A Brief Talk about Economics

Atanu Dey

March 22nd, 2012Instituto Thomas Jefferson, Queretaro

Atanu Dey Mar 22, 2012 2

IntroductionLive in CaliforniaStudied engineering, computer science,

economicsPhD Economics from Univ of California at

BerkeleyWork for a technology company in Mumbai,

IndiaBlog on “India’s Development”

www.deeshaa.orgVisited ITJ many times

Today we will talk about economics

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What is Economics?

Study of how people behave

People produce & consume

AND

Exchange

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Paul Samuelson’s definitionEconomics is the study of how people and

society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. Economics analyzes the costs and the benefits of improving patterns of resource use.

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People Respond to Incentives

Studying people exercising choice is what makes economics a study of behavior

Behavior is affected by rewards and punishments, gains and losses

In other words, people respond to incentives

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Markets WorkMarkets determine pricesPrices reflect the distributed informationPrices help allocate resources efficiently

Difference between efficiency and equity

Economic analysis can be eitherPOSITIVE – the study of what the situation ISNORMATIVE – what SHOULD be

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Economics is Common Sense

Economics is codified common sense

Economists work with models

Models are abstractions from reality

Models help us understand how the world works

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Simple Supply & Demand model

DemandWhen the price is high, the quantity demanded

is low, and vice versa

SupplyWhen the price is high, the quantity supplied

is high, and vice versa

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A Set of Ideas

Public goods and Private goods

Opportunity Cost

The Prisoner’s Dilemma

Tragedy of the Commons

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Public and Private Goods

Private goods are rival in consumptionAn apple, a pair of jeans, a bookMaterial objects

Public goods are non-rivalIdeas, recipe, national defenseInformation

Exchanging public versus private goods

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Opportunity CostWhat is the best alternative use of the

resource

What you have to give up in order to get this

The opportunity cost of eating the cake is having it

The opportunity cost of having the cake is eating it

Limited time

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The Prisoner’s Dilemma StoryIf A confesses & B keeps quiet

A goes freeB gets 10 years in prison

If B confesses & A keeps quietB goes freeA gets 10 years in prison

If both keep quietBoth get 2 years in prison

If both confessBoth get 6 years in prison

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Prisoner’s Dilemma Diagram

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Both end up Confessing

The rational outcome is not the preferred outcome

Because it is hard to make a commitment

One-shot exchange of a watch and money

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Another example of PD

A has a watch, wants to sell it for $100B wants a watch, and wants to buy it for $100Exchange will be made in the park in brown

paper bags

Does the exchange take place?What if the game is repeated?

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Tragedy of the CommonsCommons

Open access resource such as a pasture or a fishery

Not private property

Limited resource

The benefit of taking from the commons is private

The cost of taking from the commons is shared (or social)

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Thank you!

QUESTIONS?