Microeconomics Ch 1_Introduction

Advanced Microeconomics
Saba Yifredew
Department of Economics
Addis Ababa University
Email: Saba.Yifredew@aau.edu.et
Econ 601:ADVANCED MICROECONOMICS I
Main topics to be covered
1. Consumer theory
2. Theory of the firm
3. Intertemporal choice
4. Choice under uncertainty
5. Market Structure
6. Game Theory
Main references: Textbooks
1. Jehle, Geoffrey and Philip Reny, Advanced Microeconomic Theory, 3rd edition,
2011
2. Mas-Colell, A., M. D. Whinston and J. R. Green (1995), Microeconomic Theory,
New York: Oxford University Press.
3. Varian, H, Microeconomic Analysis, 3rd Edition, Norton, 1992

How will you benefit from this course?
Where does microeconomic theory fit in contemporary

economic research?
(Tilman Börgers:2022)
American Economic Review:Vol. 113 No. 10,October 2023
• Hard to guess what some of these articles
are about?
• Variety of topics
• Economics is divided into many fields
• Demand for Government: Public good
provision
• Regulation and competition
• Behavioral economics
• Development Economics/Female schooling
and employment
• Information Economics
• Migration/refugees
• Mechanism Design
• Trade and Industrial Economics
Let us focus on Lashkaripour and Lugovskyy (2023):
• Analyze optimal trade/industrial policy
• How large are the gains from terms-of-trade (ToT) manipulation?
• More simply put they study the impact of import tax, export tax,
production tax and consumption tax.
• Using micro level data one of their findings suggest: Corrective domestic
taxes deliver greater gains than foreign trade taxes for most economies
Lashkaripour and Lugovskyy (2023): Excerpt from
the section : Theoretical Framework
How economists do research?
• Start with an interesting question about the real world, or about
economic policy.
• Develop a mathematical model that seems suitable for the purpose, but
that is sufficiently flexible so that there are at least some value of the
model’s parameters such that the predictions of the model are not too far
from the data.
• Use data to figure out the most likely values of the parameters.
• Use the understanding of the world that you have developed in this
exercise to make predictions about how different economic policies will
affect or have affected the world.
The “big picture” of research in economics
• Before you can do economic research, you have to first learn two sets
of helpful skills.
1. One is the set of skills needed to write mathematical/ models(Theory).
2. The second is the set of skills needed when taking microeconomic models to
real world data.
• This course is meant to help you develop the first set of skills
referred above!!
Proof techniques
Proof techniques
• Important ideas in the economics literature are often stated in the
form of theorems.
• A theorem is simply a statement deduced from other statements.
• Theorems provide a compact and precise format for presenting the
assumptions and important conclusions of sometimes lengthy
arguments.
• A proof consists of establishing the validity of the statement in the
theorem in a way that is consistent with the rules of logic.
The purpose of rules of inference
We use rules of inference to construct valid arguments.
A valid argument is one in which it is not possible for the conclusion to be

false if the premises are true.
The argument is valid IFF the truth of all premises implies the conclusion
is true. This is proofing an argument.
The Rules of Inference -
Modus Ponens
𝑝→𝑞
𝑝
∴𝑞
P Q 𝑃→𝑄
If you get an A, I will give you $100 T T T

You got an A T F F
Therefore, I will give you $100 F T F
F F F
Now consider the truth table

Necessary and Sufficient conditions
• When we say, ‘p is necessary for q’, we mean that p must hold or be

true for q to hold or be true.
• For q to be true requires p to be true, so whenever q is true, we

know that p must also be true.
• So, we might have said, instead, that ‘p is true if q is true’, or simply

that ‘p is implied by q’ (p ⇐ q).
Example: Modus Ponens
• if n is divisible by 5, then n3 is divisible by 125 is true.

• Consequently, if we pick up an integer n that is divisible by 5
(say n = 10), then by modus ponens it follows that n3 must be
divisible by 125 (in our example, indeed n3 = 1000 is divisible
by 125). Because 125*8=1000
The Rules of Inference -
Modus Tollens
𝑝→𝑞
¬𝑞
∴ ¬𝑝
If grass is blue, then trees are blue

Trees are not blue
Therefore, grass is not blue
Rules of inference: Double negation
Double negation .They are the inferences that, if not not-
𝑝 is true, then 𝑝 is true, and its converse, that, if 𝑝 is true,
then not not- 𝑝 is true, respectively.
𝑝
∴ ¬¬𝑝
The Rules of Inference -Hypothetical Syllogism
𝑝→𝑞
𝑞→𝑟
∴𝑝→𝑟
If I do not wake up, then I cannot go to work.

