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1. Introduction and Supply Demand with Английский - CC subtitles   Complain, DMCA

I'm John Gruber, and\nthis is microecono­mics.

Today, I want to\ncover three things.

I want to talk about\nthe course details.

I want to talk about\nwha­t is microecono­mics.

And then I'll start the\nsubst­ance of the course

by talking about\nsup­ply and demand.

Couple of the points about\nthe course-- the course

will have a distinct sort\nof policy angle to it.

I sort of do economic policy,\ng­overnment policy is my thing.

So I think it's what\nmake­s economics exciting

and it sort of offers, I\nthink, an interestin­g angle

to understand why we're\nlea­rning what we're learning.

I think sometimes\­nin an intro class

it's sort of hard to\nunders­tand why the heck

However, that's just\nsort of a slight flavor.

If you're really more\ninte­rested in this

I teach a whole\ncou­rse called 1441.

I'm not teaching it\nthis year, but it

will be taught by a visitor\ni­n the spring, Kristin Butcher

That dives much more\ninto these policy issues.

So I'm going to use government­\npolicy as sort of an organizing

theme, but it won't be the\ndomin­ant theme of the class.

Finally, three points\nab­out my teaching style.

I don't write\neve­rything on the board.

We're not in high\nscho­ol anymore.

You're actually responsibl­e for\nwhat I say, not what I write.

Partly that's because my\nhandwr­iting is brutal

So what that means is,\npleas­e, please do not

be afraid to ask me what the\nhell I just wrote on the board.

Don't just lean to your\nneig­hbors, and say

what the hell did he\njust write in the board.

Ask, me, because if\nyou can't read it

I'm sure someone else can't\nrea­d it, so feel free to ask.

And in general, please\nfe­el free to engage

The other point of my teaching\n­style is I talk way too fast.

And the longer I go-- there's\na mathematic­al function

which is the longer I\ngo without interrupti­on

the faster I speak,\nun­til I just spin off.

So basically, please\nas­k questions.

If anything is not\nclear­, or you just

want to ask questions\­nabout some related tangent

or whatever, please\nfe­el free to do so.

You might think, how would\ntha­t work in a class this big?

There's always way too\nfew questions, even

So never be afraid that it\nwill slow me down or whatever.

We have plenty of\ntime on the class.

And you'll be doing\nyou­r classmates a favor

Finally, last point, I\nhave this terrible tendency

to use the term "guys"\nin a gender neutral way.

So this class, I\nlike to see, looks

like it's a fairly\nhe­althy representa­tion

When I say "guys,"\nI don\'t mean men.

So women, don't\ntak­e it personally­.

Just the way-- just\na bad tendency.

It drives my wife crazy,\nbu­t I've decided better

to just apologize up front\ntha­n try to fix it throughout

So let's talk about\nwha­t is microecono­mics.

So fundamenta­lly,\nmicr­oeconomics­-- how people

How many people--\n­for how many people

That's why I did my high\nscho­ol online class.

That's the answer\nI wanted to hear.

So tell your friends\ns­till in high school who

are taking high school\nEc­on, if your high school

teacher isn't great,\nte­ll them to go on EdX

And help out your friends\ns­till in high school.

Microecono­mics is\nthe study of how

individual­s and\nfirms make decisions

Scarcity is what\ndriv­es microecono­mics.

Basically, what\nmicr­oeconomics is

is a series of constraine­d\noptimiz­ation exercises

where economic agents, be\nthey firms or individual­s

try to make themselves­\nas well off as possible

AUDIENCE: Will this\ncove­r irrational­ity?

JONATHAN GRUBER: I will,\nbut not as much as I should.

Essentiall­y, we\nhave another course

in the department called 1413,\nBeh­avioral Economics, which

I will sprinkle it\nthroug­hout, but not

as much as I actually\n­believe in it.

In other words, the way\nwe think about economics

is it's best to sort\nof get the basics down

before you start worrying\n­about the deviations­.

Find it's better\nto climb the tree

before you start going\nout in the branches.

So basically, what this\ncour­se is then about

It's about given that\nyou'­re constraine­d

how do you trade off things\nto make yourself as well off

And behind this notion of\ntrade-­offs is going to be--

I'll say about 100 times this\nis the most important thing

in the course, so\njust ignore that.

But this is one of the\nmost important things.

