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PROFESSOR: So what I want to
do today is I want to talk
about what the heck
this course is.
What is microeconomics?
What are you going to be
learning in this course?
And just, sort of, set us
up for the semester.
OK.
So basically, microeconomics
is all about scarcity.
It's all about how individuals
and firms make decisions given
that we live in a world
of scarcity.
Scarcity is key because
basically what we're going to
learn about this semester in
various shapes and forms is a
lot of different types of
constrained optimization.
We're going to learn a lot
about different ways that
individuals make choices
in a world of scarcity.
OK?
That is, this course is going
to be about trade-offs.
Given scarce resources, how
the individuals and firms
trade off different alternatives
to make
themselves as well-off
as possible.
That's why economics is called
the dismal science.
OK?
It's called the dismal science
because we are not about
everyone have everything.
We're always the people who
say, no, you can't have
everything.
You have to make a trade-off.
OK?
You have to give
up x to get y.
And that's why people
don't like us.
OK?
Because that's why we're called
the dismal science,
because we're always
pointing out the
trade-offs that people face.
Now, some may call it dismal,
but I call it fun.
And that may be because of my
MIT training, as I said I was
an undergraduate here.
In fact, MIT is the perfect
place to teach microeconomics
because this whole institute is
about engineering solutions
which are really ultimately
about constrained
optimization.
Indeed, what's the best
example in the
world we have of this?
It's the 270 contest. Right?
You're given a pile of junk,
you've got to build something
that does something else.
That's an exercise in
constrained optimization.
All engineering is really
constrained optimization.
How do you take the resources
you're given and do the best
job building something.
And that's really what
microeconomics is.
Just like 270 is not a dismal
contest, microeconomics is not
to me a dismal science.
You could think of this
course like 270.
But instead of the building
robots, we're
running people's lives.
OK?
That's, kind of, the
way I like to
think about this course.
Instead of trying to decide how
we can build something to
move a ping pong ball across a
table, we're trying to decide
how people make their decisions
to consume, and
firms make their decisions
to produce.
That's basically what's going
to go on in this class.
OK?
And that's why basically modern
microeconomics was
founded at MIT in the 1950s
by Paul Samuelson.
The father of modern economics
was a professor here, and he
basically founded the field.
He basically introduced
mathematics to economics.
And through teaching this
course, 14.01, 50, 60 years
ago, actually developed the
field that we now study.
Now, what we're going to do in
this class, is focused on two
types of actors in the economy:
consumers and producers.
OK?
And we are going to build models
of how consumers and
producers behave. Now,
technically, a model is going
to be a description of any
relationship between two or
more economic variables.
OK?
That's a model.
A description of any
relationship between two or
more economic variables.
The trick with economics, and
the reason many of you will be
frustrated during the semester,
is that unlike the
modern relationship between
say energy and mass these
models are never precise.
They are never accurate
to the 10th decimal.
OK?
This is not a precise,
scientific
relationship with modeling.
We'll be making a number of
simplifying assumptions that
allow us to capture the main
tendencies in the data.
That allow us to capture the
main insights into how
individuals make consumption
decisions and how firms make
production decisions.
But it's not going to be as
clean and precise as the kind
of proofs you're going to be
doing in some of your other
classes in freshman and
sophomore year.
OK?
So basically, we have a trade
off with the simplifying
assumptions.
On the one hand, obviously we
want a model that can explain
reality as much as possible.
If a model can't explain
reality, it's not useful.
On the other hand, we need a
model that's tractable, a
model that I can teach you
in a lecture or less.
OK?
And basically, what we do is we
make a lot of simplifying
assumptions in this class to
make those models work.
And yet, what we'll find is
despite these assumptions,
we'll come up with incredibly
powerful predictions of how
consumers and producers
behave.
So with consumers what we're
going to do is, we're going to
say that consumers are
constrained by their limited
wealth or what we'll call
their budget constraint.
And subject to that constraint
they choose the set of goods
that makes them as well
off as possible.
OK?
