeconomics textbooks, the measurable welfare effects of price controls, quantitative restrictions, and market restrictions more generally, are depicted as a Harberger triangle. This depiction understates these restrictions' inefficiency costs because it captures only the “top‐down” distortion caused by the wedge these restrictions drive between market‐wide quantity demanded and quantity supplied. It ignores the “bottom‐up” distortions caused by allocative inefficiencies on the constrained side of the market. In this article we describe a simple graphical exposition of these bottom‐up distortions. We argue that this graph can provide students with a picture of both the top‐down and bottom‐up inefficiencies. Moreover, it can be used for simple back‐of‐the‐envelope estimates of the magnitudes of the two inefficiencies.

The Traders’ Cross: Identifying Traders’ Surpluses in the Traditional Edgeworth Exchange Diagram

The Edgeworth exchange diagram is a traditional tool of undergraduate microeconomic theory that depicts the mutually beneficial gains from voluntary trade. The authors take the analysis one step further. They identify the buyer's and seller's surpluses that accrue to both trading parties in the Edgeworth diagram. This is a straightforward exercise that has not, however, been developed in microeconomics textbooks, an exercise that can further hone students’ understanding of the concept of buyer's and seller's surpluses and the notion of gains from voluntary exchange.