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JONATHAN GRUBER: This is 14.01.
I'm John Gruber, and
this is microeconomics.
Today, I want to
cover three things.
I want to talk about
the course details.
I want to talk about
what is microeconomics.
And then I'll start the
substance of the course
by talking about
supply and demand.
Couple of the points about
the course-- the course
will have a distinct sort
of policy angle to it.
I sort of do economic policy,
government policy is my thing.
So I think it's what
makes economics exciting
and it sort of offers, I
think, an interesting angle
to understand why we're
learning what we're learning.
I think sometimes
in an intro class,
it's sort of hard to
understand why the heck
you're doing things.
However, that's just
sort of a slight flavor.
If you're really more
interested in this,
I teach a whole
course called 1441.
I'm not teaching it
this year, but it
will be taught by a visitor
in the spring, Kristin Butcher
from Wellesley.
And I'll be teaching next year.
That dives much more
into these policy issues.
So I'm going to use government
policy as sort of an organizing
theme, but it won't be the
dominant theme of the class.
Finally, three points
about my teaching style.
I don't write
everything on the board.
We're not in high
school anymore.
You're actually responsible for
what I say, not what I write.
Partly that's because my
handwriting is brutal,
as you can tell already.
So what that means is,
please, please do not
be afraid to ask me what the
hell I just wrote on the board.
There's no shame in that.
Don't just lean to your
neighbors, and say,
what the hell did he
just write in the board.
Ask, me, because if
you can't read it,
I'm sure someone else can't
read it, so feel free to ask.
And in general, please
feel free to engage
with questions in this class.
The other point of my teaching
style is I talk way too fast.
And the longer I go-- there's
a mathematical function,
which is the longer I
go without interruption,
the faster I speak,
until I just spin off.
So basically, please
ask questions.
If anything is not
clear, or you just
want to ask questions
about some related tangent
or whatever, please
feel free to do so.
You might think, how would
that work in a class this big?
There's always way too
few questions, even
a class this big.
So never be afraid that it
will slow me down or whatever.
Ask me questions.
We have plenty of
time on the class.
And you'll be doing
your classmates a favor,
because it'll slow me down.
Finally, last point, I
have this terrible tendency
to use the term "guys"
in a gender neutral way.
So this class, I
like to see, looks
like it's a fairly
healthy representation
both males and females.
When I say "guys,"
I don't mean men.
I mean people.
I mean people.
So women, don't
take it personally.
"Guys" means economic agent.
It means people.
It doesn't mean men.
Just the way-- just
a bad tendency.
It drives my wife crazy,
but I've decided better
to just apologize up front
than try to fix it throughout,
which is impossible.
So let's talk about
what is microeconomics.
So fundamentally,
microeconomics-- how people
took AP high school Econ?
How many people--
for how many people
was it taught really well?
That's about right.
That's why I did my high
school online class.
That's the answer
I wanted to hear.
So tell your friends
still in high school who
are taking high school
Econ, if your high school
teacher isn't great,
tell them to go on EdX
and take the class.
And help out your friends
still in high school.
So what is microeconomics?
Microeconomics is
the study of how
individuals and
firms make decisions
in a world of scarcity.
Scarcity is what
drives microeconomics.
Basically, what
microeconomics is
is a series of constrained
optimization exercises,
where economic agents, be
they firms or individuals,
try to make themselves
as well off as possible
given their constraints.
Yeah.
AUDIENCE: Will this
cover irrationality?
JONATHAN GRUBER: I will,
but not as much as I should.
Essentially, we
have another course
in the department called 1413,
Behavioral Economics, which
gets into that much more.
I will sprinkle it
throughout, but not
as much as I actually
believe in it.
In other words, the way
we think about economics
is it's best to sort
of get the basics down
before you start worrying
about the deviations.
Find it's better
to climb the tree
before you start going
out in the branches.
So basically, what this
course is then about
is it's about trade-offs.
It's about given that
you're constrained,
how do you trade off things
to make yourself as well off
as possible?
And behind this notion of
trade-offs is going to be--
I'll say about 100 times this
is the most important thing
in the course, so
just ignore that.
But this is one of the
most important things.
