Riassunto esame Microeconomics, Prof. Roberti Paolo, libro consigliato Microeconomics, Acemoglu

Microeconomics: Chapter 1 - Three principles and practice of economics

The scope of economics

Economists study choice—not money—which is the unifying feature of all the things that economists study. In fact, economists think of almost all human behavior as the outcome of choices.

Economic agents and economic resources

An economic agent is an individual or a group that makes choices. Examples are a consumer, a parent, a student, a citizen, a criminal, a worker, a business leader, a senator, an army, a political party, a labor union, a sports team, and so forth.

Scarce resources are things that people want, where the quantity that people want exceeds the quantity that is available. Scarcity exists because people have unlimited wants in a world of limited resources. The world does not have enough resources to give everyone everything they want.

Definition of economics

Economics is the study of how agents choose to allocate scarce resources and how those choices affect society. Economics is the study of any individual agent’s choices on society.

Positive and normative economics

Economics actually:

• Describes what people do (positive economics): Descriptions of what people actually do are statements about the world—in other words, statements that can be confirmed or tested with data. Describing what has happened or predicting what will happen is referred to as positive economics.
• Recommends what people, including society, ought to do (normative economics): Normative economics advises individuals and society on their choices. Normative economics is almost always dependent on subjective judgments, which means that normative economics depends at least in part on personal feelings, tastes, or opinions. Economists believe that the people being advised should determine the preferences to be used.

When economic analysis is used to help individual economic agents choose what is in their personal best interest, this type of normative economics is referred to as prescriptive economics. Normative analysis also generates advice to society in general.

Economists must make ethical judgments when evaluating policies that make one group worse off so another group can be made better off.

Microeconomics and macroeconomics

Microeconomics is the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the well-being of other agents. Macroeconomists study a small piece of the overall economy.

Macroeconomics is the study of the economy as a whole. Macroeconomists study economy-wide phenomena.

Three principles of economics

• Optimization: Making the best choice possible with given information. People often make mistakes, but they try to do as well as they can.
• Equilibrium: A situation in which no agent would benefit personally by changing his or her behavior, given the choices of others. The economic system is in equilibrium when each agent cannot do any better by picking another course of action.
• Empiricism: Using data to figure out answers to interesting questions. Economists use data to develop theories, to test theories, to evaluate the success of different government policies and to determine what is causing things to happen in the world.

Optimization

Feasible (fattibili, plausibili) options are those that are available and affordable to an economic agent. The concept of feasibility goes beyond the financial budget of the agent. Many different constraints can determine what is feasible.

Any decision can depend only on the information available at the time of the choice. Optimization means that you weigh the information that you have, not that you perfectly foresee the future. When someone makes the right decision, economists say that the decision maker is being rational.

Finally, it is important to note that what we optimize varies from person to person and group to group.

Trade-offs and budget constraints

All optimization problems involve trade-offs. Trade-offs arise when some benefits must be given up in order to gain others.

Economists use budget constraints to describe trade-offs. A budget constraint is the set of things that a person can choose to do (or buy) without breaking her budget.

Opportunity cost

We face trade-offs whenever we allocate our time. When we do one thing, something else gets squeezed out. Economists tend to focus on the alternative activity. We refer to this best alternative activity as the opportunity cost.

Economists often try to put a monetary value on opportunity cost. One way to estimate the monetary value of an hour of your time is to analyze the consequences of taking a part-time job or working additional hours at the part-time job you already have. The opportunity cost of an hour of your time is at least the value that you would receive from an hour of work at a job, assuming that you can find one that fits your schedule.

Cost-benefit analysis

We want to compare a set of feasible alternatives and pick the best one. This process is called cost-benefit analysis. Cost-benefit analysis is a calculation that identifies the best option by summing benefits and subtracting costs, with both benefits and costs denominated in a common unit of measurement (like dollars). Cost-benefit analysis is used to identify the alternative that has the greatest net benefit, which is the sum of the benefits of choosing an alternative minus the costs of choosing that alternative.

To an economist, cost-benefit analysis and optimization are the same thing.

