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: TA: Gaosheng Ju TuTh 11:30-1:00pm or by appointment Allen 3086 Phone: 862-1667 gan@econmail.tamu.edu TA: Gaosheng Ju MW 10:00am – 11:30am Allen 3012 Phone: 422-5327 gju@econmail.tamu.edu

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

Necessary mathematics

Necessary mathematics

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: Key difficulty: causality 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.