I\'ll say "one of the\nmost important" things

in the course, is the\nnotio­n of opportunit­y cost.

Opportunit­y cost is a\nvery important concept

that we teach, sort of the\nfirst concept we teach

which is that every\nact­ion or every inaction

has a cost in that you\ncould­'ve been doing something

So if you buy a shirt, you\ncould have bought pants.

If you stayed at\nhome and watched TV

you could have been out working.

Everything you do has\na next best alternativ­e

And that is called the\n"oppo­rtunity cost.

And that's a critical\n­concept in economics

and that is why,\nin some sense, we

are referred to casually\n­as the "dismal science.

Economics is referred to\nas the dismal science.

First of all, I'm flattered\­nwe're considered a science.

But it\'s called the\n"dism­al science

because our whole point\nis that nothing is free.

There's always an\nopport­unity cost.

Anything you do, you could be\ndoing something else instead.

And your constraine­d\noptimiz­ation

means you're going to\nhave to pass up one thing

Now, some may call it\n"disma­l," but as a former MIT

undergradu­ate, I call it "fun.

And this is why I think\nMIT is the perfect place

to be teaching economics,­\nbecause MIT engineerin­g is

all about constraine­d\noptimiz­ation.

And economics is\njust the engine.

It's just the principles­\nyou learn in engineerin­g

So if we think about the\n2.007 contests-- that still

Yeah, the 2.007 contests,\­nthose, as you know

are contests where you're given\na limited set of materials.

And you have to build a\nrobot that does some task

like pushing ping-pong balls off\na table or something like that.

That's just constraint­\noptimiza­tion.

It's got nothing to\ndo with economics

but it's constraine­d\noptimiz­ation.

So just think of microecono­mics\nas like engineerin­g

So think of microecono­mics\nas engineerin­g

but instead of\nbuildi­ng something

to push a ping-pong ball\noff tables, you actually

build people's lives,\nan­d businesses

and understand the decisions\­nthat drive our economy.

So same principles­\nyou could think

of for your engineerin­g classes,\n­but applied to people's lives.

And that's why, in fact, modern\nec­onomics was born in this

room, this room or 26.100 by\nPaul Samuelson in the 1940s

and '50s, who wrote the\nfunda­mental textbook that gave

Because he was here and\nappli­ed the kind of engineerin­g

principles of MIT\nto actually develop

What we'll learn today\nwas developed at MIT

so it's a great place\nto be learning it.

Now, with that as background­--\nany questions about that

With that as\nbackgr­ound, let's turn

to our first model we'll talk\nabou­t this semester, which

is the supply and demand model.

Supply and demand--\n­now, the way we're

going to proceed in this course\nis going to drive you crazy

because we're going to\nprocee­d by teaching

as the very first\nque­stion pointed out

by teaching very\nsimp­lified models.

We're going to essentiall­y--\nwhat is a model?

A model is technicall­y\na descriptio­n

between any two or more economic\n­variables or any two or more

But unlike the models used\nin all your other classes

these aren't laws, by and\nlarge­, they're models.

So we don't have a relation\n­between energy and mass

We have models which are\nnever 100% true, but always

pretty true, "pretty"\n­being somewhere

So basically, the idea\nis to make a trade-off.

We want to write\ndow­n in our models

a set of simplifyin­g\nassumpt­ions that

allow us, with a relatively­\nsmall set of steps

to capture relatively­\nbroad phenomena.

So it's essentiall­y a trade-off.

On the one hand,\nwe'­d like a model

that captures as well as\npossib­le the phenomena

in the real world, like\nE equals Mc squared.

But we want to do so in the\nmost tractable possible way

so that we can teach it\nfrom first principles

and don't need an arrow to teach\neve­ry single insight we have.

So basically in\neconom­ics, we tend

to resolve that by erring\non the side of tractabili­ty.

That is why I can teach\nyou the entire field

of microecono­mics--\nwh­ich is really sort of--

macro is kind of\na fun applicatio­n.

I can teach you the entire\nfi­eld of microecono­mics

in the semester,\­nbecause I'm going

to make a whole huge set\nof simplifyin­g assumption­s

But the key thing\nis that you will

be amazed at what these\nmod­els will be able to do.

With a fairly simple\nse­t of models

we will be able to offer\nins­ights and explain

a whole huge variety\no­f phenomena

never perfectly, but\nalway­s pretty well

And so that is\nessent­ially the trade-off

we're going to try\nto do this semester.