I'll say "one of the
most important" things
in the course, is the
notion of opportunity cost.
Opportunity cost is a
very important concept
that we teach, sort of the
first concept we teach,
which is that every
action or every inaction
has a cost in that you
could've been doing something
else instead.
So if you buy a shirt, you
could have bought pants.
If you stayed at
home and watched TV,
you could have been out working.
Everything you do has
a next best alternative
you could have done instead.
And that is called the
"opportunity cost."
And that's a critical
concept in economics,
and that is why,
in some sense, we
are referred to casually
as the "dismal science."
Economics is referred to
as the dismal science.
First of all, I'm flattered
we're considered a science.
But it's called the
"dismal science"
because our whole point
is that nothing is free.
There is always a trade-off.
There's always an
opportunity cost.
Anything you do, you could be
doing something else instead.
And your constrained
optimization
means you're going to
have to pass up one thing
to do another.
Now, some may call it
"dismal," but as a former MIT
undergraduate, I call it "fun."
And this is why I think
MIT is the perfect place
to be teaching economics,
because MIT engineering is
all about constrained
optimization.
That's what engineering is.
And economics is
just the engine.
It's just the principles
you learn in engineering
applied in different contexts.
So if we think about the
2.007 contests-- that still
exist with the robots, 2.007?
Yeah, the 2.007 contests,
those, as you know,
are contests where you're given
a limited set of materials.
And you have to build a
robot that does some task,
like pushing ping-pong balls off
a table or something like that.
That's just constraint
optimization.
It's got nothing to
do with economics,
but it's constrained
optimization.
So just think of microeconomics
as like engineering,
but actually interesting.
So think of microeconomics
as engineering,
but instead of
building something
to push a ping-pong ball
off tables, you actually
build people's lives,
and businesses,
and understand the decisions
that drive our economy.
So same principles
you could think
of for your engineering classes,
but applied to people's lives.
And that's why, in fact, modern
economics was born in this
room, this room or 26.100 by
Paul Samuelson in the 1940s
and '50s, who wrote the
fundamental textbook that gave
birth to modern economics.
Because he was here and
applied the kind of engineering
principles of MIT
to actually develop
the field of modern economics.
What we'll learn today
was developed at MIT,
so it's a great place
to be learning it.
Now, with that as background--
any questions about that,
about what is microeconomics?
With that as
background, let's turn
to our first model we'll talk
about this semester, which
is the supply and demand model.
Supply and demand--
now, the way we're
going to proceed in this course
is going to drive you crazy,
because we're going to
proceed by teaching,
as the very first
question pointed out,
by teaching very
simplified models.
We're going to essentially--
what is a model?
A model is technically
a description
between any two or more economic
variables or any two or more
variables.
But unlike the models used
in all your other classes,
these aren't laws, by and
large, they're models.
So we don't have a relation
between energy and mass
which you can write down.
It's a law and you're done.
We have models which are
never 100% true, but always
pretty true, "pretty"
being somewhere
between 10% and 95% true.
So basically, the idea
is to make a trade-off.
We want to write
down in our models
a set of simplifying
assumptions that
allow us, with a relatively
small set of steps,
to capture relatively
broad phenomena.
So it's essentially a trade-off.
On the one hand,
we'd like a model
that captures as well as
possible the phenomena
in the real world, like
E equals Mc squared.
But we want to do so in the
most tractable possible way
so that we can teach it
from first principles,
and don't need an arrow to teach
every single insight we have.
So basically in
economics, we tend
to resolve that by erring
on the side of tractability.
That is why I can teach
you the entire field
of microeconomics--
which is really sort of--
macro is kind of
a fun application.
Micro is really economics.
I can teach you the entire
field of microeconomics
in the semester,
because I'm going
to make a whole huge set
of simplifying assumptions
to make things tractable.
But the key thing
is that you will
be amazed at what these
models will be able to do.
With a fairly simple
set of models,
we will be able to offer
insights and explain
a whole huge variety
of phenomena,
never perfectly, but
always pretty well,
generally pretty well.
And so that is
essentially the trade-off
we're going to try
to do this semester.
So the line I like
is the statistician
George Box said that all models
are wrong, but some are useful.
