1.1 — The Tools of Microeconomics

# 1.1 — The Tools of Microeconomics

## ECON 306 • Microeconomic Analysis • Spring 2023

### Ryan Safner<br> Associate Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i>safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/microS23"><i class="fa fa-github fa-fw"></i>ryansafner/microS23</a><br> <a href="https://microS23.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i>microS23.classes.ryansafner.com</a><br>
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# Outline

### [The Tools of Microeconomics](#18)
### [Incentives](#22)
### [Equilibrium](#33)
### [Real Talk: The Math](#46)
### [About This Course](#58)

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# About Me

- Ph.D (Economics) — George Mason University, 2015

- B.A. (Economics) — University of Connecticut, 2011

- 7th year teaching at Hood

- Specializations:
  - Law and Economics
  - Austrian Economics

- Research interests
  - modeling innovation & economic growth
  - political economy & economic history of intellectual property
  - my Substack: [Increasing Returns](https://increasingreturns.substack.com)

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# What's Keeping Me Busy

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# *Micro*-economics

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# Micro- vs. Macro-economics

- What is “an economy?”

- Where do aggregates (“GDP”, “unemployment”, & “inflation”) come from?

- .hi[Micro]: [modeling] .hi-purple[Choices] and .hi-purple[consequences]

- .hi[Macro]: [modeling] .hi-purple[Systemic interaction] of choosers & .hi-purple[emergent behavior]

]

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# Where You Are Now

.pull-left[
- .hi-purple[Basic concepts] of markets, individuals (consumers & firms), economies:
    - ECON 205: Principles of Macroeconomics
    - ECON 206: Principles of Microeconomics

- .hi-purple[Modeling] markets, individuals (consumers & firms), economies
    - ECON 306: Microeconomic Analysis
    - ECON 305: Macroeconomic Analysis<sup>.magenta[†]</sup>
]

.pull-right[
.center[
![](../images/choices.jpg)
]
.footnote[<sup>.magenta[†]</sup> Required for ECON majors only. Calculus I required.]

]

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# Economists Speak a Foreign Language...

- Terms you “know” from ordinary life mean .hi-purple[very different things] to economists:

> Cost, efficiency, welfare, competition, marginal, equilibrium, profit, public good, discrimination, elasticity

- Using these words’ “ordinary” meanings can lead to *wrong* economic conclusions!

- You will need to .hi-purple[“relearn”] the economic meanings of these words
]

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# ...But You Can Learn It

- You’ll need to master a new vocabulary:

> marginal rate of substitution, marginal cost, consumer surplus, allocative efficiency, externality

- Avoid excessive jargon, but these concepts are useful to explain reality!

]

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# Don't Think You Know It Already!

- Everyone thinks they are *already* an economist and can speak this foreign language

- Be humble!

- Economics is *often* common sense, but reached via deep analytical thinking

]

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# And Tread Cautiously

- An application of the famous [“Dunning-Kreuger effect”](https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect) in social psychology

]

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# Economics `$\neq$` Business or $$$

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# Economics `$\neq$` Business or $$$

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# Economics Can Be Difficult

- Economics is hard!

- We are literally retraining and rewiring your brain to see the world in a new way

- If you “don't get it” you can't just try to memorize a bunch of facts

]

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# Economics Can Be Difficult

- Not trying to scare you! (I'd rather say this now than after the Exam)
  - .hi-purple[Grades don't reflect your worth as a person!]

- .hi[Comparative advantage]: nobody can be good at everything!
  - I'm awful at accounting, chemistry, etc.

]

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# The Uses of Economics

- Most of you will not become professional economists — that's OK
  - Economics is a .hi-purple[liberal art], useful to you even if it's not your career

- Understand .hi-turquoise[“how the world works”]

]

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# The Uses of Economics

- A great .hi-purple[bullshit-detector], especially about self-interested, squishy, or political statements

- People love to forget that we have to make tradeoffs
  - “Economics puts parameters on people's utopias”

]

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# The Tools of Microeconomics

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# Economics as a *Way of Thinking*

- Economics is a .hi-purple[way of thinking] based on a few core ideas:
]

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# Economics as a *Way of Thinking*

- Economics is a .hi-purple[way of thinking] based on a few core ideas:

- .hi[People respond to incentives]
    - Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals

]

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# Economics as a *Way of Thinking*

- Economics is a .hi-purple[way of thinking] based on a few core ideas:

- .hi[People respond to incentives]
    - Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals

- .hi[Environments adjust until they are in equilibrium]
    - People adjust their choices until optimal, given others’ actions
]

![:scale 70%](../images/equilibriumbalance.png)
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# Incentives

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# Incentives Example: Subway I

The NYC Subway bans dogs unless they can be [“enclosed in a container”](https://cityroom.blogs.nytimes.com/2009/09/30/answers-about-exploring-new-york-with-your-dog/?_r=0)
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# Incentives Example: Subway II

Pictures [Source](https://www.rover.com/blog/nyc-subway-dogs-fs/)
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# Incentives Example: Rat Bounty

.bg-washed-green.b--dark-green.ba.bw2.br3.shadow-5.ph4.mt5[
Some governments pay bounties to reduce pest populations such as rats.

