In this first session, we'd like to cover four key concepts with you. First, the scope of microeconomic theory. Microeconomics, its derivation from the Greek word mikros, which means small or the building block units that make up an aggregate economy. By contrast, macroeconomics focuses on the aggregates, the overall economic body, and aggregate price levels. Notwithstanding focusing on the building blocks, microeconomics has wonderful power. Because understanding how individual sellers Buyers, laborers, hirers of labor behave, allow us to better understand how the overall aggregate will turn out. And it turns out, it also has much stronger predictive power. So our focus will be on microeconomics. A lot of times, it's called price theory. Because, we believe prices play such an integral role in determining the actions of buyers and sellers. The second concept is the nature and role of theory. Econimics is very much a framework oriented, deductive approach. And it has great power because in contrast to inductive case by case approaches. The belief is that the cases will keep changing over time. So what are the powerful set of tools that allow us to explain and predict what's happened, or what will happen in these new cases It's a very portable set of tools that you'll find. And as your career develops, ten, 20, 30 years down the road, incredibly versatile. And then when you look, I guess, the analogy. Simon School at the University of Rochester very much prides itself. On our Economics based approach. On the role of this, deductive power of Economics. A good analogy is if, imagine if you're flying in a plane and all of a sudden something unusual happens, the left engine shuts down accidentally. Would you rather have a pilot trained by the inductive method? In which case you hope she or he has run into that particular case. Or would you rather have the pilot trained from a deductive framework approach? The theory of aerodynamics in flying. Most of us, I think, would agree that that framework has great potency. In cases of flying or in cases of understanding how markets work that economics applies to. Theories are constantly getting stacked up to test whether they fit the data. And invariably, they're imprecise, but what ultimately matters is how well they explain and predict. take, for example, the calorie theory and the belief that, if you want to lose weight. You have to ingest fewer calories. We've never seen, nobody has ever seen a calorie or how it gets converted to energy, and yet the theory has great potency. It's not perfect, it's not the only thing that explains why you gain or lose weight, there are other factors like heredity. Age, metabolism, how much you exercise. All that said, though, the calorie theory still has great potency. And so this approach, this theoretical approach, has a wonderful way of explaining how individual decision makers, how firms behave. How organizations are structured effectively or ineffectively. So if you want to understand what caused the recent economic downturn, or Enron to come to naught, or Arthur Andersen, economics will give you what one alum of the Simon School calls that x-ray vision, the ability to see around corners. The third concept for this session is positive versus normative analysis. Economics falls in the positive realm, it explains what is, instead of what ought to be. There are other social sciences and humanities, like philosophy, that focus on what ought to be. Economics is in the positive realm, and there are two dimensions to it, both quantitative and qualitative. Take the example of the minimum wage, there are huge debates right now in Washington D.C., should the minimum wage be raised from $7.25 an hour? where it was established a few years ago, to as a high as $10.00 an hour. To understand the impact of such a potential raise, positive analysis comes in handy in two ways. First of all, economic theory will show when we raise the minimum wage, if that happens, qualitatively what'll happen to the number of low skilled workers employed? It'll go down. And then beyond the qualitative there's also the quantative. What are the best testaments? How much will employment go down should the minimum wage be raised to as high as $10 an hour? So for those two steps, the qualitative and the quantitative, economics is a positive analytic approach. All that said, however, one still has to then weigh in normative considerations. Knowing the qualitative and quantitative impacts. Is it still worthwhile to raise the minimum wage? Do the people that still remain employed, and at now a higher wage, is it better to have that outcome for them, even though some may lose their work along the way. And then the fourth and final concept for this opening session. Microeconomics focuses on real, and not nominal prices. Is a five cent cup of coffee cheap or expensive? It depends on what time you look at it. In 1910, it would have been ridiculously expensive. Nowadays it would be ridiculously cheap. So to determine the real price of a good, we have to look at what's happening to the general price level. And adjust for that fact that over time the value of a dollar is elastic in a sense. It's can vary. And fundamentally, when we look at a market, we want to determine the real price. We want to adjust for the changing over all price level. Let me give you an example, turn to the next page. The consumer price index is one way economists measure the aggregate price level. Right now, and it's for short, it's called the CPI for consumer price index. Right now, the base here, in which the CPI's calculatd is 1983. And for the overall aggregate price level, the base number is 100, against which other things are measured. At the present time, say in 2013, the CPI level is 224. So general prices have gone up over the last 30 years. And if we want to determine how much general prices have gone up, we'd want to compare the current level of the CPI versus what it was in 1983. So if you look on this slide on page two of the power points, the overall price level has gone up from 220 from a 100 to 224 and relative to a base of a hundred. We can determine it has gone up by a 124%. That's how elastic the overall price level, how much it has changed over that 30 year period, And say we want microeconomics to focus on a particular grid like healthcare, healthcare relative to a base of 100 in 1983. At the present time we'll say it's 425, it's gone up much more that the general price level, to determine how much relative to the general price level between 1983 and 2013, we'd look at where right now the price of health care stands at 425. Relative to the general price level 224 and then scale it, in the denominator by 224 because that's how much overall prices have risen. And when you do that calculation we can determine that healthcare in real terms over the last 30 years has gone up by 90%. You'll see in the PDF version of the text, other examples of goods that have gone up in real terms and some that have fallen in real terms. For example, college tuition, has risen much more. Textbooks have risen much more, than has the general price level. And in real terms, there is a positive percentage increase over the last 30 years. There are other goods, like phone calls, and personal computers, that have fallen dramatically, in real terms. So those are the four initial concepts. We're delighted, I'm delighted personally, you're here for the journey. And we look forward to the next video segment.
