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    ECON10004 Lecture 1 2024s2

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    ECON10004 Lecture 1 2024s2

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    Introductory Microeconomics

    Economics 10004
    Semester 2, 2024

    Department of Economics
    University of Melbourne
    Welcome

    Lecturer: Tom Wilkening


    Agenda
    É Introduction to Economics
    É Administration (Read the Subject Guide!)
    Subject overview

    The basic economic problem:


    Human wants are unlimited
    But the means to satisfy those wants are limited
    Hence, how do we make choices on
    what to produce?
    how to produce?
    for whom to produce?
    Economics offer a “way of thinking” that can help answer these
    questions
    Introduction
    Economics is a social science that analyses how individuals make
    decisions in groups when there is a scarcity of resources or conflicting
    incentives
    Social: Interested in the interaction between individuals and the
    rules and incentives that govern those interactions
    Science: We try to understand individual behaviour, and create
    theories that enable us to make predictions about future
    outcomes
    Introduction

    Economics focuses on situations where


    Individual actors are autonomous: Each individual makes their
    own decision
    Individual have freedom: Individuals have the ability to walk
    away from a situation i.e. participation is typically voluntary
    Interactions matter: The outcome is determined by the
    confluence of decisions, each from an uncoordinated source
    Introduction

    Economics gather data to:


    Test the prediction of theory
    Select between alternative theories based on empirical tests
    Evaluate the effects of policies and decisions on outcomes
    Forecast future decisions and outcomes
    Investment Game

    Everyone in the room who wishes to participate can login to flux


    and answer the poll:
    É Stream 1: https://flux.qa/9WJEDA
    É Stream 2: https://flux.qa/9VT38Z

    You will be asked to choose between “Don’t Invest” or “Invest”

    I will randomly pick two responses to the poll


    É Both Choose “Don’t Invest”: Each player will receive $30
    É One Chooses “Invest”: Investing player will receive $50, and the
    other receives $0
    É Both Choose “Invest”: Each player will receive $15

    Winners will be notified by email and can collect on Wednesday


    Golden Balls

    The Investment Game is an example of a prisoner’s dilemma

    Prisoner’s dilemma problems are used to model investments,


    contests, and war

    Variants of the problem are popular for game shows due to the
    tension that arises between autonomous agents with strategic
    actions and conflicting incentives

    Golden Balls
    É Extremely popular British TV show from 2008-2009
    É Four part show which involves lying and voting other contestants
    off until their are only two players left. They then play the “golden
    balls” game
    Theory and Data

    Under the assumption that individuals care only about their own
    payment, each individual has an economic incentive to steal
    É If the other person chooses “Split” I receive the most money by
    stealing
    É If the other person chooses “Steal” I am indifferent between
    stealing and not stealing

    If this theory perfectly matched reality, it would be a boring TV


    show
    É Experiments like this one show that many individuals are
    “conditional cooperators” who want to split only when the other
    person splits
    É The action of conditional cooperators depend explicitly on what
    they believe the other person will do
    Incentives Matter

    What can we learn from the Golden Balls game?

    Lesson 1: Systems where the incentives of individuals are at odds


    with the objects of the designer are likely to be unstable and lead to
    inefficiencies

    For good or ill, the incentives generated in an economic system


    influence the decisions of the individual
    É A small number of professional rent seekers can destroy economic
    institutions
    É Systems work best when the goals of individuals and society are
    aligned
    An Example

    Arizona’s Alternative Fuel Program (2000)

    Objective: Increase the number of vehicles using alternative fuel


    systems in the Phoenix area
    Approach: Lump-sum rebate of up to 40% of the final price of
    vehicles which have the ability to use LNG. Further exemptions
    from sales tax, vehicle licensing, and emissions
    Problem: ...
    An Example

    Arizona’s Alternative Fuel Program (2000)

    Objective: Increase the number of vehicles using alternative fuel


    systems in the Phoenix area
    Approach: Lump-sum rebate of up to 40% of the final price of
    vehicles which have the ability to use LNG. Further exemptions
    from sales tax, vehicle licensing, and emissions
    Problem: No Usage Requirement! SUV owners bought a $1,000
    secondary fuel tank and disabled it after delivery. Hummer
    purchasers saved $22,000 without actually using the secondary
    fuel tank
    Outcome

    Program expanded from an expected $3 million to $600 million.