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# Incentives: Even Dolphins Understand I

.source[July 2 2003, [“Why Dolphins are Deep Thinkers”](https://www.theguardian.com/science/2003/jul/03/research.science), *The Guardian*]

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# Incentives: Even Dolphins Understand II

.source[July 2 2003, [“Why Dolphins are Deep Thinkers”](https://www.theguardian.com/science/2003/jul/03/research.science), *The Guardian*]

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# Incentives: Monkeys Too

.source[January 17, 2021, [These Monkeys Understand Economics and Intentionally Steal High-Ticket Items to Barter for Better Food, Study Finds](https://gizmodo.com/these-monkeys-understand-economics-and-intentionally-st-1846078932?utm_medium=sharefromsite&utm_source=_facebook), *Gizmodo*]

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# In Fact a Lot of the Natural World Behaves Economically

.pull-left[
.center[
![:scale 75%](../images/walrasianequilibriumnature.png)
]
.source[Loch-Temzelides, Ted, 2021, [“Walrasian equilibrium behavior in nature”](https://www.pnas.org/content/118/27/e2020961118), *PNAS* 118(27)]
]

.pull-right[
.center[
![:scale 65%](../images/nematodesutilitymax.png)
]
.source[Katzen et al., 2021, [“The nematode worm *C. elegans* chooses between bacterial foods exactly as if maximizing economic utility”](https://www.biorxiv.org/content/10.1101/2021.04.25.441352v2) *bioRxiv*]
]

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# Takeaways About Incentives I

- People respond to (changes in) incentives

- People have goals they seek to attain

- Making one alternative more costly `$\neq$` people *stop* pursuing their goals

- People will seek (less preferred) *alternative* methods to attain goals

- .hi-purple[Unintended consequences]!

]

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# Takeaways About Incentives II

.center[
<blockquote class="twitter-tweet"><p lang="en" dir="ltr">Whenever I am working on policy decisions I think of this image... 🚴
♂️ <a href="https://t.co/GE3yyDmjs0">pic.twitter.com/GE3yyDmjs0</a></p>&mdash; Councillor Peter Fortune (@PeterTFortune) <a href="https://twitter.com/PeterTFortune/status/1159176114230763520?ref_src=twsrc%5Etfw">August 7, 2019</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
]

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# Equilibrium

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# Equilibrium Example I

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)
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# Equilibrium Example I

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

- Assume people .hi[optimize]: choose road to **minimize travel time** between cities
]

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# Equilibrium Example II

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

.bg-washed-green.b--dark-green.ba.bw2.br3.shadow-5.ph4.mt5[
.green[**Scenario I**:] There are **less than 30 cars** on the local road
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]

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# Equilibrium Example III

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

.bg-washed-green.b--dark-green.ba.bw2.br3.shadow-5.ph4.mt5[
.green[**Scenario II**:] There are **more than 30 cars** on the local road
]
]

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# Equilibrium Example IV

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

.bg-washed-green.b--dark-green.ba.bw2.br3.shadow-5.ph4.mt5[
.green[**Equilibrium**:] How many cars are on each road? (Why?)
]
]

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# Equilibrium Example V

- Local road travel time: .hi-purple[30 min + 0.5 min/car]

- Highway travel time: 1 hour (always)
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]

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# Equilibrium Example V

- Local road travel time: .hi-purple[30 min + 0.5 min/car]

- Highway travel time: 1 hour (always)

- .hi-green[Will this reduce travel time?]

- Yes! says the State:
    - 30 cars use the local road, takes 1 hour
    - With wider road it takes 45 min!
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]

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# Equilibrium Example V

- Local road travel time: .hi-purple[30 min + 0.5 min/car]

- Highway travel time: 1 hour (always)

- .hi-green[Will this reduce travel time?]

- Yes! says the State:
    - 30 cars use the local road, takes 1 hour
    - With wider road it takes 45 min!

