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## Über dieses Buch

This textbook covers microeconomic theory at the level of intermediate and advanced undergraduates. It is also intended as an introduction for those with other intellectual and academic backgrounds who may not necessarily agree with “mainstream” economists but at least are interested knowing how they think and see things.

The book provides thorough explanations of definitions and assumptions that the theory is based upon. It provides comprehensive accounts of motivations and reservations behind the theory. As well, it precisely presents the logical process of how the assumptions lead to the conclusion, conveying the intuition and the key of the arguments.

An abundance of topics is included here: individual choice, general equilibrium, partial equilibrium, game theory, imperfect competition, transaction under incomplete information, market failures, welfare economics, social choice and mechanism design. The book is a valuable resource for any reader studying or simply interested in microeconomic theory.

## Inhaltsverzeichnis

### Chapter 1. Introduction

Here I present my reservations, not an instruction, about some basic concepts in economic theory: rationality and equilibrium, ordinalism and the revealed preference approach, efficiency and fairness, perfect competition and imperfect competition, complete market and incomplete market, complete information and incomplete information, and general equilibrium analysis and partial equilibrium analysis.

Takashi Hayashi

### Chapter 2. Choice Objects and Choice Opportunities

The method (not substantive contents conveyed by it) covered in this book can be applied to general kinds of spheres of society, not only to individual and material consumptions. It allows for example that one’s consumption may affect other ones’ consumptions (externality), and that there may be a good which many people can use at the same time (public good).

Takashi Hayashi

### Chapter 3. Preference

Preference relation describes an individual’s subjective ranking over choice objects. It is denoted by $$\succsim$$ ≿ , $$\succ$$ ≻ , $$\sim$$ ∼ . Preference relation To help understanding you may take an analogy to inequality and equality symbols $$\geqq$$ ≧ , >, $$=$$ = , while this analogy is not quite right as seen below.

Takashi Hayashi

### Chapter 4. So-Called Utility Function

There are many statements in economics which can be obtained by directly tracking the properties of preferences. Not only that, in principle every statement in economics is obtained by doing this. However, it is customary to represent preferences by means of numerical functions in order to make analysis more operational. In the previous chapter I wrote that the “mountain” described by a series of indifference curves is not assigned numbers describing its height, but I’m here saying that we will assign such numbers for our convenience.

Takashi Hayashi

### Chapter 5. Choice and Demand

As before, let X be the set of all the potentially available choice alternatives, which is the consumption set in the context of choosing consumptions. Let $$\succsim$$ ≿ denote preference relation defined over X. Now suppose that an opportunity set B is available as a subset of X. Then the “best” choice in B for a given individual is defined as a maximal element in it according to his preference.

Takashi Hayashi

### Chapter 6. Demand Analysis

In this chapter let us consider how demand responds to price and income changes, and welfare evaluation of such changes.

Takashi Hayashi

### Chapter 7. Willingness to Pay and Consumer Surplus

Cost-benefit analysis will be the heart of introductory micro, and well-known (and probably notorious) even to non-economists. What do we mean by benefit, however, while cost is more or less clear.

Takashi Hayashi

### Chapter 8. Choice over Time

Let me repeat that even if goods are materially the same they are treated as different goods when they are to be consumed at different time periods. Here saving is understood as selling current consumption and buying future consumption, and borrowing is understood as buying current consumption and selling future consumption.

Takashi Hayashi

### Chapter 9. Choice Under Risk

Uncertainty in a broad sense can be classified into two specific notions. Risk refers to situations in which probability distributions over outcomes are given as objects, such as in coin flipping or throwing a die, or as in game theory in which players make choice over probability distributions over strategies.

Takashi Hayashi

### Chapter 10. Revealed Preference

Until the previous chapter we have assumed a priori that each individual has his preference and chooses best alternatives according to it. It is of course a natural response to wonder, however, if that’s true. You cannot open your brain physically, however, in order to show your preference or maximization process directly as biological objects or substances or visible structures or processes. So here we take the standpoint to consider if observed choices can be explained consistently as maximization some preference, rather than thinking if we can find preferences as physical substances or processes.

Takashi Hayashi

### Chapter 11. General Equilibrium in Competitive Exchange Economies

Having given apologies in Introduction, I will start talking about perfectly competitive and complete markets with complete information. I will do this with general equilibrium approach first, in which we look at all goods simultaneously and handle simultaneous determination of price and income. In the last chapter of this part I will talk about partial equilibrium approach, which isolates the market of a particular good from the rest of the economy by presuming that income does not matter (no income effect).General equilibrium Partial equilibrium

Takashi Hayashi

### Chapter 12. Efficiency of Allocation

Now, is the competitive market (if it really exists) a “good” way of resource allocation? Of course it depends on what we mean by “good.”

Takashi Hayashi

Takashi Hayashi

### Chapter 14. Profit Maximization and Cost Minimization with Price-Taking

Firms as described in the analysis of competitive market are a pretty boring existence. They are just like a machine which automatically maximizes profit. In their “established form,” you might not see any dynamism you would imagine from real businesses. Nevertheless, it is seen to be a good description of the “limit form” of business activities.

