Microeconomic Theory

Citation

Mas-Colell, A., Whinston, M. D., & Green, J. R. (1995). Microeconomic Theory. Oxford University Press.

Chapter Summary

The book has 981 pages, 23 chapters in five parts and a mathematical appendix. Every chapter ends with exercises. The publisher describes the text as the result of years of teaching microeconomics at Harvard and stresses that the game theory part is free-standing, so that an instructor can return to it at any point in a course.

Part I, Individual Decision Making: Chapters 1–2: Preference and Choice; Consumer Choice

Chapter 1 starts from preference relations and choice rules and examines how the two relate. Chapter 2 sets up the consumer's problem: commodities, the consumption set, competitive budgets, demand functions and comparative statics, and the weak axiom of revealed preference and the law of demand.

Chapters 3–4: Classical Demand Theory; Aggregate Demand

Chapter 3 develops utility maximization and expenditure minimization, duality, the relations among demand, indirect utility and expenditure functions, integrability, welfare evaluation of economic changes and the strong axiom of revealed preference. Chapter 4 asks when aggregate demand behaves like the demand of a single consumer, through the weak axiom for aggregate demand and the representative consumer.

Chapters 5–6: Production; Choice under Uncertainty

Chapter 5 covers production sets, profit maximization and cost minimization, the geometry of cost and supply, aggregation, efficient production and the objectives of the firm. Chapter 6 treats expected utility theory, money lotteries and risk aversion, comparison of payoff distributions, state-dependent utility and subjective probability.

Part II, Game Theory: Chapters 7–9: Basic Elements of Non-Cooperative Games; Simultaneous-Move Games; Dynamic Games

Chapter 7 defines games in extensive and normal form and introduces randomized choices. Chapter 8 covers dominant and dominated strategies, rationalizability, Nash equilibrium, Bayesian Nash equilibrium for games of incomplete information and trembling-hand perfection. Chapter 9 turns to sequential rationality, backward induction, subgame perfection, beliefs off the equilibrium path, forward induction and bilateral bargaining.

Part III, Market Equilibrium and Market Failure: Chapters 10–12: Competitive Markets; Externalities and Public Goods; Market Power

Chapter 10 treats competitive markets in a partial equilibrium setting, including the welfare theorems and free entry. Chapter 11 starts from a simple bilateral externality and moves to public goods, multilateral externalities and second-best solutions under private information. Chapter 12 covers monopoly pricing, static oligopoly models, repeated interaction, entry and strategic precommitment.

Chapters 13–14: Adverse Selection, Signalling, and Screening; The Principal-Agent Problem

Chapter 13 introduces informational asymmetries and adverse selection, then signalling and screening. Chapter 14 covers hidden actions (moral hazard), hidden information with monopolistic screening, and hybrid models.

Part IV, General Equilibrium: Chapters 15–18: General Equilibrium Theory: Some Examples; Equilibrium and Its Basic Welfare Properties; The Positive Theory of Equilibrium; Some Foundations for Competitive Equilibria

Chapter 15 uses the Edgeworth box and small production economies to preview general equilibrium. Chapter 16 states the model and the first and second fundamental theorems of welfare economics. Chapter 17 covers existence, local uniqueness, the Sonnenschein-Mantel-Debreu result, comparative statics and tatonnement stability. Chapter 18 gives foundations for competitive equilibria through the core, non-cooperative models and the marginal productivity principle.

Chapters 19–20: General Equilibrium under Uncertainty; Equilibrium and Time

Chapter 19 covers contingent commodities, Arrow-Debreu equilibrium, sequential trade, asset markets and incomplete markets. Chapter 20 treats intertemporal utility and production, stationary programs and golden rules, and overlapping generations.

Part V, Welfare Economics and Incentives: Chapters 21–23: Social Choice Theory; Elements of Welfare Economics and Axiomatic Bargaining; Incentives and Mechanism Design

Chapter 21 covers Arrow's impossibility theorem, restricted domains and social choice functions. Chapter 22 treats utility possibility sets, social welfare functions, the axiomatic bargaining approach and the Shapley value. Chapter 23 presents the mechanism design problem, dominant-strategy and Bayesian implementation, participation constraints and implementation with multiple equilibria.

Mathematical Appendix

Collects mathematical tools used in the text: homogeneous, concave and quasiconcave functions, the implicit function theorem, convex sets and separating hyperplanes, correspondences, fixed point theorems, constrained maximization, the envelope theorem, linear programming and dynamic programming.

