Lecture 1: Introduction to Microeconomics

Instructor and Course Information

• Instructor: John Gruber
• Course: Microeconomics 1401
• Course Highlight: Will have a policy angle related to government policy
• Related Course: Economic Policy (1441), to be taught next year

Teaching Style

• Minimal Board Writing: Responsibility on listening
  • Feel free to ask questions if you can't read the board
• Fast-Paced Lectures: Encourage questions to slow down the pace
• Gender-Neutral Language: Uses “guys” to mean all people

Course Topics Overview

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

What is Microeconomics?

• Study of how individuals and firms make decisions in a world of scarcity
• Key Concept: Constrained optimization
  • Economic agents (firms/individuals) maximize well-being given constraints
  • Opportunity Cost: Cost related to the next best alternative forgone

Importance of Opportunity Cost

• Introduced as one of the first concepts
• Every action has an alternative cost
• Often referred to as the reason economics is called the “dismal science”

Economics as Constrained Optimization

• Similar to engineering in principle
• Engineers and economists both solve constrained optimization problems

Models in Economics

• Definition: Describes relationship between any two or more economic variables
• Models are not laws; they are simplifications
  • Capture phenomena with a set of simplifying assumptions
  • Trade-off between accuracy and tractability

Supply and Demand Model

• Components
  • Demand Curve: Downward sloping, represents relationship between price and quantity demanded
  • Supply Curve: Upward sloping, represents relationship between price and quantity supplied
• Market Equilibrium: Where supply and demand curves intersect, both consumers and producers are satisfied

Example: Water vs. Diamonds

• Paradox: Essential water is cheap; non-essential diamonds are expensive
• Explanation: Difference in supply
  • Water supply is abundant
  • Diamond supply is limited

Positive vs. Normative Analysis

• Positive Analysis: Study of the way things are
• Normative Analysis: Study of the way things should be
• Example: Kidney sales on eBay
  • Positive Question: Why did the price of a kidney auction skyrocket?
  • Normative Question: Should selling kidneys be allowed?

Arguments: Selling Kidneys on eBay

• Positive Analysis: High price due to low supply and high demand
• Normative Issues
  • Market Failures: Fraud, imperfect information
  • Equity and Fairness: Would benefit the rich versus the poor
  • Behavioral Economics: People may make irrational decisions

Capitalistic vs. Command Economy

• Capitalistic Economy: Firms and individuals decide what to produce and consume with minimal government interference
  • Leads to tremendous growth but also high inequality
• Command Economy: Government makes all production and consumption decisions
  • Attempts equity but often leads to inefficiency and corruption

Adam Smith and the Invisible Hand

• Consumers and firms acting in their own self-interest benefit society
• We will explore how this magic works and its limitations

Course Structure

• Demand and Supply
  • Demand: Utility maximization and budget constraints
  • Supply: Firm decisions on inputs and outputs
  • Market equilibrium and variations
• Further Topics: Market failures, equity, behavioral economics

Sections and Problem Sets

• Sections: Combination of new material and problem-solving
• Problem Sets: Cover material taught up to the assignment date
• First Section: Mathematics of supply and demand
  • Next Lecture: Underpinnings of the demand curve

Key Takeaways

• Engage with questions
• Understand both intuitive, graphical, and mathematical aspects of models
• Explore positive and normative analyses
• Microeconomics is about making the most of limited resources through trade-offs