Takashi Hayashi

### Chapter 15. Cost Curve and Competitive Supply

In the last chapter we derived the short-run cost function as a consequence of short-run cost minimization. Here VC(y) denotes the variable cost and FC denotes the fixed cost.

Takashi Hayashi

### Chapter 16. General Equilibrium in Competitive Production Economies

Here we consider a model of production economy so-called private ownership economy. There are n consumers and m firms. The key here is that the firms are owned ultimately by the consumers = shareholders and their profits are paid to the consumers as dividends. Also, the ownership structure of each firm is fixed and remains unchanged. This might be a too “classic” view to understand modern corporations in which ownership and management are separated and the composition of shareholders change over time. So I like you to read ahead by taking this model as a benchmark.

Takashi Hayashi

### Chapter 17. General Equilibrium with Many Goods

The concept of exchange, substitution and transformation between goods itself can be understood with the simplest two-good model, as illustrated in the previous chapters. Nevertheless there are significant cases in which manyness of goods matters.

Takashi Hayashi

### Chapter 18. Comparative Welfare Properties of General Equilibrium

General equilibrium analysis sometimes provides counter-intuitive comparative welfare results which we do not have in partial equilibrium analysis, when the underlying economic environment is variable, even when efficiency is achieved under fixed environment. This is due to the possibility of changes in relative prices, which result in changes in income. Here I present some of them.

Takashi Hayashi

### Chapter 19. Partial Equilibrium Analysis

We have worked in the previous chapters on the model in which demands match supplies for multiple goods simultaneously. To emphasize such simultaneity we call it general equilibrium model. It is hard to analyze the behavior of general equilibrium by hand, which is particularly the case when we need to deal with more goods. Thus it is hard to analyze the effects of policies such as taxation, subsidy and regulation in the way that we can see their implications to the allocations of ALL goods simultaneously.

Takashi Hayashi

### Chapter 20. Monopoly

Recall that perfect competition refers to situations in which the markets consist of a large number of small participants, each of which is negligibly small compared to the entire economy and has to take the market price as give which he cannot manipulate by himself alone.

Takashi Hayashi

### Chapter 21. Basic Game Theory I: Normal-Form Games

This book is not intended to be a textbook on game theory itself, but I would like to cover it as far as it is useful for the understanding of microeconomic theory.

Takashi Hayashi

### Chapter 22. Basic Game Theory II: Extensive-Form Games

Extensive-form games deal with sequential decisions with turns, which are described by game trees. It will be better to start with an example.

Takashi Hayashi

### Chapter 23. Oligopoly

In monopoly there is only one firm which has market power. Now we consider oligopoly in which there are several firms that have market power. I start with duopoly, the case of two firms, and later extend the argument to the case of more firms.Oligopoly

Takashi Hayashi

### Chapter 24. Basic Game Theory III: Games with Incomplete Information

Until the previous chapter I have assumed that all the players or market participants have the same information. This assumption is called complete information. It means for example that firms know each other’s cost function, sellers know buyers’ willingness to pay, buyers’ know the qualities of the items being sold, bidders know each other’s valuation of the item, and so on.

Takashi Hayashi

### Chapter 25. Auction

I focus on the case that a single item is being sold and buyers bid. Like procurement auctions we can consider that the sellers bid, but it can be treated by flipping the direction in the arguments below.

Takashi Hayashi

### Chapter 26. Trade with Incomplete Information

Many kinds of information such as quality of goods, ability of workers and consumers’ preferences or willingness to pay are private information which are not observable or verifiable by other market participants. Trades which are smoothly done under complete information are likely to fail under such types of incomplete information. We can roughly think of two kinds of such situations, one is adverse selection and the other is moral hazard.

Takashi Hayashi

### Chapter 27. Externality

Consumption or production activity is said to have an externality if its effect is not taken into account in the determination of market price.

Takashi Hayashi

### Chapter 28. Public Goods and the Free-Rider Problem

A good with the following two properties are called a public good

Takashi Hayashi

### Chapter 29. Indivisibility and Heterogeneity

This chapter covers allocation of indivisible and heterogeneous objects.

Takashi Hayashi

### Chapter 30. Welfare Comparison and Fairness

I have used Pareto efficiency as a criterion for welfare judgment in many places in this book, but I also emphasized that the Pareto principle alone is silent about whether a change in economic activity is desirable when it does not improve all individuals welfare and about who should gain and who should lose, and how much. Also I emphasized that Pareto efficiency has nothing to do with notion of fairness in any sense.

Takashi Hayashi

### Chapter 31. Aggregation of Preferences and Social Choice

The argument in the last chapter suggests that we have to have a serious theory about who should gain and who should lose when a policy cannot make everybody better off. The problem of modern economics is rather that it is not even utilitarian.

Takashi Hayashi

### Chapter 32. Implementability of Social Choice Objectives

If you are a “benevolent” policy maker, you would like to satisfy “people’s voice” as much as possible. However, the argument in the previous chapter shows that it is a non-obvious problem to aggregate “people’s voices” into “people’s voice.”

Takashi Hayashi

### Backmatter

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