Equilibrium

Economists think of the world as a large number of economic agents who are interacting and influencing one another’s efforts at optimization. Recall that equilibrium is the special situation in which everyone is optimizing, so nobody would benefit personally by changing his or her own behavior. In equilibrium, all economic agents are making their best feasible choices, taking into account all of the information they have, including their beliefs about the behavior of others.

Rewriting the definition we say that in equilibrium, nobody receives that they will benefit from changing their own behavior.

The free rider problem

Most people want to let someone else do the dirty work. We would like to be free riders who don’t contribute but still benefit from the investments that others make.

When there are few free riders and lots of contributors, the free riders might be overlooked (non visti, dimenticati). So equilibrium analysis explains what individuals sometimes fail to serve the interest of society and how the incentive structure can be redesigned to fix these problems.

Empiricism

Economists use data to determine whether our theories about human behavior—like optimization and equilibrium—match up with actual human behavior.

Economists are also interested in understanding what is causing things to happen in the world. (Example: hot days and crowded beaches occur at the same time of the year: high temperatures cause people to go swimming, not vice versa.)

But there are cases when cause and effect are hard to untangle (sbrogliare).

Is economics good for you?

Learning to make good choices is the biggest benefit you’ll realize from learning economics.

Chapter 2 - Economic methods and economic questions

The scientific method

The scientific method is the name for the ongoing process that economists, other social scientists, and natural scientists use to:

• Develop models of the world
• Evaluate those models by testing them with data

Testing models with data enables economists to separate the good models—those that make predictions that are mostly consistent with the data—from the bad models.

Models and data

A model is a simplified description of reality. Sometimes economists will refer to a model as a theory. Because models are simplified, they are not perfect replicas of reality. Scientists use the model that is best suited to analyzing the problem at hand. Even if a model/map is based on assumptions that are known to be false, like the flatness of the earth, the model may still help us to make good predictions and good plan for the future. It is more important for a model to be simple and useful than it is for the model to be precisely accurate.

Scientific models are used to make predictions that can be checked with empirical evidence—in other words, facts that are obtained through observation and measurement. We also refer to empirical evidence as data.

When conducting empirical analysis, economists refer to a model’s predictions as hypotheses.

Means and medians

The mean (or average) is the sum of all different values divided by the number of values and is a commonly used technique for summarizing data.

The median value is calculated by ordering the numbers from least to greater and then finding the value halfway through the list.

Causation and correlation

Causation occurs when one thing directly affects another. You can think of it as a path from cause to effect. Causation occurs when one variable causes another variable to change.

Correlation means that two variables tend to change at the same time. Correlations are divided into three categories:

• Positive correlation: Implies that two variables tend to move in the same direction.
• Negative correlation: Implies that two variables tend to move in opposite directions.
• Zero correlation: When two variables are not related.

Correlation does not imply causality when:

• There are omitted variables
• Reverse causality

An omitted variable is something that has been left out of a study that, if included, would explain why two variables are correlated. Reverse causality occurs when we mix up the direction of cause and effect.

Experimental economics and natural experiments

How can we tell the difference between causality and correlation? Experiments help economists to measure cause and effect.

Randomization is the assignment of subjects by chance, rather than by choice, to a treatment group or to a control group.

Controlled experiments: Subjects are randomly put into treatment and control groups by the researcher (difficult to do with economics studies due to ethics).

One problem with experimentation is that experiments can sometimes be very costly to conduct. We say “garbage in, garbage out” to capture the idea that bad research methods invalidate a study’s conclusions.

A natural experiment is an empirical study in which some process—out of the control of the experimenter—has assigned subjects to control and treatment groups in a random or nearly random way (for example, natural disasters).

Economic questions and answers

Economic questions: Economic research as something that contributes to society's welfare. The questions are important to individual economic agents and to our society.

Economic answers: Economic questions can be answered with hard work, careful reasoning, and empirical evidence.

Chapter 3 - Optimization: doing the best you can

(3.1: we have to choose one apartment between four. They are completely identical, the only difference is the distance between them and the place of work. Considering the first principle of economics, optimization, we will be able to decide the best choice in two different ways).

