University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

396

Pages:

22
Author:

aneddasaib75

The Basics of Economics (in an hour) The Flavor of Economics • • • • How do economists think about problems? What is the basic toolset? Standard terminology And a taste of the complexity involved… Models: Similarities Climate Parameters Natural forcings GHGs Structure • Components • Behavior • Interactions Equilibrium solution Transient solutions Estimation, calibration Temp, Precip Economic Parameters Exogenous Variables Policy Structure • Components • Behavior • Interactions GDP, GHGs Equilibrium solution Dynamics (investment) Estimation, calibration Challenges of Economic Modeling • Invention of new technologies • Foresight – Learning under uncertainty • Consumer preferences – Attitudes to risk • Values and political decisions – Prescriptive/descriptive dichotomy Market-Based vs. Technological Cost Top-Down vs. • General equilibrium Bottom-up • Engineering cost – Full economy – Technical detail – Zero-cost opportunities • Goods, capital, labor – Prices endogenous – Factors driving growth – International trade • Sacrifice technological detail – Production technology – Aggregation of sectors • Partial equilibrium – Key prices exogenous – Omit interactions • Direct costs, ignoring – Consumer surplus loss – Industrial structure – Transactions costs Hybrids Basic Assumptions of Markets • Market efficiency depends on: – Perfect information – Perfect or complete competition • No single entity can influence prices – Clear and complete property rights – No transaction costs – Rational behavior Transactions In a Simple Economy Factor Inputs Labor, capital, land Factor Incomes ($) Producing Units Individuals Purchases ($) Final Goods and Services Output or Production Technology: Cutting Grass K Power Mower 20 acres per day 10 acres per day L With Several Technologies K 10 acres per day Riding Mower Power Mower Push Mower L Technology Choice K KL KL Ht = a t (bKK ρ + bLLρ ) Riding Mower Prices 1 Power Mower Push Mower Prices 2 L 1 KL ρ Extending the Production Function • More than just capital and labor – Energy, materials – Products of one production function can be inputs to another production function • Extend to entire sectors – Eg, US agriculture Demand Functions Wine Prices 1 Prices 2 Cheese Aggregating Demand Functions P Aggregate Q Individuals Price Elasticity of Demand (ΔQ / Q) Ep = (ΔP / P) Ep = infinite (elastic) Ep = 0 (Inelastic) P P Q Q Supply & Demand P S D QM Consumer/Producer “Surplus” P P P D qA qB P qA QM P qB S QM Taxes, Quotas, and Surplus Effects Quota P S Tax Deadweight loss D QM General Equilibrium • Supply/demand relationships do not exist in a vacuum. – If the US were to put a $2 tax on gasoline what would happen? • 1st: Solve supply/demand equation for gasoline. Reduction in gasoline usage, reduction in gasoline price • In the US, goods that use gasoline as an intermediate will increase in price • Outside the US, lower gasoline prices will lead to increased consumption (“leakage”) • Eventually, consumers will move in order to drive less – Propagate changes until a new equilibrium is reached Discount Rate • Composed of: – Rate of Time preference – Marginal productivity of capital * marginal utility of money • Discount Rate is not Inflation: we use “constant” dollars • Usual expression: Bt = (1 + r ) −t • Net Present Value = sum of all time periods, appropriately discounted. • Value judgment? Revealed preference? Long time horizon? Opportunity Cost • Most valuable alternative use of resource – Time, money, capital – Owning vs. renting – Opportunity cost of watching a free movie Marginal Abatement Cost • “MAC curve” Price • Include all options for reduction, ordered by price, with quantity available at that price Double Pane Windows CFL Lightbulbs Solar Panels CO2 reduction Cost/Benefit Analysis • Cost of a decision – Money spent, opportunity cost • Benefit – Calculate quantity abated – Discount rate • The total benefit minus total cost is maximized at the point where the marginal cost = marginal benefit • Valuation – Revealed preferences, value of a human life, existence value, etc – But every decision has an implicit valuation