Microeconomics 1401 - Lecture Notes

Instructor Details

• Instructor: John Gruber
• Course: Microeconomics 1401
• Lecture Points: Course details, What is microeconomics, Supply and demand introduction

Course Approach

• Policy Angle: Economics with a focus on government policy.
• Handwriting Warning: Instructor's handwriting is difficult to read; don't hesitate to ask for clarification.
• Engagement: Encourage questions in class to slow down the lecture and enhance understanding.
• Language Use: Uses "guys" in a gender-neutral way to refer to all students.

What is Microeconomics?

• Definition: Study of how individuals and firms make decisions in a world of scarcity.
  • Economic Agents: Firms and individuals
  • Focus: Constrained optimization
• Opportunity Cost: The cost of the next best alternative forgone by choosing one option over another.
• Analogy with Engineering: Comparison to MIT engineering, focusing on constrained optimization.

Supply and Demand Model

• Model Overview: Description between economic variables.
  • Models vs. Laws: Not 100% true but useful (10-95% accurate).
  • Simplifying Assumptions: Needed to make models tractable and teachable.
• Levels of Understanding: Three levels for each model.
  • Intuitive Level: Explainable in simple terms (Mom Test).
  • Graphical Level: Using XY graphs.
  • Mathematical Level: Less important but necessary for testing.

Water-Diamond Paradox by Adam Smith

• Paradox Example: Water is essential but cheap, diamonds are non-essential but expensive.
  • Supply & Demand: Supply is large for water but limited for diamonds. Demand concept alone can't explain pricing.

Graph Example: Market for Roses

• Demand Curve: Downward sloping; higher prices result in less quantity demanded.
• Supply Curve: Upward sloping; higher prices incentivize more production.
• Market Equilibrium: Intersection of supply and demand curves where both producers and consumers are satisfied.

Positive vs. Normative Analysis

• Positive Analysis: The study of how things are (e.g., why the kidney auction price was high).
• Normative Analysis: The study of how things should be (e.g., should kidney auctions be allowed?).
• Examples: Kidney auctions and related market failures.
  • Market Failures: Fraud, imperfect information, equity/fairness concerns.
  • Behavioral Economics: People might not always make rational decisions.

Capitalistic vs. Command Economy

• Capitalistic Economy: Firms and individuals decide production and consumption.
  • Pros: Efficiency, innovation, wealth growth.
  • Cons: Inequality, potential for market failures.
• Command Economy: Government makes production and consumption decisions.
  • Example: Soviet Union model, corruption, inefficiency.
  • Adam Smith's Invisible Hand: Market self-regulates based on individuals pursuing their self-interest.
  • Trade-off: Balancing efficiency and equity.

Course Structure and Important Information

• Course Flow: Understanding basics -> Complex models -> Market failures -> Application to real world.
• Problem Sets: Weekly problem sets reflecting material up to that date; sections will include practice problems.
• Sections: Half for new material, half for working through problems.
• First Section: Mathematics of supply and demand.