Microeconomics Lecture Notes

Professor John Gruber

Lecture Overview

• Course Details
• What is Microeconomics?
• Introduction to Supply and Demand

Course Details

• The course includes a distinct policy angle related to government policy.
• Focus will be on understanding the economic underpinnings behind these policies.
• Teaching Style:
  • Does not write everything on the board; responsible for listening.
  • Encourages asking questions to clarify points.
  • Talks fast; questions help slow down the pace.
  • Uses 'guys' in a gender-neutral way.

What is Microeconomics?

• Definition: Study of how individuals and firms make decisions in a world of scarcity.

  • Series of constrained optimization exercises.
  • Opportunity cost is a core concept: every action/inaction has an alternative cost.

• Microeconomics vs. Behavioral Economics:

  • Microeconomics gets basic concepts down before addressing deviations (behavioral economics).

• Opportunity Cost: Definition and Examples

  • Every action has a next best alternative—buy shirts vs. pants, watch TV vs. work.
  • Dismal Science: Recognizes trade-offs exist; nothing is free.

• Comparison to Engineering: Both disciplines involve constrained optimization.

  • Example: Building robots with limited materials.

Supply and Demand

• Basic Concepts:

  • Supply and Demand Models: Describe relationships between economic variables.
  • Models are not always accurate but are useful.

• **Three Levels of Understanding Models: **

  • Intuitive Level: Understand and explain simply.
  • Graphical Level: Use of graphs to show relationships.
  • Mathematical Level: Formalize models with equations.

• Example: Water-Diamond Paradox

  • Demand: High for water, low for diamonds.
  • Supply: Abundant for water, scarce for diamonds.
  • Balance of supply and demand explains price differences.

Equilibrium in Supply and Demand

• Graphical Representation: Roses Example
  • Demand Curve: Shows relationship between price and quantity demanded.
  • Supply Curve: Shows relationship between price and quantity supplied.
  • Equilibrium: Point where supply meets demand; market-clearing price.

Positive vs. Normative Analysis

• Positive Analysis: Study of 'what is'.

  • Example: Why did the price of a kidney on eBay go so high?
  • Low supply and high demand.

• Normative Analysis: Study of 'what should be'.

  • Should we allow the sale of kidneys on eBay?
  • Arguments For: High demand, life-saving, economic benefit to sellers.
  • Arguments Against: Market failures, equity, behavioral economics concerns.

Capitalistic vs. Command Economies

• Capitalistic Economy: Individuals and firms decide production/consumption.

  • Strengths: Tremendous growth, wealth generation.
  • Weaknesses: Inequality, market failures.

• Command Economy: Government makes all production and consumption decisions.

  • Intended for equity but often failed due to corruption and inefficiency.
  • Example: Soviet Union's control over production.

Conclusion

• Economics often adheres to the principle that 'the market knows best'.
• Upcoming topics will explore how market equilibrium is achieved, deviations from idealized models, and the roles governments can play.
• Emphasis on understanding underlying principles before questioning policies.

Upcoming Classes and Problem Sets

• Rest stations will cover both review and new material.
• Sections will practice problems related to problem sets.
• Upcoming Session: Mathematics of supply and demand.