Optimization application: renting the optimal apartment

Optimization using total value

We are focusing only on costs: costs of commuting time and costs of rent. We are assuming that the benefits of these apartments are the same (view or size), thanks to that cost-benefit analysis becomes easier. (In normal cost-benefit analysis, the decision maker finds the best alternative with the highest value of net benefit, which is benefits minus costs). When the benefits are equal, we simply have to choose the alternative with the lowest cost.

Firstly, we have to give a price to our commuting time, after that we need to sum the cost of rent and the cost of our commuting time to calculate the total cost of each apartment. The total cost includes the direct cost of rent and the indirect cost of commute time. To do that we have to decide on a common unit of account (which could be dollars/month or similar). To do this, we have to use the concept of opportunity cost (chapter 1). Economists call the best feasible choice the optimum.

If we assume $10/hour as our opportunity cost, we see that our optimum coincides with the apartment “Far.” But if we assume $15/hour as our opportunity cost, it changes. Assuming $15/hour as opportunity cost, the optimum choice becomes the apartment “Close.”

Optimization using marginal analysis

This different kind of optimization is often faster to implement than optimization using total value because optimization using marginal analysis focuses only on the ways that alternatives differ.

Optimization using marginal analysis breaks an optimization problem down by thinking about how costs and benefits change as you hypothetically move from one alternative to another. The economists use the word marginal to indicate a difference between options.

A cost-benefit calculation that focuses on the difference between one feasible alternative and the next feasible alternative is called marginal analysis. This analysis compares the consequences of doing one step more of something. (The marginal analysis is only a different way to find an optimum, the result will be the same).

Marginal cost

We have to consider again a cost of our opportunity cost of time ($10/hour). Instead of thinking about each of the apartments in isolation, we have to think about the apartments comparatively (if we hypothetically “move” from one apartment to another).

In general, marginal cost is the extra cost generated by moving from one feasible alternative to the next one. Moving from “Close” to “Far” made the worker better off, but moving from “Far” to “Very Far” made the worker worse off. Finally, “Far” is the only apartment which satisfies the following property: if an option is the best choice, you will be made better off as you move toward it, and worse off as you move away from it.

Chapter 4 - Demand, supply and equilibrium

Markets

A market is a group of economic agents who are trading a good or a service plus the rules and arrangements for trading.

We focus the discussion on markets in which all exchanges occur voluntarily at flexible prices determined by market forces (in contrast to prices fixed by the government). Prices act as a selection device that encourages trade between the sellers who can produce goods at low cost and the buyers who place a high value on the goods.

Competitive markets

If all sellers and all buyers face the same price, that price is referred to as the market price. In a perfectly competitive market, (1) sellers all sell an identical good or service, and (2) any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price. In contrast, there are some markets in which large market participants—like Microsoft in the software market—can single-handedly control market prices.

Fundamental questions are:

• How do buyers behave?
• How do sellers behave?
• How does the behavior of buyers and sellers jointly determine the market price and the quantity of goods transacted?

How do buyers behave?

How do sellers behave?

Supply and demand in equilibrium

Chapter 5 - Consumers and incentives

The buyer’s problem

“How do consumers decide what to buy?”

By “buyer’s problem” we mean how consumers arrive at a choice as to what to purchase. There are three ingredients:

• What you like?
• Prices of goods and services?
• How much money you have to spend?

Together, these elements provide the foundations for the demand curves.

What you like - Preferences

The benefits that you receive from consuming goods and services are a direct result of your tastes and preferences. The only assumption that economists make in formulating this part of the buyer’s problem is that the consumer attempts to maximize the benefits from consumption.

As part of the buying decision, consumers must figure out how to make the most of every dollar and, in the process, must consider the trade-offs that they face. Trade-offs = una scelta implica la rinuncia a qualcos’altro che desideri.

What do our buying decisions signal about us as consumers? They will show that from the set of all the things that you are able to buy, you most prefer the things that you choose to buy. We all want the “biggest bang for our buck.”

Prices of goods and services - Prices

Prices allow us to formally define the relative cost of goods. What these prices imply is that the opportunity cost of buying a pair of jeans is two sweaters. So if you purchase a pair of jeans, we know that you like those jeans more than you like two sweaters. The consumer is a price taker. The rationale behind this assumption is that an individual consumer tends to buy only a tiny fraction of the total amount of a produced good. Because each buyer is only...