Video Transcript: Introduction

Hello, welcome to Principles of Microeconomics. Microeconomics is the study of economics on an individual or a local basis. So, we'll be diving into that and  learning more about the concepts and the fundamentals of everything that  microeconomics entails. So, first I'd like to introduce Adam Smith. Adam Smith is known as the father of the free market. He came up with a saying: every  individual neither intends to promote the public interest nor knows how much he  is promoting it. He intends only his own security, and by directing that industry in such a manner as it may produce the greatest value, he intends only his own  gain, and he is in this, as in many other cases, led by an invisible hand to  promote an end which has, which was no part of the intention, so the invisible  hand is what kind of guides the free market, right. There is a price discovery  mechanism, which is known as the invisible hand, right. So it's always wanted to keep prices in equilibrium, where demand equals supply, which is known as  price discovery. So, a little background on Adam Smith. Adam Smith was an  18th century Scottish philosopher, renowned, renowned as the father of modern  economics, and a major proponent of the laissez-faire economic policy, which is  kind of top-down economics, right? Expand the reinvestment base, and it'll be  able to flow to greater growth in production or greater growth inside the industry.  Therefore, creating more jobs, rising wages, less employment. That's known as  laissez-faire economics. Smith was a fierce opponent of mercantilism, right,  which is kind of the old European form of economics, where everything was kind of controlled by vassal states and different monarchs, and there wasn't really a  free market, because everything was pre-planned. These characteristics of  Smith led him to become known as the father of modern free trade and the  creator of the concept now known as GDP, or Gross Domestic Product, in his  first book, The Theory of Moral Sentiments, Smith proposed the idea of the  invisible hand, the tendency of free markets to regulate themselves by means of competition, supply and demand, and self-interest. Smith is also known for his  theory of compensating wage differentials, meaning that dangerous or  undesirable jobs tend to pay higher wages to attract workers to those positions,  but he is most famous for his 1776 book, An Inquiry into the Nation, into the  nature and causes of the wealth of nations, so Adam Smith's Invisible Hand  quote is at the core of capitalism. Smith's book, The Wealth of Nations, which  reinforced the idea of the invisible hand and free market capitalism, was  published the same year as the Declaration of Independence was written in  1776 Notice the correlation, the Declaration of Independence, the introduction of the free market kind of coincides with the American experience. America  promotes free democratic society, while Adam Smith promotes the ideas of true  free market capitalism, not surprising the economical sentiment was correlated  to the political sentiment of the time, freedom, right? So Adam Smith thought  that self-interested action frequently leads to greater innovation, better  investment, and more productivity overall, which will lead to greater individual 

wealth, which is promoted by the free market and the invisible hand. Adam  Smith's Invisible Hand quote is a prime example of microeconomics as a study  of individual economic actors who are firms, people, households, etc. and how  they make cash allocation decisions about scarce resources. Cash allocation,  referring to how do they spend their cash, how do they divvy up their cash, what  priorities are they dividing their cash into? Right, so they're going to allocate  their cash based on the amount of scarcity of particular resources, scarce  resources, scarcity refers to the basic economic problem, the gap between  limited, that is scarce resources, and theoretically limitless wants. Right, so  there's only a certain amount of land. In the world, we can't create and grow new land, so that is the ultimate scarce resource, where people have unlimited wants for the amount of land. Therefore, land costs, in some cases, could be very  expensive, depending on barriers to entry. This situation requires people to  make decisions about how to allocate resources efficiently, right. So we need to  make sure that it's done so, and it's in order to satisfy basic needs and as some  additional wants as possible. Any resource that has a nonzero cost to consume  is scarce to some degree. That's why there's a price on it, right. The demand  and the supply are going to come to an equilibrium, and the demand and the  supply is going to dictate the price. Money and time are quintessentially scarce  resources. We don't, we have a finite amount of time, right? We have a finite  amount of money, right. So they are the quintessential scarce resources, along  with land, most people have too little of one, the both, the other, or both. An  unemployed person may have an abundance of time, but find it hard to pay rent. A hotshot executive, on the other hand, may be financially capable of retiring on  a whim, yet be forced to eat 10 minute lunches and sleep four hours a night,  even resources that we consider indefinitely abundant and which are free in  dollar terms are scarce in some sense. Yes, take air, for example, from an  individual's perspective, breathing is completely free, yet there are a number of  costs associated with this activity. It requires, it requires breathable air, which  has become increasingly difficult to take for granted since the Industrial  Revolution. In a number of cities today, poor air quality has been associated with high rates of disease and death. Unfortunately, in order to avoid these costly  affairs and assure that citizens can breathe safely, governments must invest in  methods of power generation that do not create harmful emissions. These may  be expensive or more expensive than dirtier methods, but even if they are not,  they require massive capital expenditures. These costs fall on the citizens in one way or another. Breathing freely, in other words, is not free. So we're going to  study how people use scarce resources and how this impacts prices and  markets. We will attempt to quantify economics, to make them mathematical by  illustrating market assumptions through charts and graphs, we should start with  trying to understand how people think and observe if people make rational  economic decisions, and how these decisions impact markets. In the philosophy

of making decisions in microeconomics, economists must make some  assumptions to simplify the mathematical process. Most economists feel people  are rational and will act in their own self-interest to maximize their personal gain. This isn't always true, because people are motivated by many different things.  Economists look to simplify these motivations, so they can deal with the decision making process in a mathematical sense, quantifying the decision process. This  decision making process this allows economists to have a good idea as to what  is going on in the market relative to supply and demand, which will give you your pricing. It is very valuable to have these tangible calculations to help guide  future decision making, and this is what we're going to be focusing on in this  class, is to learn about pricing, learn about markets, learn about supply and  demand, so that we can make rational economic decisions to therefore give us  the most potential to maximize our personal gain as an individual and on the  firm level or as a collective community. Unfortunately, the simplified assumptions economists are making in these economic graphs and charts can be misleading  due to the fact that these are simplified conclusions. Right, everything is in a  box, everything is controlled in some of these instances, so we'll have a  fundamental theoretical idea of how we think markets are going to react and  how prices will move, so these simplified assumptions are made right, and we  have to prove these charts and graphs and data, right, but the conclusions are  based on these assumptions, and they could be wrong or potentially  oversimplified. So we need to be able to use the context in a relevant manner  and make the best conclusions that we can from the data that's available. Take  all the simplified economic data. With a grain of salt, because it's all based on  simplified assumptions, but we have to make these assumptions from the data  that we can collect from the market, so that we can have some kind of idea, no  matter how simplified that it may be, on how the markets are moving, how  they're going to react, how we should price our products, how we should pay our labor, you know, should we expand, should we grow, should we build new  plants, should we buy more property or or equipment?