Intro to Microeconomics: Scarcity, Opportunity Cost, and Market Models

Um, let's get started. This is uh 1401 uh microeconomics. Uh the uh and um I'm Professor John Gruber.

Now, couple notes about the course. Uh there's a distinct policy angle to this course. Um I think personally what makes

economics most exciting is it can you you can use it to think intelligently about the problems that policy makers

face every day as they try to decide how to make the economy work the best for its citizens. Um in fact, I teach a

whole course about this called 1441. Uh but I'm going to bring some of those insights into this class and use

policy-based examples and things like that to try to motivate uh and organize our thinking about economics.

Um lastly, uh three points about my teaching style. First of all, I don't write everything

on the board. Uh for the freshmen here, we're not in high school anymore. You need to pay attention and listen to what

I say, not just what I write. Um so it's important to remember that. Um uh I uh the second point is as you can

tell, I talk really fast and my handwriting is really bad. Okay? So please please don't be afraid

to ask what the hell I just said or wrote. Okay? There is if you don't know, chances are at least 40% of the class

doesn't know either. We'll learn later semester about the concept of a public good. A public good

is something you do which has a personal cost and a social benefit. I understand raising your raising your hand in a

class as large as this can be intimidating, but remember in doing so, you're not just helping yourself, you're

helping your fellow classmates. So please don't lean and whisper loudly, "What the hell did he just say?" to the

person next to you. Raise your hand and ask me because if you didn't understand, many other people didn't as well.

More generally, it's hard to get class participation in a class this large, but I really encourage people to participate

as much as possible. I've never had a year in this class where there's been too much

participation. I've had every single year too little participation. So, please follow up with questions, uh

things like that. And then finally, the third point about my teaching style is I have a bad

tendency to use the term guys in a gender neutral sense. So, when I say guys, I don't mean men. I

mean economic agents, people, everyone. And I'm sorry guys is a gendered word. Often I don't mean it

that way. It's just kind of uh economist talk for for economic agents. We call them guys.

What we're going to do today is talk about what is microeconomics. What are you going to learn in this course? What

is the basic field about? And then we'll dive in next time into actually starting to learn about the

models that make up basic microeconomics. Um

microeconomics is fundamentally in a sentence the study of how individuals and firms

make themselves as well off as possible in a world of scarcity. It's how individuals and firms make

themselves as well off as possible in a world of scarcity. Scarcity is key.

The core of microeconomics is constrained optimization. Basically, individuals or firms

assessing the tradeoffs they face every day in the decisions they make, and then

trying to decide the best decision given those tradeoffs. So, that is microeconomics is really

about tradeoffs. Microeconomics is really about you can't have it all. So, what are you going to do with what

you can have? How are you best going to use your limited resources? And the key concept behind all this, the

sort of probably the I'm going to say about a hundred times, this is one of the most important

concepts in economics. I'm sorry about that, but this is really one of the most important concepts in economics, is the

concept of opportunity cost. Opportunity cost. Okay? An opportunity cost is the notion

that every action or inaction has cost in terms of what you could have

done instead, in terms of the next best opportunity. If you buy a shirt,

you are foregoing spending that money on buying something else. So, if you decide between shirts and pants, you buy the

shirt, you're foregoing buying the pair of pants. If you study,

if you spend all night studying, you're foregoing the opportunity to go see a band you like in concert. And vice

versa. Every action you take is a trade-off. Every decision you make

involves a trade-off cuz there's always an opportunity cost. There's always something you could have done instead.

Yeah. Uh great question. Um actually, let me come back to that in

1 minute. I'm going to come back to that. Or 5 minutes.

Um Okay. So, this is why economics is called the dismal science. We're called the dismal science because

the role of the economist is to basically say, "Well, you think that's free, but it's not.

You think you can just relax and watch TV, but you know that by watching TV you're giving up the opportunity to

study, the opportunity to go out and see a concert, or the opportunity to something else."

Okay? So, that's why it's called the dismal science. Now, some people may call it dismal, I call it fun, and maybe

that's cuz I was an MIT undergraduate. And what is an engineering school but the land of constrained optimization?

That's what engineering and science is. It's all about what engineering is. It's constrained optimization. What better

example could there be than the 2.007 contest where you're given a set of materials and asked to build something?

