FUNDAMENTALS OF ECONOMICS

This is an introductory-level course in economics, with a focus on microeconomics and macroeconomics. The aim is to provide a general conceptual framework to analyze real economic problems.

1. Knowledge and understanding. The objectives of the module aim at acquiring knowledge about: i) microfoundations of the economic behavior of individuals and firms and the understanding of markets; ii) economy-wide and large-scale phenomena and economic factors.
2. Applying knowledge and understanding. On completion, the student will be able: i) to interpret and address real-world microeconomic and macroeconomic problems; ii) to understand the open questions and issues on real-world economic problems.
3. Making judgments. On completion, students will able to understand the complexity and the trade-offs related to different market institutions and alternative economic policy measures.
4. Communication skills. On completion, students will be able how to present the results from the economic analyses, and which conclusions can be drawn from the analyses.
5. Learning skills. On completion, students will be able to address new questions and more sophisticated frameworks in economics.

Lectures and discussion of case studies.

Basic knowledge of mathematics

Mandatory.

This course teaches the most important basic concepts in microeconomics and macroeconomics. In the first part of the course, students will be introduced to a range of economic tools from microeconomics used to study models explicitly involving consumer and firm behavior in monopoly, oligopoly, perfect competition and the role of prices and institutions. In the second part of the course, students will be introduced to some analytical macroeconomic frameworks. In particular, the course will present national accounts, the role of money, fiscal and monetary policies, unemployment, inflation and fundamentals of modern theories of economic growth. For each topic case studies and real-world examples will be analyzed.

• Intermediate microeconomics, a modern approach Hal Varian W. W. Norton & Company • New York • London
• Macroeconomics, Global Edition Oliver Blanchard, Pearson

Final written examination (70 percent) and problem sets (30)

Here, an example of problems and exercises on the first 6 hours of lecture (basic consumer behavior) is provided.

Consider a consumer with preferences that can be expressed by the following utility function:

u(x,y) = a log x + (1-a) log y

the price of good x is p_x and the price of good y is p_y. Instead of having an income M, the consumer has endowments of goods x and y that we indicate with w_x and w_y. Since the individual can sell the goods, the endowments are a source of wealth. Hence his income is p_x w_x + p_x w_y, which should be treated as an exogenous variable.

1. First, write down the budget constraint and plot the budget line assuming that w_x=1 , w_y=1 and p_x= p_y=1. Second, plot the line assuming that p_x increases and is equal to 2. Third, plot the budget constraints for the same combination of prices p_x= p_y=1 and p_x= 2, p_y=1, assuming the standard case with an income M=2 (no endowments). Explain the difference between the variations of the budget constraints with endowments and the one with no endowments and income.
2. Solve the maximization problem and find the Marshallian demand function of x and y as a function of the prices and the endowments.
3. Show how the Marshallian function of the good x varies with p_x, p_y, w_x, and w_y.
4. With the Marshallian demand function x* and y*, find the net demands for goods x and y, namely the z^x = x* - w_x and z^y = y* - w_y. If a net demand of a good is negative, the consumer sells that good. If the net demand is positive, the consumer buys that good. Derive the conditions according to which the net demands are positive and show how the net demands varies with respect to the endowments.
5. Solve the maximization problem and find the Marshallian demand function of x and y as a function of the prices and the endowments under the utility function u(x,y)= x^alpha y^1-alpha. Show that you obtain the same results of point 2.
6. Solve the minimization problem min (p_x x + p_xy ), subject to the u(x,y)=u, where u(x,y) is the same provided in point 5. Derive the Hicksian (compensated) demand functions of x and y.