ECON10004_2025_-_week_1.1

Introduction

• Welcome to the first lecture of Introductory Micro at the University of Melbourne.

• Lecture logistics explained: classes typically start about five minutes past the hour for smooth transitions between students.

Course Overview

• Objectives:

  • Introduce the subject and key concepts in economics.

  • Discuss housekeeping matters, including course structure and assessments.

Basics of Economics

• Basic Economic Problem:

  • Unlimited human wants versus limited resources.

  • Central economic questions: What to produce? How to produce? For whom to produce?

• Economics Defined:

  • A social science analyzing how individuals make decisions under conditions of scarcity.

  • Emphasizes the interaction between individuals and the incentives that govern their decisions.

Social and Scientific Aspects of Economics

• Social Aspect:

  • Focus on individual behavior and group decision-making.

• Scientific Aspect:

  • Development of theories and models to explain behavior based on collected data.

  • Example of data collection in real-world scenarios to validate economic theories.

Decision-Making and Incentives

• Individuals are autonomous decision-makers with freedom to choose.

• Decisions made are influenced by the incentives created by the systems within which individuals operate.

Theory and Data in Economics

• Explanation of how economists formulate theories and apply data to test these theories.

• Importance of empirical research in validating economic predictions.

The Golden Balls Game

• Example of the Prisoner’s Dilemma:

  • Game show scenario illustrating strategic decision-making.

  • Participants must choose between 'split' or 'steal' with potential gains and losses.

  • Highlights the conflict between individual rationality and collective benefit.

Key Takeaways from the Prisoner’s Dilemma

• Rational behavior may lead to suboptimal outcomes in economic systems.

• Individuals often make decisions based on self-interest, leading to inefficiencies.

Lesson One: Designing Systems with Aligned Incentives

• Systems should be structured to align individual incentives with social outcomes.

• Misaligned incentives can lead to system instability and inefficiency.

Example: Arizona’s Alternative Fuel Program

• Initial intent to promote eco-friendly vehicles led to unintended consequences.

• Lack of enforcement of actual usage of alternative fuel resulted in exploitation of the system.

• Lessons learned: Importance of clear requirements and enforcement in policy design.

Lesson Two: Sustainability of Economic Systems

• Poorly designed systems may function in the short term but collapse in the long run.

• Continuous adaptation by individuals in response to incentives can lead to inefficiencies.

Challenges in Economic Forecasting

• Economists can effectively analyze past decisions but struggle with accurate future predictions.

• Importance of sound economic analysis to evaluate and improve policies.

The Role of Information in Economic Systems

• Asymmetric information complicates decision-making for system designers.

• Markets as a mechanism for aggregating information and facilitating efficient outcomes.

Course Structure and Key Personnel

• Course includes two lectures a week and several tutorials.

• Key dates for assessments: Mid-term, assignments, and final exam outlined.

• Importance of tutorial attendance for participation marks emphasized.

Resources and Support

• Encouragement to engage with the subject guide for detailed information on course content and logistics.

• Availability of supplementary consultation sessions for additional support.

Conclusion

• Recap of the introductory lecture topics and reminders about course structure.

• Encourage students to leave quietly as the next class arrives.