ECONOMICS 1 Professor Kenneth Train

8/27/08 Lecture 1

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LECTURE I am Professor Train and this is Econ 1. Economics changes the way you think about the world. In fact I think there is no better way to motivate the class then to look at headlines for the past few days. It is hard to understand how to read the newspaper without a background in economics. The economy is slowing down. Production is not as high as it should be. But we are getting incipient cues that inflation is picking up. Unfortunately trying to solve one problem will make the other worse. How did we get here? How can we prevent this from happening? The importance of this is all of this has impacts on the market. The increase in producer prices caused the stock market to drop in the exact same day. You would think if there are higher prices then there will be higher profits. But what the government has to do to fix this will hurt the economy and the stock market dropped in anticipation. This will hurt your pocket book if you have money in the stock market. How many of you have money in the stock market? Have you lost money recently? And, the other thing that happened in the same day is that the dollar tumbled. What does that mean? Is the dollar rolling down the hill? And is this good or bad? It is actually paradoxical. The dollar goes down in value relative to other currencies when stock market drops or inflation is kicking in. But when the dollar goes down in value it helps out economy. If you do not understand this,

you will not understand what this means. This is what we will study in macroeconomics. Then there is this other headline. Microsoft just cannot seem to get a break, can it? Nobody uses Netscape anymore. Microsoft was found guilty of violating antitrust laws. That case went on for many years but was settled by the government. But this is happening in other countries, Europe, and now Taiwan. Why would people pick on Microsoft? The basic idea of economics is that competition is beneficial and the exercise of monopoly power is bad and Microsoft is as close to a monopoly as you can get in this country. We want to know why we want to prevent this and in what conditions we should stop them. Should we? Microsoft has done a good many worthwhile things. We want to see what our laws are, and what is and is not illegal. I do not see how, without the basic knowledge of economics, you would care what Microsoft is doing. All this is on the microeconomic side and in this course you will see how that affects society as a whole. Another headline I like, and this is my favorite, is, China convicts Americans as trash smuggler. You know disposable diapers people use for babies? Well someone has to dispose of these diapers. Our country produces a shitload of those and something has to happen. So someone entrepreneurial took these diapers and shipped them over to China to dump them illegally but he got caught. The basic problem here is our society creates pollution. Children by their nature create pollution in the form of soiled diapers. What is the balance for the right amount of production and how do we deal with this pollution? Whenever the

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actions of one individual or firm impinge on other people then you have to figure out how to handle that interaction. This is a topic in microeconomics we will have to discuss to correctly deal with pollution and other negative aspects that come from production. These are the headline ideas of micro and macroeconomics. Economics is how societies use scarce resources to produce valuable commodities and distribute them among people. Economics answers these questions: What goods are produced? What resources are used to produce the goods? Who gets to consume the goods? As you can guess, for the question, How can we make the economy operate better?each of you will have different answers based on your different goals. There is a big aspect of social activism in economics, as I teach it, at least. The underlying concept in this is scarce and is the motivating paradigm for economics. As a result of scarcity you have to make choices. If you are distributing goods amongst people, for instance, any apartment one person is living in will not be given to someone else. There is a choice that has to go on because of scarcity. The existence of this choice implies that there is an opportunity cost for everything. Opportunity cost is whatever is foregone because of the choice that was made. For example, this lecture. Each of you, instead of being here could be drinking coffee with your friends, practicing the piano and each of these would provide some benefit. The opportunity cost of that is not being able to do that. Economics is at its deepest, a level of the formalization of this idea. I hope you can come back to this as we go through the course. This way of looking at economics, of production under scarcity, has led to the notion that economics is the Dismal Science. I hate to think I am a professor of a dismal science but it does make sense