    This was roughly 10% of the state budget
    Law repealed with a final cost of $200 million
    Political disaster: Legislators who wrote the bill were removed
    from office. Many purchased SUVs using the scheme
    Environmental disaster: Policy led to a decrease in overall vehicle
    fuel efficiency due to an increase in large vehicle sales
    Learning to Think Like an Economist

    An insightful quote from Ben Bernanke:

    “Economics is a highly sophisticated field of thought that is superb at


    explaining to policymakers precisely why the choices they made in the
    past were wrong. About the future, not so much...”

    “However, careful economic analysis does have one important benefit,


    which is that it can help kill ideas that are completely logically
    inconsistent or wildly at variance with the data. This insight covers at
    least 90 percent of proposed economic policies.”
    People Adapt to Systems

    Lesson 2: People adapt to economic systems. Imperfect systems may


    work in the short run but often collapse in the long run

    Individuals who act in good faith in a bad economic system are


    exploited over time. This leads to increasingly inefficient
    outcomes
    É Sarah cooperated in her first game, but defected in her second. She
    learned to behave in a socially inefficient way
    É Golden Balls: Discontinued after the 2009 season, partly due to an
    increase in defections over time
    Information Matters

    Lesson 3: In economic systems, information held by individuals is


    private. The inability of a system designer to know everything makes
    optimization a challenge

    Golden Balls:
    Information Matters

    Our inability to observe the private information of individuals


    makes it difficult to design centralized systems that are efficient

    Instead, economists often advocate decentralized systems such as


    markets where individuals reveal their information when making
    trades that are in their self interest
    É Market exchanges are the fastest known mechanism for
    aggregating large amounts of information
    É In many cases, markets lead to efficient outcomes when all market
    participants follow their private incentives
    Subject Overview

    Microeconomics is about
    É the behaviour of individual decision-makers
    É their interaction through exchange and in markets

    Two-stage approach to mastering microeconomics


    1 learn key economic concepts, theories and methods
    2 apply them to situations and problems

    The focus of this subject is geared towards making you apply the
    concepts and tools that you learn (case studies, news articles, and
    other applications)
    Part 2: Administration

    Agenda
    É Introduction to Economics
    É Administration
    Important Details

    Read the subject guide!

    Key personnel (lecturers, tutorial coordinator, tutors)

    Lectures – 2 × 1 hour, weekly

    Tutorials – 1 × 1 hour, weekly

    Textbook (see discount code on LMS)


    É Principles of Microeconomics – Mankiw, King, Gans and Byford
    (GKBM)
    É Microeconomics: Case Studies and Applications – Borland
    Assessments

    Assignment 1 (15%) – due Wednesday, August 21, 18:00

    Midterm (25%) – September 11, In-Class

    Tutorial participation and attendance (10%)

    Final exam (50%) – two-hour exam, date TBA

    É TO PASS THIS SUBJECT, YOU MUST PASS THE FINAL EXAM


    Lectures and Repeats

    Stream 1:
    É Monday: 13:15 - 14:15 Copeland Theatre
    É Wednesday: 11:00 - 12:00 Copeland Theatre
    Stream 2:
    É Monday: 14:15 - 15:15 Copeland Theatre
    É Wednesday: 12:00 - 13:00 Copeland Theatre
    Subject overview

    Tutorials:

    É Enrolment – SWS online

    É Pre-tutorial and in-tutorial tasks

    É Participation marks
    Æ Pre-tutorial quizzes (Best 9 used)
    Æ Frequency of participation in discussion
    Æ Relevance and logic of contributions
    Æ Evidence of listening to other students’ contributions

    É For inquiries about tutorials, please contact Nahid Khan


    (n.khan@unimelb.edu.au)
    Subject Resources

    Subject homepage (LMS)

    Lecture slides, recordings, etc.

    Tutorial material, tutor consultation times

    Online tutor (Discussion Board on LMS)

    Assessment information

    Multiple choice test revision questions

    Exam review information

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