A Brief Talk about Economics

1. A Brief Talk about Economics AtanuDey March 22nd, 2012 Instituto Thomas Jefferson, Queretaro

2. Introduction • Live in California • Studied engineering, computer science, economics • PhD Economics from Univ of California at Berkeley • Work for a technology company in Mumbai, India • Blog on “India’s Development” www.deeshaa.org • Visited ITJ many times • Today we will talk about economics Atanu Dey Mar 22, 2012

3. What is Economics? • Study of how people behave • People produce & consume • AND • Exchange Atanu Dey Mar 22, 2012

4. Paul Samuelson’s definition • Economics 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. Atanu Dey Mar 22, 2012

5. 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 Atanu Dey Mar 22, 2012

6. Markets Work • Markets determine prices • Prices reflect the distributed information • Prices help allocate resources efficiently • Difference between efficiency and equity • Economic analysis can be either • POSITIVE – the study of what the situation IS • NORMATIVE – what SHOULD be Atanu Dey Mar 22, 2012

7. 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 Atanu Dey Mar 22, 2012

8. Simple Supply & Demand model • Demand • When the price is high, the quantity demanded is low, and vice versa • Supply • When the price is high, the quantity supplied is high, and vice versa Atanu Dey Mar 22, 2012

9. Atanu Dey Mar 22, 2012

10. A Set of Ideas • Public goods and Private goods • Opportunity Cost • The Prisoner’s Dilemma • Tragedy of the Commons Atanu Dey Mar 22, 2012

11. Public and Private Goods • Private goods are rival in consumption • An apple, a pair of jeans, a book • Material objects • Public goods are non-rival • Ideas, recipe, national defense • Information • Exchanging public versus private goods Atanu Dey Mar 22, 2012

12. Opportunity Cost • What 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 Atanu Dey Mar 22, 2012

13. The Prisoner’s Dilemma Story • If A confesses & B keeps quiet • A goes free • B gets 10 years in prison • If B confesses & A keeps quiet • B goes free • A gets 10 years in prison • If both keep quiet • Both get 2 years in prison • If both confess • Both get 6 years in prison Atanu Dey Mar 22, 2012

14. Prisoner’s Dilemma Diagram Atanu Dey Mar 22, 2012

15. 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 Atanu Dey Mar 22, 2012

16. Another example of PD • A has a watch, wants to sell it for $100 • B wants a watch, and wants to buy it for $100 • Exchange will be made in the park in brown paper bags • Does the exchange take place? • What if the game is repeated? Atanu Dey Mar 22, 2012

17. Tragedy of the Commons • Commons • Openaccess 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) Atanu Dey Mar 22, 2012

18. Thank you! • QUESTIONS? Atanu Dey Mar 22, 2012