That's what we're going to call
utility maximization.
We'll say the consumers maximize
their utility,
consumers are going to maximize
utility subject to a
budget constraint.
That's going to be what
we're going to develop
the consumer decision.
They have some utility function
which is going to be
a model of their preferences.
OK?
So I'm going to propose to take
everything you love in
life and write it down
as a u function.
OK?
Then I'm going to propose you
take all the resources at your
disposal, write them down as a
budget constraint and then I
just do constrained maximization
to solve for how
you make decisions.
Firms, on the other hand, are
going to maximize profits.
Pi is profits.
Firms are going to
maximize profits.
Their goal is to make as much
profit as possible, to earn as
much money as possible.
OK?
However, that's going to be
subject to both the demands of
consumers, we get to firms it's
a lot harder, subject to
both consumer demand
and input costs.
So firms have to consider,
consumers have to consider
look what does stuff cost
and what do I like,
I'll make my decision.
Firms is a little more
complicated.
They've go to consider, what do
consumers want and how do I
make what they want?
So they've got to consider both
the output side, what a
consumer is going to want me to
make and what's it going to
cost me to produce that good?
And how do I combine those
to make the most profits?
OK?
So from these assumptions, we
will be able to answer the
three fundamental questions
of microeconomics.
OK?
The three fundamental questions
of microeconomics
will be, what goods and services
should be produced?
What goods and services
should be produced?
How to produce those
goods and services?
And who gets the goods
and services?
What goods and services
get produced?
How to produce those
goods and services?
And who gets them?
And what's amazing, we'll learn
in this course, is that
all three of these questions,
the three fundamental
questions that drive our entire
economy, are all solved
through the role of
one key state
variable, which is prices.
Prices in the economy resolve
all of these problems. OK?
Consumers and firms will
interact in a market, they'll
interact in a marketplace.
And out of that marketplace will
emerge a set of prices,
in a way we'll describe.
And those prices will allow
firms and consumers to make
the relevant decisions.
OK?
So let me just give you one, and
we're going to do all this
rigorously throughout the
semester, let me just start
with one casual example.
OK?
Let's think about the
development of the iPod.
OK?
Let's cast our minds way back,
lo way back to the development
of the iPod.
OK?
Now, when Apple was thinking
about making the iPod, they
had to ask, would consumers
want this?
So consumers had to decide given
their limited resources,
given the fact that they were
buying a certain set of things
would they be willing to forsake
some things they were
already doing to spend the
money on the iPod?
OK?
It was a non-trivial
amount of money.
Would they be willing to
forsake things they are
already doing?
OK?
To spend money on the iPod.
And clearly they were.
Clearly, consumers were willing
to spend money, to
spend a lot of money,
to get an iPod.
They were originally
what? $300 Back
when $300 meant something.
OK.
So basically, what the firm will
do is they'll say, OK, we
get a signal from the consumer
that they're willing to pay
money to get the iPod.
They're willing to pay a high
price to get the iPod.
Now, the firm will say, well,
should we make iPods?
Well, that will depend on what
it cost to make them.
So we have to then assess what
are the inputs that we'll need
to make an iPod?
Well, to do that we have to
look at the prices of the
various inputs that we'll need,
of the chip in them and
the metal and all the other
stuff that goes into the iPod.
OK?
So they can shop across
different countries, to
different kinds of chips, they
can look at different kinds of
monitors, et cetera.
But, once again, what they'll
do is they'll use the prices
of those different inputs
to decide how
to produce the iPod.
So whether to produce the iPod
will depend on the price
people are willing
to pay for it.
How to make the iPod will depend
on the prices that
firms have to pay for the chip
and the casing and all the
other things that go
into the iPod.
OK?
And then finally, who's
going to get the iPod?
Well, they're going to make
a certain amount.
What decided who gets them?
Well, the person who gets them
are the people who are willing
to pay the price that Apple
decides to charge.
Some people are willing to pay
that price, they're going to
get an iPod.
Some people are not willing to
pay that price, they will not
get an iPod.
