Microeconomics Lecture Notes

Course Introduction

• Instructor: John Gruber
• Course Focus: Microeconomics with a policy angle
  • Emphasis on understanding economics through government policy
• Related Courses:
  • Course 1441 for deeper policy discussions
  • Course 1413 for Behavioral Economics
• Teaching Style:
  • Emphasis on listening; not everything will be written on the board
  • Encouragement to ask questions to slow down the pace
  • Use of 'guys' as a gender-neutral term

What is Microeconomics?

• Definition: Study of how individuals and firms make decisions in a world of scarcity
• Key Concepts:
  • Scarcity: Fundamental driver of microeconomic decisions
  • Constrained Optimization: Economic agents maximizing well-being within constraints
  • Opportunity Cost: Every decision involves forgoing an alternative
• Economics as a Science: Often called the dismal science due to focus on trade-offs

Microeconomics vs. Engineering

• Comparison: Economics applies engineering principles to human decisions
• History: Modern economics developed at MIT by Paul Samuelson

Supply and Demand Model

• Introduction: First model discussed in the course
• Adam Smith's Contribution:
  • Water-diamond paradox illustrating demand vs. supply
  • Supply and demand scissors concept
• Market Equilibrium: Point where supply and demand curves intersect
  • Demand Curve: Downward sloping; higher price leads to less demand
  • Supply Curve: Upward sloping; higher price motivates more supply

Economic Models

• Nature of Models: Simplified representations that are often not 100% accurate
• Levels of Understanding:
  • Intuitive
  • Graphical
  • Mathematical

Positive vs. Normative Analysis

• Positive Analysis: Study of the way things are
• Normative Analysis: Study of the way things should be
• Example: eBay kidney auction:
  • Positive: High demand, low supply
  • Normative: Ethical considerations of selling kidneys

Market Failures and Equity

• Market Failures: Situations where markets do not function optimally
  • Fraud, imperfect information, etc.
• Equity Concerns: Fairness in distribution and access

Capitalistic vs. Command Economies

• Capitalistic Economy:
  • Driven by individual and firm decisions
  • Leads to growth but also inequality
• Command Economy:
  • Government controls production and consumption
  • Historically led to inefficiency and corruption

Invisible Hand and Economic Growth

• Concept: Market will distribute resources efficiently if left to its own devices
• Challenges: Can lead to inequitable outcomes

Course Structure

• Initial Focus: How individual decisions lead to market outcomes
• Later Focus: Market failures, equity, and behavioral economics

Recitations and Problem Sets

• Recitations: Important for learning both new material and problem-solving skills
• Problem Sets: Cover material taught up to assignment date
  • Recitations will include practice problems related to upcoming problem sets

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Next Steps:

• Attend recitation on Friday focusing on mathematics of supply and demand
• Begin problem sets to reinforce concepts discussed in class