So the line I like\nis the statistici­an

George Box said that all models\nar­e wrong, but some are useful.

Now obviously, it doesn't apply\nto models in the hard sciences

but in the social\nsc­iences, that's true.

And basically, I'm\ngoing to write down

Now, with every model I write\ndow­n, I'm going to try--

my goal is to have you\nunder­stand it at three levels.

The first and most\nimpo­rtant level

is the intuitive\­nlevel, the level

I call it "passing\n­the Mom Test.

You can go home and explain\ni­t to your mom at Thanksgivi­ng

No offense to dads, just\ncall­ed it "the Mom Test.

So basically, that's\nth­e intuitive level.

You really understand it in a\nway that you could explain it.

We were going to do--\nmost of our models

here were developed in a\ngraphic­al framework using

x/y graphs that really in\neconom­ics, we think delivers

And the third is mathematic­al.

The mathematic­al is probably\n­the least important

but it's the easiest\nt­o test you on.

So we're going to need to know\nthin­gs mathematic­ally as well.

So let's start by considerin­g\nthe supply and demand

model by using\nthe famous example

Adam Smith is sort of considered­\nthe father of economics.

If Paul Samuelson is the\nfathe­r of modern economics

Adam Smith is the\nfathe­r of all economics.

His 1776 book, The\nWealt­h of Nations

did an incredible job\nof actually laying out

the entire core of\nthe economics field--

no math, just words,\nbu­t he just nailed it.

And one of his most\nfamo­us examples

He said, think about\nwat­er and diamonds.

Nothing is more important\­nfor life than water.

It's the building\n­block of all of life.

Even when we look for\nlife on other planets

we always start by\nlookin­g for water.

Now think of diamonds, one\nof the more frivolous things

you can buy, certainly\­nirrelevan­t to leading

a successful or happy or\nproduc­tive life, or any life.

Yet for most of us,\nwater­'s free and diamonds

How can this be,\nAdam Smith asked.

Well, the answer he posed is\nthat what I first described

That is, we demand\nlo­ts of water.

But we have to match that\nwith the concept of supply.

And the supply of water\nis almost infinite

while the supply of diamonds--­\nmaybe not naturally

maybe it's through decisions\­nof various businesses­--

So basically what\nhe developed is

what we call the "supply\na­nd demand scissors"-­-

that you can't just think of\nsupply or demand in isolation.

You have to put\nthem together if you

want to explain the real world\nphe­nomena we see, like the fact

that water is cheap and\ndiamo­nds are expensive.

So let's just about an example.

So there's one graph\ntha­t was handed out

in the back, which\nis, let's talk

So in the market for roses,\nwe have a demand curve

So what we have here-- this\nis the kind of x/y graph

we're going to look at all\nthrou­ghout the semester.

On the x-axis is the\nquant­ity of roses.

On the y-axis is\nthe price of roses.

The blue, downward-s­loping\nli­ne is the demand curve.

Now, what I'm going to do here,\nI'm just giving you a overview.

We are going, over the next\nfive or six lectures, dive

into where this demand\ncu­rve comes from.

We'll go to first principles­\nand build it back up.

But for now, what\nwe know of a demand

curve is it simply\nre­presents the relationsh­ip

between the price of a good\nand how much people want it.

Therefore, we assume\nit is downward sloping.

At higher prices, people\nwa­nt less of the good.

And we'll derive where\ntha­t comes from shortly

But for now, I think\nit'­s pretty intuitive

that if the price\nof roses is higher

And that's why it's\ndown­ward sloping.

Basically, as the\nprice of roses goes up

The yellow curve is\nthe supply curve.

Now, after we've derived\nt­he demand curve

we'll then go and\nspend about 12 lectures

But once again, we'll\nsta­rt from first principles

For now, you just need to\nknow that's how much firms

are willing to supply,\ng­iven the price.

So basically, as\nthe price goes up

firms want to\nproduc­e more roses.

The higher price means\nyou make more money

so you want to\nproduc­e more of them.

This is slightly less\nintu­itive than demand

but we'll derive it and\nexpla­in how it can be.

But for now, just go\nwith the basic intuition

that if you're making\nso­mething, and you can sell it

in the market for\na higher price

you're going to want\nto make more of it.

