Engagement: Encourage questions; don't hesitate to ask for clarification if something is unclear.
Responsibility: Students are responsible for what is said, not just what's written.
Pace: Teaching may be fast; interruptions for questions are welcome.
Language: Uses "guys" as a gender-neutral term, meant to include everyone.
What is Microeconomics?
Definition: The study of how individuals and firms make decisions in a world of scarcity.
Key Concept: Scarcity drives microeconomics; it involves constrained optimization exercises.
Trade-offs: Understanding how to trade off constraints to maximize well-being.
Opportunity Cost: Every action has a cost in terms of the next best alternative.
Economics as a Science
Economics is often referred to as the "dismal science" because nothing is free; everything has an opportunity cost.
Emphasizes the principles of constrained optimization and how they apply to economic decisions.
Comparison to engineering principles; microeconomics can be viewed as a branch of engineering applied to people's lives.
Supply and Demand Model
Introduction to the Model
The supply and demand model is fundamental to understanding market equilibrium.
Simplified Models: Models in economics are approximations; they are not strict laws but useful tools for understanding economic phenomena.
George Box Quote: "All models are wrong, but some are useful."
Key Elements of the Model
Demand Curve: Represents the relationship between the price of a good and the quantity demanded. It slopes downward; higher prices lead to lower demand.
Supply Curve: Represents the relationship between the price of a good and the quantity supplied. It slopes upward; higher prices lead to higher supply.
Market Equilibrium: The point where the quantity demanded equals the quantity supplied.
Adam Smith's Water-Diamond Paradox
Water is essential for life (high demand, low price) vs. diamonds (low demand, high price).
Supply and demand need to be considered together to explain this phenomenon.
Positive vs. Normative Analysis
Positive Analysis: Examines how things are (e.g., market behavior).
Normative Analysis: Examines how things should be (e.g., ethical implications of market practices).
Example: eBay kidney auction illustrates the distinction between what happens (positive) and whether it should be allowed (normative).
Market Failures
Market failures occur when the market does not operate efficiently due to reasons such as:
Fraud
Imperfect information
Equity concerns (e.g., unequal access to resources)
Behavioral economics (individuals do not always make rational decisions).
Capitalistic vs. Command Economies
Capitalistic Economy: Decisions made by firms and individuals, allowing for growth but also leading to inequality.
Command Economy: Decisions made by the government, often leading to inefficiencies and corruption.
Adam Smith's "invisible hand": Suggests that individuals acting in their self-interest can lead to beneficial outcomes for society.
Course Structure
Content Delivery: Lectures will provide foundation, and recitations will offer problem-solving sessions and new material.
Problem Sets: Assigned weekly, covering material taught up to that date.
Mathematics: Specific focus on the mathematical representation of supply and demand in upcoming classes.
Conclusion
The course will explore how microeconomic principles apply to real-world scenarios, aiming for maximum surplus through efficient production and consumption.
Further discussions on equity, market failures, and implications for government policy will follow.