Now obviously, it doesn't apply
to models in the hard sciences,
but in the social
sciences, that's true.
And basically, I'm
going to write down
a set of models like that.
Now, with every model I write
down, I'm going to try--
my goal is to have you
understand it at three levels.
The first and most
important level
is the intuitive
level, the level
which you sort of understand.
I call it "passing
the Mom Test."
You can go home and explain
it to your mom at Thanksgiving
or at the end of semester.
No offense to dads, just
called it "the Mom Test."
So basically, that's
the intuitive level.
You really understand it in a
way that you could explain it.
The second is graphical.
We were going to do--
most of our models
here were developed in a
graphical framework using
x/y graphs that really in
economics, we think delivers
a lot of shorthand power.
And the third is mathematical.
The mathematical is probably
the least important,
but it's the easiest
to test you on.
So we're going to need to know
things mathematically as well.
So let's start by considering
the supply and demand
model by using
the famous example
brought up by Adam Smith.
Adam Smith is sort of considered
the father of economics.
If Paul Samuelson is the
father of modern economics,
Adam Smith is the
father of all economics.
His 1776 book, The
Wealth of Nations
did an incredible job
of actually laying out
the entire core of
the economics field--
no math, just words,
but he just nailed it.
And one of his most
famous examples
was the water diamond paradox.
He said, think about
water and diamonds.
He said, start with water.
Nothing is more important
for life than water.
It's the building
block of all of life.
Even when we look for
life on other planets,
we always start by
looking for water.
Now think of diamonds, one
of the more frivolous things
you can buy, certainly
irrelevant to leading
a successful or happy or
productive life, or any life.
Yet for most of us,
water's free and diamonds
are super expensive.
How can this be,
Adam Smith asked.
Well, the answer he posed is
that what I first described
was just demand.
That is, we demand
lots of water.
We demand fewer diamonds.
But we have to match that
with the concept of supply.
And the supply of water
is almost infinite,
while the supply of diamonds--
maybe not naturally,
maybe it's through decisions
of various businesses--
but it's somewhat limited.
So basically what
he developed is
what we call the "supply
and demand scissors"--
that you can't just think of
supply or demand in isolation.
You have to put
them together if you
want to explain the real world
phenomena we see, like the fact
that water is cheap and
diamonds are expensive.
So let's just about an example.
So there's one graph
that was handed out
in the back, which
is, let's talk
about the market for roses.
So in the market for roses,
we have a demand curve
and a supply curve.
So what we have here-- this
is the kind of x/y graph
we're going to look at all
throughout the semester.
On the x-axis is the
quantity of roses.
On the y-axis is
the price of roses.
The blue, downward-sloping
line is the demand curve.
Now, what I'm going to do here,
I'm just giving you a overview.
We are going, over the next
five or six lectures, dive
into where this demand
curve comes from.
We'll go to first principles
and build it back up.
But for now, what
we know of a demand
curve is it simply
represents the relationship
between the price of a good
and how much people want it.
Therefore, we assume
it is downward sloping.
At higher prices, people
want less of the good.
And we'll derive where
that comes from shortly,
starting next lecture.
But for now, I think
it's pretty intuitive
that if the price
of roses is higher,
people want fewer of them.
And that's why it's
downward sloping.
Basically, as the
price of roses goes up,
people want fewer roses.
The yellow curve is
the supply curve.
Now, after we've derived
the demand curve,
we'll then go and
spend about 12 lectures
deriving the supply curve.
That's a bit harder.
But once again, we'll
start from first principles
and build it up.
For now, you just need to
know that's how much firms
are willing to supply,
given the price.
So basically, as
the price goes up,
firms want to
produce more roses.
The higher price means
you make more money,
so you want to
produce more of them.
This is slightly less
intuitive than demand,
but we'll derive it and
explain how it can be.
But for now, just go
with the basic intuition
that if you're making
something, and you can sell it
in the market for
a higher price,
you're going to want
to make more of it.
And that leads to the
upward sloping supply curve.
Where the points meet is
the market equilibrium.
Where supply and demand meets
is the market equilibrium.