That's a constrained optimization exercise. Indeed, economics was invented modern economics invented at MIT by the

economist Paul Samuelson, who essentially said the mathematics that sciences and engineers engineers use can

be applied to analyze really the sort of essay-like approach that people had taken in economics before him.

So, he basically brought the tools of science to economics and basically developed the course I'll teach today

and the course that's taught all over the world was developed right here at MIT. Modern economics is born here

because we introduce the tools of constrained optimization. Now,

oh, over here I'm usually going to try to do like an outline of what we're covering. So, we talked about course

details, what is micro? I just did that. talk about how we do that. What economics does, which is we use models

and I'm talking about a model of supply and demand. How do we actually teach you all about

these tradeoffs? Okay? The way we do it is by building

simplified models. Okay, what is a model? A model is technically the description of any relationship between

two or more variables is a model. Um,

now, but unlike explain the relationship between energy and mass, we do not have scientific laws and constants in our

universe. Okay? Economics is, as much as we hate to say it, not a real science. It is a social science.

Which means that basically we don't have rigid laws that we can write down and say they're all they're everywhere

applicable. Okay? We we have to use models to basically try to explain the world as

much as we can. And so, in doing so, we have to make a set of simplifying assumptions.

A set of simplifying assumptions to try to essentially trade off two goals. One goal is to explain as much as we

can. The other goal is to have parsimonious models that I can teach you.

Okay? The more complicated the model gets, the harder it is to teach, the harder it is to solve. This comes to the

earlier question about are you really just trading off two goods? Well, of course you're never just trading off two

goods. But, we're going to write our models like you are.

And it's going to turn out that gives you all the intuition you need for a model with just three or four goods.

It's just a lot easier math. So, it turns out everything you learn in a model with two goods tells you

everything you need to know for a model with n goods. Just with easier math. So, that's the

kind of simplifying assumption. That's a fairly um uh that's a fairly uh non-offensive

simplifying assumption because it doesn't really change anything. We'll make other simplifying assumptions which

are noxious and offensive. And we'll talk about those. And if you are offended by them and bothered and

want to see what happens without those assumptions, then that's exactly why you should be economics major.

Because that's really what we go on and do in the rest of the classes. Say, "Okay, now let's move on from these

simplified models, add some richness, and see what it does to the world." Okay?

Uh the statistician George Box uh once wrote that all models are wrong, but some are useful.

Okay? And that's exactly what we're going to try to work with today. Okay? When I teach you economics, I'm

going to try to teach it to you on three levels. Okay, the first one for MIT is

mathematical. The second is graphical, and the third is intuitive.

Really, if you want to succeed in this class, you need to understand all three. Now, not every model will I use all

three. But, you want to understand all three of those concepts to really understand the

material we're learning here. And we'll start with the model of supply and demand. The very first economic

model developed by Adam Smith in 1776 in the book that was sort of the founding of economics, The Wealth of Nations.

Adam Smith asked the question, um think about two goods. Think about water or think about diamonds.

Okay? Nothing is more essential for life than water. We cannot function without it.

Nothing is probably less essential for life than diamonds, especially back then when diamonds didn't have industrial

uses. They were just baubles. Okay? Water is clearly just essential. Diamonds aren't. Yet, the price of

diamonds is very high and water's essentially free. He asked, "How could this be?"

And the answer is because what I've just described is only one half of the model of where we get the price of water or

diamonds. I've described the demand. I've described the demand

for water and diamonds. I've said the demand for water is much, much larger than the demand for diamonds.

What I haven't talked about is the supply. Which is that the supply of water is

even more relative to supply of diamonds. Water's everywhere, diamonds are rare to find.

And what Adam Smith said is that while the demand for diamonds may not be as high as the demand for water, the supply

of diamonds is much, much smaller than the supply of water. And that is why you can end up with a

good that's inherently less valuable to life having a higher price.

Okay? And Smith's point is you can't just think of supply and demand in isolation.

You need to think of them uh together. Um is uh Oh, Pedro, could you grab me a copy of the handout?

Thanks. Um Okay. So, that's sort of the intuition.

That's the intuition supply and demand model. Now, let's talk about the graphics and the math.

Okay? So, now let's talk about an example of a supply and demand model. And let's focus on the market for roses.

What is a market? A market's what it sounds like. It's buyers and sellers coming together.

Are there any more any extra handouts around? Does everyone have one?

