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JONATHAN GRUBER: This is 14.01.
I'm John Gruber, and this is microeconomics.
Today, I want to cover three things.
I want to talk about the course details.
I want to talk about what is microeconomics.
And then I'll start the substance of the course
by talking about supply and demand.
Couple of the points about the course-- the course
will have a distinct sort of policy angle to it.
I sort of do economic policy, government policy is my thing.
So I think it's what makes economics exciting
and it sort of offers, I think, an interesting angle
to understand why we're learning what we're learning.
I think sometimes in an intro class,
it's sort of hard to understand why the heck
you're doing things.
However, that's just sort of a slight flavor.
If you're really more interested in this,
I teach a whole course called 1441.
I'm not teaching it this year, but it
will be taught by a visitor in the spring, Kristin Butcher
from Wellesley.
And I'll be teaching next year.
That dives much more into these policy issues.
So I'm going to use government policy as sort of an organizing
theme, but it won't be the dominant theme of the class.
Finally, three points about my teaching style.
I don't write everything on the board.
We're not in high school anymore.
You're actually responsible for what I say, not what I write.
Partly that's because my handwriting is brutal,
as you can tell already.
So what that means is, please, please do not
be afraid to ask me what the hell I just wrote on the board.
There's no shame in that.
Don't just lean to your neighbors, and say,
what the hell did he just write in the board.
Ask, me, because if you can't read it,
I'm sure someone else can't read it, so feel free to ask.
And in general, please feel free to engage
with questions in this class.
The other point of my teaching style is I talk way too fast.
And the longer I go-- there's a mathematical function,
which is the longer I go without interruption,
the faster I speak, until I just spin off.
So basically, please ask questions.
If anything is not clear, or you just
want to ask questions about some related tangent
or whatever, please feel free to do so.
You might think, how would that work in a class this big?
There's always way too few questions, even
a class this big.
So never be afraid that it will slow me down or whatever.
Ask me questions.
We have plenty of time on the class.
And you'll be doing your classmates a favor,
because it'll slow me down.
Finally, last point, I have this terrible tendency
to use the term "guys" in a gender neutral way.
So this class, I like to see, looks
like it's a fairly healthy representation
both males and females.
When I say "guys," I don't mean men.
I mean people.
So women, don't take it personally.
"Guys" means economic agent.
It means people.
It doesn't mean men.
Just the way-- just a bad tendency.
It drives my wife crazy, but I've decided better
to just apologize up front than try to fix it throughout,
which is impossible.
So let's talk about what is microeconomics.
So fundamentally, microeconomics-- how people
took AP high school Econ?
How many people-- for how many people
was it taught really well?
That's about right.
That's why I did my high school online class.
That's the answer I wanted to hear.
So tell your friends still in high school who
are taking high school Econ, if your high school
teacher isn't great, tell them to go on EdX
and take the class.
And help out your friends still in high school.
So what is microeconomics?
Microeconomics is the study of how
individuals and firms make decisions
in a world of scarcity.
Scarcity is what drives microeconomics.
Basically, what microeconomics is
is a series of constrained optimization exercises,
where economic agents, be they firms or individuals,
try to make themselves as well off as possible
given their constraints.
Yeah.
AUDIENCE: Will this cover irrationality?
JONATHAN GRUBER: I will, but not as much as I should.
Essentially, we have another course
in the department called 1413, Behavioral Economics, which
gets into that much more.
I will sprinkle it throughout, but not
as much as I actually believe in it.
In other words, the way we think about economics
is it's best to sort of get the basics down
before you start worrying about the deviations.
Find it's better to climb the tree
before you start going out in the branches.
So basically, what this course is then about
is it's about trade-offs.
It's about given that you're constrained,
how do you trade off things to make yourself as well off
as possible?
And behind this notion of trade-offs is going to be--
I'll say about 100 times this is the most important thing
in the course, so just ignore that.
But this is one of the most important things.