And that is the point where
both consumers and producers are
happy to make a transaction.
Consumers are happy because
on their demand curve
is the $3 and 600 roses.
That is, they are willing
to buy 600 roses at $3.
Producers are happy,
because on their supply
curve is the same point.
They are willing to
supply 600 roses at $3.
That is the one point
where consumers are happy
and producers are happy.
Therefore, it's
the equilibrium--
highly non-technical, but
that's the basic intuition.
The point at which they're
both willing to make
that transaction, the
point at which they're
both satisfied with
that transaction,
is the equilibrium, which
in this case is $3 per
rose and 600 roses.
Now, this raises
lots of questions.
Where did the curves come from?
How does equilibrium
get achieved?
Why the heck do we give roses?
These are a bunch of questions.
We will come to
all these questions
over the next set of lectures.
But the basic thing
is to understand
this intuition of Adam Smith's
supply and demand model.
Questions about that?
Now, this model also raises
another important distinction
that we'll focus
on this semester
and is easy to get mixed up.
So I want you to, if
you're ever unclear,
I want you to ask me about it.
And that's the distinction
between positive
versus normative analyses--
positive versus normative.
Positive analysis is the
study of the way things are,
while normative
analyses is the study
of the way things should be.
A positive analysis is the
study of the way things are,
while normative
analysis is the study
of the way things should be.
Let me give you a great
example, which is eBay auctions.
Auctions are a terrific example.
They're like the
textbook example
of a competitive market.
You can see it in your head--
demand comes as a bunch of
people going on and bidding.
People who want
it more bid more,
so you actually
get a demand curve.
The higher the price, the fewer
people you're getting to bid.
Supply is how many units
of it are for sale on eBay.
You bid until those two meet.
And then you have a
market equilibrium
at that bidded price.
Now, one example
of an eBay auction
that got a lot of attention
a number of years ago,
early in the days
of eBay, was someone
offered their
kidney for auction.
They said, look,
I got two kidneys.
You only need one to live.
There are people out
there who need a kidney.
I'm putting my kidney
on eBay for auction.
And what happened,
bidding went nuts.
It started at $25,000.
It climbed to $5 million before
the auction was shut down,
and eBay decided
they wouldn't allow
you to sell your body on
eBay, bodily parts on eBay.
So this raises two questions.
The first is the
positive question,
why did the price go so high?
So what's the answer to that?
What's the answer to
the positive question?
AUDIENCE: Somebody
wanted a kidney.
JONATHAN GRUBER: Good
answer, but let's raise hands
and give answers.
That's part of it.
Yeah.
AUDIENCE: Low
supply, high demand.
JONATHAN GRUBER: Low
supply, high demand.
Demand is incredibly high,
because I'd die without it.
Supply is low, because
like not a lot of us
are willing to
sell their kidneys
on eBay So low supply, high
demand led to a high price--
Adam Smith at work.
That's the positive analysis.
But then there's the
normative question, which is,
should you be allowed to
sell your kidneys on eBay?
That's the normative question.
The positive question is,
what happens if you do?
The normative question
is, should you?
Now, the standard
economics answer to start
would be, of course you should.
We're in a world where
thousands of people
die every year because there's
a waiting list for a kidney
transplant.
and these are people who would
happily pay a lot of money
to stay alive, I presume.
Meanwhile, there's
hundreds of millions
of people walking around with
two kidneys who only need one.
And many of these
people are poor.
And lives could be changed
by being paid $1 million
for their kidney, and might be
happy to take the risk that one
kidney will be fine, as
it is for most everyone
for most of their
life, in return
for having a life-changing
payment from a stranger.
So economists say, look--
here's a transaction that
makes both parties better off.
The person who gets the
kidney gets to stay alive,
and they are willing to
pay a huge amount for that.
The person who sells the
kidney in most probability
is fine, because
almost all of us
can make it through life
fine with one kidney,
and create a life-changing
amount of money that
could allow them to pursue
their dreams in various ways.
So that's the standard
argument, would be,
yeah, you should be able to
sell your kidneys on eBay.
So the question is, why not?
Why would we want to
stop this transaction?
What are the
counter-arguments to that?
Let's raise our hands.