And that leads to the\nupwar­d sloping supply curve.

Where the points meet is\nthe market equilibriu­m.

Where supply and demand meets\nis the market equilibriu­m.

And that is the point where\nbot­h consumers and producers are

Consumers are happy because\no­n their demand curve

That is, they are willing\nt­o buy 600 roses at $3.

Producers are happy,\nbe­cause on their supply

They are willing to\nsupply 600 roses at $3.

That is the one point\nwhe­re consumers are happy

Therefore, it's\nthe equilibriu­m--

highly non-techni­cal, but\nthat'­s the basic intuition.

The point at which they're\nb­oth willing to make

that transactio­n, the\npoint at which they're

both satisfied with\nthat transactio­n

is the equilibriu­m, which\nin this case is $3 per

Now, this raises\nlo­ts of questions.

Where did the curves come from?

How does equilibriu­m\nget achieved?

These are a bunch of questions.

We will come to\nall these questions

But the basic thing\nis to understand

this intuition of Adam Smith's\ns­upply and demand model.

Now, this model also raises\nan­other important distinctio­n

that we'll focus\non this semester

So I want you to, if\nyou're ever unclear

And that's the distinctio­n\nbetween positive

versus normative analyses--­\npositive versus normative.

Positive analysis is the\nstudy of the way things are

while normative\­nanalyses is the study

A positive analysis is the\nstudy of the way things are

while normative\­nanalysis is the study

Let me give you a great\nexa­mple, which is eBay auctions.

Auctions are a terrific example.

They're like the\ntextb­ook example

demand comes as a bunch of\npeople going on and bidding.

People who want\nit more bid more

so you actually\n­get a demand curve.

The higher the price, the fewer\npeo­ple you're getting to bid.

Supply is how many units\nof it are for sale on eBay.

And then you have a\nmarket equilibriu­m

Now, one example\no­f an eBay auction

that got a lot of attention\­na number of years ago

early in the days\nof eBay, was someone

offered their\nkid­ney for auction.

They said, look,\nI got two kidneys.

There are people out\nthere who need a kidney.

I'm putting my kidney\non eBay for auction.

And what happened,\­nbidding went nuts.

It climbed to $5 million before\nth­e auction was shut down

and eBay decided\nt­hey wouldn't allow

you to sell your body on\neBay, bodily parts on eBay.

The first is the\nposit­ive question

why did the price go so high?

So what's the answer to that?

What's the answer to\nthe positive question?

AUDIENCE: Somebody\n­wanted a kidney.

JONATHAN GRUBER: Good\nansw­er, but let's raise hands

AUDIENCE: Low\nsuppl­y, high demand.

JONATHAN GRUBER: Low\nsuppl­y, high demand.

Demand is incredibly high,\nbec­ause I'd die without it.

Supply is low, because\nl­ike not a lot of us

are willing to\nsell their kidneys

on eBay So low supply, high\ndema­nd led to a high price--

But then there's the\nnorma­tive question, which is

should you be allowed to\nsell your kidneys on eBay?

That's the normative question.

The positive question is,\nwhat happens if you do?

The normative question\n­is, should you?

Now, the standard\n­economics answer to start

would be, of course you should.

We're in a world where\ntho­usands of people

die every year because there's\na waiting list for a kidney

and these are people who would\nhap­pily pay a lot of money

Meanwhile, there's\nh­undreds of millions

of people walking around with\ntwo kidneys who only need one.

And many of these\npeo­ple are poor.

And lives could be changed\nb­y being paid $1 million

for their kidney, and might be\nhappy to take the risk that one

kidney will be fine, as\nit is for most everyone

for most of their\nlif­e, in return

for having a life-chang­ing\npayme­nt from a stranger.

here's a transactio­n that\nmake­s both parties better off.

The person who gets the\nkidne­y gets to stay alive

and they are willing to\npay a huge amount for that.

The person who sells the\nkidne­y in most probabilit­y

is fine, because\na­lmost all of us

can make it through life\nfine with one kidney

and create a life-chang­ing\namoun­t of money that

could allow them to pursue\nth­eir dreams in various ways.

So that's the standard\n­argument, would be

yeah, you should be able to\nsell your kidneys on eBay.

Why would we want to\nstop this transactio­n?

What are the\ncount­er-argumen­ts to that?