I'll say "one of the most important" things
in the course, is the notion of opportunity cost.
Opportunity cost is a very important concept
that we teach, sort of the first concept we teach,
which is that every action or every inaction
has a cost in that you could've been doing something
else instead.
So if you buy a shirt, you could have bought pants.
If you stayed at home and watched TV,
you could have been out working.
Everything you do has a next best alternative
you could have done instead.
And that is called the "opportunity cost."
And that's a critical concept in economics,
and that is why, in some sense, we
are referred to casually as the "dismal science."
Economics is referred to as the dismal science.
First of all, I'm flattered we're considered a science.
But it's called the "dismal science"
because our whole point is that nothing is free.
There is always a trade-off.
There's always an opportunity cost.
Anything you do, you could be doing something else instead.
And your constrained optimization
means you're going to have to pass up one thing
to do another.
Now, some may call it "dismal," but as a former MIT
undergraduate, I call it "fun."
And this is why I think MIT is the perfect place
to be teaching economics, because MIT engineering is
all about constrained optimization.
That's what engineering is.
And economics is just the engine.
It's just the principles you learn in engineering
applied in different contexts.
So if we think about the 2.007 contests-- that still
exist with the robots, 2.007?
Yeah, the 2.007 contests, those, as you know,
are contests where you're given a limited set of materials.
And you have to build a robot that does some task,
like pushing ping-pong balls off a table or something like that.
That's just constraint optimization.
It's got nothing to do with economics,
but it's constrained optimization.
So just think of microeconomics as like engineering,
but actually interesting.
So think of microeconomics as engineering,
but instead of building something
to push a ping-pong ball off tables, you actually
build people's lives, and businesses,
and understand the decisions that drive our economy.
So same principles you could think
of for your engineering classes, but applied to people's lives.
And that's why, in fact, modern economics was born in this
room, this room or 26.100 by Paul Samuelson in the 1940s
and '50s, who wrote the fundamental textbook that gave
birth to modern economics.
Because he was here and applied the kind of engineering
principles of MIT to actually develop
the field of modern economics.
What we'll learn today was developed at MIT,
so it's a great place to be learning it.
Now, with that as background-- any questions about that,
about what is microeconomics?
With that as background, let's turn
to our first model we'll talk about this semester, which
is the supply and demand model.
Supply and demand-- now, the way we're
going to proceed in this course is going to drive you crazy,
because we're going to proceed by teaching,
as the very first question pointed out,
by teaching very simplified models.
We're going to essentially-- what is a model?
A model is technically a description
between any two or more economic variables or any two or more
variables.
But unlike the models used in all your other classes,
these aren't laws, by and large, they're models.
So we don't have a relation between energy and mass
which you can write down.
It's a law and you're done.
We have models which are never 100% true, but always
pretty true, "pretty" being somewhere
between 10% and 95% true.
So basically, the idea is to make a trade-off.
We want to write down in our models
a set of simplifying assumptions that
allow us, with a relatively small set of steps,
to capture relatively broad phenomena.
So it's essentially a trade-off.
On the one hand, we'd like a model
that captures as well as possible the phenomena
in the real world, like E equals Mc squared.
But we want to do so in the most tractable possible way
so that we can teach it from first principles,
and don't need an arrow to teach every single insight we have.
So basically in economics, we tend
to resolve that by erring on the side of tractability.
That is why I can teach you the entire field
of microeconomics-- which is really sort of--
macro is kind of a fun application.
Micro is really economics.
I can teach you the entire field of microeconomics
in the semester, because I'm going
to make a whole huge set of simplifying assumptions
to make things tractable.
But the key thing is that you will
be amazed at what these models will be able to do.
With a fairly simple set of models,
we will be able to offer insights and explain
a whole huge variety of phenomena,
never perfectly, but always pretty well,
generally pretty well.
And so that is essentially the trade-off
we're going to try to do this semester.
So the line I like is the statistician
George Box said that all models are wrong, but some are useful.
