Lecture Notes in Microeconomic Theory

As a new graduate student, you are at the beginning of a new stage of your life. In a few months you will be overloaded with definitions, concepts, and models. Your teachers will be guiding you into the wonders of economics and will rarely have the time to stop to raise fundamental questions about what these models are supposed to mean. It is not un-likely that you will be brainwashed by the professional-sounding language and hidden assumptions. I am afraid I am about to initiate you into this inevitable process. Still, I want to use this opportunity to pause for a moment and alert you to the fact that many economists have strong and conflicting views about what economic theory is. Some see it as a set of theories that can (or should) be tested. Others see it as a bag of tools to be used by economic agents. Many see it as a framework through which professional and academic economists view the world.

My own view may disappoint those of you who have come to this course with practical motivations. In my view, economic theory is no more than an arena for the investigation of concepts we use in thinking about economics in real life. What makes a theoretical model ‘economics’ is that the concepts we are analyzing are taken from real-life reasoning about economic issues. Through the investigation of these concepts, we indeed try to understand reality better, and the models provide a language that enables us to think about economic interactions in a systematic way. But I do not view economic models as an attempt to describe the world or to provide tools for predicting the future. I object to looking for an ultimate truth in economic theory, and I do not expect it to be the foundation for any policy recommendation. Nothing is ‘holy’ in economic theory and everything is the creation of people like yourself.

Basically, this course is about a certain class of economic concepts and models. Although we will be studying formal concepts and models, they will always be given an interpretation. An economic model differs substantially from a purely mathematical model in that it is a combination of a mathematical model and its interpretation. The names of the mathematical objects are an integral part of an economic model. When mathematicians use terms such as ‘field’ or ‘ring’ that are in everyday use, it is only for the sake of convenience. When they name a collection of sets a ‘filter’, they are doing so in an associative manner; in principle, they could call it ‘ice cream cone’. When they use the term ‘well ordering’, they are not making an ethical judgment. In contrast to mathematics, interpretation is an essential ingredient of any economic model.