if you look at it this way. But it can look quite optimistic if you look at it another way. If you start with scarcity, you see it as the basis for growth. Like in AA, the first thing you do is admit you are an alcoholic. So admitting scarcity is the basis to create more abundance in the world, and that allows us to create more benefits for more people. We can find mutually advantageous ways to trade, and new products and processes. In fact as you will see, the science of economics has brought to the U.S. a tremendous amount of benefits. Your understanding will help continue this. We will do micro firsthow individuals, firms behave, how they interact and how to arrange markets to bring as many benefits as we can. Then there is the macro half which has to do with how economy as a whole operates, what affects level of output in economy, how inflation changes etc. We will look at these separately but I hope you recognize that the behavior of individuals causes the macro to come about. There is always an interaction between the two. However sometimes it is easier to look at the macroeconomy not simply as a derivation of the individual level but as an entity itself. Like in physics, you can talk about flows of liquids without having to describe every molecule in the liquid. When you take more economics classes, you will have one whole class of each. ANNOUNCEMENTS Syllabuses are online or you can pick one up after class. These are the pragmatics: There will be two hours of lecture a week. There is also two hours of section meetings a week. In this class, section meetings are crucial. You should think of half of the teaching going on in section. There are many topics I asked the GSIs to cover in section and they will be in the exams. It does behoove you to gosections are going to be interesting and all our GSIs have worked in this area. Most are in public policy which is interesting because they can show you how you use these tools to affect policy. Also I will talk about grading later, which is done by section. The textbook is by Case and Fair, 8th or 7th edition, Principles of Economics. Get whichever is

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cheaper. You do not need the study guides; I have not found them to be useful. I have an ongoing battle with publishers because book prices are so high; they come up with new editions to clean out the used editions. The course website is listed in the syllabus. There will be five problem sets. These are important. What I found in economics, both in learning and teaching is that I find that it is so logical when you are hearing it, like light bulbs going off in your head. But when you sit down and try to use it you do not know which concepts to use with a problem. That is what problem sets are for, to transition from a passive understanding to be able to use material in an active way. The problem sets are intended to do that. I do not want the problem sets to be used as an evaluation tool; they are only to learn the material. You only have to turn them in in your own words but you are not graded on whether your words make sense. That does not mean you should not try to make them correct please do not get answers from someone else. It is like going to the gym, you have to lift the weight to get the benefit. I would rather you worry about what the right answer is for the full week instead of getting the answer from someone else. There are two midterms and a final exam. Grading: Problem sets: 5% Midterm: 25% each Final: 45% Each GSI grades students. The expected grade distribution for each GSI: As: 25%, Bs: 35% and Cs and below: 40%. This class is used as an entry class to the economics major, Haas and so on, so the department has strict guidelines for how many As and Bs are given to determine admits in the departments. Each GSI will be doing this so you only compete with students with the same GSI. One possible disadvantage of this is one GSI has all the smart students and the others do not, but that does not seem to generally happen. Because each GSI has about 50 students, and with the randomness of

who gets into each section, there is not much difference across the GSIs. There is grading across the whole class where one GSI grades question 1 and another grades question 2, but what I do not like about that is that different GSIs teach differently and cover different material. There is always individual variation. If one GSI does not cover a topic I put on the exam then those students in that section are disadvantaged. With the grading per section, everyone is getting the same education. The course website is not in bSpace. I do not like bSpace because you have to log in and all that. I believe in free information so this is available to everyone. Lecture slidesI recommend you bring copies to class to see what is there so you do not have to draw the graph yourself. You can get them on the course website and you can download them and print them out or you can get the entire booklet for $18 at Desktop Design Center, 100 Berkeley Square. There are a lot of graphs so I recommend you do either of this. If you are already in the class, be sure to attend section this week and next. If you do not, you will be dropped immediately. If you want to change section, go to your enrolled section until the switch. Enrollment issues are handled by head GSI, Natasha. GSI Natasha: We have more than 100 people on the waitlist. And this class is 700 people. So those in the waitlist, you have to fill out a form from my office, 508-2 Evans Hall, which is like an application for an entry code. Slide the form under the door, and by the 2nd week of class we will decide who can and cannot get in. We have a limited number of spots so you need to have a very good reason to get in to the class. My office hours are at different times during these two weeks but they are posted on the door of my office. Student: How does the waitlist work?

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Stop trying to solve Telebears and you will be happier. Just try to get on it and we will try to get you in. Just wait. Last thing, just for enjoyment, a few years ago, I wanted to get people to understand what economists do. Our department has some of the most amazing economists in this country so I did a series of interviews with Nobel Prize winners, people who did exciting work in Africa and Asia. These are all online. Go take a look if you have free time. Alright that is it. See you all next Wednesday!

End of lecture. Notes prepared by Vanessa Chan. Edited by Kiesha Oliver.

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