Introduction
Welcome
TA
Syllabus
Style
Us
You
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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 airline’s
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 people’s 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.
• Don’t 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
• Don’t 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
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•
•
•
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
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16
x 10
Current MPA Network, Channel Islands
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12
PPF of all possible
MPA networks
Profit
10
8
6
Random sample, same size
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2
0
1.5
2
2.5
3
3.5
Stock
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4.5
5
7
x 10
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