If I cannot go to work, then I will not get paid.
Therefore, if I do not wake up, then I will not get paid.
Examples
• Prove the following argument is valid
P → 𝑄 Λ¬𝑄......Premise 1
¬𝑃....................Conclusion
How to prove the conclusion given the premise?.
P → 𝑄.............(by simplification and given)
¬𝑄 .................(by simplification and given)
If Q is false then how can be P true?
Therefore by Modus Tollens, ¬𝑷
Proved!!
Examples
𝑃→𝑄
•
𝑃→𝑅
∴ 𝑷 → 𝑸𝜦R…………….This the conclusion we need to prove
Proof
We have to assume P is true…we care about that
Recall truth table
P Q 𝑃→𝑄
P……..Conditional derivation T T T
Q……..Modes Ponens T F F
R………Modes Ponens F T F
F F F
𝑄ΛR….Q and R are both true
∴ 𝑷 → 𝑸𝜦R
Types of proofs: Examples
Direct Proof
1. Direct proof (proof by construction): a way of showing the truth or falsehood of
a given statement by a straightforward combination of established facts, lemmas, and
theorems
– Relying on further assumptions is not needed.
Eg. Given a proposition: If a and b are consecutive integers, then their sum (a+b) must be
an odd.
Proof. Let a+b=k, since a and b are consecutive, b=a+1

2a+1=k
2a is always an even number (theorem).
Then , k=even number + 1 is an odd number
Thus, the given proposition is proved to be true (direct proof)
22
Proof by contradiction
• In logic, proof by contradiction is a form of proof that establishes the truth or
the validity of a proposition, by showing that assuming the proposition to be false
leads to a contradiction. It is also known as indirect proof.
• Eg. Proposition: if 𝑛2 is even, then n is an even number
• Proof by contradiction
– Suppose not (i.e n is an odd number)
– n=2k+1
– Then 𝑛2 =(2k+1)*(2k+1)=4𝑘 2 +4k+1=2(2𝑘 2 +2k)+1
Let 2𝑘 2 +2k=m
→ 𝑛2 =2m+1, but 2m is always even number
→ 𝑛2 =even number +1 (which is an odd number)
→ This shows that if n is not an even number, then 𝑛2 cannot be an even number.
→ Hence, we proved that the proposition is true through proof by contradiction.
Basic concepts and Notations
Basic concepts and Notations: Set theory
• A set is any collection of elements. Sets can be defined by enumeration of
their elements, e.g., S = {2, 4, 6, 8}
• When we wish to denote membership or inclusion in a set, we use the
symbol ∈, E.g., 6 ∈ S.
• A set S is a subset of another set T if every element of S is also an element
of T. We write S ⊂ T (S is contained in T) or T ⊃ S (T contains S). If S ⊂ T,
then x ∈ S ⇒ x ∈ T.
• The set of real numbers is denoted by the special symbol ℝ and is defined
as ℝ ≡ {x | −∞ < x < ∞}.
1
• ℝ= ……-3,-1,0, , 1.1, 2, 2, 3, 𝜋, … …
5
• A set S is empty or is an empty set if it contains no elements at all.
• The empty set by the symbol ∅ and write A = ∅.
• The basic operations on sets are union and intersection. They
correspond to the logical notions of ‘or’ and ‘and’, respectively.
• For two sets S and T, we define the union of S and T as the set
S ∪ T ≡ {x | x ∈ S or x ∈ T}. We define the intersection of S and
T as the set S ∩ T ≡ {x | x ∈ S and x ∈ T}.
• The product of two sets S and T is the set of ‘ordered pairs’ in
the form (s, t), where the first element in the pair is a member
of S and the second is a member of T. The product of S and T is
denoted.
• S × T ≡ {(s, t) | s ∈ S, t ∈ T}.
Cartesian plane in 2 dimensions ℝ × ℝ ≡ {(x1, x2) | x1 ∈ ℝ, x2 ∈
ℝ},
Basic concepts and Notations:Cartesian Plane
• The set ℝ × ℝ is sometimes called ‘two-dimensional Euclidean
space’ and is commonly denoted ℝ2 .
Basic concepts and Notations:Cartesian Plane
• In ℝ3+ , z= f(x,y)
Utility, z, depends on consumption of x and y
• More generally, n-dimensional ordered tuple (x1, . . . , xn) and can be

thought of as a ‘point’ in n-dimensional Euclidean space, or ‘n-space’.
• The set Product will be in ℝ𝑛 . Often in Economics non-negative ℝ𝑛+

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Advanced Microeconomics

Main topics to be covered

2. Mas-Colell, A., M. D. Whinston and J. R. Green (1995), Microeconomic Theory,

New York: Oxford University Press.

3. Varian, H, Microeconomic Analysis, 3rd Edition, Norton, 1992

Where does microeconomic theory ﬁt in contemporary

• How large are the gains from terms-of-trade (ToT) manipulation?

1. One is the set of skills needed to write mathematical/ models(Theory).

A valid argument is one in which it is not possible for the conclusion to be

If you get an A, I will give you $100 T T T

Now consider the truth table

• When we say, ‘p is necessary for q’, we mean that p must hold or be

• For q to be true requires p to be true, so whenever q is true, we

• So, we might have said, instead, that ‘p is true if q is true’, or simply

• if n is divisible by 5, then n3 is divisible by 125 is true.

If grass is blue, then trees are blue

If I do not wake up, then I cannot go to work.

Proof. Let a+b=k, since a and b are consecutive, b=a+1

Thus, the given proposition is proved to be true (direct proof)

• More generally, n-dimensional ordered tuple (x1, . . . , xn) and can be

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