Does everyone have a handout? Okay, good. That's fine then. Okay, let's talk about the the markets for di-

Let let's talk about the market for roses. Okay? First of all, what is a market?

A market is Think of a market to start. Yeah. Like another page, right?

The handout has graphs on it. Does anyone have the handout? Did you tell me to print?

What's that? Is there any Is there an extra pile sitting around there of handouts?

We've got some extras there. Okay, pass those around. Make sure you know, pass those around and uh

Yeah, next time I said the the they'll be in the back. So, please, you know, raise your hand if you don't have a

handout and let's try to pass those around. Okay? Hey, dude, can you grab one for

me? Um okay. So, basically, let's think about the market for roses. What is a

market? A market is a place where buyers and sellers come together to make

transactions. Okay? Think of it like the old-timey markets of ancient England, where literally the

only way to transact was physically being in the same place, where the buyers and sellers would come

to market once a week and the people would bring their cows and people who wanted milk would come in or meat would

come in and they would transact. Think of the market that way. Now, of course, that's not how the modern market works,

but that's the way we want you to intuitively think of a market. It's literally a place where buyers and

sellers are interacting. And it turns out that intuition will work even even given the modern economy.

Okay? So, now, who else doesn't have handouts? Everyone got the graphs?

Okay. All right. So, um now, let's talk about the market for roses. In figure 1.1,

we have the market for roses. Okay? On the x-axis, the horizontal axis, we have the quantity of roses. I'm

going to, by the way, try to have handouts for all the graphs cuz my handwriting's so brutal. So, uh

uh you shouldn't have to see Hopefully, if all goes well this semester, you should never see me draw a graph on the

board. Um so, uh on the x-axis, we have the quantity of

roses. On the y-axis, we have the price of roses. Okay? Um the demand curve represents the

relationship between price and quantity from the consumer's perspective. So, the demand curve in this case is

represented by the equation Q = 1,800

- 400 P. Okay, now you immediately say, "Well, what's Where's 1,800 400 come from?" It

doesn't matter right now. That's what we're going to teach you in the next few lectures. Right now, that's

just That's an equation that represents a line. And it's The critical aspect of that

equation is that there's a negative relationship between

price and quantity. As price goes up, consumers want fewer roses.

Why is that? Well, it's just because of opportunity cost. The more expensive is a rose, the more

you have to give up to buy it. So, its opportunity cost is higher, so you want it less.

Okay? So, the higher is the price, the fewer roses you want. So, we get a downward-sloping

demand curve. The The blue line. Now, the supply curve represents the

same relation between price and quantity, but from the suppliers' perspective.

A supply curve in this case that we've drawn here has the equation Q = 200 P.

200 P. You'll see here there is a positive relationship

between price and quantity. That is, the supply curve is upward-sloping.

As price goes up, firms will Firms will produce more roses. Why? Once again, opportunity cost.

With a low price, producing a rose means you can't use that farm to produce something else.

If the price of roses is low, you're going to use the farm for something else. If the price of roses is high,

you will then use that farm to produce roses, cuz that is a better choice than the next best alternative.

So, once again, this concept of opportunity cost has already helped explain the basic model of economics.

The single most important model of economics is represented in this graph. And you can understand it just by the

concept of opportunity cost. That is why we are such a powerful social science. That's why all the other

social sciences are jealous of us. Okay? Because we can use simple tools to

explain much to explain much of the world. And here's a perfect example. Okay? Now, we call the point

where those two curves meet the equilibrium. The point where supply and demand

are in agreement is the equilibrium. That is the point at which suppliers are willing to sell roses

at the same price consumers are willing to pay for them. So, with 600 roses, 600 box of roses, or

whatever it is, the the equilibrium price is $3. Well, it's a rose, so it with 600

roses, equilibrium price is $3. That is both parties are happy in equilibrium. The key point about equilibrium,

as the name implies, as the term equilibrium implies, it's the point where

the system has come to rest. Where both parties are happy with the outcome. Both parties are happy because

it's on the demand and supply curve. Since it's on the demand curve, consumers are willing to pay

$3 for 600 roses. They wouldn't pay $4 for 600 roses, but they'd pay three.