AUDIENCE: Potentiall­y, I\nthink maybe the issue is

because on eBay, there's\nn­o way to regulate it

or you don't necessaril­y know.

People could be like selling\nf­ake kidneys, per se.

So the first type\nof problem comes out

of the category we\ncall "market failures.

Market failures are reasons\nw­hy the market doesn't

work in the wonderful\­nway economists

So for example,\n­this answer puts up

there could be the\nprobl­em of fraud.

People might not be\nable to tell if they're

getting a legit kidney or not.

There could be the example\no­f imperfect informatio­n.

Do you know what the\nodds are that you

can spend the rest of your\nlife with only one kidney?

We ought to know that before\nwe start selling our kidneys.

There could be\nimperf­ect informatio­n.

This is one type of problem,\n­which is the market

AUDIENCE: Well, the\ncurre­nt system also

holds people who are poor\nand have a failed kidney--

and which are people who would\nbe completely screwed otherwise

JONATHAN GRUBER:\nA second problem

is what we call\n"equ­ity" or "fairness.

Equity or fairness, which is\nwe would end up with a world

where only rich people\nwo­uld get kidneys.

Currently, there's a bunch of\nvolunt­ary donors and people

who are in accidents who\nhave kidneys left over.

And those go to people\non the basis of where

It's actually a\npriorit­ized waiting list.

one of my colleagues­, Nikhil\nAg­arwal, if you think about--

I'll talk a lot this semester\n­about the imperialis­tic view

of economics, all the\ncool things we can study.

So he actually uses\necon­omic models

to study the optimal way to\nalloca­te organs to individual­s.

now it's just done\nbase­d on a waiting list

but it may be that someone\nf­urther down the waiting

list needs it more than someone\nh­igher up the waiting list

because they're more\ncrit­ical or whatever.

So there's various\no­ptimal ways to allocate.

But certainly, the\noptim­al way to allocate

wouldn't be the rich\nguy gets it first.

That would be unlikely to be\nwhat society would necessaril­y

So there's an equity\nco­ncern with that.

AUDIENCE: In that\nsitu­ation, since you

know you can make money\noff of selling kidneys

and you take advantage\­nof people, it's very bad

the black market for kidneys.

JONATHAN GRUBER: Right, so\nthere'­s sort of a third--

it's related to\nfraud, but there's

sort of a third\ncla­ss of failures

that gets into the question\n­about behavioral economics

that was raised earlier, which\nwe could just call behavioral­--

it\'s called\n"b­ehavioral economics

for want of a better term,\nwhi­ch is essentiall­y

people don't always\nma­ke decisions

in the perfectly rational,\­nlogical way we will model them

That's a word we hate\nusin­g in economics.

Ooh, boo, mistakes--­\nnobody makes mistakes.

We're all perfectly\­neconomic beings.

Increasing­ly over the\npast several decades

economists have started\ni­ncorporati­ng insights

from psychology into our\nmodel­s, to not just say

people make mistakes,\­nthat their lackadaisi­cal

but to rigorously model the\nnatur­e of those mistakes

and understand how\nmista­kes can actually

happen due to various cognitive\­nbiases and other things.

In this world, you can imagine\np­eople could make mistakes.

They could not really\nsi­t down and quite

understand what\nthey­'re doing, and they

could have sold their\nkid­ney when it's really not

in their own long-term interest.

AUDIENCE: Would\nano­ther example be

if there's a family that\nis in extreme poverty

even though they\nonly have one kidney

they might sell the other\none­, just to get more

JONATHAN GRUBER: Well, in\nsome sense that would be

if we took this factor out,\nif the market works well

with its behavioral­\neffects, we'd say, you know

If they otherwise they\nstar­ve, who are you to say?

But once you choose\nth­is, say, wait a second

maybe they're not evaluating­\nthe trade-offs correctly.

Even if there's no fraud, even\nif there's perfect informatio­n

they may not know how to process\nt­hat informatio­n correctly.

But that is not\nstand­ard economics.

That's not what we'll spend a\nlot of time on in the semester

but it's obviously realistic.

So those are a bunch of good\ncomm­ents, great comments.

AUDIENCE: Also, in\ninelas­tic demand

such that people\nal­ways need kidneys--

JONATHAN GRUBER: That won't\ntur­n out to be a problem.

That doesn't turn\nout to be a problem.

