Economics for Policy I: Microeconomics - tools and methods (STG-MA-A01-23)
Economists usually express their theories through mathematical models that are simplified representations of the real world, and contrast the results against real economic data. This is what we do in microecomics as well, in order to understand how agents (i.e., individuals, firms and governments) make decisions and how their combined decisions determine the allocation of scarce resources. In this course, we will first (re)introduce students to basic concepts in economics, including demand, supply, and elasticity. While doing so, we will review basic principles of decision making and develop useful tools for identifying the choice that strikes the best balance between benefit and costs. We will also discuss choices involving strategy, and introduce students to game theory. We will then turn our attention to markets and study how quantity and prices are determined in markets with different degrees of competitions (e.g., competitive market, monopoly and oligopoly) and their welfare implications. For example, we will see that perfectly competitive markets achieve desirable economic outcomes, but a monopoly falls short on the competitive ideal. Government interventions usually alter market outcomes. In so doing, they often reduce efficiency and aggregate surplus along with it. We will use microeconomic tools to examine the welfare effect of three types of interventions: i) taxes and subsidies; ii) policies designed to raise prices (i.e., price floors, price supports, production quotas, and voluntary price programs); iii) import tariffs and quotas. We will see that Government intervention is instead beneficial in the presence of market failures. Specifically, we will highlight the difference between individual and societal perspectives in the presence of externalities. We will discuss the nature and limitations of private negotiation as well as various public policies as remedy for market failures with environmental and health externalities. We will identify the characteristics of a good that can justify public provision, with a specific focus on the provision of transnational public goods and the factors promoting collective action at the transnational level. We will understand why common property resources tend to be overused (tragedy of the commons) and analyze possible corrections. Another form of market failure that we will analyze is the presence of asymmetric information with applications to transnational governance. Next, we will study some applications of bargaining theory (with a focus on the tradeoffs and fairness in negotiations; the solution concept of backward induction; first mover advantage) and demonstrates the workings of an auction and the optimal bidding strategy depending on the setting. Finally, we will examine choices involving time and risk and discuss the implications of departing from the standard economic theory. We will introduce the objective and methods of behavioral economics. Throughout the course, student will acquire the necessary tools to understand the causes and consequences of individual behavior, aggregate economic outcomes, and government interventions.
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This class will require problem-solving and algebra skills.
Page last updated on 05 September 2023