Greetings, welcome to the first video of what will be many in this course on microeconomics. This is a course that thinks about issues related to resource allocation prices, what's important about them and what are the real issues and how are these issues resolved? And so we're going to spend a lot of time thinking about how economies handle these issues. If you were to look up the definition of economics in the dictionary, it would say it's the science that studies the allocation of scarce goods and services. Who produces what and who gets to buy it? These are all complex issues and we have to figure out why are they so complex and how are they hand? And so today is going to be our first attempt to push into that. And we're going to learn a few key elements and then we'll move on. I want to start with a little story. I have this prop with me here today and this prop is very real. It's an old yellowed piece of paper and let me tell you something. Here's a hint for you, if you're ever in a college class and university professor pulls out some old yellow sheet of paper be very afraid. It probably means that this is some lecture that the guy wrote 30 years ago and hasn't updated it since. But don't fear about that, that's not what this is about. This is actually a great page that I took out of a magazine. The magazine was called InfoWorld, InfoWorld is a trade publication for the technology industry. It was founded in 1978 and it was in this paper version until 2007. It's still alive today, but now the the only way you can get right now is online, okay? So InfoWorld is still a magazine is basically talks about breakthroughs and what's happening in the tech industry. Well, this one happens to be September 1990, that's a long time ago, okay? But there's a very interesting story on here and the story says it's down here in the corner. And I had it, because it's all beaten up, I used it for many years as you can tell and so now I've kind of glued it to the sheet of paper here. So it's even still yellow but you can see it was tearing. The story says, Memory Upgrades, Vendors Beat Compaq to RAM Punch. And then the subheading says, Third-Party Manufacturers Offer Low-Cost SIMMS. So the gist of the story is that we're talking about in 1990 third-party manufacturers are offering add-ons to you, the PC owner. If you've got a Compaq PC, okay, you want to boost the memory of your PC, you can buy from third-party suppliers. And this story says these third-party manufacturers are offering low-cost SIMMS. Now, I wish I could have a chance to sort have you have a little survey here and guess as to what these costs are. But they got a little table here and the table tells that these are four megabyte chips, four megabyte, okay? There's a name there, chips, and the price that they're quoting here is for one of these four megabytes chips if you want to buy it from Compaq. It's $2,500, actually $2,600, 2599 to buy this chip, but the low-cost third party supplier is selling it for 2299, for $2,300 for a four megabyte chip. I mean, come on, four megabyte chips, they put these in Cracker Jack boxes these days. There's nothing, in fact I went out today and I went to a popular online tech site called Newegg. And I looked for RAM, I said sort by the lowest price and the lowest price piece of RAM they had there was a 512 megabyte chip. Now 512 megabytes is 128 times more powerful than this four megabyte chip and they're selling them today for $4.59. So this is a phenomenal thing. I mean, we're talking about a couple decades ago back in 1990. A chip was for people will lining up to pay $2,300 for a four megabyte chip to put in their PC, but the today these things are just dirt cheap. And so the question is how does that process work? That my friends is what really makes economists get jazzed up, this whole idea of where does this process come from? Was it like a government bureau that said, we need cheaper chips? We need to grow this industry, now that wasn't happening. What happened was there were a lot of people out there who looked at this idea and said, hey, wait a minute. It's not very expensive to make those chips, I can make those chips. I can put some silicon and I can plug that some things in and I can make those chips. I can make them probably cheaper and I could probably make the chips run faster. And so what happened was what we now call Silicon Valley, they moved out to the area surrounding Stanford University, and Silicon Valley became this hotbed of this type of activity. And so what happened was people who were willing to put their own skin in line flocked out into this area and started to produce their own product and put it on the market. Now you don't have to have an economics course, which you're now taking one to understand that when lots of people start supplying something it will bring the price down. And that's what we're going to talk about basically for the rest of this course. Not just the prices will go down, we can finish that off in module 1. We can think about demand and supply curves and the stuff that we're going to do as we push forward. But it's this whole idea of how does this process work? Who decides who's going in that industry? Where did they come from? Did they sell their restaurant that they had in Kansas City and move out there to make chips? Maybe that might have been what happened. We're going to think about this process of how do resource allocation decisions actually happen? So we have to start, we're going to move from this and start thinking about how these allocation problems arise and how we solve them. And the keyword here is this simple word scarcity. Now scarcity, you all have an idea in your head of what scarcity means. You say well, scarce means there's not a lot of it or I don't know, but what economist scarcity means