From the Lectern: Week 1

This semester I'd like to present some of the basic ideas I'm teaching in my class week by week. I'm teaching Principles of Microeconomics using a text by Paul Krugman and Robin Wells. There's a lot more detail (technical and otherwise) that I'll go into in my class, so this isn't anywhere near a substitute for the real deal. That said, I think the economic concepts and reasoning that we cover are things everyone needs to know and understand, so I'd like to start you all thinking about them here.

This week only had one lecture due to Martin Luther King, Jr. day. The opening lecture is an important one, since it's the key to (1) catching the attention of the students who might be interested, and (2) frightening off the students who don't want to work. I opened by asking students to think about why they were here. There are really only three kinds answers (and their combinations): Consumption, Productivity, and Signaling. Over the course of the semester I'll discuss each in more detail.

The main topics on the first day, though, deal with answering two questions. The first is "What is economics?" Every textbook and every instructor has their own way to answer this, and I'm no exception. In a nutshell, here is my definition of economics:

Economics is the science of choice.

'Choice' means that there are many desirable options, but not all can be pursued. Most textbooks represent this idea with the term scarcity, which is a technical term meaning "you have to pick one." The fact that individuals must make a choice also indicates that they have to compare the benefits of each different option. The best choice will the the one for which the benefits outweigh the benefits of all the other options. The benefits given up when a choice is made are called the opportunity cost of a choice.

'Science' is key because it indicates how we will learn about choice. Economists don't just sit around giving their opinions about choices, events, and incentives. I mean, we do that, but we don't just do that. In order to say something meaningful, we have to be systematic and rigorous in developing our theories and testable hypotheses. We use a lot of graphs and a lot of math in order to keep our arguments logically consistent. It's true that some of the greatest economists in history didn't use math. It's also true that we still aren't sure what they meant. So we're gonna use math.

The definition of economics is remarkably broad. It includes a lot of human behavior we don't really think of as economic activity (that is, trade). This is intentional. Nobel Prize winning economist Gary Becker extended economic reasoning to such questions as who to marry, how to divide up household chores, and other areas typically not considered economics. Some fascinating examples of economic thinking applied beyond simple trade can be found in the books Freakanomics and its sequel SuperFreakanomics.

Nevertheless we will spend most of our time talking about what is typically thought about as economic activity. This brings us to our second main question: "What's so special about trade?" The short answer is that by engaging in trade, everyone can gain something for nothing.

Let me illustrate. Suppose there are two cave men, Nog and Pog. These cave men do what all cave men do: collect sticks and rocks. In a given day, Pog can collect 40 sticks and 40 rocks. Nog is a bit slower, especially when it comes to rocks; he can pick up 10 sticks and 4 rocks in a day. So far, so good, but they can both do better. If Nog just focuses on picking up sticks, he can get 20 in a day, although he'll have no rocks. However, what he has to give up to get 10 more sticks is only 4 rocks (that is, his opportunity cost of specializing in sticks is low; Nog has what we call a comparative advantage in sticks). Similarly, if Pog specializes in rocks, he can collect 50 rocks, but only 35 sticks (Pog's comparative advantage is in rocks).

Now that they've specialized, they can trade. Suppose Nog offers 8 sticks to Pog in exchange for 7 rocks. Pog agrees. Now Pog has 43 sticks and 43 rocks, while Nog has 12 sticks and 7 rocks. Compare those numbers to what they have before: they both have more of both. In total they are splitting 5 sticks and 10 rocks that neither would have had if they hadn't specialized and traded. These 5 sticks and 10 rocks represent the gains from trade. These gains are benefits to everyone: everyone is better off in every dimension. These are benefits that exist solely because Nog and Pog decided to engage in economic activity.

Economic activity is fascinating to economists because trade can create something from nothing. That doesn't happen in Psychology. It doesn't happen in Physics. Only in economics.

We'll talk about these ideas in more specific contexts throughout the semester. But everything we do in Principles of Microeconomics is going to be made up of these few, powerful ideas.