Yeah.
AUDIENCE: Potentially, I
think maybe the issue is
because on eBay, there's
no way to regulate it
or you don't necessarily know.
People could be like selling
fake kidneys, per se.
JONATHAN GRUBER: Right.
So the first type
of problem comes out
of the category we
call "market failures."
Market failures are reasons
why the market doesn't
work in the wonderful
way economists
like to think it should.
So for example,
this answer puts up
there could be the
problem of fraud.
People might not be
able to tell if they're
getting a legit kidney or not.
There could be the example
of imperfect information.
Do you know what the
odds are that you
can spend the rest of your
life with only one kidney?
I don't either.
We ought to know that before
we start selling our kidneys.
There could be
imperfect information.
This is one type of problem,
which is the market,
maybe the market may fail.
Yeah.
AUDIENCE: Well, the
current system also
holds people who are poor
and have a failed kidney--
and which are people who would
be completely screwed otherwise
in the [INAUDIBLE] system.
JONATHAN GRUBER:
A second problem
is what we call
"equity" or "fairness."
Equity or fairness, which is
we would end up with a world
where only rich people
would get kidneys.
Currently, there's a bunch of
voluntary donors and people
who are in accidents who
have kidneys left over.
And those go to people
on the basis of where
they are on a waiting list.
It's actually a
prioritized waiting list.
It's kind of a cool--
one of my colleagues, Nikhil
Agarwal, if you think about--
I'll talk a lot this semester
about the imperialistic view
of economics, all the
cool things we can study.
So he actually uses
economic models
to study the optimal way to
allocate organs to individuals.
now it's just done
based on a waiting list,
but it may be that someone
further down the waiting
list needs it more than someone
higher up the waiting list
because they're more
critical or whatever.
So there's various
optimal ways to allocate.
But certainly, the
optimal way to allocate
wouldn't be the rich
guy gets it first.
That would be unlikely to be
what society would necessarily
want.
So there's an equity
concern with that.
What else?
What other-- yeah.
AUDIENCE: In that
situation, since you
know you can make money
off of selling kidneys,
and you take advantage
of people, it's very bad,
the black market for kidneys.
JONATHAN GRUBER: Right, so
there's sort of a third--
it's related to
fraud, but there's
sort of a third
class of failures
that gets into the question
about behavioral economics
that was raised earlier, which
we could just call behavioral--
it's called
"behavioral economics,"
for want of a better term,
which is essentially,
people don't always
make decisions
in the perfectly rational,
logical way we will model them
as doing so this semester.
People make mistakes.
That's a word we hate
using in economics.
We hate saying "mistakes."
Ooh, boo, mistakes--
nobody makes mistakes.
We're all perfectly
economic beings.
But we know that's not true.
Increasingly over the
past several decades,
economists have started
incorporating insights
from psychology into our
models, to not just say
people make mistakes,
that their lackadaisical,
but to rigorously model the
nature of those mistakes
and understand how
mistakes can actually
happen due to various cognitive
biases and other things.
In this world, you can imagine
people could make mistakes.
They could not really
sit down and quite
understand what
they're doing, and they
could have sold their
kidney when it's really not
in their own long-term interest.
Yeah.
AUDIENCE: Would
another example be
if there's a family that
is in extreme poverty,
even though they
only have one kidney,
they might sell the other
one, just to get more
money for the family, per se?
JONATHAN GRUBER: Well, in
some sense that would be,
once again--
if we took this factor out,
if the market works well
with its behavioral
effects, we'd say, you know,
that's their decision.
If they otherwise they
starve, who are you to say?
But once you choose
this, say, wait a second,
maybe they're not evaluating
the trade-offs correctly.
Even if there's no fraud, even
if there's perfect information,
they may not know how to process
that information correctly.
But that is not
standard economics.
That's not what we'll spend a
lot of time on in the semester,
but it's obviously realistic.
So those are a bunch of good
comments, great comments.
And yeah.
AUDIENCE: Also, in
inelastic demand,
such that people
always need kidneys--
JONATHAN GRUBER: That won't
turn out to be a problem.
That doesn't turn
out to be a problem.