Now obviously, it doesn't apply to models in the hard sciences,
but in the social sciences, that's true.
And basically, I'm going to write down
a set of models like that.
Now, with every model I write down, I'm going to try--
my goal is to have you understand it at three levels.
The first and most important level
is the intuitive level, the level
which you sort of understand.
I call it "passing the Mom Test."
You can go home and explain it to your mom at Thanksgiving
or at the end of semester.
No offense to dads, just called it "the Mom Test."
So basically, that's the intuitive level.
You really understand it in a way that you could explain it.
The second is graphical.
We were going to do-- most of our models
here were developed in a graphical framework using
x/y graphs that really in economics, we think delivers
a lot of shorthand power.
And the third is mathematical.
The mathematical is probably the least important,
but it's the easiest to test you on.
So we're going to need to know things mathematically as well.
So let's start by considering the supply and demand
model by using the famous example
brought up by Adam Smith.
Adam Smith is sort of considered the father of economics.
If Paul Samuelson is the father of modern economics,
Adam Smith is the father of all economics.
His 1776 book, The Wealth of Nations
did an incredible job of actually laying out
the entire core of the economics field--
no math, just words, but he just nailed it.
And one of his most famous examples
was the water diamond paradox.
He said, think about water and diamonds.
He said, start with water.
Nothing is more important for life than water.
It's the building block of all of life.
Even when we look for life on other planets,
we always start by looking for water.
Now think of diamonds, one of the more frivolous things
you can buy, certainly irrelevant to leading
a successful or happy or productive life, or any life.
Yet for most of us, water's free and diamonds
are super expensive.
How can this be, Adam Smith asked.
Well, the answer he posed is that what I first described
was just demand.
That is, we demand lots of water.
We demand fewer diamonds.
But we have to match that with the concept of supply.
And the supply of water is almost infinite,
while the supply of diamonds-- maybe not naturally,
maybe it's through decisions of various businesses--
but it's somewhat limited.
So basically what he developed is
what we call the "supply and demand scissors"--
that you can't just think of supply or demand in isolation.
You have to put them together if you
want to explain the real world phenomena we see, like the fact
that water is cheap and diamonds are expensive.
So let's just about an example.
So there's one graph that was handed out
in the back, which is, let's talk
about the market for roses.
So in the market for roses, we have a demand curve
and a supply curve.
So what we have here-- this is the kind of x/y graph
we're going to look at all throughout the semester.
On the x-axis is the quantity of roses.
On the y-axis is the price of roses.
The blue, downward-sloping line is the demand curve.
Now, what I'm going to do here, I'm just giving you a overview.
We are going, over the next five or six lectures, dive
into where this demand curve comes from.
We'll go to first principles and build it back up.
But for now, what we know of a demand
curve is it simply represents the relationship
between the price of a good and how much people want it.
Therefore, we assume it is downward sloping.
At higher prices, people want less of the good.
And we'll derive where that comes from shortly,
starting next lecture.
But for now, I think it's pretty intuitive
that if the price of roses is higher,
people want fewer of them.
And that's why it's downward sloping.
Basically, as the price of roses goes up,
people want fewer roses.
The yellow curve is the supply curve.
Now, after we've derived the demand curve,
we'll then go and spend about 12 lectures
deriving the supply curve.
That's a bit harder.
But once again, we'll start from first principles
and build it up.
For now, you just need to know that's how much firms
are willing to supply, given the price.
So basically, as the price goes up,
firms want to produce more roses.
The higher price means you make more money,
so you want to produce more of them.
This is slightly less intuitive than demand,
but we'll derive it and explain how it can be.
But for now, just go with the basic intuition
that if you're making something, and you can sell it
in the market for a higher price,
you're going to want to make more of it.
And that leads to the upward sloping supply curve.
Where the points meet is the market equilibrium.
Where supply and demand meets is the market equilibrium.
And that is the point where both consumers and producers are
happy to make a transaction.