Key Concepts

Part I: Individual Decision Making (Chapters 1–6)

• Preference relations and choice rules: two alternative starting points for modelling individual choice.
• Revealed preference: the weak and strong axioms that connect observed choices to rational preferences.
• Duality: the link between utility maximization and expenditure minimization.
• Expected utility: the theory of choice among risky prospects, with risk aversion.

Part II: Game Theory (Chapters 7–9)

• Nash equilibrium and Bayesian Nash equilibrium: equilibrium in simultaneous-move games, without and with incomplete information.
• Subgame perfection and sequential rationality: equilibrium refinements for dynamic games.

Parts III–IV: Markets and General Equilibrium (Chapters 10–20)

• Externalities and public goods: sources of market failure analysed in Chapter 11.
• Adverse selection and moral hazard: the two information problems developed in Chapters 13–14.
• Fundamental welfare theorems: the relationship between competitive equilibrium and Pareto optimality.
• Arrow-Debreu equilibrium and incomplete markets: general equilibrium under uncertainty.

Part V: Welfare Economics and Incentives (Chapters 21–23)

• Arrow's impossibility theorem: the limits on aggregating individual preferences.
• Mechanism design and implementation: designing rules so that self-interested behaviour yields a desired outcome.

Critical Analysis

Strengths

• Breadth and depth in one volume. The publisher presents the book as covering all the essential topics of first-year graduate microeconomics in depth, and the contents bear this out: choice, game theory, markets, general equilibrium and welfare economics with incentives are all treated in a single text of about a thousand pages.
• A free-standing game theory part. Placing game theory in its own part, followed by applications in Parts III and V, lets instructors use it early, late or throughout, and makes the information and mechanism design chapters possible.
• Modular structure. Each part opens with a short introduction and each chapter ends with exercises, so courses can select among parts to suit their priorities, as the publisher intends.
• Information economics and mechanism design. Adverse selection, signalling, screening, the principal-agent problem and mechanism design have chapters of their own, topics that the publisher singles out as receiving attention that reflects their standing in the discipline.
• Reference apparatus. The mathematical appendix and, according to the publisher, an appendix of terms cross-referenced to the text support use as a long-term reference.

Limitations

• Date. The edition described is from 1995; later developments in microeconomic theory and its applications are outside it.
• Length and demands. At 981 pages, with proofs and formal statements throughout, the book cannot be covered in one course and assumes a mathematical background beyond intermediate microeconomics.
• Narrow empirical content. The contents are devoted to theory; there are no chapters presenting data or econometric evidence, so applied questions need other sources.

Where It Fits in the Course

This is a first-year graduate text, and it is the broadest and most formal title on the course list. Intermediate texts such as Varian and Melitz's Intermediate Microeconomics: A Modern Approach and Pindyck and Rubinfeld's Microeconomics develop consumer and producer theory mainly through graphs, verbal reasoning and modest calculus, and are the right preparation. Parkin's Microeconomics is a principles-level text and Dixit's Microeconomics: A Very Short Introduction is a compact non-technical overview; neither prepares a reader for the formal level of Mas-Colell, Whinston and Green on its own.

The closest alternative is Jehle and Reny's Advanced Microeconomic Theory, a graduate textbook that develops consumer and producer theory, equilibrium, social choice, game theory and mechanism design from explicit assumptions with proofs and a self-contained mathematical appendix. The two cover much of the same ground; many readers use one as the main text and the other for a second explanation of difficult topics.

How to Use This Book

The book is for first-year doctoral students in economics, advanced master's students and strong undergraduates in a proof-based microeconomics sequence, and for researchers who want precise statements of standard results. Multivariable calculus, linear algebra and real analysis at the level of a mathematics-for-economists course, plus intermediate microeconomics, are the expected preparation.

A practical plan for a two-semester sequence:

• Core, first semester: Part I (Chapters 1–6) and Part II (Chapters 7–9), with Chapters 10–12 for competitive and imperfectly competitive markets.
• Core, second semester: Chapters 13–14 on information, then Part IV (Chapters 15–20) on general equilibrium, and Part V (Chapters 21–23).
• Optional: Appendices inside chapters, Chapter 18 on foundations of competitive equilibria and Chapter 20 on equilibrium and time can be left for later study.

Work the exercises at the end of each chapter; most of the learning comes from them. Keep the mathematical appendix at hand, and read the chapter introductions first to see how the parts fit together.