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Economics1:IntroductiontoEconomics:January20,2016Lecture
J.BradfordDeLong<delong@econ.berkeley.edu>
Economics1:Spring2016:CourseIntro
January20,20168-0AMWheelerAuditorium,U.C.Berkeley
3
WelcometoEcon1:Spring2016:UCBerkeley
• J.BradfordDeLong
• delong@econ.berkeley.edu:MW8:00AMWheelerAuditorium
• Thisdocument:<https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus>
• OfficeHours:J.BradfordDeLong'sofficehoursforundergraduateswillstartJanuary26,andwillbeTuesday9-11inEvansHall591.
• RequiredPurchases:
• RobertFrank,BenBernanke,KateAntonovics,andOriHeffetz:PrinciplesofEconomics<http://amzn.to/1Zpuoj5>(NewYork:McGraw-Hill:9781259897580)besuretoorderandbuyISBN9781259897580fromtheBerkeleybookstore
• ParthaDasgupta(2007):Economics:AVeryShortIntroduction<http://amzn.to/1ZpuFCQ>(Oxford:OxfordUniversityPress:9780192853455)
• MiltonFriedmanandRoseDirectorFriedman(1970):FreetoChoose:APersonalStatement<http://amzn.to/1NbvEPU>(NewYork:MarinerBooks:9780156334600)
• TomSlee(2006):NoOneMakesYouShopatWal-Mart:TheSurprisingDeceptionsofIndividualChoice<http://amzn.to/234zCph>(NewYork:BetweentheLines:9781897071069)
• i>Clicker+StudentRemote<http://amzn.to/1ZpvkEe?(NewYork:W.H.Freeman:9781464120152)
4
WelcometoEcon1:Spring2016:UCBerkeley
• FIRSTSECTIONMEETINGSWILLBEWEDNESDAY1/20ANDTHURSDAY1/21:TherearenoMondayorTuesdaysectionstheweekofJanuary18
• YOUMUSTATTENDYOURFIRSTSECTIONMEETING:Ifyoufailtoattend,youwillbesentbacktothewaitlist.
• UsefulResourcestokeepatyourfingertipsforEcon1:Spring2016:
• Econ1QuestionsatPiazza<http://piazza.com>:<https://piazza.com/class/ijbycscre596wc
• Econ1Chat:<https://bcourses.berkeley.edu/courses/1411451/external_tools/24485>
• Econ1Announcements:<https://bcourses.berkeley.edu/courses/1411451/announcements>
• YouareresponsibleforeverythingintheCoursePoliciesdocument.READIT!<http://www.bradford-delong.com/course-policies.html>
ThingstoNoticeAboutThisCourseI
• Thisisonesemester– Everywhereelsethisisatwosemestercourse:–Wegofast
• ThisistheUniversityofCaliforniaatBerkeley– Certainlythefinestpublicuniversityintheworld– Perhapsthefinestuniversityintheworld– Otherscouldbeinyourseats
• Theywouldtakeadvantageoftheopportunitieshere• Don’twasteyouropportunityhere
• Thisisalecturehall:apre-Gutenbergeducationaltechnologyforapost-Gutenbergage
• Wewilldothebestwecan
ThingstoNoticeAboutThisCourseII
• UndergraduateStudentLearningInitiative:AspartofBerkeley'sUndergraduateStudentLearningInitiative(USLI),theEconomicsDepartmenthasdevelopedlearninggoalsfortheEconomicsmajorat:http://emlab.berkeley.edu/econ/ugrad/ugrad_goals.shtml.Thespecificlearninggoalswhichthiscourseaimstoachieveare:• CT1:understandeverydayeconomicproblems,• CT2:useeconomictheorytounderstandandevaluatepolicyproposals,
• PS1:solveproblemswithclearsolutions,• CS1:communicateeffectivelyabouteconomicissues,and• LL3:understandtheeconomicnews.
• Butthatisnotterriblyhelpful,isit?
ThingstoNoticeAboutThisCourseIII:EconomicLiteracy
• Thereallearninggoalforthiscourseis:economicliteracy.• Attheendofthecourse,studentsshouldbeabletotakeanyarticleabouttheeconomy,whetherin,say,theFinancialTimesortheEconomistortheSanFranciscoChronicleorBusinessInsiderorvox.com:• Determinewhatassertionsitismakingabout
• howtheeconomyworks,and• whatthecurrentstateoftheeconomyis,
• breakdownthoseassertions,• useeconomiclogicandeconomicmodelsandeconomicdatatoanalyzethem,and
• concludewhetherandunderwhatconditionstheargumentsofthearticlemakesense.