Consumers are happy because on their demand curve
is the $3 and 600 roses.
That is, they are willing to buy 600 roses at $3.
Producers are happy, because on their supply
curve is the same point.
They are willing to supply 600 roses at $3.
That is the one point where consumers are happy
and producers are happy.
Therefore, it's the equilibrium--
highly non-technical, but that's the basic intuition.
The point at which they're both willing to make
that transaction, the point at which they're
both satisfied with that transaction,
is the equilibrium, which in this case is $3 per
rose and 600 roses.
Now, this raises lots of questions.
Where did the curves come from?
How does equilibrium get achieved?
Why the heck do we give roses?
These are a bunch of questions.
We will come to all these questions
over the next set of lectures.
But the basic thing is to understand
this intuition of Adam Smith's supply and demand model.
Questions about that?
Now, this model also raises another important distinction
that we'll focus on this semester
and is easy to get mixed up.
So I want you to, if you're ever unclear,
I want you to ask me about it.
And that's the distinction between positive
versus normative analyses-- positive versus normative.
Positive analysis is the study of the way things are,
while normative analyses is the study
of the way things should be.
A positive analysis is the study of the way things are,
while normative analysis is the study
of the way things should be.
Let me give you a great example, which is eBay auctions.
Auctions are a terrific example.
They're like the textbook example
of a competitive market.
You can see it in your head--
demand comes as a bunch of people going on and bidding.
People who want it more bid more,
so you actually get a demand curve.
The higher the price, the fewer people you're getting to bid.
Supply is how many units of it are for sale on eBay.
You bid until those two meet.
And then you have a market equilibrium
at that bidded price.
Now, one example of an eBay auction
that got a lot of attention a number of years ago,
early in the days of eBay, was someone
offered their kidney for auction.
They said, look, I got two kidneys.
You only need one to live.
There are people out there who need a kidney.
I'm putting my kidney on eBay for auction.
And what happened, bidding went nuts.
It started at $25,000.
It climbed to $5 million before the auction was shut down,
and eBay decided they wouldn't allow
you to sell your body on eBay, bodily parts on eBay.
So this raises two questions.
The first is the positive question,
why did the price go so high?
So what's the answer to that?
What's the answer to the positive question?
AUDIENCE: Somebody wanted a kidney.
JONATHAN GRUBER: Good answer, but let's raise hands
and give answers.
That's part of it.
Yeah.
AUDIENCE: Low supply, high demand.
JONATHAN GRUBER: Low supply, high demand.
Demand is incredibly high, because I'd die without it.
Supply is low, because like not a lot of us
are willing to sell their kidneys
on eBay So low supply, high demand led to a high price--
Adam Smith at work.
That's the positive analysis.
But then there's the normative question, which is,
should you be allowed to sell your kidneys on eBay?
That's the normative question.
The positive question is, what happens if you do?
The normative question is, should you?
Now, the standard economics answer to start
would be, of course you should.
We're in a world where thousands of people
die every year because there's a waiting list for a kidney
transplant.
and these are people who would happily pay a lot of money
to stay alive, I presume.
Meanwhile, there's hundreds of millions
of people walking around with two kidneys who only need one.
And many of these people are poor.
And lives could be changed by being paid $1 million
for their kidney, and might be happy to take the risk that one
kidney will be fine, as it is for most everyone
for most of their life, in return
for having a life-changing payment from a stranger.
So economists say, look--
here's a transaction that makes both parties better off.
The person who gets the kidney gets to stay alive,
and they are willing to pay a huge amount for that.
The person who sells the kidney in most probability
is fine, because almost all of us
can make it through life fine with one kidney,
and create a life-changing amount of money that
could allow them to pursue their dreams in various ways.
So that's the standard argument, would be,
yeah, you should be able to sell your kidneys on eBay.
So the question is, why not?
Why would we want to stop this transaction?
What are the counter-arguments to that?
Let's raise our hands.