So the price in the market will
ultimately decide who
gets the iPod, as well.
OK?
So basically, prices will
determine what gets produced,
how it's produced,
and who gets the
goods that are produced.
OK?
Of course, this is a very, very
simplified example, as
you can already tell.
There are lots of cases
where prices don't
decide these things.
So my favorite example is the
fact that there are lines for
hours to get tickets to see
a Lady Gaga concert.
OK?
Now if it's really true that
prices determine everything,
we shouldn't see any lines.
It should just be that those
who are willing to pay the
most to see Lady Gaga should.
Those who want the most
to get Lady Gaga
should get the tickets.
Those who aren't willing to pay
shouldn't get the tickets.
Why should there be a line?
Not to mention the fact that
people shouldn't be willing to
pay anything, but that's
a different issue.
That's a taste issue.
We'll come to taste later.
OK?
So basically, clearly this
is not working perfectly.
If the world worked in the way
I just described, then what
should happen is there should be
essentially an auction and
whoever is willing to pay the
most for Lady Gaga tickets
would get them.
And whoever is not willing
to pay wouldn't.
It wouldn't involve
any waiting in
line or other things.
Now, what's very interesting
is we've actually seen an
evolution from my youth to
your youth towards the
economic model.
When I was a kid, if you wanted,
so then it was Cars
tickets, OK, to date myself, OK,
you had to go and camp out
at 3:00 in the morning outside
the store where they're
selling them to get
the tickets.
Now, of course, you don't
do that anymore.
Now you go on Stub Hub or
Ticketmaster or these other
secondary sellers and there
there are prices that
determine it.
So how many people have
waited on line to
get a concert ticket?
That's amazing.
So if I asked this question 30
years ago, 90% of the hands
would have gone up.
OK?
So what that means is the
price mechanism has
started to be used.
It has replaced the line
mechanism as a way to allocate
those tickets.
And we see prices working.
That wasn't true.
There wasn't StubHub.
There weren't these secondary
ticket sellers 30 years ago.
You had to wait on line
to get the tickets.
Now, so that's basically, sort
of, an overview about, sort of
an example, of how we think
about the role of prices.
Now, let me draw a couple of
important distinctions, terms
I'm going to use this semester
that I want you to be
comfortable with.
OK?
The first distinction I want to
draw is between theoretical
versus empirical economics.
Theoretical versus empirical
economics.
OK.
Theoretical economics is the
process of building models to
explain the world.
OK?
Empirical economics is the
process of testing those
models to see how good
a job they do in
explaining the world.
OK?
We could all make up a model.
OK?
Anybody with math skills
could make up a model.
But it doesn't do any good
unless it's actually doing
something to explain
the world.
And so basically, the goal of
theoretical economics is
essentially to build a model
that has some testable
predictions.
To build a model that says,
look here's my simplified
model of how consumers decide
whether or not to buy an iPod.
OK?
I have a model of that, that
I've built theoretically.
Well, that has some testable
predictions.
And the role of empirical
economics is to gather the
data and go and test them using
statistical methods.
Specifically, typically
regression analysis like the
kind you learn about in
advanced statistics.
OK?
So basically, what we're going
to do is we're going to is 95%
of this course will be
about theoretical
economics this semester.
It will be about understanding
how economists develop the
models to model how consumers
and firms behave. But I will
try to talk somewhat about
empirical economics and what
data we can bring to bear to
understand whether or not
these models explain
the world.
OK?
The other distinction that's
very important is positive
versus normative economics.
Positive versus normative
economics.
And this is the distinction
between the way things are,
which is positive economics, and
the way things should be
which is normative economics.
Distinction between the way
things are and the way
things should be.
OK?
So let's consider a great
example of microeconomics at
work which is auctions
on eBay.
OK?
Auctions on eBay, economists
love studying auctions on eBay
because it's a textbook example
of what we call a
perfectly competitive market
which is what we'll focus on
the semester.
A perfectly competitive
market.
OK?