Since it's on the supply curve, suppliers are willing to accept $3 for 600 roses. They wouldn't accept $2 for

600 roses, but they'll accept $3 cuz it's on the curve. So, basically, it's just two equations

and two unknowns. You set these two things equal to each other, and you solve, and you get Q star

equals uh Q star equals 600, and P star equals three. Just by two equations and

two unknowns. Once again, why we only have two goods? I could have done this in three dimensions. The graph would

have been uglier, but the math would have been harder, but nothing would have changed. Yeah.

Oh, that's a great question. Basically, they are It's a good question. We write down the

functions are basically invertible and we use them both ways is the bottom line. It doesn't We're really writing

down equilibrium in Q and P. It doesn't really matter what X and Y is. We're really just writing down an equilibrium

relationship. It's just the convention is to put Q on the X axis, even though the

even though the convention will sometimes write demand curves with P on the left-hand side. The graphic

eventually will never change, but how I write the curves might change. How I write the equations might change. Yeah.

Great question. Okay, let's go through it. That's exactly the kind of question I want to hear this semester. The reason

demand is a Why don't you take a crack at it? Anyone Anyone want to explain? Yeah.

And speak up. If the price is higher to in order to get that rose, you had to give up more

because the price represents sort of like your opportunity Right. Price The opportunity cost of any

good in the free market is its price. So, as the as the price goes up, the opportunity cost goes up. Why? Because

there's more other stuff you could have bought. So, if it's three bucks a rose, you

could have bought, you know, a slice of pizza and a coke. But it's four buck If it's If it's four bucks a rose, you

four bucks a rose, you don't have enough money left to buy both the coke and the and the slice of pizza. So, and but

that's a great question cuz that's exactly where we're going to go next. Is the next three lectures are going to

tell you where this equation comes from. We're going to start with the basic principles of people's preferences.

Really almost philosophical. And we're going to derive this curve. Then after that, the next five lectures

will be deriving this curve. We'll start with the basic principles of how firms make decisions.

And we'll derive the supply curve. Yeah. Um so, when you say $3, is that per rose or is that for a certain quantity of

roses or for one rose? Well, it depends on on what I've written on the axis. You're right. This is this

is confusing. Page, you should make a note. We should probably make this clearer next time. We should have called

this number of roses or shouldn't have been called quantity of roses. That's a great point. We should call this number

of roses or boxes of roses. But it's per a quantity that's specified in the model.

Okay. Great question. Think of MIT. You cannot get away with

with sloppiness here. I love it. Harvard, what the hell? You write whatever you want. Yeah.

Um are the supply and demand curves usually linear or are they often non-linear?

Great question. Indeed, uh this is another cheat we'll do, which we'll often write down non-linear

representations but draw them linearly. Um this is a linear representation, but sometimes we'll have non-linear curves

and draw them linearly. But when we do, think of it as a local approximation. Think of the linear piece as a local

approximation to the larger function. Okay, great questions. I love it. Okay. Now,

this raises this model raises a very important distinction that we're going to focus on this

semester and it's going to trip you up, I guarantee you a number of times. So, I want you to be very careful thinking

about this, which is the distinction between positive

economics and normative economics. Positive economics

is the study of the way things are, while normative economics is the study of the way things should

be. Okay, positive economics study the way things are.

Normative economics is the study of the way things should be. Okay?

Now, to consider to understand this, let's consider a great example of economics at work,

which is eBay. Okay? When eBay came along,

okay, I know it is older than all of you, but it's younger than me. When eBay came along, economists were very excited

because economists love auctions. Auctions are, if you will, the standard market that used to exist in, you know,

15th century England. Okay? It's literally people bidding against each other

in a way that reveals who wants the good the most. And what's wonderful about that, and

we'll come back to this throughout the semester, is it has two great features. One is it makes sure the right amount

gets produced, and two is it makes sure the people who want it the most get it. One beautiful feature of free markets

is that they don't just get you to the right aggregate quantity, they also get the get the goods in the hands of people

who are willing to pay the most for them. And that's what what eBay did.

Now, one auction eBay got a lot of example got a lot of attention, I'm sorry. Got a lot of attention.

Which is that somebody put their kidney for auction on eBay. They auctioned their kidney. And they

said, "I'll give you my kidney for Let the bidding start at $25,000." The bidding got up to $5 million before

eBay shut it down and said, "No auctioning human body parts on eBay." Okay?

