14.01 Microeconomics

Professor John Gruber

Lecture Overview

1. Course Details
2. What is Microeconomics?
3. Supply and Demand

Course Details

• Policy Angle:
  • The course will have a slight focus on economic policy and government policy.
  • A more in-depth approach available in course 1441.
• Teaching Style:
  • Not everything will be written on the board; students must pay attention to what is said.
  • Encourages questions to slow down the fast-paced lecturing style.
  • Uses the term 'guys' in a gender-neutral way.

What is Microeconomics?

• Definition: Study of how individuals and firms make decisions in a world of scarcity.
• Key Concept: Opportunity Cost
  • Every action or inaction has a cost; the next best alternative you could have done instead is the opportunity cost.
  • Economics is about trade-offs due to constraints.
• Models: Simplified representations of real-world phenomena used to draw insights.
  • Models aim for tractability over perfect accuracy.

Supply and Demand

• Introduction Model: Supply and Demand
• Key Example: Adam Smith's Water-Diamond Paradox
  • Water is essential but cheap; diamonds are non-essential but expensive.
  • Explained by the difference in supply (water is abundant; diamonds are scarce) and demand.
• Graph Explanation: Market for Roses
  • Demand Curve: Downward sloping; as price increases, quantity demanded decreases.
  • Supply Curve: Upward sloping; as price increases, quantity supplied increases.
  • Equilibrium: Where supply and demand curves intersect (price and quantity where both consumers and producers are happy).

Positive vs. Normative Analysis

• Positive Analysis: Study of the way things are.
• Normative Analysis: Study of the way things should be.
• Example: eBay auction of a kidney.
  • Positive: High demand, low supply led to high price.
  • Normative: Debates on moral and ethical grounds about selling kidneys.
  • Concerns include market failures, equity (fairness), and behavioral economics.

Market Types

• Capitalistic Economy:
  • Firms and individuals decide what to produce and consume with minimal government interference.
  • Benefits: Drives growth and efficiency.
  • Issues: Leads to inequality and potential market failures.
• Command Economy:
  • Government makes all production and consumption decisions.
  • Benefits: Aims for equity.
  • Issues: Often inefficient and prone to corruption.

Course Plan

• Start with demand (consumer decision-making and utility maximization).
• Move to supply (firm decision-making and market types: competitive, monopoly).
• Integrate supply and demand to explore market equilibrium.
• Discuss deviations from models: market failures, equity, behavioral economics.

Sections and Problem Sets

• Recitations: Mix of new material and problem-solving.
  • E.g., Upcoming recitation will cover mathematical representations of supply and demand.
• Problem Sets: Assigned will cover material taught up to the given date.

Questions

• Encouraged for clarity and deeper understanding.