#### Transcript Lecture 1 - Economics

Lecture 1: Introduction Li Gan Department of Economics Texas A&M University Syllabus Weekly quizzes - 20% Homework assignments – 20% Two midterm exams – 15% each Final exam – 30% Syllabus Each quiz: 3 multiple choice questions Each homework: 25 multiple choice questions – please use scantron 3 essay questions Syllabus First midterm: Tuesday, Feb 22nd, in class. Second midterm: Tuesday, March 31st, in class Final: Friday, May 6th: 12:30-2:30 Makeup exam: Saturday, May 7th. Office Hours Gan: TuTh 11:30-1:00pm or by appointment Allen 3086 Phone: 862-1667 [email protected] TA: Gaosheng Ju MW 10:00am – 11:30am Allen 3012 Phone: 422-5327 [email protected] Introduction Key factors in making choices or optimization Key difficulty in economics Key tools for this course Key questions in this course Key factors to making choices or optimization 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 All decisions require an objective. What is your objective of taking this course? Key factor #1: objective Individual objective: Utility Firm objective: Profit Government objective: ? Key factor #2: constraints Budget constraint Time constraint Budget constraint Individual budget constraint? Income Government budget constraint? Tax revenue Key factor #3: choose at margin Compare marginal cost and marginal benefit. When they are equal, the optimal is achieved. Choose at the margin: 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: Overtime optimization Individual overtime optimization? Working right now, enjoy later Studying in college and making more money later Overtime optimization Government overtime optimization Borrowing money to spend: budget deficit – 14 trillion dollars of debt! Externality: Question: is self interest consistent with social interest? Examples Most are consistent Entrepreneurship Examples 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 Medical services Free medical service Co-pay in medical expenditure The key difficulty in economic research Difficulty in establishing causality Example: Example: Demand and supply 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 Because many factors are changing simultaneously, it is difficult to establish the causality. Key tools for studying this course Graphs 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 1L 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: Why we have achieved so much 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 Keys to optimization: Objectives Constraints Choose at margin New concept: overtime optimization Key difficulty: causality Key tools for this course: graph and math Key questions: Why we have achieved so much. Why growth varies so much overtime.