Microeconomics: Introduction, Supply & Demand

Welcome and Course Outline

• Instructor: John Gruber
• Course: Microeconomics (1401)
• Topics Today:
  1. Course Details
  2. Introduction to Microeconomics
  3. Supply and Demand

Course Details with Policy Focus

• Economic policy is a central theme; however, the course will not be dominated by it.
• For deeper policy discussions, consider 1441 (offered in the spring by Kristen Butcher).
• Teaching Style:
  • Responsibility for understanding what is said, not just what is written.
  • Encouragement to ask questions and engage in discussions.
  • Acknowledges tendency to speak quickly; asking questions helps slow down the pace.
  • Use of the term “guys” in a gender-neutral way for both males and females.

What is Microeconomics?

• Study of how individuals and firms make decisions in a world of scarcity.
• Series of constrained optimization exercises.
• Opportunity Cost: Important concept; every action or inaction has a cost in terms of what you could have done instead.
• Microeconomics vs Behavioral Economics: Basic concepts first, behavioral insights will be sprinkled in.

Supply and Demand

• Models in Economics: Simplified representations of reality, used for understanding economic phenomena.
• George Box: All models are wrong but some are useful.
• Levels of Understanding: Intuitive, Graphical, Mathematical.
• Example (Adam Smith): Water and Diamonds Paradox
  • Water: essential for life but cheap due to abundant supply.
  • Diamonds: non-essential but expensive due to limited supply.

Supply and Demand Graph

• Axes: Quantity (x), Price (y)
• Demand Curve (Blue): Relationship between price and quantity demanded; downward sloping.
• Supply Curve (Yellow): Relationship between price and quantity supplied; upward sloping.
• Equilibrium: Point where supply and demand curves meet.
  • Consumers and producers agree on quantity and price.

Positive vs Normative Analysis

• Positive Analysis: Study of what is.
• Normative Analysis: Study of what should be.
• Example (eBay Kidney Auction):
  • Positive Analysis: High demand and low supply led to high prices.
  • Normative Analysis: Should such transactions be allowed?
  • Issues: Market failures, equity, fairness, and imperfect information.

Capitalistic vs Command Economy

• Capitalistic Economy:
  • Firms and individuals make production and consumption decisions.
  • Leads to growth and wealth but also inequality and other issues.
• Command Economy:
  • Government makes production and consumption decisions.
  • Ensures equity but often inefficient and corrupt.
• Adam Smith’s Invisible Hand: Consumers and firms acting in their self-interest can lead to societal benefits.
• Best for Society: Initially maximized production and consumption; further discussions will include additional factors like health and equity.

Course Structure Moving Forward

• Initial focus: Principles of demand and supply, utility maximization, and firm operations.
• Later: Market failures, equity, and behavioral economics.
• Section and Problem Sets: Problem sets cover material up to the class before. Sections will alternate between new material and problem-solving.
• Math-focused Sections: Teaching assistants will cover the math necessary for problem sets.