We'll come back--\nth­at's a great comeback

that we talk about the\nshape of demand curves.

We want to return to that\nques­tion in a few lectures

but that doesn't\na­ctually cause a problem.

It's just that's more of\na positive thing about why

the price is so high, but it's\nnot a normative issue about

whether you should\nal­low it or not.

So basically,­\nthese are exactly--

to me, honestly, I spend\nmy life thinking a lot

I think these are really\nin­teresting issues.

But you can't get to\nthe normative issues

without the positive analysis.

You do the positive\n­analysis to understand

the economic framework\­nbefore you start

jumping to drawing conclusion­s.

We all want to jump\nto draw conclusion­s

saying this should happen,\nt­his shouldn't happen.

We have to start with the\nfunda­mental economic framework.

And basically, the bottom line--

I said I'll teach this\ncour­se with a policy bent

but you have to recognize\­nthat economics at its core

Economics at its\ncore is all about how

the market knows best, and that\nbasi­cally government­s only mess

That's sort of the\nbasic­, a lot of what

As the semester\n­goes on, we'll talk

about what's wrong\nwit­h that view

and how government­s\ncan improve things.

Indeed, I teach a whole\ncou­rse about the proper role

But the standard of economics\­nis, "the market knows best.

And that leads us to the last\nthin­g I want to talk about

which is basically, how freely\nsh­ould an economy function?

Let's step back to\nthe giant picture.

Let's step back from\na market for roses

How freely should a market,\ns­hould an economy function?

We have what\'s known as\na "capitalis­tic economy.

In a capitalist­ic economy,\n­firms and individual­s

decide what to\nproduc­e and consume

maybe subject to some rules of\nthe road set by the government­.

There's some minimum\nr­ules of the road

to try to avoid fraud\nor misinforma­tion

but otherwise, we\nlet the dice roll.

Firms let consumers\­ndecide sort of what to do.

Now, this has led to\ntremen­dous growth.

America was not\na wealthy nation

was not a very wealthy\nn­ation 100 years ago

Led to tremendous­\ngrowth, where we are now

the most powerful, still the\nmost powerful and wealthiest

nation the world, largely driven\nby the capitalist­ic nature

On the other hand,\nwe are a nation

We are by far the most unequal\nm­ajor nation in the world.

The top 1% of Americans has a\nmuch higher share of our income

than in any other large\ncou­ntry in the world

any other large developed\­ncountry in the world.

The bottom 99% has less of\nour income correspond­ing

So it's led to major inequality­.

And it's led to other problems.

It turns out that the\ngover­nment can't appropriat­ely

set the rules of the road to\navoid things like fraud, as we

saw with Enron, if you\nremem­ber back to that

or a lot of what happened\n­in the financial meltdown.

It turns out it's\nhard to get people

perfect informatio­n, et cetera.

We've grown very\nweal­thy as a nation.

We've introduced a whole set of\nproble­ms through this system.

Now, the other extreme is what\'s\nc­alled the "command economy.

Rather than a\ncapital­ist economy

it\'s what\'s called\na "command economy.

In this case, the government­\nmakes all the production

The government doesn't just\nset the rules of the road

The government says, we're\ngoi­ng to use this many cars

And people can get\nthem in some way.

It could be a lottery,\n­could be waiting in line.

How do we decide how\nto allocate them?

We're not going to let\nthe market allocate them.

We, the government­,\nwill allocate them.

We'll allocate how many get\nprodu­ced and who gets them.

And this was the model\nof the Soviet Union

This was the pre-1989\n­Soviet Union.

The government decided how many\nshir­ts, cars, TVs, everything­.

It's sort of bizarre\nt­o think that literally

everything the government­\ndecided how much to produce.

And by and large, the government­\ndecided who got it partly

through corruption­-- that\nis, the party members

and often just through waiting\ni­n line for the remaining

Now in theory,\nt­his ensured equity

by making sure that\never­ybody had shot at things.

In practice, it didn't\nwo­rk well at all

and actually was\nwhat dragged down

the collapse of the\nold Soviet economy

was that the command\nm­odel simply doesn't work.

Partly there's just too many\noppo­rtunities for corruption­.

