As a way of thinking through the material in the last three weeks of class (Week One, Two, and Three) I’d be keen for you to watch a video from the Primer Youtube channel. Note: I prefer to hyperlink rather than embed the link, so the channel provider gets the ad revenue – it doesn’t always work through WordPress.
This is not compulsory for the course, and will not be assessed. But if you can follow the video, and understand how it relates to the concepts I list below, then you have a great grasp of the content!
The Primer channel started as a biology channel, but has already done a couple of videos about economics that I think offer an excellent way of thinking through the analytical models we build in class.
The concepts covered in the video are things that you have covered as of Week 3:
- The Production Possibility Frontier
- Diminishing Marginal Utility
- *Non-satiation/increasing utility
- Selection of the optimal bundle.
If you are keen, either comment or email me your thoughts on how where and how these concepts are covered in the video.
The blob and our models
But there is a key difference between the endowment of the blob and the endowment of our choice maker in class – the scarcity is in terms of a trade-off in collecting/producing the goods rather than in terms of a fixed “monetary income”. In this way, the discussion is closest to the allocative efficiency concept we talked about for PPFs.
Now if you have trouble following the video that is ok, you will be assessed in the way it is taught in class – with PPFs used for thinking about society, while we have a fixed monetary budget constraint for individuals. However, this other perspective may be more intuitive for some students, and may give a deeper understanding of our models to other students. For those interested in thinking more deeply on this framework I suggest looking at Edgeworth boxes.
However, there is a broader reason why I think it is useful to see this type of simulation for thinking about economic phenomenon instead of just looking at analytical rules defined from arbitrage conditions (eg the idea that someone sets the marginal utility per dollar equal for all the goods they purchase).
The risk with teaching analytical solutions is that we don’t think about the process that builds those rules, or how bounded rationality (the use of experimentation and “good enough” decision rules) fits into that. Simulation helps us think about how these other ideas fit in!
This is what we are attempting to do when we ask about what happens when we aren’t at equilibrium, or when our arbitrage conditions aren’t meet. The disequilibrium process we describe, step by step, is similar to the learning and experimenting the little blob in the video does to figure out what its best choice is.
Remember what we said in Lecture 2 – models are caricature of reality that allow us to describe something about reality. Solving our model is “simulating” an alternative world that is represented by this caricature, and as a result both this and what we do in class are very similar!
However, knowing how to simulate and experiment can also give us insights in situations where the model doesn’t have a unique equilibrium – something that will become more important when you do Game Theory and Macroeconomics later in the course.