Microeconomics Lecture: Course Introduction, Microeconomics, and Supply & Demand

Course Details

• Instructor: John Gruber
• Focus on economic policy and government policy as an interesting angle.
• Related course: 1441 (more policy-focused, taught by Kristen Butcher this spring; Gruber to teach next year).

Teaching Style

• Doesn't write everything on the board; responsible for spoken content.
• Encourages questions for clarification on board writings and lecture material.
• Talks fast; questions are encouraged to slow down the pace and ensure comprehension.
• Uses the term 'guys' in a gender-neutral way (means 'people' or 'economic agents').

What is Microeconomics?

• Study of how individuals and firms make decisions in a world of scarcity.
• Series of constrained optimization exercises: making the best decisions within given constraints.
• Key concept: Opportunity Cost
  • The cost of the next best alternative forgone.
• Modern Economics development at MIT by Paul Samuelson.

Fundamental Concepts

• Microeconomics as trade-offs and optimization.
• Opportunity Cost as a central theme.
• Economics is seen as a 'dismal science' because of trade-offs and opportunity costs.
• Comparison to engineering: focused on constrained optimization (e.g., building a robot with limited materials).

Models in Economics

• A model is a simplified description between economic variables.
• Aim for balance: capture real-world phenomena in the most tractable way.
• Quote: “All models are wrong, but some are useful” - George Box.
• Understanding models at three levels:
  • Intuitive (explainable to a non-specialist).
  • Graphical (using XY graphs).
  • Mathematical.

Supply and Demand Model

• Combination of supply and demand to explain real-world phenomena.
• Example: Water-Diamond Paradox (Adam Smith)
  • Water: essential but cheap due to high supply.
  • Diamonds: non-essential but expensive due to low supply.
• Market Equilibrium: Point where the quantity demanded equals the quantity supplied (e.g., roses example).
• Graph explanation: downward-sloping demand curve, upward-sloping supply curve.

Positive vs. Normative Analysis

• Positive Analysis: Study of the way things are.
• Normative Analysis: Study of the way things should be.
• Example: Kidney auction on eBay
  • Positive: Low supply, high demand = high price.
  • Normative: Should it be allowed? Raises issues like market failures, equity/fairness, and behavioral economics.

Capitalistic vs. Command Economies

• Capitalistic Economy: Firms and individuals make all production and consumption decisions.
  • Leads to economic growth but also inequality and potential market failures.
• Command Economy: Government makes all production and consumption decisions.
  • Example: Soviet Union; issues with corruption and inefficiency.

Adam Smith’s Invisible Hand

• The idea that individuals and firms acting in their own self-interest unintentionally benefit society as a whole.
• Central to the course: Understanding how self-interested actions yield the largest productive economy.

Course Structure

• Starting with Demand (principle of utility maximization).
• Moving to Supply (firms' production decisions).
• Understanding different markets (competitive, monopoly).
• Addressing market equilibrium.
• Examining market failures and equity concerns.
• Introduces behavioral economics.

Class Logistics

• Regular assignments and problem sets to reinforce lecture material.
• Sections to cover new material and practice problems.
• Fridays focus on the mathematics of supply and demand.
• Engage actively in lectures and sections for better comprehension.

Next Lecture: Start building the demand curve from first principles.