This MIT open course is conducted by Professor Jon Gruber, teaching about principles of microeconomics and focused on the introductory parts. This blog will select of some the main theories in the lecture and explain the knowledge behind.
Knowledge One: Definition to Microeconomics
Microeconomics is basically the study of how economic agents make decisions in a world with scarcity.
Knowledge Two: Constrained Optimization
Constrained Optimization is the term describing the pocess of reaching the best results with given resources. This term is often associated with opportunity cost as they have a similar meaning. Opportunity cost is the next best opportunity forgone when making economic decisions. One of the key principles in Microeconomics which is also mentioned in Gregory Mankiw’s Principles of Economics is that people face trade-offs when making decisions. The term “constrained optimization” describes how economic agents make decisions under the conditions of trade-offs.
Knowledge Three: Models on Two Types of Actors in Economies:Consumers and Producers
The Natures of the Models:
-never precise and accurate
-it states the major tendencies
Assumptions Made when Making Models:
-For Consumers:
They are constrained by their limited wealth and technically called budget constraint.
They choose the goods that make them as well as possible, in other words the consumers maximize their utility subject to budget constraint, forming a U-shaped function.
-For Producers:
They maximize profit subject to both consumer demand and input cost.
Knowledge Four: Three Fundamental Questions of Economics
- What goods and services should be produced
- How to produce the goods and services
- Who gets the goods and services
All three questions are solved by one key variable:price. Producers and consumers interact in a market and emerge a set of prices. The prices allow consumers and producers to make relevant decisions.
Take Apple’s development of ipod as an example. Question one can be solved by considering both consumers and producers. Consumers will ask themselves what would they buy under the conditions of forsaking the original decisions. After inventing a design , Apple will ask themselves why would consumers like their products. When producers’ supply met the consumers’ demand what to produce will be decided. The answer to how to produce will be answered based on the price of factors of production. Apple aims at profit maximization so lowering the cost will be essential. For question three, the people who gets the ipods are the people that are willing to pay high prices for the ipods.
Knowledge Five: Theoretical and Empirical Economics
-Theoretical Economics is the study of building models to explain the world
goal is building models that have testable predicitions
-Empirical Economics is the study of testing the models. Models can be examined through gathering the datas and test them using statistical methods.
Knowledge Six: Positive and Normative Economics
Briefly speaking, Positive Economics is the way things are, Normative Economics is the way things should be
Take an auction of kidney as an example. The consumers bid up the price until the person that offers highest price gets the kidney.According to the record of nedws, the kidney had the start price at 25000 dollars and ended at 5 million dollars before ebay shut it down.
Positive Economics in this case, investigates why the price went so high. From the demand side,the more the demand on good, the greater the upward pressure on the prices. From the supply side, the less the supply on good, the higher prices it will be. The demand for kidney is high as it is vital for living, supply for kidney is low as not many people are not organ donors. The book Wealth of Nations published by Adam Smith doubted this framework by suggesting the Water Dimond Paradox. It stated that water is essential for living, dimond isn’t. However, the price of dimond is astronomical and water is free. The answer to this paradox is that the supply of the two products weren’t considered. It is essential to know that the market is determined by the twin forces of demand and supply.
Normative Economics will consider whether auction should be banned. On one hand, it is a double coincidence of demand and supply, making it shouldn’t be banned. Many people are waiting for a kidney transplant to save their lives. Saving their lives are the consumers’ benefits from the transaction. Suppliers are also benefited beacause they get money from the consumeres. On the other hand, kidney shouldn’t be allocated according to the higher price but who needs it the most. Additionally, an equity componet involved in the transaction. The system may be criticised of giving the rich the access to most resources.
References
The video of this open course is presented in the Youtube channel called Open Courseware and named as “MIT 14.01SC Principles of Microeconomics - Lecture 1. Introduction ot Microeconomics”.