Now, I don't know why they stopped at $5 million utterly, but whatever. Okay. So, we can with this example, we can ask

both a positive and a normative question. The positive question is, "Why did the

price get so high?" And here, we only need appeal to supply and demand model.

The demand for a kidney is going to be pretty high. If you need a kidney to live, you're going to pay approximately

everything you have to get it. The supply of kidneys on the free market is pretty low. Like, that was the only

one I know of. Okay? So, it's a classic case of a very high demand and a very low supply,

you're going to get a very high price. And so, it's not surprising the price went up and probably would have gone up

further if eBay hadn't shut it down. But, now we come to the normative question, which is more interesting and

harder. Which is um should we be allowed to sell our bodily organs on eBay?

Okay? You might think that this is a question you're in philosophy class, but fundamentally this is an economics

question. Okay? Many folks die in America because the because we do not have enough organs

to help those with organ failure. We we have a limited supply of organs. I hope you all are organ donors on your

driver's licenses. Doesn't cost you anything, you're gone anyway, and it can save a life.

Um but um many people don't do that and uh even if they did, we're just we have a higher demand for organs than we can

fit. Now, if someone who wants an organ is wealthy

and willing to pay a lot of money for it. And there's someone else

who says, "Look, I got two kidneys. You can function just fine with one. The odds of kidney failure is really

low." Someone says, "Look, I am in desperate straits.

I can't feed my family. I can't how house my family. I can sell one kidney, still function

fine, and change my life forever. Educate my children, build a house, do things I need to do.

Why shouldn't we let that happen? So, standard economics would say

great, let them auction their body parts. But in fact

there's reasons why we don't think men there's many reasons why that may

not be a good outcome. What are those? What are reasons we might not want to just say, "Sure, let

her rip."? What are some reasons? Yeah.

Go ahead, do you share? Yeah. So, there's fundamentally two kinds of reasons.

The first kind is what we'll call market failures. Market failures are something we're not

going to cover for about the first 11 lectures. For the first 11 lectures, the free market is going to be king.

Let me be very clear with you. Economics is fundamentally a right-wing science. Okay, as will come clear through the

semester, I'm kind of a left-wing guy, but economics is pretty much a right-wing science. And a basic

economics says the market knows best. And the And there's only two reasons why you should ever interfere with the

market. And the first is cuz for some reason the market's not working properly. This is

an example. We It would be fine if I would knowledgeably went into this

transaction. But what if this turns out this can cause people to like

force force their children to give up their kidney or do things against their will

or other criminal activities. Um what if people don't really understand

how dangerous it is to give your kidney? There's 50,000 Americans every year There's now currently about 100,000

Americans living with hepatitis C, which causes kidney failure. Hepatitis C can live dormant for years

before you know you have it. What if you give up your kidney and find out you have hepatitis C? Then you're

dead. So, there's lots of reasons why I think, well, maybe this market doesn't work

quite as well as economists say it does. People might be misinformed. People might be

people might be forced to do it. What's interesting is the black market

is not necessarily one of those reasons. And here's why. Because the black market economists just

say is a market. Let's say eBay doesn't allow you to sell your kidneys, so you have to go sell it

on the black market. Well, if there's no other market failures, that's okay. For the same

reason economists think it'd be okay to sell your body parts, there's no reason why you sell your body parts on a formal

market and informal market. The only reason why it would be bad would be if that informal market comes with other

unsavory features, like forcing people to sell their body parts or not being informed. That's when it'd be bad.

Okay? What other reasons might might care? Might we worried about people selling the kidneys.

Yeah, white t-shirt in the back. It would mean that only like really rich people would be able to get them.

Great Great answers, guys. The second reason we care is what we call equity or fairness,

which is we might not think it's fair that rich people get to live and poor get to live longer and buy their organs

if poor people don't. Okay, we might think this is that that this is an unfair outcome.

Now, this is what's fascinating about America, which is even though we pride ourselves

on being the land of the market economy, we also care a lot about fairness as a nation.

And this is viewed by many as being blatantly unfair, that the richer you are, the more you can just buy part body

parts off poor people. Now, here's what's a little bit sad about this class and the sad about the

limitation of only having, you know, the number of weeks we have, which is I'm not going to talk nearly as much about

equity as I'd like to. 90% of this course is going to be about efficiency.

It's going to be about does the market work? Does the market deliver the right quantity of goods?