is little bit something more. And instead of going with a real long definition I'm going to go to with a much shorter definition that says there's not enough to go around. There's not enough to go around, In other words, something is scarce when there's not enough for everybody to have it. There's not enough that everybody can have their fill of this product. So economists believe everything is scarce. Okay, economists believe that there's really nothing that we have on this planet that everybody can have all they want of it any time they want, that's kind of a Utopian world, okay? We don't have that situation. There are some things where it's pretty easy to think about this issue. All right, some products like for example the Mona Lisa, there's only one Mona Lisa, okay? So who gets that Mona Lisa? Well, it happens to be in Paris in a museum, but there are other great paintings from Old European Masters, which actually are on the market. Every now and then one of them pops up, a famous Rembrandt will pop up at Southeast and it goes for over $100 million. Okay, because they're very scarce, and other products maybe not that scarce but still quite scarce. A special vintage of Chateau Lafite, there may only be a couple hundred cases left of that on the planet and people will bid that price up. But on the other hand, there are products like salt, okay? Salt is pretty ubiquitous, there is salt all over the place. All right, but it's not enough, we used to think of products. When I first took my economics course a long, long time ago on a classic textbook, which I will remain unnamed. It was, the book said everything is scarce, except one commodity and they said that commodity was air, they said there's enough air for all of us. Now we just know that's not true, there's not enough clean air for all of us. Otherwise, we wouldn't have to have catalytic converters on our cars, we wouldn't have to use unleaded gas. If you're in California, you wouldn't have these rules about what type of grill you can have in your backyard, what type of lawnmower you can use in your art. All of these things are because we just don't have an unlimited supply. We used to think water was unlimited, we got water all over the place. We got right we can't see it, but underneath there's this giant aquifer here where we are. It's the Mahomet Aquifer underneath the ground, vast expanse of water, but you know what, it's not nearly as vast as it was just 25 years ago. All right, and it's going down even though we do get a lot of rain here these days, these things are being overused. So economists believe that basically everything is scarce and the implication of that is important. So I'm going to say implication, And the implication is that, Someone, Someone has to make the call. What do I mean by that? Has to make, The call. Someone has to make the call and what do I mean there? Well, if there's not enough to go around that means everybody can't have it. So who gets it? What's the process, do we roll dice? Do we play rock-paper-scissors? What do we do to decide who gets this product? Well, this issue to economists is that we need, Some, Allocation, Mechanism, we need some allocation mechanism. To an economist, an allocation mechanism is exactly as it sounds. It's a rule we use to decide who gets what. Now in the vast history of this planet, the vast majority of the time that rule was the king. The king decided who was going to get cheap and who's going to be in the army and who was going to do this and who's going to be that and the king decided who got what, and that lasted for centuries. In some, even in the 20th century, we had economies where the government decided who got an apartment and who got a house. The government decided who got a car and who didn't, the government decided how many pounds of meat you got per family per week. All these decisions could be handled by the government. Those are basically mad economies, but for the most part, In our economy. Okay, we use something called Western, This is the name that the media calls it, Western Economies or, The phrase we are going to use is markets. We use market to determine the allocation. See, we still have to decide on who's going to make the call. But rather than having one person say, you can have a car, you have to ride public transportation. We let the market determine who's getting these different goods and services and that allocation mechanism is go by the phrase Western economies. But it basically means that we use markets and we use markets in a special way, okay? So we're going to start this second slide by saying markets use and here comes that magic word, prices. Prices are very special, I'm just like you, I'm an economist. I love it when the prices are cheap, when there's a big sale I load up on some things. I would just, I have this great weakness for a Snickers bar, and the Snickers bars will be selling for $0.5. I'd even have more weight than I already have, this would be a great thing for me. But as an economist when I'm wearing my economist hats, I understand the prices aren't there just to give you deals and sales. Prices are there, because prices are essentially rationing devices. So from now on we're going to deal a lot with prices, you're going to price everyday in this class. But when we talk about prices we talk about prices as being rationing devices. Okay, and so what that means is that when there's not very much to go around, price drifts up so that more and more people say well, I'm out of that game, I can't buy that product right now. Okay, until you get just enough people left who are still willing to be in that market, [COUGH] to pay that price that they'll be met by that supply. So again, prices drift up or down if there's a lot, if there's just excess amounts of this commodity around, price