And by that we mean that
basically that producers in
this market offer up
their good to a
wide range of consumers.
OK?
A number of producers offer
up their goods to a
wide range of consumers.
OK?
And the consumers bid up the
price until the person who has
the highest value for
the good gets it.
So price serves exactly
the signal it should
in allocating goods.
OK?
So really eBay's really sort of
about this third thing of
who gets the good.
OK?
I offer my alarm clock or
whatever on eBay, OK, and then
people bid on that.
And whoever values that the
most, that rare Jon Gruber
alarm clock the most,
they get it.
OK?
So it's a perfect textbook
example.
OK?
And basically, because on eBay
the price is used, or now with
also StubHub and concert
tickets, the price is used to
allocate the good to the
person who wants
it the most. OK?
Now, a recent example of an
auction on eBay that a lot of
attention, not so recent anymore
a couple years ago,
someone tried to auction
their kidney on eBay.
OK?
Someone offered their kidney for
auction on eBay and said,
I have two kidneys
I only need one.
So I'm going to auction my
kidney, you pay for me to fly
to wherever you need my kidney
and the operation, they take
it out and they give
it to you.
And that's the way it goes.
So what happened was person
offered their kidney and they
said the starting price
will be $25,000.
They didn't do a buy it now.
They said the starting price
will be $25,000 and the
bidding went on.
The price got to $5 million
before eBay shot it down.
eBay shut the auction down.
And eBay said no, in fact,
you can't do this.
Now there's two questions
here.
The first is, why did
the price of the
kidney go so high?
That's the positive question.
The positive question is, why
did the price the kidney on
eBay get so high?
And here, we'll talk, and you'll
learn more starting
Friday, about the twin forces
of supply and demand.
The twin forces that drive the
economy of supply and demand.
And you'll talk more rigorously
about these on Friday.
Basically, they're what
they sound like.
Demand is how much someone
wants something.
Supply is how much of
it there is to have.
And the intuition here
is surprising.
OK?
The more that there's demand for
a good, the higher will be
the upward pressure on prices.
The more people want a good,
the higher prices will go.
And the less supply there is
of a good, also the higher
prices will go.
So if everybody wants something
but it's common, the
price will be low.
And if no one wants something
but it's uncommon, the price
will still be low,
and vice versa.
In fact, the development of the
model of supply and demand
framework was from Adam Smith,
the, sort of, so-called first
economist who wrote The Wealth
of Nations in 1776 which is,
sort of, viewed as the,
kind of, first
serious book about economics.
And he posed what he called
the water diamond paradox.
What Smith said in that book is,
look, it's clear water is
the most important
thing in life.
We can't live without water.
And diamonds are completely
irrelevant to life.
You can live totally fine
without a diamond.
And yet, the price
of diamonds is
astronomical and water's free.
How can this be?
How can it be that water which
is so much more of a
fundamental building block of
our life is so much cheaper
than diamonds which are not.
And the answer, of course, is
that so far you've only
considered demand
and not supply.
Yes, it's true.
The demand for water
is much higher than
the demand for diamonds.
But the supply is even larger.
So that basically, yes it's true
that while water should
be worth more, in fact, in the
end the price of water is much
lower, because of the twin
forces of demand and supply.
The demand is higher, but the
supply is much higher.
So the price ends up lower.
And that was his diamond
water paradox.
OK?
Well, in this case, it's
a similar thing.
What determines the demand
for a kidney?
What determines the demand for
a kidney is going to be the
fact that you die without it.
OK?
If you have no kidneys, you're
having kidney failure.
OK?
You'll die without it.
So basically, what will
determine it is people are
willing to spend all their
wealth, as much money as they
can have, to get a kidney OK?
So the demand will
be quite high.
The supply will be quite low.
Sadly, not many people are
willing to be organ donors.
More relevantly, a lot of
people aren't in good
situations to be organ donors.
OK?
As a result, the supply is much
lower than the demand.
So we have a situation with a
high demand, a low supply and
the price went through
the roof.
