Introduction Welcome TA Syllabus Style Us You

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IntroductionWelcomeTASyllabusStyleUsYou
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• How is it that all the cows know how much milk is
  needed to make the butter and the cheese and the
  ice cream that people will buy at a price that
  covers the cost of maintaining and milking the
  cow and getting each little piece of butter
  wrapped in aluminum foil with the airlines own
  insignia printed on it?
• Thomas Schelling
• Micromotives and Macrobehavior

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Basic Definitions

• Economics the study of how people, households,
  communities, societies, countries, etc. manage
  their scarce resources
• Scarcity when a resource is limited so that all
  demands for it cannot be satisfied
• How? Prices are the key! (producers respond,
  consumers respond, even without coordination)
• Microeconomic theory is essentially price theory
• But it is NOT about money!
• First Fundamental Theorem of Welfare Economics
  see Stavins

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Micro- vs. Macro-Economics

• Microeconomics the study of how individuals,
  households, and firms make decisions and interact
  in markets Decision-making
• Macroeconomics the study of economy-wide
  phenomena, including inflation, unemployment, and
  economic growth Aggregate results
• Micromotives and Macrobehavior by Thomas
  Schelling
• Individual decisions lead to economy-wide
  phenomena.
• Emergent Properties

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From Schelling

• If you join a crowd because you like crowds, you
  add to the crowd. If you withdraw your child
  from school because of the pupils he goes to
  school with, you remove a pupil that they go to
  school with. If you raise your voice to make
  yourself heard, you add to the noise that other
  people are raising their voices to be heard
  above. When you cut your hair short, you change,
  ever so slightly, other peoples impressions of
  how long people are wearing their hair.
• The point Understanding and being able to
  predict individual incentives and behavior is
  often critical in understanding aggregate,
  economy-wide, consequences.

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From Individual Action to Aggregate Effect

• Driving..Climate Change
• Farming..Dead Zone in Gulf of Mexico
• Desire for a Nice Ocean View.habitat
  fragmentation of undisturbed coastline

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Models Tools of the Trade

• Models make complex phenomena tractable
• Models are only as good as their assumptions,
  which should be made explicit and should be
  questioned
• There are qualitative and quantitative models
• We will focus on equilibrium analysis
• Trick is what assumptions are reasonable?
  Benign? Pivotal?
• Key point models help us simplify, understand,
  and predict behavior.
• Dont just dismiss because it is not real a
  map is not real either.

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Positive vs. Normative Analysis

• Positive analysis descriptive and theoretically
  verifiable what IS
• e.g., The increased concentration of CO2 in the
  atmosphere is causing the climate to change.
• Normative analysis Prescriptive and value
  judgment what OUGHT to be
• e.g., The U.S. should have signed the Kyoto
  Protocol.
• Microeconomics
• Positive analysis based on utility maximization
  and equilibrium analysis
• Normative criteria is often efficiency
• Other criteria are not excluded by economics

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Key Concept 1 Tradeoffs

• Tradeoff
• Something has to be given up in order to get
  something
• e.g., More resources devoted to national defense
  implies fewer resources for environmental
  protection
• e.g., More resources devoted to endangered
  species protection means fewer resources for
  superfund clean-up
• Scarcity is a necessary condition for tradeoffs
  to occur
• Microeconomics is about the study of tradeoffs

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Key Concept 2 Opportunity Cost

• Opportunity cost
• The cost of foregone opportunities (tradeoffs)
  when making a decision
• Only the highest valued tradeoff(s) counts to
  avoid multi-counting
• e.g., the cost of your decision to attend grad
  school
• Explicit cost is tuition
• Opportunity cost includes explicit cost and
  foregone earnings
• Dont count things like the cost of foregone
  surfing
• Opportunity costs are central to benefit-cost
  analysis

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Key Concept 3 Thinking at the Margin

• Not all decisions are all-or-nothing
• Decisions are often about more or less
• Thinking at the margin
• Involves consideration of the benefits/costs of
  doing marginally more or marginally less of an
  activity
• e.g., studying more or less
• e.g., increasing/decreasing air quality standards
• Draw graph of Benefit of NOx Reduction (0 to
  100).

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The Production Possibilities Frontier (PPF)

• Assume there is a firm that
• produces only two goods
• labor is the only input for production
• The PPF identifies the set of all feasible
  bundles that can be produced
• How do you pick one?
• Can you eliminate any of these choices?

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The PPF Demonstrates Many Concepts

• PPF describes what can be produced (positive
  analysis)
• Movements along the frontier (thinking at the
  margin)
• The slope of the frontier (tradeoffs)
• If had information on prices, we could figure out
  foregone revenues from producing more of one good
  (opportunity cost)
• Question of what should be produced (normative
  analysis)
• The PPF demonstrates the similarity between
  microeconomics and behavioral ecology

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PPF from Polasky et al. 2008. Biological
Conservation
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PPF from Costello et al. 2007. Marine Life
Protection Act, Modeling Subteam
Current MPA Network, Channel Islands
PPF of all possible MPA networks
Random sample, same size