Consumption Economics and Price Analysis (AREC /ECON 513) Dept. of Agricultural and Resource Economics University of Arizona Fall 2014

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1 Consumption Economics and Price Analysis (AREC /ECON 513) Dept. of Agricultural and Resource Economics University of Arizona Fall 2014 Instructor: Dr.Roger Dahlgran Office: 403C Chavez Building Ph: (Office) Office Hours: I welcome student interaction but sometimes other duties create conflicts. Office hours are Mon 10:00-12:00, Wed 3:00-5:00. I am available other times as well but the hours from 12:00 to 2:00 Monday thru Friday are reserved for class preparation and fall under the category of Do Not Disturb. Class Hours: T, Th 2:00-3:15 p.m. Chavez Building, Room 304. Course Description (per UA Course Catalog): Course Objectives: Pre-requisites: Theory of the consumer, demand, market equilibrium, and welfare analysis. AREC 513 is designed to provide graduate students with a rigorous introduction to the theory of the consumer. AREC 513 is not intended to be a course on empirical applications (e.g., estimation of demand systems), but instead focuses on the implications of microeconomic theory for empirical work. The course is the consumer side counter part of AREC 504. Together, these courses are designed to give Master s students a rigorous training on decision making by individuals (consumers and producers). The following topics covered in Chiang, Alpha C., and Kevin Wainwright, Fundamental Methods of Mathematical Economics, New York: McGraw-Hill, 2005 (4th ed.), are necessary background for the level of mathematics used in the course: Topic Pages Cramer's Rule (Chapter 5) Comparative Static Analysis (Chapters 6-8) Optimization Problems (Chapters 9-13) Students are expected to know this material beforehand. Henderson and Quandt (Appendix: Mathematical Review; section A1-4, pages ) provides a succinct review of mathematical concepts necessary for this course. Text Books: We will cover concepts presented in several books so no single text book is required for this course. Any graduate level microeconomics book will have chapters on the theory 1

2 Course Website: Student Evaluation: of the consumer. We will also draw on books that deal with consumption economics. The following books are useful: Henderson, James M. and Richard E. Quandt. Microeconomic Theory: A Mathematical Approach. New York: McGraw-Hill, 1980 (3rd edition). Chapters 2, 3, and sections 12-1 and Varian, Hal R. Microeconomic Analysis. Third Edition. New York: W. W. Norton and Company Chapters 7-11, 19, 25, and 27. The above two books could constitute text books for this course. Other books that students should read are: Silberberg, Eugene and Wing Suen. The Structure of Economics: A Mathematical Analysis. New York: Irwin-McGraw-Hill, 2000 (3rd edition). ECON 513 / AREC 513: Syllabus Spring2011, Page 2 of 5 This book provides a solid mathematical foundation for consumption theory. Nearly all the commonly used theorems are presented in this text. Deaton, Angus and John Muellbaurer. Economics and Consumer Behavior. New York: Cambridge University Press Some material is password protected. User: arec513, password: consumer. Grades will be based on student performance on home assignments, one midterm exam, a term paper and a final exam. Course Requirement Points Homework Assignments Not graded Paper: 30% Presentations: Early Nov Due: Fri, Dec 18 Midterm - Tu, Oct 28 30% Final (Comprehensive) 40% Wed, 12/17 3:30-5:30pm Total 100% If a student has a documented emergency that requires missing the midterm examination, then the weight of the missed examination will be added to the final exam. Make-up examinations will not be given. 2

3 Problem Sets/Homework Assignments: Paper: Problem sets complement/reinforce the ideas covered in class. While they will not be formally graded, they give you important practice in solving problems like those that you might encounter on an examination. It is therefore important that you know how to solve these problems and that you practice them with a goal of mastery of the mathematics involved in their solutions. Students can learn a great deal from each other and collaboration and interaction on problem sets is acceptable. Papers handed in however should reflect the student s own thinking. The goal of the term paper for you to apply the material covered in this course to a real world problem. This paper might be the basis for thesis research or it might lead you to a problem that you discover that you do not want to pursue. A good source for your term paper topic might be an issue featured in the popular press. Some examples of popular press stories that might lead to term papers are under Term Paper Ideas on the course website. Feel free to pursue ideas from any source. Other sources include podcasts such as Freakenomics, and TED talks (NPR). Your submitted paper should contain at least twenty pages including bibliography, figures, and tables. Grading will be based on the correct and comprehensive application of topics covered in the course. The major sections and topics at least address: I. Introduction. What is the source of the idea? Why is it important? II. Literature Review. Who has written papers on this topic? What economic models did they use? What did they find or conclude? III. Theoretical Model. How do concepts covered in this course aid you in analyzing this problem? Are concepts applied appropriately, correctly, rigorously, completely? Lay out a graphical and mathematical representation of the problem. IV. Testing the Model. How would you determine if your model accurately depicts the problem you are addressing? What data would you need to collect? How might you interpret empirical results? 3

4 V. Critique of the model. How could your model be improved? VI. Next steps and conclusions. VII. References. Academic Integrity, Special Needs, Incomplete Grade & Withdrawal Grade: Subject to Change Statement: This class follows appropriate and relevant policies of the University of Arizona. See and Information in this syllabus, other than the grade and absence policy, may be subject to change with advance notice, as deemed appropriate by the instructor. Tentative Topic Outline: I. Overview of Consumption, Demand, and Price Analysis A. Demand Functions 1. Exogenous price 2. Exogenous quantity 3. Simultaneous systems B. Welfare analysis C. Forecasting D. Price dimensions 1. Time 2. Form 3. Space II. Utility and demand 2 goods A. Historical perspective C. Consumer preference mapping: Neoclassical utility functions 1. Existence of utility function 2. Concavity, convexity, monotonic transformations 2. Ordinal and cardinal utility measures 3. Monotonic transformations 4. Homothetic preferences C. Utility maximization 2 goods 1. First and second order conditions 2. Ordinary and compensated demand functions 3. Comparative statistics and Slutsky equation D. Duality and Envelope Theorem 1. Indirect Utility Function 2. Roy s Identity Expenditure Function 4

5 III. Demand systems n goods A. Utility maximization 1. First and second order conditions a. Homogeneiry b. Additivity c. Symmetry 2. Ordinary and compensated demand functions 3. Comparative statistics and Slutsky equation B. Duality and Envelope Theorem 1. Indirect Utility Function 2. Roy s Identity Expenditure Function C. Applied demand analysis 1. Integrability of demand functions 2. Systems of demand functions a. Rotterdam model b. Linear expenditure system c. Almost ideal demand system d. Other demand systems IV. Topics A. Aggregation over commodities and seperability B. Aggregation over consumers C. Consumer surplus D. Revealed preferences E. Income and leisure decisions F. Intertemporal Optimization G. Risk and Uncertainty 1. Risk aversion and risk neutrality and measures of risk aversion 2. Expected utility maximization and mean-variance analysis 3. Investments analysis H. Information: The principal agent problem 5

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7 Topic Outline AREC 513 Introduction -- Demand in market models The graphical representation Demand Price fixed Quantity fixed Simultaneous equations Market equilibrium Equilibrium price Equilibrium quantity Determinants of Equilibrium Price Time, Form, Space Derived demand Back to back models Welfare analysis Transfers and DWLs Mathematical representations Two good Utility Maximization based Demand Models Utility functions Utility maximization process Demand functions Indirect Utility Functions Characteristics of utility mased demand models Homogeneity 7

8 Symmetry Adding Up Some Utility based demand models Rotterdam Linear Expenditure System Other utility based models Labor leisure choice 8