micro intro lecture 1

Microeconomics: Analyzes individual decisions (households, firms, etc.). Micro I/II: Wide overview of areas and applications of microeconomics. Micro III: Back to the methodological basis. Particularly: Decision theory in the context of ◮ uncertainty ◮ multiple decision makers → ‘game theory’

(Micro-)economics as “Decision Theory” Central Problem of (Micro-)economics: Choosing a from set of available alternatives A. Goals: ◮ Predict choices (‘positive analysis’) ◮ Recommend choices (‘normative analysis’)

Outline (preliminary) 0 Introduction 0.1 Methodology 0.2 Economic Models 0.3 Decisions under Certainty (Review) 1 Decisions under Uncertainty 1.1 Lotteries and Preferences 1.2 Expected Utility 1.3 Risk Attitudes 1.4 Comparing Lotteries 1.5 Discussion 2 Game Theory Complete Information 2.1 Static Games, Complete Information 2.2 Dynamic Games, Complete Information Incomplete Information 2.3 Static Games, Incomplete Information (2.4 Dynamic Games, Incomplete Information)

Methodology Objective in Microeconomics: Description and implications of individual economic behavior. Methodology: 1. Methodological Individualism: Analysis starts at level of individual economic actor. 2. Rational Behavior: Individual actions follow some rationale (optimization process). 3. Empirical Verifiability: Want predictions to be verifiable/falsifiable. 4. Economic Modeling: Derive predictions from clear economic models.

Methodological Individualism ◮ Individual decisions are at center of analysis (firms, agents, etc.) ◮ Statements on groups of economic agents (market demand etc.) require aggregation. ◮ Positive analysis: Explain observations as optimal behavior on agents’ behalf. (For instance: minimum wage.) ◮ Normative analysis: Evaluate allocations based on ethical concepts & value judgements. (For instance: laissez faire.)

Rational Behavior ◮ Individual agents’ decisions aim to attain best possible outcome, given own preferences over feasible outcomes. ◮ In doing so, all available information is accurately processed. (Mistakes are explicitly modeled.) ◮ Behavior of a single economic agent given constraints: decision theory. ◮ Behavior given strategic interaction among multiple economic agents: game theory.

Empirical Verifiability ◮ Positive microeconomic analysis ought to be verifiable (falsifiable) in context of (model-) reality. ◮ Analysis should deliver (singular, if possible) predictions about observable quantities. ◮ Test mode hypotheses using statistical analysis of collected data, field studies or experiments.

Economic Modeling ◮ Analyze economic questions using abstract model of economic situation. ◮ Model is a simple abstract version of reality: ◮ Models are typically not realistic! ◮ Restrict model to question at hand. ◮ Model should contain all elements and interdependencies relevant to the economic question at hand – and no more.

Formal Economic Modeling ◮ Formal (mathematical) model: Line of reason/argument which derives conclusions from assumptions using elementary logic. The step from assumptions to conclusions is optimally not completely trivial. ◮ This is useful regarding ◮ internal consistency of the argument, ◮ explicit description of the assumptions required for the argument, ◮ quantifiable results. ◮ If implications are in line with observations, we say “the model can explain observe behavior.” ◮ The more general (‘abstract’) the model, the larger the set of potential applications.

Economic Modeling Distinguish model components: ◮ Exogenous variables and model components, not to be explained by the model (for instance: preferences, sequence of things, rules of a game, technology,. . . ). ◮ Endogenous variables, which are to be explained by the model and derived from exogenous components (for instance: demand for a good, labor supply, prices,. . . ). ◮ Whether a certain variable is exogenous or endogenous to a model will typically depend on the economic question to be answered by the model!

Popular Formal Concepts ◮ Optimization: Maximization of utility/profit subject to constraints. ◮ Equilibrium: Given all agents’ behavior, no agent has an incentive to adjust own behavior. Static concept! ◮ Comparative Statics: How do endogenous variables change (in equilibrium) in response to changes in exogenous parameters?

Comments

Popular posts from this blog

ft

gillian tett 1