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  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    DEPARTMENT OF ECONOMETRIC ANALYSIS

    Microeconomic AnalysisMicroeconomics as the social science

    Dmitrij CELOV

    September 5, 2017 Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Expectations Your priors to this course?

    Mathematical skills: mathematical analysis, algebra, operationresearch; mathematical economics

    Read/recall essential material in Mas-Colell et al. MathematicalAppendix or in Varian Chapters 26 Mathematics and 27 Optimizationor Useful Maths from the course companion page

    Intermediate (Introductory) course in Microeconomics Recall key microeconomic concepts and the principles of Economic

    Thinking ask if some of them are still unclear You may follow recommended readings at the companion page for

    bachelor level Microeconomics

    Current course emphasis is on methods and tools, their application(do you really need these methods and tools?)

    Experiences of microeconomic data analysis?Micro-econometric research?

    With what data types you dealt with? What issues/problems did you have to address? What methods were used to solve them?

    Slide 2/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Administrative Matters

    Lecturer: Dmitrij Celov

    Contact: dcelov@gmail.com, dmitrij.celov@mif.vu.lt

    Companion page: http://mif.vu.lt/celovCheck it approximately once per week or two

    Office hours: II 15:00-18:00, by appointment via e-mail.Questions by e-mail, to be discussed during office hours,practicals or immediately after class

    Lectures: II 15:00-18:00, room 105.

    Slide 3/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Readings and Problems Required readings:

    [V] Varian H.R. (1992) Microeconomic Analysis[MWG] Mas-Colell A., Winston D.W. and Green J.R. (2004)

    Microeconomic Theory[K] Kreps D.M. (1990) A course in microeconomic theory

    [LN] These Lecture Notes

    Additional readings:[S] Silberberg E., Suen W. (2001) The Structure of Economics: a

    mathematical analysis[R] Rasimavicius J. (2008) Makro-ekonometrinis modeliavimas (In

    Lith.) Frank R.H. (2008) Microeconomics and Behaviour Any advanced level lecture notes (for instance Luke Steins)

    Problems are selected after chapter problems (70% of the examcontent)

    Slide 4/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Assessment The general assessment framework. 10-point grade system.

    The final grade is passed iff a final exam is passed a studentmust score more than 4 points

    The final grade is a weighted average of all activities:10% Seminar presentation microeconomics application, experiment,

    case study10% Homework presentation during recitation hours40% Mid-term exam (test and problems)40% Final exam (test and problems) Exam IS NOT a memory test. It is important to understand the

    concepts and their application issues, that are tested. And beable to solve the problems.

    Nota bene: re-takes are organized for the final exam only! Additional points may be collected for participation at

    experiments, workshops, organization of debates, presentations,original solutions to the homework assignments.

    P.S. Try to score additional points, they may happen to be crucialSlide 5/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    How to score 10 points in MIKEA? Do many problems (more than it is suggested for homeworks) Pose correct questions, dig dipper into the concepts the devil is

    in details Attend lectures discussions outside the book and lecture notes Read/browse the content of recommended readings before

    lectures and a several days after (at least [V]) Make your own lecture notes the most elegant get extra points Go to bed by 11pm (including me), get up at 7am sleep at least

    8 hours per day Do not memorize the material Do not copy the solutions to the problem sets ... and do not just give your solutions to the group-mates A better option is to explain the solution loudly step-by-step ... do it to your friends, little brother, dog, Teddy Bear Avoid solution of the "typical" problem in the mechanical way

    do economics, not just mathematicsSlide 6/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    At the completion of the course

    Slide 7/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Why study Microeconomic Analysis? General tools for all economics, including empirical economics

    Microeconomics theory itself is just a bunch of facts

    ... but tools make it alive: organize your thinking, make it economic dig dipper into theorys assertions (general) and assumptions

    (particular), understand the outcomes (conclusions) predict the changes and drive conclusions followed from the theory test it on the empirical grounds (econometrics enters here) general applicable to similar decision making problems in other

    fields of studies useful to build (micro)economic models provide (with concepts) microeconomic foundations of

    macroeconomic theory

    Be a professional researcher, not just get acquainted with thestatistical/mathematical part of the story

    Slide 8/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Why economic way of thinking is so special?Starting exampleHow to provide an economic explanation to the increase in the rate of participation of women in competitive

    labor market especially in engineering, law, medicine increasing prominence of the "two-earner" family increase in age of first marriage, baby, etc.

    What do you expect to hear? What the phrase "economic explanation" means? What one

    means by the term "explanation"? Is it different from sociological or political explanation? A list of facts (empirical observations) IS NOT an explanation Facts are just the data points, but there is no story in just

    observing them The data could be interesting but it does not speak for itself

    Slide 9/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Let facts speak for themselvesWhy active labor force is emigrating from Lithuania? Lithuania has joined EU labor market Lithuanian salaries are almost five times lower when the EU

    average Lithuanian labor force is relatively highly skilled and educated 2008 global recession resulted in 10% inflation The government introduced higher taxes with reductions in

    social programs New construction orders dropped by 50% Lithuanian basketball team lost the first match in Eurobasket

    2013 "Samsono" sausages price in 2011 increased by 30% ...

    What facts help to explain the issue? What are irrelevant? Why? Do we have to vote to decide on the true migration reasons?

    Slide 10/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Explain like an economist

    Explanation there exists a more general proposition than theobserved data (a special case), a conclusion from the theory

    General laws and rules drive the facts (events), interpretation ofthem in the framework of systematic human behavior

    General want to apply the framework to other set of facts

    Standard definition of economics a social science that studyhuman behavior as the interaction between ends under scarce(restricted) resources content

    . . . but it is not the conceptual framework methodology

    N.B. Content and methodology ARE interrelated

    Slide 11/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Interdependence of content and tools

    Methodology is the positive common feature of all economists,but the economists may and do disagree on the content ofeconomics

    The content evolves: from classical political economy (trade,wealth, specialization gains, growth of the productive capacity) A.Smith, D.Ricardo, K.Marx through marginal analysis (Walras,Marshall, Pareto) to institutionalism and social choice theories

    the set of tools grows: old remain, new are developed

    Ex. Individual choice, preferences, production costs, etc.

    Elegant mathematical solution to the decision problems

    Weak points too restrictive assumptions

    The growth in tools aims to weaken restrictive assumptions, thatis in line with the evolution of the content

    Slide 12/23 - Dmitrij CELOV - Microeconomic Analysis - Lecture 1

  • V I L N I U S U N I V E R S I T Y F A C U L T Y O F M A T H E M A T I C S A N D I N F O R M A T I C S

    Marginalist paradigm Economics (neoclassical view) is an empirical science Positive economics studies the facts as they a