Atanu Dey March 22 nd, 2012 Instituto Thomas Jefferson, Queretaro

Introduction Live in California Studied engineering, computer science, economics PhD Economics from Univ of California at Berkeley Work for a technology company in Mumbai, India Blog on “India’s Development” Visited ITJ many times Today we will talk about economics 2Atanu Dey Mar 22, 2012

What is Economics? Study of how people behave People produce & consume AND Exchange 3Atanu Dey Mar 22, 2012

Paul Samuelson’s definition Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. Economics analyzes the costs and the benefits of improving patterns of resource use. Atanu Dey Mar 22, 20124

People Respond to Incentives Studying people exercising choice is what makes economics a study of behavior Behavior is affected by rewards and punishments, gains and losses In other words, people respond to incentives Atanu Dey Mar 22, 20125

Markets Work Markets determine prices Prices reflect the distributed information Prices help allocate resources efficiently Difference between efficiency and equity Economic analysis can be either POSITIVE – the study of what the situation IS NORMATIVE – what SHOULD be Atanu Dey Mar 22, 20126

Economics is Common Sense Economics is codified common sense Economists work with models Models are abstractions from reality Models help us understand how the world works Atanu Dey Mar 22, 20127

Simple Supply & Demand model Demand When the price is high, the quantity demanded is low, and vice versa Supply When the price is high, the quantity supplied is high, and vice versa Atanu Dey Mar 22, 20128

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A Set of Ideas Public goods and Private goods Opportunity Cost The Prisoner’s Dilemma Tragedy of the Commons Atanu Dey Mar 22,

Public and Private Goods Private goods are rival in consumption An apple, a pair of jeans, a book Material objects Public goods are non-rival Ideas, recipe, national defense Information Exchanging public versus private goods Atanu Dey Mar 22,

Opportunity Cost What is the best alternative use of the resource What you have to give up in order to get this The opportunity cost of eating the cake is having it The opportunity cost of having the cake is eating it Limited time Atanu Dey Mar 22,

The Prisoner’s Dilemma Story If A confesses & B keeps quiet A goes free B gets 10 years in prison If B confesses & A keeps quiet B goes free A gets 10 years in prison If both keep quiet Both get 2 years in prison If both confess Both get 6 years in prison Atanu Dey Mar 22,

Prisoner’s Dilemma Diagram Atanu Dey Mar 22,

Both end up Confessing The rational outcome is not the preferred outcome Because it is hard to make a commitment One-shot exchange of a watch and money Atanu Dey Mar 22,

Another example of PD A has a watch, wants to sell it for $100 B wants a watch, and wants to buy it for $100 Exchange will be made in the park in brown paper bags Does the exchange take place? What if the game is repeated? Atanu Dey Mar 22,

Tragedy of the Commons Commons Open access resource such as a pasture or a fishery Not private property Limited resource The benefit of taking from the commons is private The cost of taking from the commons is shared (or social) Atanu Dey Mar 22,

Thank you! QUESTIONS? 18Atanu Dey Mar 22, 2012