It's not about equity, which is well, does that right quantity end up going end up causing huge inequality in

society? So, that is kind of another reason why we might care. Okay, and we will discuss

equity later in the semester, but unfortunately not till much later. All right? Other questions or thoughts

about that? Okay. Let me finally talk about one last

thing, which sort of seems like you got to talk about in the first lecture of any of any

economics class, which is what about the underlying structure of the economy? How do we think about different models of

how economies function? And the fundamental conflict is between a capitalist model

and a command model. The capitalist model in its purest form, what's called the laissez-faire or let

it be uh model, is one where individuals decide what to produce and consume

with no interference. It's a purely free market. Okay? It's a market that sort of existed

500 years ago. Before we had sort of They The The truth is it never existed. There's no such

thing. We will do a lot of teaching by extremes in this course. We'll talk about extremes. It's a great learning

device, but there's not never been such a thing as a purely capitalist economy. Most economies, like the US,

are market-driven, but government and socially constrained. What does that mean? That means, yes, we let GM decide

how many cars to produce, but we have standards on what emissions those cars can have and how safe they have to be.

In a purely capitalist economy, GM could produce the most dangerous cars they wanted.

No one would care, and they could be smog-laden and no one would care. Obviously, we don't have that in

America. We have regulations. We have taxes on gas. We have rules on what you can learn

and where you can learn it, etc. So, we have what we call a sort of constrained capitalist economy, where fundamentally

the decisions on what to produce and what to consume are made by individuals within a set of rules set up by the

government and some also set up by social norms. Okay?

Now, the opposite extreme is what we call a command economy, and we actually had almost the

closest model that could exist to this, which was the Soviet Union of my youth. The Soviet Union of my youth, it's

typically associated with communism, although it doesn't have to be. Command economies don't have to be associated

with communism. Germany in World War II was a command economy in the service of fascism.

It's typically associated with communism is what we call a command economy. In In that extreme, the government makes all

production allocation decisions. People won't decide what they get. The government decides what they get.

So, it's the other extreme. There's no free transactions. It's the government making all the

rules, not just about how much to be produced, but who gets what's produced.

Okay, so in the free market, the market subjects that of government sort of you guys are bold, there's like the bumpers

you come up when you're a little kid and you bowl and they keep the ball on that bowling lane.

So, think of the government, you know, in a capitalist economy is those sort of those those those um guides on the side

that help keep the ball in the lane. But but you get to throw the ball and decide where you're going to which pin

you're going to go for. In a command economy, they literally they tell you go to the end of the lane and knock down

pin seven. Okay? Uh it's a very it's a very different

model. Now, in theory,

the argument for the command model is that it can ensure that the right goods get produced and

distributed as fairly as possible. The idea this the theory is quite simple. It goes back to Karl Marx. The

theory makes a lot of sense. Which is look, the government's job is to make sure society is well off as

possible. It does that by making sure the right things get produced

and get to the right people. And we can't trust the market to do that, only the government could do that.

Okay? This is a great argument in theory, in practice it doesn't work. And it doesn't work for two reasons.

It First of all, it's just too damn hard to make all those decisions. Any government, no matter how large and

how benevolent, cannot make the enormous massive quantity of billions and billions of decisions that need to be

made. Think about every good we consume in America. A government deciding how much of it to make and literally who

gets it. Okay? It's overwhelming. Governments can't do it. That led to things like in

East Germany. I was in East Germany a year ago and I went to the went to the museum of East Germany and uh they talk

about how in and back in communist days in East Germany, uh no one had cars, but they had so much bread they would feed

bread to their pigs for food. Okay? Because the government sort of screwed up and decided make, you know,

commanded too many too much bread and too few cars. Okay? That's natural. It's going to

happen. It's just too hard. Okay? The second problem is that human nature being what it is, a command

economy inevitably leads to massive corruption. Because when a handful of people are in

charge of deciding everything, of course they're going to make their lives the best first.

So, I'm not saying there's not corruption in capitalist economies, but it's sort of inherent in a command

economy. It's inherent because you're giving a set of people the power to decide who gets what, and it's

inevitably in human nature to still decide to give themselves the most in first.

So, that is why really why the Soviet Union collapsed, because the command economy simply couldn't get it done. And

let's be clear, it did not appear inevitable. In the 1950s, there was huge envy

in the US of what the Soviet Union was accomplishing. They came out of a devastating war and built a

manufacturing base that was the envy of the entire world, even the US, almost overnight. It was incredible.

