Download Lecture 1 - Economics

Lecture 1: Introduction
Li Gan
Department of Economics
Texas A&M University
Syllabus
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Weekly quizzes - 20%
Homework assignments – 20%
Two midterm exams – 15% each
Final exam – 30%
Syllabus
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Each quiz: 3 multiple choice
questions
Each homework:
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25 multiple choice questions – please
use scantron
3 essay questions
Syllabus
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First midterm: Tuesday, Feb 22nd, in
class.
Second midterm: Tuesday, March 31st, in
class
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Final: Friday, May 6th: 12:30-2:30
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Makeup exam: Saturday, May 7th.
Office Hours
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Gan:
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TuTh 11:30-1:00pm or by appointment
Allen 3086
Phone: 862-1667
[email protected]
TA: Gaosheng Ju
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MW 10:00am – 11:30am
Allen 3012
Phone: 422-5327
[email protected]
Introduction
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Key factors in making choices or
optimization
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Key difficulty in economics
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Key tools for this course
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Key questions in this course
Key factors to making choices or
optimization
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Making choices under scarcity
For individuals, key factors to make
choices?
For firms, key factors to make choices?
For government, key factors to make
choices?
Key factor #1: objective
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All decisions require an objective.
What is your objective of taking this
course?
Key factor #1: objective
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Individual objective:
Utility
Firm objective:
Profit
Government objective:
?
Key factor #2: constraints
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Budget constraint
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Time constraint
Budget constraint
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Individual budget constraint?
Income
Government budget constraint?
Tax revenue
Key factor #3: choose at margin
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Compare marginal cost and
marginal benefit.
When they are equal, the optimal is
achieved.
Choose at the margin:
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For firms:
The cost of hiring additional worker is
his/her wage.
Compare with the benefit of having this
additional worker.
If benefit > cost, hire
If benefit < cost, not hire
New concept from this course:
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Overtime optimization
Individual overtime optimization?
Working right now, enjoy later
Studying in college and making
more money later
Overtime optimization
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Government overtime optimization
Borrowing money to spend: budget
deficit – 14 trillion dollars of debt!
Externality:
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Question: is self interest consistent
with social interest?
Examples
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Most are consistent
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Entrepreneurship
Examples
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Noisy party late on Friday night
Ongoing financial crisis – Soloman
Brothers and other investment
banks borrow 30 times of their own
capital to invest
Examples
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Medical services
Free medical service
Co-pay in medical expenditure
The key difficulty in economic research
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Difficulty in establishing causality
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Example:
Example: Demand and supply
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Question: during Christmas seasons,
demands for both consumer goods and air
travel are higher.
Why prices are often lower for consumer
goods?
Why prices for air tickets are often
higher?
Demand and supply
Price
supply
demand
quantity
Demand and supply for consumer
goods during Christmas seasons
Price
supply
demand
quantity
Demand and supply for air travels
goods during Christmas seasons
Price
supply
demand
quantity
Causality is difficult to establish
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Because many factors are changing
simultaneously, it is difficult to
establish the causality.
Key tools for studying this course
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Graphs
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Mathematics
Graphs – a time series graph
Relationships between two variables: income
per person and investment ratio
Necessary mathematics
Consider a Cobb-Douglas production function,
Y = AKαL1-α.
Partial differentiation:
Y
 1   AK  L
L
Y
 AK  1 L
MPK 
K
MPL 
Necessary mathematics
Total differentiation:
Y
Y
Y  K 
 L 
K
L
In the case of Cobb-Douglas production function:
Y  K  AK  1 L  L  1   AK  L
Necessary mathematics
Furthermore,
Y
AK  1 L
AK  L
 K 
 L  1   
Y
Y
Y
K
L

 1   
K
L
The last equation represents the so-called Solow Residual.
Key questions to be answered in this
course:
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Why we have achieved so much
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But why growth is not smooth
Key question #1: why we have achieved so
much
Key questions #2: why growth is not smooth
- price
Key question #2: why growth is not smooth:
unemployment
Summary
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Keys to optimization:
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Objectives
Constraints
Choose at margin
New concept: overtime optimization
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Key difficulty: causality
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Key tools for this course: graph and math
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Key questions:
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Why we have achieved so much.
Why growth varies so much overtime.