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Akos Lada

principles of microeconomics introduction WEBsite : http://scholar.harvard.edu/alada/classes/microeconomics-harvard-kennedy-school-mcmpa-students. Akos Lada. July 18, 2014. Contents. Course’s objectives and contents Key economic principles. Course objectives and Contents. Course objectives.

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Akos Lada

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  1. principles of microeconomicsintroductionWEBsite: http://scholar.harvard.edu/alada/classes/microeconomics-harvard-kennedy-school-mcmpa-students AkosLada July 18, 2014

  2. Contents • Course’s objectives and contents • Key economic principles

  3. Course objectives and Contents

  4. Course objectives • (re) Introduce you to Economics and its public policy applications • Familiarize you with Econ vocabulary and tools • The course focuses on Microeconomics • It is NOT meant to replace a full-semester course in Microeconomics

  5. Webpage • Instructions on how to access the course webpage can be found on the syllabus • Every day after 5 PM you will find on the webpage the following day’s Power Point slides • You can also find here the syllabus, the reading lists, assignments, and other reference materials

  6. Class meetings • Meets punctually from 9:00 to 10:30 AM from Monday to Friday, except for Wednesdays • Active participation of all members of the section (not just of a few!) is expected

  7. Assignments READINGS Textbook • Principles of Economics (N. Gregory Mankiw), any from 3rd to 6th editions Articles • Current events or stories related to each of the topics we study Presentations • Present a current article (e.g. The Economist, your own country’s media) in 5 minutes (a few minutes discussion) WRITTEN ASSIGNMENTS • For almost every session (total of 10) a “problem of the day” • Key for your learning experience in this course • To be handed out at the end of each class • Students can work in groups but must turn in individual assignments • Both “problems of the day” and ‘Fridayly’ problem sets (posted Tuesdays)

  8. Exams • A take-home midterm • 2 to 4 hours of focused individual work • Handed out on Tuesday, July 29th • To be turned in on Monday, August 1st • Final exam • Tuesday, August 12th • 90 Minutes long, closed book

  9. Evaluation and feedback • No official grade However: • You will receive graded assignments with feedback and answer keys the day after turning them in • Tests will also be graded in a 100 scale • Section’s average grades will be posted on the website for your reference

  10. Tentative course contents Intro Key economic concepts Demand, Supply and Equilibrium Comparative Statics Elasticity Government interventions (taxes, subsidies and price controls) Welfare analysis (Possibly) Poverty and Inequality Production Competition and Monopolies Externalities Public Goods Final Review The frontiers of Micro-economics Fall Semester WEEK 1 Firms and Consumers WEEK 2 The Government and the Economy WEEK 4 Additional topics and final review WEEK 3 Markets in Action

  11. Key Economic Principles* * Slides from Mankiw’s Principles of Economics Teaching Companion

  12. What Economics Is All About 0 • Scarcity: the limited nature of society’s resources • Economics: the study of how society manages its scarce resources, e.g. • how people decide what to buy, how much to work, save, and spend • how firms decide how much to produce, how many workers to hire • how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs

  13. The principles of HOW PEOPLE MAKE DECISIONS 0

  14. All decisions involve tradeoffs. Examples: Going to a party the night before your midterm leaves less time for studying. Having more money to buy stuff requires working longer hours, which leaves less time for leisure. Protecting the environment requires resources that could otherwise be used to produce consumer goods. 0 Principle #1: People Face Tradeoffs

  15. Society faces an important tradeoff: efficiency vs. equality Efficiency: when society gets the most from its scarce resources Equality: when prosperity is distributed uniformly among society’s members Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor. But this may reduce incentive to work and produce, shrinks the size of the economic “pie.” 0 Principle #1: People Face Tradeoffs

  16. Making decisions requires comparing the costs and benefits of alternative choices. The opportunity cost of any item is whatever must be given up to obtain it. It is the relevant cost for decision making. Principle #2: The Cost of Something Is What You Give Up to Get It

  17. Examples:The opportunity cost of… …going to college for a year is not just the tuition, books, and fees, but also the foregone wages. …seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater. Principle #2: The Cost of Something Is What You Give Up to Get It

  18. Rational people systematically and purposefully do the best they can to achieve their objectives. make decisions by evaluating costs and benefits of marginal changes– incremental adjustments to an existing plan. Principle #3: Rational People Think at the Margin

  19. Examples: When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education. When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue. Principle #3: Rational People Think at the Margin

  20. Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. Rational people respond to incentives. Examples: When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs. When cigarette taxes increase, teen smoking falls. Principle #4: People Respond to Incentives

  21. The principles of HOW PEOPLE INTERACT 0

  22. Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. Countries also benefit from trade & specialization: Get a better price abroad for goods they produce Buy other goods more cheaply from abroad than could be produced at home Principle #5: Trade Can Make Everyone Better Off

  23. Market: a group of buyers and sellers (need not be in a single location) “Organize economic activity” means determining what goods to produce how to produce them how much of each to produce who gets them Principle #6: Markets Are Usually A Good Way to Organize Economic Activity

  24. A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets. Famous insight by Adam Smith in The Wealth of Nations (1776): Each of these households and firms acts as if “led by an invisible hand” to promote general economic well-being. Principle #6: Markets Are Usually A Good Way to Organize Economic Activity

  25. The invisible hand works through the price system: The interaction of buyers and sellers determines prices. Each price reflects the good’s value to buyers and the cost of producing the good. Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being. Principle #6: Markets Are Usually A Good Way to Organize Economic Activity

  26. Property rights Market failure: when the market fails to allocate society’s resources efficiently Causes: Externalities, when the production or consumption of a good affects bystanders (e.g. pollution) Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly) In such cases, public policy can promote efficiency. Principle #7: Governments Can Sometimes Improve Market Outcomes

  27. The Economist as a Scientist 0 • Economists play two roles: 1. Scientists: try to explain the world 2. Policy advisors: try to improve it • In the first, economists employ the scientific method, the dispassionate development and testing of theories about how the world works.

  28. Assumptions & Models 0 • Assumptions simplify the complex world, make it easier to understand. • Example: To study international trade, assume two countries and two goods. Unrealistic, but simple to learn and gives useful insights about the real world. • Model: a highly simplified representation of a more complicated reality. Economists use models to study economic issues.

  29. Some Familiar Models 0

  30. Our First Model: The Circular-Flow Diagram 0 • The Circular-Flow Diagram: a visual model of the economy, shows how dollars flow through markets among households and firms • Two types of “actors”: • households • firms • Two markets: • the market for goods and services • the market for “factors of production”

  31. Factors of Production 0 • Factors of production: the resources the economy uses to produce goods & services, including • labor • land • capital (buildings & machines used in production)

  32. The Circular-Flow Diagram Firms Households Households: • Own the factors of production, sell/rent them to firms for income • Buy and consume goods & services Firms: • Buy/hire factors of production, use them to produce goods and services • Sell goods & services

  33. The Circular-Flow Diagram Revenue Spending Markets for Goods & Services G & S sold G & S bought Firms Households Factors of production Labor, land, capital Markets for Factors of Production Income Wages, rent, profit

  34. principles of microeconomicsintroduction AkosLada July 18, 2014

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