- .hi[Is this an equilibrium?]
]
]

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# In the Long Run...(& Repeating the Same Mistake)

.center[
<blockquote class="twitter-tweet"><p lang="en" dir="ltr">1970: One more lane will fix it.<br>1980: One more lane will fix it.<br>1990: One more lane will fix it.<br>2000: One more lane will fix it.<br>2010: One more lane will fix it.<br>2020: ?<a href="https://t.co/NjS1IPORG2">pic.twitter.com/NjS1IPORG2</a><br>via <a href="https://twitter.com/avelezig?ref_src=twsrc%5Etfw">@avelezig</a></p>&mdash; Urban Planning &amp; Mobility 🚲🚶
♂️🚆 (@urbanthoughts11) <a href="https://twitter.com/urbanthoughts11/status/1191295205187686400?ref_src=twsrc%5Etfw">November 4, 2019</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script> 
]

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# Comparative Statics

- .hi[Comparative statics]: examining changes in equilibria cased by an external change (in incentives, constraints, etc.)

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# Optimization and Equilibrium

.pull-left[
- If people can .hi-purple[learn] and .hi-purple[change] their behavior, they will tend to **switch** to a higher-valued option

- If there are no alternatives that are better, a person is at an .hi[optimum]

- Everyone is at an optimum `$\iff$` the system is in .hi[equilibrium]
]

![:scale 70%](../images/equilibriumbalance.png)
]
]

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# Economics Is Broader Than You Think

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# Real Talk: The Math

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# Real Talk

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# Real Talk

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# Real Talk

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# Why We Model I

- Economists often “speak” in models that explain and predict human behavior

- The pure language of models is mathematics
    - things that are universally true, deducible from axioms, can easily spot errors
    - often equations and graphs
    - this is what scares students most about economics

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# Why We Model II

- Economists use conceptual models: fictional constructions to logically examine consequences

- Very different from other sciences
    - No social experiments
    - Purposive, strategic human beings 
    - Introspective understanding

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# The Two Major Models of Economics as a “Science”

## Optimization

- Agents have .hi[objectives] they value

- Agents face .hi[constraints]

- Make .hi[tradeoffs] to maximize objectives within constraints

## Equilibrium

- Agents .hi[compete] with others over **scarce** resources

- Agents .hi[adjust] behaviors based on prices

- .hi[Stable outcomes] when adjustments stop

]

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# A Hint That Will *Almost* Never Fail You

- **The answer to 95% of questions in this course:** .hi[where marginal benefit equals marginal cost]
  - What’s the benefit? What’s the cost?
  - Interpretation from math `$\rightarrow$` English

- In practice: .hi-purple[where slopes (rates of change) of two things are equal]
]

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# Remember: All Models are Wrong!

.pull-left[
.bg-washed-red.b--dark-red.ba.bw2.br3.shadow-5.ph4.mt5[
.red[**Caution**:] Don't conflate models with reality!
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- Models **are not** reality. They help us **understand** reality.

> “All models lie. The art is telling useful lies.” - George Box

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# Economics Uses, but Is Not Limited to, Math

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# Learning Goals

By the end of this course, you will:

1. apply the models of microeconomics (constrained optimization and equilibrium) towards explaining real world behavior of individuals, firms, and governments

2. explore the effects of economic and political processes on market performance (competition, market prices, profits and losses, property rights, entrepreneurship, market power, market failures, public policy, government failures)

3. apply the economic way of thinking to real world issues in writing

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# Assignments

<table>
 <thead>
  <tr>
   <th style="text-align:left;">  </th>
   <th style="text-align:left;"> Assignment </th>
   <th style="text-align:left;"> Percent </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;"> 1 </td>
   <td style="text-align:left;"> Opinion-Editorial </td>
   <td style="text-align:left;"> 20% </td>
  </tr>
  <tr>
   <td style="text-align:left;"> n </td>
   <td style="text-align:left;"> Homeworks (Average) </td>
   <td style="text-align:left;"> 20% </td>
  </tr>
  <tr>
   <td style="text-align:left;"> 3 </td>
   <td style="text-align:left;"> Exams </td>
   <td style="text-align:left;"> 20% each </td>
  </tr>
</tbody>
</table>

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# Your “Textbook”

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# Course Website

[microS23.classes.ryansafner.com](https://microS23.classes.ryansafner.com)
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# Logistics

- Office hours: MW 1:30—2:30 PM & by appt
  - Office: 114 Rosenstock

- Teaching Assistant(s): TBD
  - grade HWs & hold office hours

- See the [resources page](http://microS23.classes.ryansafner.com/resources) for tips for success and more helpful resources
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# You Can Do This

# And I Am Here To Help You

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# Roadmap for the Semester