ThingstoNoticeAboutThisCourseIV:GradingandFirstAssignment
• Grading:– 30%finalonMay9,20163-6PM– 15%midtermonMarch9,2016– 40%9problemsetsandashortmidtermpaper.– 9%lectureparticipation—i>ClickersshouldstartMonday.– 5%sectionparticipation.– 1%anintroductorylettertoyourGSI,– AnticipatedmediangradeinthiscourseisahighB…
• Firstsectionassignment:– ReadParthaDasgupta,Economics:AVeryShortIntroduction
LetterofIntroductionAssignment
• Bythestartofyournextsectionmeeting,pleasewritea250-wordessay--a“letterofintroduction”--toyourGSI.Includeyourname,anddiscuss:– thereasonswhyyouarechoosingtospend3%ofyourscarcecollegecurriculumtimetakingthiscoursethisyear,
– whatyouhopetolearnfromthiscourse,– whatyouhopetodointhefutureasaresultofthiscourse,and
– whateverelseaboutyourselfthatyouwouldliketosharewithyourGSI.
– Pleaseincludeorembedaphotoofyourself,asthiswillhelpuslearntorecognizeyoubysight.
MicroeconomicsIntro
January20,20168-0AMWheelerAuditorium,U.C.Berkeley
WhatIsRemarkableAbouttheEastAfricanPlainsApe?
• Basic:– Mammals– Uprightposture– Alotofus:7.4billionnow
• Form:– Handsandopposablethumbs– Bigbrains– Talk
• Behavior:– Gossip(aboutfood,threats,mating)– Alterourenvironment– Giftexchange– Large-scalesocialdivisionoflabor
greaterthanseeninthesocialinsects
AdamSmith
• In1776publisheshisWealthofNations
• Itcontainsagenuinelygame-changinginsight:the“systemofnaturalliberty”
• Justletpeopleexchangethingsfreely—inanenvironmentinwhichpropertyissecure,andinwhichthereisanalternativedealalmostasgoodjustdownthestreet—andthingswillworkoutremarkablywell…
OurTaskThisSemester
• Howisitthatmarketsworksowell?
• Whatcanmakethemfailtoworkwell?
• Whatcanwedoaboutitwhentheydofailus?
• Whatsupportfromotherpiecesofsocietydoesamarket—orperhapsweshouldsayamixed—economyreallyneed?
• Arewereallysurethatmarketsworkwell?
HowRemarkably?:TheHighStalinistExperiment
HowMuchDoesMarketOrganizationMatter?
• HighStalinistcentralplanning– Marx’ssuspicionofmarketsas
surplus-extractiondevices– Hence,thecommunistssaid,
wewon’thaveany– Wewillreproducethe
Rathenau-LudendorffWorldWarIImperialGermanwareconomy
– Communes,economiesofscale,GOSPLAN,etc.
• Effect:youthrowawayafive-foldamplificationofproductivitybyeschewingthemarket
HowMuchDoesMarketOrganizationMatter?
GregClark:DirectEstimatesofLong-RunRealWageTrends
• GregClark’snumbersonwhatmonkspaidtheirconstructionworkers,andwhatbreadandotherstaplescost…
• AustanGoolsbee:Ittook30hoursforanAmericanlaborerin1850tobuyabushelofcorn.Ittakes12minutestoday.
• Plusnewgoodsandnewtypesofgoods:solidthings,energy-manipulatingthings,information,andcommunication…
RickSteckel’sNumbersonOldWorldHeights
• “InnineteenthcenturySweden,forexample,averageheightwasthreetoeightcentimetersgreaterinruralareascomparedwithStockholm,dependinguponthetimeperiodandruralarea(SandbergandSteckel,1988)….
• “Inlateeighteenth-centuryEngland,forexample,theaverageheightsatage14ofpoorboysadmittedtotheMarineSocietywere20centimetersbelowthoseofupper-classboyswhoattendedtheeliteacademyatSandhurst(Floud,Wachter,andGregory,1990).Duringthesameera,thedifferenceinaverageheightbetweentherichandthepoorintheUnitedStateswasroughly3centimeters(MargoandSteckel,1982).”
RobertAllen’sNumbersforWorldCities
• Thisisa“subsistencebasket”foroneadultmale…
• Unskilledurbanlaborers…
• Howwouldonegoaboutthinkingofhowrepresentativeofthepopulationingeneralsuchnumbersare?
AMalthusianEconomy• Wearenotterriblyunhappywithourglobalestimatesofworldpopulation.
• Atwhatrateshouldanutritionally-unstressed,pre-artificialbirthcontrolpopulationgrow?
• Whatiskeepingthepopulationgrowthratedown?
AMalthusianEconomyII• Guessingatpre-industrialrealincomelevels.
• Butwhatdothesemean?Notjustnewgoodsbutnewtypesofgoods.
• Ittook30hoursforanAmericanmalenorthernworkerin1850toearnenoughtobuyabushelofcorn
• Ittakes12minutesnow
ThinkingLikeanEconomist
January20,20168-0AMWheelerAuditorium,U.C.Berkeley
TwoBasicPrinciplesofEconomics
• TheScarcity(orNo-Free-Lunch)Principle:Wehaveneeds,andwantsthatarepotentiallyboundless.Buttheresourcesavailabletousarelimited.Choicesareinevitable.