Yeah.
AUDIENCE: Potentially, I think maybe the issue is
because on eBay, there's no way to regulate it
or you don't necessarily know.
People could be like selling fake kidneys, per se.
JONATHAN GRUBER: Right.
So the first type of problem comes out
of the category we call "market failures."
Market failures are reasons why the market doesn't
work in the wonderful way economists
like to think it should.
So for example, this answer puts up
there could be the problem of fraud.
People might not be able to tell if they're
getting a legit kidney or not.
There could be the example of imperfect information.
Do you know what the odds are that you
can spend the rest of your life with only one kidney?
I don't either.
We ought to know that before we start selling our kidneys.
There could be imperfect information.
This is one type of problem, which is the market,
maybe the market may fail.
Yeah.
AUDIENCE: Well, the current system also
holds people who are poor and have a failed kidney--
and which are people who would be completely screwed otherwise
in the [INAUDIBLE] system.
JONATHAN GRUBER: A second problem
is what we call "equity" or "fairness."
Equity or fairness, which is we would end up with a world
where only rich people would get kidneys.
Currently, there's a bunch of voluntary donors and people
who are in accidents who have kidneys left over.
And those go to people on the basis of where
they are on a waiting list.
It's actually a prioritized waiting list.
It's kind of a cool--
one of my colleagues, Nikhil Agarwal, if you think about--
I'll talk a lot this semester about the imperialistic view
of economics, all the cool things we can study.
So he actually uses economic models
to study the optimal way to allocate organs to individuals.
now it's just done based on a waiting list,
but it may be that someone further down the waiting
list needs it more than someone higher up the waiting list
because they're more critical or whatever.
So there's various optimal ways to allocate.
But certainly, the optimal way to allocate
wouldn't be the rich guy gets it first.
That would be unlikely to be what society would necessarily
want.
So there's an equity concern with that.
What else?
What other-- yeah.
AUDIENCE: In that situation, since you
know you can make money off of selling kidneys,
and you take advantage of people, it's very bad,
the black market for kidneys.
JONATHAN GRUBER: Right, so there's sort of a third--
it's related to fraud, but there's
sort of a third class of failures
that gets into the question about behavioral economics
that was raised earlier, which we could just call behavioral--
it's called "behavioral economics,"
for want of a better term, which is essentially,
people don't always make decisions
in the perfectly rational, logical way we will model them
as doing so this semester.
People make mistakes.
That's a word we hate using in economics.
We hate saying "mistakes."
Ooh, boo, mistakes-- nobody makes mistakes.
We're all perfectly economic beings.
But we know that's not true.
Increasingly over the past several decades,
economists have started incorporating insights
from psychology into our models, to not just say
people make mistakes, that their lackadaisical,
but to rigorously model the nature of those mistakes
and understand how mistakes can actually
happen due to various cognitive biases and other things.
In this world, you can imagine people could make mistakes.
They could not really sit down and quite
understand what they're doing, and they
could have sold their kidney when it's really not
in their own long-term interest.
Yeah.
AUDIENCE: Would another example be
if there's a family that is in extreme poverty,
even though they only have one kidney,
they might sell the other one, just to get more
money for the family, per se?
JONATHAN GRUBER: Well, in some sense that would be,
once again--
if we took this factor out, if the market works well
with its behavioral effects, we'd say, you know,
that's their decision.
If they otherwise they starve, who are you to say?
But once you choose this, say, wait a second,
maybe they're not evaluating the trade-offs correctly.
Even if there's no fraud, even if there's perfect information,
they may not know how to process that information correctly.
But that is not standard economics.
That's not what we'll spend a lot of time on in the semester,
but it's obviously realistic.
So those are a bunch of good comments, great comments.
And yeah.
AUDIENCE: Also, in inelastic demand,
such that people always need kidneys--
JONATHAN GRUBER: That won't turn out to be a problem.
That doesn't turn out to be a problem.
