Econ 102 SY 2008 2009

Lecture 1

What this course is all about

June 10, 2008

Econ 102 SY 2008 2009

Key concepts

Microeconomic theory History of microeconomic theory Economic transaction

Market transactions Heirarchical transactions Hybrid transactions

Scope of the course: market transactions Requirements of the course

Econ 102 SY 2008 2009

Microeconomics

Study of the behavior of individual economic agents and why and how they undertake economic transactions

Economic agents: Consumers, business firms, workers, capitalists, farmers, government

Use of economic models

Econ 102 SY 2008 2009

Micro-economic theory Micro-economic theory: a set of assumptions and

conditions, an analytical framework, and conclusions (explanations and/or predictions) that are derived from the assumptions and the analytical framework.

Analytical framework - a set of cause and effect relationships among economic variables aimed at describing economic events as the interaction of individual economic agents in pursuit of self interest

Economic models operationalize the theory and used to predict behavior of agents and values of economic variables, e.g. prices and to explore alternative courses of action to influence outcomes

Econ 102 SY 2008 2009

Features of micro-economic theory

Scientific method — a standard of any good theory, i.e. the predictions of any scientific theory must be testable and potentially falsifiable in repeatable experiments under controlled conditions

Axiomatic – As Debreu puts it, “Allegiance to rigor dictates the axiomatic form of the analysis where the theory, in the strict sense, is logically disconnected from its interpretations.”

Deductive vs inductive, usually deductive Econometric method usually used in undertaking

economic experiments

Econ 102 SY 2008 2009

Assumptions behind micro-economic theory

1. Bounded rationality: Agents pursue their self interest based on the information and constraints they face.

2. Resources are scarce.3. Individual agents have economic freedom.4. Decision making is decentralized.5. Incentives are compatible.6. Property rights are well defined.7. There is equity in opportunity.

Econ 102 SY 2008 2009

Aspects of an analytical framework

1. Specify economic environments, i.e. a number of individuals, the individuals' characteristics (e.g. preferences, technologies, endowments, etc. ), informational structures, and institutional economic environments that include fundamental rules for establishing the basis for production, exchange, and distribution.

2. Impose behavioral assumptions3. Presenting economic institutional arrangements4. Determine equilibria5. Evaluate outcomes

Econ 102 SY 2008 2009

Roles of economic theory It can be used to explain economic behavior and

economic phenomena in the real world. It can make scientific predictions or deductions

about possible outcomes and consequences of adopted economic mechanisms when economic environments and individuals' behavior are appropriately described.

It can be used to refute faulty goals or projects before they are actually undertaken. If a conclusion is not possible in theory, then it is not possible in a real world setting, as long as the assumptions were approximated realistically.

Econ 102 SY 2008 2009

Limitations of economic theory

Generality – If its assumptions cover a wider set of applications, the theory is more powerful, useful, or meaningful.

Limitations: boundary, range of applications

Econ 102 SY 2008 2009

Role of mathematics in economic theory

Mathematics is an important tool in modern economics.

Using the mathematic language, theorists are more able to describe assumptions, logical processes and boundaries/limitations of the theory

Use of mathematics can give a new result that may not be easily obtained through observation alone, and

Its use can reduce unnecessary debates and improve or extend existing results.

Econ 102 SY 2008 2009

History of microeconomic theory

1750 -1850Adam SmithDavid RicardoJohn Stuart Mill

1850-1900•Stanley Jevons•Leon Walras•Carl Menger •Francis Ysidro Edgeworth•Vilfredo Pareto

1890-1950•Alfred Marshal•(John Maynard Keynes)•John Hicks•John von Neuman•Oscar Morgenstern

1947 – Present•Paul Sameulson•Gerard Debreu•Kenneth Arrow•Martin Shubik

Neo-classical economics Classical economics

New Institutional economics

1975- Present•Joseph Stiglitz•Oliver Willamson

Econ 102 SY 2008 2009

Classical economics

Focused on economic growth, leaving the market alone or “laissezfaire”, free competition

Approach – not mathematical Labor not use theory of value

Econ 102 SY 2008 2009

Neoclassical economics

Drive to attain “scientific rigor” Approach: mathematical, axiomatic,

deductive Use of mathematical models to describe

economic behavior Equilibrium theory Game theory

Econ 102 SY 2008 2009

New Institutional economics

Extension of neoclassical economics Transaction costs Market failures

Econ 102 SY 2008 2009

Alternative governance structures of econ transactions

Forbearance Neoclassical Classical Contract law

FiatPrivately orderedCourt orderedConflict Resolution

FiatMutual consentUnilateralAdaptation

Incommunicable and withheldIncommunicable because of high measurement costs

Market pricesConsumer welfare information signaled

through

CostlyProhibitive Negligible Defection costs

Not option/costlyRarely existCostless/availableAlternative markets

Non-existent/non-existentThin/non-existentThick /intense Markets/competition

Relevant/autonomousRelevant/bilaterally dependent

Irrelevant/autonomousIdentity/autonomy

Make only

Internal procurement

Buy and Make

Hybrid procurement

Buy only

Market procurement

HierarchyHybrid MarketAttributes

Transactions

Econ 102 SY 2008 2009

Course Requirements

Participation in class discussions Undetermined number of class assignments

and/or quizzes Three long mid-term examinations

Econ 102 SY 2008 2009

Grade Evaluation 25 percent of the grade in the first long examination 25 percent of the grade in the second long

examination 25 percent of the grade in the non-comprehensive

third long examination; 15 percent of the average grade in the quizzes or

class assignments, and 10 percent of the student’s grade for class

attendance and participation. Depending on the overall class performance, a

Pareto-improving, monotonic transformation of students’ grades may be made.

Econ 102 SY 2008 2009

Grade conversion

Course Performance Final GradeAt least 96 1.00From at least 90 to less than 96 1.25From at least 85 to less than 90 1.50From at least 80 to less than 85 1.75From at least 75 to less than 80 2.00From at least 70 to less than 75 2.25From at least 65 to less than 70 2.50From at least 60 to less than 65 2.75From at least 50 to less than 60 3.00Less than 50 5.00

Econ 102 SY 2008 2009

What you need to do

Write me an email to rclarete@yahoo.com Giving your Last Name, First Name, MI,

College, Student ID, cell phone number and/or landline number

For easy retrieval use as subject matter of your email: Econ102

I invite you to join the class yahoogroup. You can get the reading list at the group site.

Econ 102 SY 2008 2009

End of Lecture 1

What this course is all about