will go down to attract more people to say, you know what? I never really tried that before, I got to try it at that price, I'll try it. And to absorb this this this supply. So what we're going to do is we go out through this course is we're going to think about what happens when these types of activities change when something comes along that makes something scarce. So if you have a situation where for example, the weather has produced a great shortage of a certain type of grain crop. Well, there's not very much of an out there that price of that is going to start drifting up. So we're almost done with this first video. I just want to give you a story to remind you that look, just because we call this a market economy driven by prices and we do. Think bout the United States for example, we like to say we use prices in markets, but we don't always, there are situations where we don't use prices in markets, okay? So what happens then? Well, we have if you don't do these prices in markets. Okay, so let's say, With no prices we end up having something called queuing. And queuing says that you stand in line, okay? So many times this happens to you. Think about for example, when you're standing in line, there's something that's extremely scarce. What is that? Well, what's really scarce as being at the head of line. [LAUGH] The most and scarce thing in a long line is that you want to be at the front, okay? And normally, situations you can, if you go to a bank and there's a big long line, you just got to wait your turn. If you pull up to drive through and there's a big long line, you just got to wait your turn. Now some places have been figuring out how to beat this. Okay, for example a Great America, which is a big theme park here in the United States, you can actually pay an extra fee to go to the front of the line. So everybody else stands in line, but if you're willing to pay more instead of standing back two hours at the end of a line to ride this roller coaster of the Raging Bowl. You can buy the special ticket and go right the front row. Okay, so there's a way to get around that scarcity, but again, they're using markets in that case. Sometimes people just don't use markets, because they don't believe that people should have to pay a price for it. There's a very famous basketball team in the United States called Duke, Duke University has a great basketball team and they have a coach who's got a very long name. His name is Coach Krzyzewski, begins with a K and Duke's Basketball Team is always extremely competitive. Okay, they have one of the best teams in the country year in and year out. They're frequent teams listed on the final four and they win a lot of national championships. And so their fans really want to go to the game. The problem is they play in this stadium called Cameron Indoor. Cameron Indoor is the smallest basketball arena in Division 1 basketball, it's got less than 10,000 seats. So here you have a wildly popular team and they've go less than 10,000 seats. The arena is in the big ten range from 15,000 to 22,000 for attendance, but this is a very small place, very good team. And so what happens is you have a tremendous number of people who want to go to that game. And there are very few student seats by the way, because people who run Duke University have to have a lot of seats reserved for wealthy alumni who also want to come back and watch the game and they're also good generous donors to to the campus. But the people at Duke determine we're not going to charge prices for this, because you already pay high tuition at your team. So they set the price at zero. Wait a minute, if you set the price at zero everybody wants to go. I'll go, I mean, they only have a couple thousand seats for students, but they got they got many, many more thousands of students walk around that campus. So what they do is they allocate it in a different way, they have something called Krzyzewskiville. It actually has a big name sign, it's a space on campus where people come and start lining up in advance for the tickets. Now they line up so far in advance that they actually live in tents. And in fact, when they have their biggest game of the year where they played their crosstown rival. University of North Carolina also has a storied basketball legend and they happen to be within ten miles of Duke. The center of Duke campus is only about nine miles away from the center of the University of North Carolina's campus. So these two teams are wildly, they're really good and they really don't like each other. So for that particular game, the line is quite long. In fact, people start lining up staying in these tents over four weeks in advance of that game. All right, and they have this place Krzyzewskiville, it's actually their bylaws at Duke University for it. Now what's happened here is that the people at Duke University said, I can't charge my students for it. But instead of letting the pricing system just finish this so students could do what they're supposed to do, like go to class. They'd say, I'm not going to charge you anything, the allocation mechanisms just going to be you're going to have to wait in line. Well, what happens is you have people waiting in line for weeks, sometimes over a month for certain games which economists think is kind of a strange allocation mechanism. But the point here is the people at Duke kind of haven't quite got the major lesson here, which is we're going to learn several times as we go forward. Is you can't just wish away scarcity, you can't just wish away the fact that there's more people who want something than there is available and you can say well, just everybody can have it. No, everybody can't have it. And so you have to put some mechanism in place as we said at the start of this lecture, who makes the call?
