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Gruber - 2018 : Lecture 1
Microeconomics: The study of how individuals and firms make decisions in a world of scarcity.
It is a series of constrained optimization exercises - Agents (individuals and firms) operate under a set of constraints to optimization their objectives.
Tradeoffs and opportunity cost - Anything an agent does, it could have done something else instead (with an alternative gain).
Table of Contents
A simple model of supply and demand
The supply and demand of roses. Source: Class lecture note.
Two linear curves.
As the price increases, supply goes up and demand goes down.
The two curves meet at the market equilibrium, where both consumers and producers are happy to make a transactions (at the market clearing price).
The supply and demand scissors
Supply goes hand in hand with demand, they cannot be treated in isolation.
An example: water vs diamonds. Water (being the essence of life) has a much higher demand than diamonds. Nevertheless, water is much 'cheaper' than diamonds due to the differences in their supply. That is, water is often thought of 'unlimited'; clearly not the case of diamonds. A good further reading: Link.
Positive vs normative analysis
Positive analysis are descriptive and factual statement about an economic phenomenon (e.g., why something happened?). Normative analysis cares about the underlying values and morals of a phenomenon (e.g., should something happen?).
An example: eBay kidney auction. In 1999, someone was trying to sell a kidney using eBay auction. The price went from $ to $ million within one week. Further reading
Positive analysis - The price is high because of low supply and high demand.
Normative analysis - Should such transactions be permitted? The answer might be no due to factors such as market failure (e.g., fraud, imperfect information), equity / fairness (e.g., favorable to rich).