Intermediate Microeconomic Theory Introduction

What is Goal of Microeconomic Theory? The primary goal of this class is to develop a model for understanding markets. Why are markets so great?

Example of markets vs. regulation NYT recently had an article about donor eggs. American Society for Reproductive medicine recommended a regulated fixed price of $5000 paid to donors (most countries other than U.S. this is the case). They consider this to be more ethical than letting the market dictate the price. Is it?

Example of markets vs. regulation Consider two potential “buyers” Buyer 1 doesn’t care about baby’s heritage, but is not very rich, so is only willing to pay $3000 for a donor egg. Buyer 2 is rich, but is of Asian heritage and strongly desires an Asian donor egg. Therefore, she is willing to pay $7500 for an Asian donor, but nothing for a non-Asian donor. Evidence shows there are substantial numbers of donors, but relatively few Asian donors. For this example, assume that there are non-Asian donors willing to donate and egg for $2500, but another Asian donor will only become available for $7000. What happens with regulated markets with fixed $5000 price? What happens if prices were allowed to adjust to demand and supply? So which system is “more ethical”?

Markets and Efficiency Pareto Efficiency - an outcome such that we can’t make anyone better off without making someone else worse off. Ex: Is room draw Pareto Efficient? Why can markets often lead to efficient outcomes? Adam Smith’s invisible hand. Ex: Consider a room-draw + market? So in well-functioning markets, what does price reveal?

Constraints of Markets What can constrain markets from working properly and achieving efficiency? Even if markets worked properly, what might we still be concerned about?

Developing a model for understanding markets Most of class will revolve around developing a model demand and supply? What is a demand curve? What can affect it? What is a supply curve? What can affect it? What is special about where they intersect? Why?

Developing a model for understanding markets Much of what of what comes out of model is quite intuitive. Ex: Suppose the government wants to raise $1mil/yr for health programs by taxing new cars. Without the tax, 1000 cars were being sold each year. If the government imposed a tax of $1000 on each car sold, will the government raise more, less, or exactly the required amount of revenue? How would the economist consider this point?

Syllabus

Technical Nature of Micro Theory While sometimes technical, we are simply trying to put structure to relatively common sense concepts Keep in mind the big picture and the underlying intuition. If you find yourself confused, step back and just think about the problem. The technical tools useful for two reasons: 1. Help us keep track of many things potentially going on at the same time. For example, say we mandated that employers provide healthcare. How will this affect firm behavior? Worker behavior? Prices for goods in the market? 2. Force us to be more logical (or as economists say “more rigorous”) and to be explicit about the assumptions. It often bothers me when I talk to non-economists who criticize economics for making too many assumptions. I disagree. We are just explicit about the assumptions we are making. This class is the first step toward understanding this.