That's a positive analysis.
OK?
So we can understand
pretty intuitively.
We don't need this course
to understand why
the price went up.
OK?
It's just the twin powers
of demand and supply.
But what about the normative
question which is, should eBay
have allowed this
sale to happen?
EBay at $5 million cut it off
and then passed the rule
saying you can't auction your
body parts on eBay.
OK?
Should they have done that?
That's the normative question.
That's economics gets really
interesting, which is you all
are smart enough to figure out
why the price went up.
But this is where it gets
interesting is should people
have been able to auction
their kidney on eBay?
On the one hand, many, many
people in this country die for
want of a body part.
OK?
Thousands to hundreds of
thousands of people die every
year waiting for a transplant.
OK?
If someone is incredibly rich
and they want a body part,
which to me a surplus because
I have two kidneys, why
shouldn't they be allowed
to buy it from me?
I'm better off because they
can pay me a ton of money.
They are better off
because they live.
So I've just described a
transaction that makes both
parties better off.
Why shouldn't that be
allowed to happen?
So you tell me.
Does everyone think
eBay was wrong?
Yeah, go ahead.
AUDIENCE: Say there is another
person who doesn't have as
much money, and that
person also dies.
PROFESSOR: You mean the person
who, what do you mean the
person doesn't have as much-
AUDIENCE: --so obviously
somebody
doesn't get the kidney.
PROFESSOR: So in other words,
what you're assuming is, let's
say that if I hadn't done the
auction on eBay, I would have
just given my kidney away to
the transplant center.
Then that's one less kidney
that can go to
the transplant center.
And that means the rich guy gets
the kidney, and someone
else implicitly doesn't.
That's a trade-off.
You've just described
a trade-off.
The trade-off is that basically
now we've allocated
the kidney away from the poor
person to the rich person.
Now, but why do we
care about that?
I mean one person dies,
another person
lives, why do we care?
Yeah?
AUDIENCE: There would
be some sort of case
of severity in condition.
Like there might be someone
who's poor who would get the
kidney if it went to a
transplant association because
they would die in a couple
of days without it.
Whereas the rich person might
just be able to afford it, and
it might make their life
more convenient.
But they might not be
in any more peril.
PROFESSOR: They might
be a collector.
So basically, that's right.
So one reason we might care is
because we think that kidneys
should be allocated on the
basis of who needs
it the most. OK?
So a great example of this, of
course, was Mickey Mantle with
a liver transplant.
Mickey Mantle, famous
ballplayer, raging alcoholic,
who had liver failure because
he was basically drinking
himself to death, and jumped
the queue and got a liver
above a bunch, a lot of people
and then he kept drinking and
killed himself and wasted
the liver he'd gotten.
OK?
So basically, you can think
that doesn't make sense.
We should give it to people who
need it the most. For who
it would do the most
good in terms of
increasing their life.
OK.
So we've got the substitution
point.
OK.
Let's come back to the
substitution point though.
Tell me a situation in
which that's wrong.
Can someone tell me a situation
in which, in fact,
that not a valid point.
Yeah.
AUDIENCE: Well, if the guy
is only going to sell it.
He's not going to
give it away.
PROFESSOR: Exactly.
You're assuming that the
guy who did sell
would give it away.
But, in fact, if it's
sell it or keep it
then there's no trade-off.
And similar here, if it's sell
it or keep it then you might
as well let the rich
guy get it.
Or is there another argument?
Is there another reason
why you might not
want this to happen?
Yeah.
AUDIENCE: It would encourage
people to use illegal ways of
getting kidneys.
PROFESSOR: So the other reason
could be that we don't trust
people to make good decisions
when money's involved.
That we think that, gee, if it's
really true I can get a
couple million bucks for a
kidney, I might give mine up
even if I haven't really
thought through the
ramifications of doing so.
Even if there's a risk to the
surgery, if there's a risk
that my other kidney will then
fail then I'll be screwed.
OK?
So basically, we might have a
paternalistic attitude that
will lead us to not want to
allow people to engage in this
kind of risky behavior.