And a lot of people questioned whether that might after all not be the right model. It just it turns out over about

30 years it fell apart, cuz it just wasn't sustainable. Now, the alternative, of course, is the

uh US economy. The capital economy, which operates by what the famous the father of economics,

Adam Smith, calls the invisible hand. The notion of invisible hand is you don't need a government to make all the

decisions, cuz the market makes it for you. The invisible hand of the market decides how much should get produced and

who should get it, not through any one person making decision, but just through people coming together in a market and

working together to make those decisions. And that's what we'll teach you this semester, how the market works

and how those that invisible hand can lead through the magic of the market to the right goods being produced and

getting in the hands of the right people. Okay? So, that's a huge advantage, and

it's worked. America is the richest nation in the world, we've grown rapidly for centuries now,

um and we are um and and we're very successful. On the other hand,

it leads to tremendous inequality. Because the way the right person to have the good is the person who can pay the

most for it. Right? In the command economy, the right person to have the good, corruption

aside, is who needs it the most. If you take our kidney example, the command economy would say, "Well, let's

find the person close to death and give them the kidney." The capitalist economy would say, "Let's find the person

willing to pay the most to give them the kidney." Well, that's unfair. And that is an inevitable outcome of a

capitalist economy. America is the most unequal major nation in the world. Our inequality dwarfs what we see in

other countries around the world. The top 1% of Americans control 25% of all the income in the US.

Which is which is at least 5% higher than any other major nation in the world.

Okay? So, we have large inequality because basically the market is inevitable in a market

that'll happen because people who want to pay the most get the stuff. Okay? So, that gives you the trade-off.

The consensus, I would say, among virtually every economist is that

a command economy is not the way to go. The debate is within the capitalist model

how far the government should intervene. If you look at countries like Europe, they have a much more interventionist

economies. You'll often hear European countries being called socialist. They're not socialist. Socialist means

the government controls the industry. Socialist would be there's still consumers who get to decide what to buy,

but the government produces everything. The government runs the banks. The government runs the airplanes. The

government decides how much steel to produce. The government So, in substance, a socialist is sort of

halfway between capitalist and command economy. Where the government does the

production, but market forces decide the allocation. That's not true in any other major

country in the world. Okay? These countries are all different levels of constrained capitalist

economies. They're all different widths of those bowling alleys. Okay?

In Europe and many European nations, they have much more constrained capitalist economies, much higher taxes,

much more government intervention. Also much more equal. And what we'll be talking about this

semester, and what I focus on much more in my course 1441, is how do we think about those tradeoffs?

Between a freer economy which is larger, but leads to more inequality than the US, and a less

free economy with less inequality. Okay? So, to guide you to where we're going to go, I'm really big on sort of

making sure you have a big picture of where we are in this class. And once again, if you're confused not just about

the little picture, but the big picture, let's talk. I do urge people to come talk to me. I generally, my rule is if

it's like a question about a problem set, go see the TAs. If it's a question about like I don't

understand a concept, or I want to just talk about economics in general, or life in general, or music, or whatever, then

come see me. Okay? And I really do urge you folks to come come see me. Uh now that I'm chairman, I have to be around

all the time. So, I'm around plenty of time. Please just make an appointment and come see me.

So, where we're going to go from here. What we're going to do, like I said, is the next few lectures we're going to map

out what makes a demand curve. Then we're going to map out what makes a supply curve.

Then we're going to put them together and talk about basically, in some sense, come back to where we started.

But now with an understanding of what demand and supply mean, and why the equilibrium makes sense. We'll then talk

about We'll then turn to normative economics and talk about why the market equilibrium is really the best outcome.

We're then going to start to talk about where the standard We'll spend about the first, I would say, half of the class on

the standard economic model. The second half of the class will be focused on where the standard model

breaks down. What happens when there's monopolies, like Google, effectively a monopoly on

search engines? What happens when we want to trade with other countries?

What happens when we have to decide how much to save and how hard to work? What happens when we have to decide, um where

to invest, and what to do about global warming? These are all the questions we'll tackle

in the second half of the class. Okay? So, let me stop there, and I hope I'll be seeing you all, uh every Monday

and Wednesday. Thank you.