• TheCost-BenefitPrinciple:Don’tdostupidstuff—doonlystuffthatmakessense,thatleavesyoubetteroff.• Calculatecostsandbenefitssensibly!• Donotanchor,considerabsolutemagnitudes,don’tforgetimplicitcosts,optionality,doforgetsunkcosts,thinkatthemargin
• Isthiscost-benefitprinciplepositive—howpeoplebehave—ornormative—howpeopleoughttobehave?
FourMorePrinciplesofEconomics
• TheIncentivePrinciple:“Itisnotfromthebenevolenceofthebutcher,thebrewer,orthebakerthatweexpectourdinner,butfromtheirregardtotheirowninterest…”
• TheSpecializationPrinciple:Practicemakesperfect,oratleastbetter.Asocietyofgeneralistswilltendtobeapoorsociety.
• Win-WinExchange:Inasocietyofspecialists,allpartiesbenefitfrominformedtrade.
• ComparativeAdvantage:Lessproductivethaneveryoneelseatmakingeverything?Youshouldstillspecializeatwhatyoudorelativelybest—andtrade.Moreproductivethaneveryoneelseatmakingeverything?Youstillbenefitbyspecializingatyourcomparativeadvantage—andtrading.
Principles:Individuals
• Principlesofindividualdecision-making:– Peoplemustmakechoicesbecauseresourcesarescarce
• Whatifresourcesaren’tscarce?We’llfocusourattentiononanareaoflifeinwhichtheyarescarce!
– Theopportunitycostofanitemisitstruecost– “Howmuch”decisionsinevitablyinvolvemakingdecisionsatthemargin
– Peopleusuallyrespondtomaterialincentives—exploitingopportunitiestomakethemselvesbetteroff• “[hu]manhasalmostconstantoccasionforthehelpofhis[orher]brethren,anditisinvain…toexpectitfromtheirbenevolenceonly”
Principles:Interactions
• Principlesofsocialinteractions:– Therearegainsfromtrade
• “Incivilizedsociety[man]standsatalltimesinneedofthecooperationandassistanceofgreatmultitudes”
• “[Man’s]wholelifeisscarcesufficienttogainthefriendshipofafewpersons”
• “Aspanielendeavoursbyathousandattractionstoengagetheattentionofitsmaster….[Man]hasnottime,however,todothisuponeveryoccasion”
– Resourcesoughttobeusedas“efficiently”aspossible– Marketsmovetoward“equilibrium”– Marketequilibriumusually(?)leadsto“efficiency”– Wheneveramarketisnotachieving“efficiency”,governmentinterventioncanimprovesociety’swelfare
Principles:EmergentMacroDifficulties
• Principlesofmacroeconomics:– Oneperson’sspendingisanotherperson’sincome– Overallspendingsometimesgetsoutoflinewiththeeconomy’sproductivecapacity
– Governmentpoliciescanchangespending• Butwewon’ttalkabouttheseuntilnearlyspringbreak.– Forthenexttwomonthswewillassumethatpeopleinaggregatewanttospendtheirincomestoday
– Thosewhowanttospendlessthantheirincomearebalancedbythosewhowanttospendmore
TheManyThingsthattheMarketSystemGetsUs
• Peoplecan“specialize”inwhattheyaremostproductivedoing
• Peoplecanbecomemoreproductive
• Peoplecantradeviathisinstitutioncalled“market”
• Marketexchangeiswin-win– Butrelativetowhat
baseline?• Marketexchangemaximizes
wealth– Aslongascommoditiesare
excludible,rival,known,andinternal
• Distribution?
Remember:GovernmentCreatestheMarketSystem
• Allthis“laissezfairevs.government”ideologyisgreatlyoversold…• Economistsstartwithanautarchicbaseline,andthenmovetoatrading-what-
you-made-with-your-own-handsbenchmark,andthenstarttalkingaboutgovernment
• Moneyandtrust– “Thick-tie”exchanges– “Thin-tie”exchanges– Weightsandmeasures
• Propertyrights• Contractenforcement• Threatstoproperty,contract,and(arms-length)exchange:
– Positiveandnegativeaffectiveties– Rovingbandits– Localnotables– Government’sownfunctionaries
• Theso-called“nightwatchman”stateisamightyinstrumentalityindeed…
DoINeedtoGoThroughtheAppendixtoCh1?
• TheAlfredMarshallparadigm:words,graphs,equations.
• TheSamuelsonpost-WorldWarIIMITexperiment.• Howwellhasthisservedus?• Youshouldbeabletohandlethismodeofanalysis—youshouldbeabletomovewellenoughbetweenverbalchainsofcausationandanalysis,equations,andgraphsviaanalyticgeometry.• Ifnot?Wewillfindoutquickly,anddoubleback
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