Yeah?
AUDIENCE: There may also be
some legal ramifications
associated with that if someone
sells their kidney and
then their other kidney fails,
they might then blame eBay.
PROFESSOR: Want it back.
Like that Repo movie.
That's right.
There could, but let's leave the
lawyers out of this, OK?
I don't like lawyers.
I'm going to rag on lawyers
this semester.
We're going leave the
lawyers out of this.
But, in any case,
you're right.
That's, sort of, a
ramification of the same thing.
So we've talked about the fact
that there's substitution.
We've talked about the fact
that it's not allocated to
those who need it the most.
We've talked about the fact
that people might be making bad
decisions in doing this.
But there's another factor, as
well, which is we may just as
a society feel it's unfair
that rich people can get
things poor people can't.
There may be a pure equity
component here.
OK?
Which is simply that we as a
society value equality, value
income inequality.
And we think people should not
have an extra shot at getting
a resource just because
they're rich.
Now that is a very deep and hard
concept, and we'll spend
a couple lectures talking about
equity towards the end
of the semester.
By and large, we won't
consider it.
OK?
But it turns out to be behind
much of what we'll discuss,
OK, in much of what we'll
discuss this semester and much
of what goes on in economics.
OK?
Just take a look at the debate
that's going on right now in
terms of President Obama trying
to decide whether or
not to extend tax cuts to
wealthy individuals in the US.
Some people argue that allowing
those tax cuts would
promote the economy.
OK?
But others argue it's
unfair for rich
people to get tax breaks.
And that fairness argument
matters a lot in terms of
driving the kind of
economic policy
decisions we need to make.
So this semester, we're going
to focus a lot on efficiency
and optimization and how
to get resources
to the right place.
But you have to remember behind
a lot of this is deep
normative issues about what
should be happening, how
should an economy function, and,
in particular, how should
we think about these
kind of equity
issues that are so important.
OK.
The last thing I want to talk
about is I want to talk about
why micro is not just an
abstract concept for things
like you might say, oh this is
all pretty funny and it's like
selling kidneys on eBay and
tax cuts for the rich
and why do I care?
OK?
Well, you care because literally
every decision you
make is made through the kind
of framework we're going to
think about this semester.
OK?
Now, different decisions may
follow our models more closely
and less closely.
But there is not an
economic decision.
OK?
Sorry, let me back up.
There's not a decision that
people have made that
economists haven't
tried to model.
From whether to produce iPods,
to how many times to
have sex each week.
OK?
These are all things economists
have tried to model
with varying degrees
of success.
OK?
Because economists think that
these all come from the same
decision theoretic framework
that we can discuss.
Let's talk about a simple
example from this course.
Your decision of whether or
not to buy the textbook.
There's a textbook and
what's it cost? $140?
What's it cost?
Does anyone know?
AUDIENCE: This line says $180.
And this one says $180, but
it's available for $130.
PROFESSOR: $130, fine.
So $130 for Professor Perloff
out at Berkeley.
He doesn't get it all.
I wrote a textbook too.
He gets a small share of it.
OK.
So you have to decide, now has
anyone bought a used version
of the fourth, well it's the
fifth edition now, does
anybody use a version of
the fourth edition?
Does anyone know what
the used price is?
You can be honest.
I don't care.
AUDIENCE: I know some people
found it for like $85 or so.
PROFESSOR: So $85.
So you've got to decide.
So let's say you can buy the
previous edition, the fourth
edition, for $85 or the current
edition for $130.
OK?
You've got to make
that decision.
OK?
How do you make that decision.
Well you may think, gee I
just make the decision.
It's not really about
microeconomics.
But it is.
We're going to model how
you think about a
decision like that.
Well how do you think about
a decision like that?
Well, the first thing you
consider is your preferences.
How much are you willing to take
a chance that there's new
stuff in the fifth edition
that you need to know?
OK?
If the fifth issue was identical
to the fourth
edition then you'd be an idiot
to not just buy the used
fourth edition.