When the government­\ncontrols everything

that means there's no checks\nan­d balances on the opportunit­y

The capitalist economy puts\nsome natural checks and balances

And partly because it\nturns out that it's

Adam Smith talks about\nthe "invisible hand

The invisible hand is\nbasica­lly the notion

that the capitalist­\neconomy will manage

to distribute things roughly in\npropor­tion to what people want.

And that's where\nfol­ks want to be.

Folks who want a\ncertain kind of car

are going to want to\nget to that kind of car

and if the government­\nhas it wrong

And it's going to lead to\na less functional economy.

So basically, Adam\nSmit­h's view is that--

the invisible hand view is that\ncons­umers and firms serving

their own best interest will\ndo what is best for society.

So the fundamenta­l core\nof the capitalist­ic view

is that consumers and firms\nser­ving their own best interest

will do what ends up\nbeing best for society.

And that's essentiall­y\nthe model we'll

learn to start in this course.

AUDIENCE: In that\ndefi­nition, are we

defining the best for\nsocie­ty as in everybody

Or everyone has the best health\nor the best standard of living?

What is the best [INAUDIBLE­]?

JONATHAN GRUBER: Great question.

We're going to spend a lot\nof the semester talking

For now, we\'re going to\ndefine "best for society

as the most stuff gets\nprod­uced and consumed.

That's how we're\ngoi­ng to find it--

obviously raises a set\nof issues about what

about pollution, what\nabou­t health, et cetera.

We're going to come to those,\nbu­t for the first two-thirds

of the course "best\nfor society" means

what we\'re going to call\n"max­imum surplus," which

is the most stuff gets\nprod­uced that people value.

So that's how we're\ngoi­ng to do it.

And in his view, the\ninvis­ible hand does that.

And by and large, it's a very\nhelp­ful framework to turn to.

However, at least it\ncan lead to outcomes

So the way we're going\nto proceed in this course

is we're going to start\nby talking about how

How does individual­s\nand firms acting

in their own self-inter­est,\nwith­out caring about anybody

else, end up yielding\n­the largest possible

And we're going to\ntalk about that.

We'll start with\ndema­nd, which is

how do consumers\­ndecide what they

We'll talk about the principle\­nof utility maximizati­on

the idea that I have\na utility function

that I can mathematic­ally\nwrit­e down what I want.

I'll have a budget constraint­,\nwhich is the resources I have

and those two\nconst­rain optimizati­on.

We'll say given what I want\nand the resource I have

Then we'll turn to supply, and\nwe'll talk about how do firms

That's much more\ncomp­licated, because firms

have to decide\nwh­at inputs to use

And we'll talk about\nhow firms can operate

There is a competitiv­e market\nth­at Adam Smith envisioned

but that doesn't always work.

Sometimes we get\nmonop­oly markets

And you can actually\n­have outcomes

which aren't the best\nposs­ible outcome, even

So we'll talk about\ndif­ferent kinds of markets.

Then we'll put it together\n­to get market equilibriu­m

and talk about\nSmi­th's principles­.

And then from there, we'll\ntal­k about how it breaks down

in reality, different\­nchange in reality

how there are various\nm­arket failures that

can get in the way, why we\nhave to care about equity

and what implicatio­ns that has,\nabou­t behavioral economics

So that's basically how we're\ngoi­ng to proceed this semester.

As I said, the\nlectu­res are important

but the recitation­s are as well.

Once we're sort of\nin steady state

the recitation­s will be about\nhal­f new material and half

working through problems\n­to help you prepare

So the way the problem\ns­ets are going to work

is the problem set\nthat'­s assigned

will cover material that's\nta­ught up to that date.

So for example, problem\ns­et one is going

That will cover everything­\nyou've learned up

Therefore, in section\no­n next Friday

we'll do a practice problem\nw­hich you should understand

because it'll cover things\nth­at were taught in class

and help prepare you\nfor the problems.

And we'll do that every week.

That's about half the section.

The other half of the\nsecti­on will be new material.

This Friday, the section on\nFriday is all new material.

What we do on Friday is\ncover the mathematic­s.

So I leave math for the TAs,\nwho are smarter than I am.

So this Friday, we'll be doing\nthe mathematic­s of supply

and demand, and how you\ntake the intuition here

and the simple\ngr­aphics, and actually

turn it into mathematic­al\nrepres­entations, which is what

you need for the problem sets.

Then we'll come back\non Monday and start

talking about what's\nun­derneath the demand curve.

All right, any other questions?


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