We'll come back--
that's a great comeback
that we talk about the
shape of demand curves.
We want to return to that
question in a few lectures,
but that doesn't
actually cause a problem.
It's just that's more of
a positive thing about why
the price is so high, but it's
not a normative issue about
whether you should
allow it or not.
So basically,
these are exactly--
to me, honestly, I spend
my life thinking a lot
about these things.
I think these are really
interesting issues.
But you can't get to
the normative issues
without the positive analysis.
You do the positive
analysis to understand
the economic framework
before you start
jumping to drawing conclusions.
That's no fun.
We all want to jump
to draw conclusions,
saying this should happen,
this shouldn't happen.
You can't do that.
We have to be disciplined.
We have to start with the
fundamental economic framework.
And basically, the bottom line--
I said I'll teach this
course with a policy bent,
but you have to recognize
that economics at its core
is a right-wing science.
Economics at its
core is all about how
the market knows best, and that
basically governments only mess
things up.
That's sort of the
basic, a lot of what
we'll learn this semester.
As the semester
goes on, we'll talk
about what's wrong
with that view
and how governments
can improve things.
Indeed, I teach a whole
course about the proper role
of government the economy.
But the standard of economics
is, "the market knows best."
And that leads us to the last
thing I want to talk about,
which is basically, how freely
should an economy function?
Let's step back to
the giant picture.
Let's step back from
a market for roses
to the entire economy.
How freely should a market,
should an economy function?
We have what's known as
a "capitalistic economy."
In a capitalistic economy,
firms and individuals
decide what to
produce and consume,
maybe subject to some rules of
the road set by the government.
There's some minimum
rules of the road
to try to avoid fraud
or misinformation,
but otherwise, we
let the dice roll.
Firms let consumers
decide sort of what to do.
Now, this has led to
tremendous growth.
America was not
a wealthy nation,
was not a very wealthy
nation 100 years ago,
or 150 years ago.
Led to tremendous
growth, where we are now
the most powerful, still the
most powerful and wealthiest
nation the world, largely driven
by the capitalistic nature
of our economy.
On the other hand,
we are a nation
with tremendous inequality.
We are by far the most unequal
major nation in the world.
The top 1% of Americans has a
much higher share of our income
than in any other large
country in the world,
any other large developed
country in the world.
The bottom 99% has less of
our income corresponding
with anywhere else.
So it's led to major inequality.
And it's led to other problems.
It turns out that the
government can't appropriately
set the rules of the road to
avoid things like fraud, as we
saw with Enron, if you
remember back to that,
or a lot of what happened
in the financial meltdown.
It turns out it's
hard to get people
perfect information, et cetera.
So we've seen the problems.
We've grown very
wealthy as a nation.
We've introduced a whole set of
problems through this system.
Now, the other extreme is what's
called the "command economy."
Rather than a
capitalist economy,
it's what's called
a "command economy."
In this case, the government
makes all the production
and consumption decisions.
The government doesn't just
set the rules of the road,
the government owns the road.
The government says, we're
going to use this many cars
this year.
And people can get
them in some way.
It could be a lottery,
could be waiting in line.
How do we decide how
to allocate them?
We're not going to let
the market allocate them.
We, the government,
will allocate them.
We'll allocate how many get
produced and who gets them.
And this was the model
of the Soviet Union
that I grew up with.
This was the pre-1989
Soviet Union.
The government decided how many
shirts, cars, TVs, everything.
It's sort of bizarre
to think that literally
everything the government
decided how much to produce.
And by and large, the government
decided who got it partly
through corruption-- that
is, the party members,
party leaders got it first--
and often just through waiting
in line for the remaining
application.
Now in theory,
this ensured equity
by making sure that
everybody had shot at things.
In practice, it didn't
work well at all
and actually was
what dragged down
the collapse of the
old Soviet economy,
was that the command
model simply doesn't work.
Partly there's just too many
opportunities for corruption.
When the government
controls everything,
that means there's no checks
and balances on the opportunity
for enormous corruption.
The capitalist economy puts
some natural checks and balances
on that.
And partly because it
turns out that it's
hard to control human nature.
And Adam Smith had it right.
