1. Advanced Microeconomics
ECH-51806
Part 1: Consumer Theory and
Theory of the Firm
Dušan Drabik
de Leeuwenborch 2105
The material contained in these slides draws heavily on:
Geoffrey A. Jehle and Philip J. Reny (2011). Advanced Microeconomic Theory (3rd Edition). Prentice Hall, 672 p.

2. Disclaimer
These slides are not meant to be your sole study material. They are just a (incomplete) summary of what will be covered in Part 1 of the course.

3. Quotes to live by
“You've got to be very careful if you don't know where you are going, because you might not get there.” “I'm not going to buy my kids an encyclopedia. Let them walk to school like I did.” Yogi Berra

4. General Information
Advance level course (abstraction, mathematically oriented, but fun)
All relevant information (e.g., problem sets, home assignments, tests) here:
Textbook
Recommended supplemental reading

5. General Information
Exercises to be solved at home and discussed in class (not graded)
Home assignment for Part 1 due on or before September 18, 2017 in room 2105 (hand-written is fine) (graded)
No official office hours for Part 1. Write me an or stop by

6. Consumer Theory

7. Primitive notions Four building blocks: Consumption (choice) set
Consumption bundle (plan)
Preference relation
Behavioral assumption

8. Preferences and utility
Axioms of consumer choice

9. Preferences and utility

10. Preferences and utility

11. Preferences and utility

12. Preferences and utility

13. The utility function

14. Consumer’s problem Utility maximization problem
Find
Consumption bundle
Feasible set
Utility maximization problem
 Solution to the UMP is Marshallian demand functions

15. Consumer’s problem and consumer demand behavior

16. The indirect utility function
Indirect utility function is a maximum value function:

17. The expenditure function
Hicksian (compensated) demand functions

18. Properties of the expenditure function
Advanced Microeconomic Theory – Consumer Theory

19. Relations between IUF and EF
Advanced Microeconomic Theory – Consumer Theory

20. Duality between Marshallian and Hicksian demand functions
Advanced Microeconomic Theory – Consumer Theory

21. Income and substitution effects

22. The Slutsky equation

24. Relationships between UMP and EMP
x(p, y)
xh(p, u)
Utility maximisation
Expenditure minimisation
Slutsky equation (for derivatives)
x(p, y) = xh(p, v(p, y))
xh(p, u) = x(p, e(p, u))
Roy’s identity
xh(p, u) = p e(p, u)
v(p, y)
e(p, u)
e(p, u) = v(p, e(p, u))
v(p, y) = e(p, v(p, y))
Scheme to illustrate duality
From Marshallian to Hicksian demand function: Slutsky equation
From Marshallian demand to indirect utility: Roy’s identity
Substitution of utility function by expenditure function
Substitution of budget by indirect utility function
Adapted from Mas-Collel, Whinston and Green (1995); p. 75

25. Theory of the Firm

26. Production Production possibility set Production plan
Production function

27. Production

28. Cost
Conditional input demand

29. Properties of the cost function

34. The competitive firm
Profit maximization
...or
Cost function

35. The profit function