Welcome!
Please sit in the first five rows.
It's not a big class. :)
Welcome &
Review of Econ 50
Christopher Makler
Stanford University Department of Economics
Econ 51: Lecture 1
pollev.com/chrismakler
What is an economic issue you care deeply about?
Did what we studied in Econ 50 offer a good model for this issue?
Please be fully present in lecture.
No phones.
No tablets (except to take notes on with a stylus).
No laptops.
I'm not a monster. There will be a break in the middle of each class to connect with your digital world.
Today's Agenda
Part 1: Course Overview
Part 2: Review of Econ 50
Themes of the course
Course schedule
Grading policies
Good 1  Good 2 Space
Budget Constraints
Preferences and Utility
Optimal Choice
Demand
Three Central Themes

Efficiency and Equity

Time

Information
Weeks 13
Efficiency and Equity
Weeks 89
Game Theory II: Asymmetric Information
Quarter Rhythm
Weeks 57
Game Theory I: Perfect Information
Thursday 4/25
Midterm
Wednesday 6/12,
12:153:15pm
Final Exam
Week 4
Externalities
Week 10
Public Goods and Public Choice
Before Lecture
 Read the textbook and take online quizzes on the major points to be prepared for learning in lecture
Lecture
 Presents new ideas
 Illustrate those ideas with simple examples
After Lecture
 Exercises for each lecture are designed to help you understand nuance
 More complex examples and applications than in lectures; work on connecting the dots
After Each Unit
 Exam questions will ask you to apply concepts from lecture to new situations you haven't seen before.
Monday
Reading and quiz for Tuesday's lecture
Thursday
Lecture; do second half of problem set exercises
Thursday & Friday
Section; office hours
Weekly Rhythm (Suggested)
Wednesday
Reading and quiz for Thursday's lecture
Tuesday
Lecture; do first half of problem set exercises
Weekend
Review material from the week
Do practice exam problems
Finish & hand in problem set
Grading Policy

This course is not graded on a curve.
If everyone gets an A, everyone gets an A;
if everyone gets a B, everyone gets a B. 
Reading quizzes: 5% of your grade
These are challenging, and I don't expect you to be perfect; 20% bonus given 
Inclass polls: 5% of your grade.
Graded for correctness, not just completion; but 20% added to your grade. 
Homework: 20% of your grade.
Max 15 points per pset, max 100 points overall 
Exams: 70% of your grade (30% midterm, 40% final exam)
If you miss the midterm, the final counts for all 70%. Don't do this if at all possible.
Most of you will get 100% (or close) on your quizzes, pollev, and homework;
your grade will largely be determined by the exams.
So, use the quizzes, lecture, and homework to prepare for the exams!
I Know The Final Is On The Last Day of Finals Week

You must take final here in person unless you're traveling on Stanford business, or if you've started a summer job or internship.

If you have a summer job or internship, you are responsible for finding someone official to administer the test concurrently with the rest of the class. We need to know who that's going to be by Memorial Day (end of Week 8).
I'm really sorry.
Course Web Sites
All content is posted/linked within Canvas.
Each lecture has its own module with everything you need to know about that lecture.
Please use Ed Discussions to ask questions (not email).
Please upload your homework to Gradescope by 8am the morning after it's due.
UCSD Videos
UCSD has video libraries for both intermediate micro and game theory...and they've let you have them for free! :) Information about how to sign up and which videos are most relevant will be posted on ED.
Review of Econ 50
pollev.com/chrismakler
When did you take Econ 50?
How well do you remember it?
Good 1  Good 2 Space
Two "Goods" : Good 1 and Good 2
Budget Constraints
Preferences
Definition Review:
Indifference Curves
Preferred/Dispreferred Sets
Marginal Rate of Substitution
Utility Functions
Indifference curve is
steeper than the budget line
Indifference curve is
flatter than the budget line
Moving to the right
along the budget line
would increase utility
Moving to the left
along the budget line
would increase utility
More willing to give up good 2
than the market requires
Less willing to give up good 2
than the market requires
The “Gravitational Pull" Towards Optimality
POINT A
POINT B
IF...
THEN...
The consumer's utility function is "well behaved"  smooth, strictly convex, and strictly monotonic
The indifference curves do not cross the axes
The budget line is a simple straight line
The optimal consumption bundle will be characterized by two equations:
More generally: the optimal bundle may be found using the Lagrange method
Optimal Choice
Otherwise, the optimal bundle may lie at a corner,
a kink in the indifference curve, or a kink in the budget line.
No matter what, you can use the "gravitational pull" argument!
 Write an equation for the tangency condition.
 Write an equation for the budget line.
 Solve for \(x_1^*\) or \(x_2^*\).
 Plug value from (3) into either equation (1) or (2).
Solving for Optimality when Calculus Works
(Gross) demand functions are mathematical expressions
of endogenous choices as a function of exogenous variables (prices, income).
(Gross) Demand Functions
For a CobbDouglas utility function of the form
Special Case: The “CobbDouglas Rule"
The demand functions will be
That is, the consumer will spend fraction \(a/(a+b)\) of their income on good 1, and fraction \(b/(a+b)\) of their income on good 2.
This shortcut is very much worth memorizing! We'll use it a lot in the next few weeks in place of going through the whole optimization process.
pollev.com/chrismakler
Find the optimal bundle for the CobbDouglas utility function is
and the budget constraint is
Functional forms for utility functions:
1. Weighted average of some common
"onegood" utility function \(v(x)\):
2. "Quasilinear": one good enters linearly
(in this case \(x_2\)), another nonlinearly:
3. Perfect complements:
not used as often, but helpful
CobbDouglas (decreasing MRS)
Weak Substitutes (decreasing MRS)
Perfect Substitutes (constant MRS)
Concave (increasing MRS)
To Do Before Next Class
Be sure you've filled out the section survey.
Do the reading and the quiz  due at 11:15am on Thursday!
Look over the summary notes for this class.
Econ 51  01  Welcome and Review of Econ 50
By Chris Makler
Econ 51  01  Welcome and Review of Econ 50
Welcome and Review of Econ 50
 341