We'll come back-- that's a great comeback
that we talk about the shape of demand curves.
We want to return to that question in a few lectures,
but that doesn't actually cause a problem.
It's just that's more of a positive thing about why
the price is so high, but it's not a normative issue about
whether you should allow it or not.
So basically, these are exactly--
to me, honestly, I spend my life thinking a lot
about these things.
I think these are really interesting issues.
But you can't get to the normative issues
without the positive analysis.
You do the positive analysis to understand
the economic framework before you start
jumping to drawing conclusions.
That's no fun.
We all want to jump to draw conclusions,
saying this should happen, this shouldn't happen.
You can't do that.
We have to be disciplined.
We have to start with the fundamental economic framework.
And basically, the bottom line--
I said I'll teach this course with a policy bent,
but you have to recognize that economics at its core
is a right-wing science.
Economics at its core is all about how
the market knows best, and that basically governments only mess
things up.
That's sort of the basic, a lot of what
we'll learn this semester.
As the semester goes on, we'll talk
about what's wrong with that view
and how governments can improve things.
Indeed, I teach a whole course about the proper role
of government the economy.
But the standard of economics is, "the market knows best."
And that leads us to the last thing I want to talk about,
which is basically, how freely should an economy function?
Let's step back to the giant picture.
Let's step back from a market for roses
to the entire economy.
How freely should a market, should an economy function?
We have what's known as a "capitalistic economy."
In a capitalistic economy, firms and individuals
decide what to produce and consume,
maybe subject to some rules of the road set by the government.
There's some minimum rules of the road
to try to avoid fraud or misinformation,
but otherwise, we let the dice roll.
Firms let consumers decide sort of what to do.
Now, this has led to tremendous growth.
America was not a wealthy nation,
was not a very wealthy nation 100 years ago,
or 150 years ago.
Led to tremendous growth, where we are now
the most powerful, still the most powerful and wealthiest
nation the world, largely driven by the capitalistic nature
of our economy.
On the other hand, we are a nation
with tremendous inequality.
We are by far the most unequal major nation in the world.
The top 1% of Americans has a much higher share of our income
than in any other large country in the world,
any other large developed country in the world.
The bottom 99% has less of our income corresponding
with anywhere else.
So it's led to major inequality.
And it's led to other problems.
It turns out that the government can't appropriately
set the rules of the road to avoid things like fraud, as we
saw with Enron, if you remember back to that,
or a lot of what happened in the financial meltdown.
It turns out it's hard to get people
perfect information, et cetera.
So we've seen the problems.
We've grown very wealthy as a nation.
We've introduced a whole set of problems through this system.
Now, the other extreme is what's called the "command economy."
Rather than a capitalist economy,
it's what's called a "command economy."
In this case, the government makes all the production
and consumption decisions.
The government doesn't just set the rules of the road,
the government owns the road.
The government says, we're going to use this many cars
this year.
And people can get them in some way.
It could be a lottery, could be waiting in line.
How do we decide how to allocate them?
We're not going to let the market allocate them.
We, the government, will allocate them.
We'll allocate how many get produced and who gets them.
And this was the model of the Soviet Union
that I grew up with.
This was the pre-1989 Soviet Union.
The government decided how many shirts, cars, TVs, everything.
It's sort of bizarre to think that literally
everything the government decided how much to produce.
And by and large, the government decided who got it partly
through corruption-- that is, the party members,
party leaders got it first--
and often just through waiting in line for the remaining
application.
Now in theory, this ensured equity
by making sure that everybody had shot at things.
In practice, it didn't work well at all
and actually was what dragged down
the collapse of the old Soviet economy,
was that the command model simply doesn't work.
Partly there's just too many opportunities for corruption.
When the government controls everything,
that means there's no checks and balances on the opportunity
for enormous corruption.
The capitalist economy puts some natural checks and balances
on that.
And partly because it turns out that it's
hard to control human nature.
And Adam Smith had it right.