But it's not.
Textbook writers are smart.
They update their book.
OK?
So basically, the fifth
edition is updated.
There's new things in it.
So you have to ask yourself,
what are the odds that I need
some of the new information in
the fifth edition and not in
the fourth edition?
And in thinking about that,
you're going to think about
your preferences.
In particular, are you very risk
averse, are you afraid to
take a chance?
Or are you risk loving?
Are you willing to
take a chance?
OK?
That's one side of
the equation.
If you're someone that says,
you know I will not take a
chance in life.
I just have to make sure I learn
the most possible from
this course.
Then you're going to want
that new edition.
If you're someone that says, you
know what screw it, I'll
just figure it out later.
I'm going to the lectures.
I don't care.
OK?
Then you might not want
it that much.
So that's the first factor, is
going to be your preferences
and break down how much you
are willing to take a risk
that you need this
fifth edition.
The second factor is going to
be your constraint: how much
money you have. OK.
The more money you have, the
more you're willing, or more
relevant perhaps your parents
have, the more willing you are
to go ahead and buy
that new edition.
The less money you have, the
less willing you are.
OK?
So basically, it's going to
depend on whether you're
paying or your parents are
paying, in which case what the
hell you might as well buy
the fifth edition.
OK?
And then finally, you're going
to take these preferences and
this constraint, your
preferences and your
resources, and go to the market
and look at what does
the market tell me the
difference is.
So you're going to say, here's
how much I kind of care about
fifth versus fourth edition,
here's the resources I have,
now I'll go to the market and
say, aha there is a $45
difference between these
two editions.
So now I will solve
that constrained
optimization problem.
And I'll decide whether I
want to get that book.
You are going to be thinking to
yourself, this is stupid.
I never think about
it that way.
But the key point is you don't
have to think about it
exactly that way.
There's a famous example in
economics of what's called the
as if principle.
I don't know if kids still
say this one, as if.
So it's the as if principle.
OK?
And basically it's from Milton
Friedman, the famous economist
from Chicago, who said, look,
when you're playing pool,
technically you could compute
the optimal angles of which to
shoot the ball every single time
to get the appropriate
bounce and get the balls in.
You could do the mathematics
and compute it.
But professional pool players
are not in this class with
you, I'll only say that.
OK?
They're not guys who are able
to do that computation.
They just know how to hit the
ball to get the same outcome
they would get if they
mathematically solved for the
optimal trajectory
to hit the ball.
OK?
They behave as if they've
solved the constrained
optimization problem.
And your decision when you buy
this book, you may not think
it through the very framework
that I just laid out very
heuristically and will lay out
more rigorously this semester.
But you're going to behave
as if you do.
Because those facts are going to
be in your mind, and you'll
be thinking about it when
you make that decision.
So while you may feel the models
we learn in this course
are rather abstract and don't
really explain how you behave
in an everyday basis, you're
going to behave as if those
models are really
applying to you.
And if you think about, over the
next few days, think about
the decisions you make.
From should I bring
an umbrella today,
it looks like rain?
Well, on the one hand,
I might lose it.
It's a pain to carry.
On the other hand, how much do
I care about getting wet?
That's a constrained
optimization decision.
To should I have an extra drink
at a party Friday night?
On the one hand, that could
have some pros and cons.
OK?
These are all decisions,
constrained optimization
decisions, you're
going to make.
They're going to affect
your life.
And what we'll learn this
semester is about how you make
them and how we model, how
economists can use what we
learn about that to understand
the function of the economy.
OK?
So I'm going to stop there.
One other announcement, there
will, in general, be handouts
every lecture.
I'm not going to
do PowerPoint.
I'm going to do handouts.
So when you come in every
lecture, please look at the
back banister.
Though typically, not today.
But typically, they'll be
handouts that you'll need to
follow along with in class.
So remember, go to section on
Friday, first problems that
will be posted on Friday and it
will be due in section the
Friday after.
And I'll see you all back here
on Monday, next Monday.