Adam Smith talks about
the "invisible hand"
of the capitalist economy.
The invisible hand is
basically the notion
that the capitalist
economy will manage
to distribute things roughly in
proportion to what people want.
And that's where
folks want to be.
Folks who want a
certain kind of car
are going to want to
get to that kind of car,
and if the government
has it wrong,
they're going to get upset.
And it's going to lead to
a less functional economy.
So basically, Adam
Smith's view is that--
the invisible hand view is that
consumers and firms serving
their own best interest will
do what is best for society.
So the fundamental core
of the capitalistic view
is that consumers and firms
serving their own best interest
will do what ends up
being best for society.
And that's essentially
the model we'll
learn to start in this course.
Yeah.
AUDIENCE: In that
definition, are we
defining the best for
society as in everybody
has the most money?
Or everyone has the best health
or the best standard of living?
What is the best [INAUDIBLE]?
JONATHAN GRUBER: Great question.
We're going to spend a lot
of the semester talking
about that.
For now, we're going to
define "best for society"
as the most stuff gets
produced and consumed.
That's how we're
going to find it--
obviously raises a set
of issues about what
about pollution, what
about health, et cetera.
We're going to come to those,
but for the first two-thirds
of the course "best
for society" means
what we're going to call
"maximum surplus," which
is the most stuff gets
produced that people value.
So that's how we're
going to do it.
And in his view, the
invisible hand does that.
And by and large, it's a very
helpful framework to turn to.
However, at least it
can lead to outcomes
that are not very fair.
So the way we're going
to proceed in this course
is we're going to start
by talking about how
Adam Smith's magic works.
How does the magic happen?
How does individuals
and firms acting
in their own self-interest,
without caring about anybody
else, end up yielding
the largest possible
productive economy?
How does that happen?
And we're going to
talk about that.
We'll start with
demand, which is
how do consumers
decide what they
want given their resources.
We'll talk about the principle
of utility maximization,
the idea that I have
a utility function
that I can mathematically
write down what I want.
I'll have a budget constraint,
which is the resources I have,
and those two
constrain optimization.
We'll say given what I want
and the resource I have,
what decisions do I make?
Boom, we get the demand curve.
Then we'll turn to supply, and
we'll talk about how do firms
decide what to produce.
That's much more
complicated, because firms
have to decide
what inputs to use
and what outputs to produce.
And we'll talk about
how firms can operate
in very different markets.
There is a competitive market
that Adam Smith envisioned,
but that doesn't always work.
Sometimes we get
monopoly markets,
where one firm dominates.
And you can actually
have outcomes
which aren't the best
possible outcome, even
with the invisible hand.
So we'll talk about
different kinds of markets.
Then we'll put it together
to get market equilibrium,
and talk about
Smith's principles.
And then from there, we'll
talk about how it breaks down
in reality, different
change in reality,
how there are various
market failures that
can get in the way, why we
have to care about equity
and what implications that has,
about behavioral economics,
about a set of other factors.
So that's basically how we're
going to proceed this semester.
As I said, the
lectures are important,
but the recitations are as well.
Once we're sort of
in steady state,
the recitations will be about
half new material and half
working through problems
to help you prepare
for that next problem set.
So the way the problem
sets are going to work
is the problem set
that's assigned
will cover material that's
taught up to that date.
So for example, problem
set one is going
to be assigned next Friday.
That will cover everything
you've learned up
through next Wednesday.
Therefore, in section
on next Friday,
we'll do a practice problem
which you should understand
because it'll cover things
that were taught in class,
and help prepare you
for the problems.
And we'll do that every week.
That's about half the section.
The other half of the
section will be new material.
This Friday, the section on
Friday is all new material.
What we do on Friday is
cover the mathematics.
I don't like doing math.
I always get it wrong.
So I leave math for the TAs,
who are smarter than I am.
So this Friday, we'll be doing
the mathematics of supply
and demand, and how you
take the intuition here
and the simple
graphics, and actually
turn it into mathematical
representations, which is what
you need for the problem sets.
That's this Friday.
Then we'll come back
on Monday and start
talking about what's
underneath the demand curve.
All right, any other questions?
I'll see you on Monday.