Adam Smith talks about the "invisible hand"
of the capitalist economy.
The invisible hand is basically the notion
that the capitalist economy will manage
to distribute things roughly in proportion to what people want.
And that's where folks want to be.
Folks who want a certain kind of car
are going to want to get to that kind of car,
and if the government has it wrong,
they're going to get upset.
And it's going to lead to a less functional economy.
So basically, Adam Smith's view is that--
the invisible hand view is that consumers and firms serving
their own best interest will do what is best for society.
So the fundamental core of the capitalistic view
is that consumers and firms serving their own best interest
will do what ends up being best for society.
And that's essentially the model we'll
learn to start in this course.
Yeah.
AUDIENCE: In that definition, are we
defining the best for society as in everybody
has the most money?
Or everyone has the best health or the best standard of living?
What is the best [INAUDIBLE]?
JONATHAN GRUBER: Great question.
We're going to spend a lot of the semester talking
about that.
For now, we're going to define "best for society"
as the most stuff gets produced and consumed.
That's how we're going to find it--
obviously raises a set of issues about what
about pollution, what about health, et cetera.
We're going to come to those, but for the first two-thirds
of the course "best for society" means
what we're going to call "maximum surplus," which
is the most stuff gets produced that people value.
So that's how we're going to do it.
And in his view, the invisible hand does that.
And by and large, it's a very helpful framework to turn to.
However, at least it can lead to outcomes
that are not very fair.
So the way we're going to proceed in this course
is we're going to start by talking about how
Adam Smith's magic works.
How does the magic happen?
How does individuals and firms acting
in their own self-interest, without caring about anybody
else, end up yielding the largest possible
productive economy?
How does that happen?
And we're going to talk about that.
We'll start with demand, which is
how do consumers decide what they
want given their resources.
We'll talk about the principle of utility maximization,
the idea that I have a utility function
that I can mathematically write down what I want.
I'll have a budget constraint, which is the resources I have,
and those two constrain optimization.
We'll say given what I want and the resource I have,
what decisions do I make?
Boom, we get the demand curve.
Then we'll turn to supply, and we'll talk about how do firms
decide what to produce.
That's much more complicated, because firms
have to decide what inputs to use
and what outputs to produce.
And we'll talk about how firms can operate
in very different markets.
There is a competitive market that Adam Smith envisioned,
but that doesn't always work.
Sometimes we get monopoly markets,
where one firm dominates.
And you can actually have outcomes
which aren't the best possible outcome, even
with the invisible hand.
So we'll talk about different kinds of markets.
Then we'll put it together to get market equilibrium,
and talk about Smith's principles.
And then from there, we'll talk about how it breaks down
in reality, different change in reality,
how there are various market failures that
can get in the way, why we have to care about equity
and what implications that has, about behavioral economics,
about a set of other factors.
So that's basically how we're going to proceed this semester.
As I said, the lectures are important,
but the recitations are as well.
Once we're sort of in steady state,
the recitations will be about half new material and half
working through problems to help you prepare
for that next problem set.
So the way the problem sets are going to work
is the problem set that's assigned
will cover material that's taught up to that date.
So for example, problem set one is going
to be assigned next Friday.
That will cover everything you've learned up
through next Wednesday.
Therefore, in section on next Friday,
we'll do a practice problem which you should understand
because it'll cover things that were taught in class,
and help prepare you for the problems.
And we'll do that every week.
That's about half the section.
The other half of the section will be new material.
This Friday, the section on Friday is all new material.
What we do on Friday is cover the mathematics.
I don't like doing math.
I always get it wrong.
So I leave math for the TAs, who are smarter than I am.
So this Friday, we'll be doing the mathematics of supply
and demand, and how you take the intuition here
and the simple graphics, and actually
turn it into mathematical representations, which is what
you need for the problem sets.
That's this Friday.
Then we'll come back on Monday and start
talking about what's underneath the demand curve.
All right, any other questions?
I'll see you on Monday.