Lecture notes · Microeconomics · Lecture 1

Lec 1: Introduction to Principles of Microeconomics and Supply & Demand

MIT 14.01 Principles of Microeconomics, lecture 1, explained in plain English

Want this lecture to stick? In LessonBound you get checked practice questions for every part, can ask about anything you don't get, and can listen with your screen off. Free, no ads.

Learn this lecture free

Watch or read the original lecture: MIT OpenCourseWare.

Part 1 · 0:00–10:00

Professor Gruber introduces the course: microeconomics studies how people and firms make the best choices when resources are limited, using simplified models such as supply and demand.

Key ideas

Microeconomics is the study of how individuals and firms make themselves as well off as possible in a world of scarcity. Scarcity means you can't have everything you want. 2:37
Microeconomics is really about trade-offs. You have to choose what to do with the limited resources you have. 3:00
Opportunity cost is the value of the next best thing you give up when you make a choice. Every action has one, even if it looks free. 3:44
Economists use models, which are simplified descriptions of how things relate. Economics has no fixed laws like physics, so models must simplify the real world to be useful. 6:18
Adam Smith's puzzle about water and diamonds is the starting point for supply and demand. Water is essential but cheap, and diamonds are not essential but expensive, and Gruber says demand alone is only half the answer. 9:19

Words to know

scarcity: Not having enough of something to get everything you want, so you have to choose.
opportunity cost: What you give up by choosing one thing instead of the next best option.
model: A simplified description of how two or more things are related, used to explain the world.
demand: How much of something people want to buy. In this lesson, it is one half of the supply and demand model.

Example

Say you spend Saturday night studying. The opportunity cost is the concert you could have gone to instead. Gruber's point is that a choice that seems free still costs you whatever you gave up.

3 checked practice questions for this part are in the app.

Part 2 · 10:00–20:00

This part introduces what a market is, then uses a rose example to show how demand and supply curves meet at a balance point called equilibrium.

Key ideas

Adam Smith's point is that supply and demand must be thought of together, not one at a time. Diamonds cost more than water even though people need water more, because diamonds are much harder to get. 10:18
A market is a place, real or imagined, where buyers and sellers come together to make deals. The idea works for modern markets too, even though most trades happen without everyone standing in one spot. 12:07
The demand curve shows that as the price of roses goes up, buyers want fewer roses. This is because a higher price means giving up more of other things you could buy. 13:09
The supply curve slopes up. When roses sell for more, farms choose to grow more of them, because roses become a better use of the farm than other options. 14:33
Equilibrium is the point where the two curves cross. At 600 roses and a price of $3, buyers and sellers both agree, so the market is at rest. 15:57

Words to know

market: A place, or any setup, where buyers and sellers come together to trade.
opportunity cost: What you give up when you choose one thing over another. In a free market, the price of a good is its opportunity cost.
demand curve: A line on a graph showing how many items buyers want at each price.
equilibrium: The balance point where the supply curve and demand curve meet, so buyers and sellers agree on the price and quantity.

Example

Think of a slice of pizza and a Coke. If a rose costs $3, you can still afford the rose plus the pizza and Coke. If it costs $4, you may have to pick one, so the rose now costs you more, and you want fewer of them.

3 checked practice questions for this part are in the app.

Part 3 · 20:00–30:00

This part explains the difference between describing how things are (positive economics) and judging how things should be (normative economics), using eBay kidney auctions as the example, and then introduces market failures, fairness, and t

Key ideas

Positive economics describes the way things are, while normative economics describes the way things should be. Keeping these apart is important and easy to mix up. 20:42
Supply and demand can explain positive questions, such as why the kidney price on eBay rose so high: very high demand and very low supply push the price up. 22:29
The normative question, whether people should be allowed to sell organs, is harder. Economics gives one answer, but there are reasons to hold back, such as market failures and fairness. 22:49
A market failure is when the free market does not work well, for example when people are misinformed or forced to sell. Outside of market failures, economists say the market knows best. 24:34
Fairness (equity) is a separate concern from efficiency. This course mostly focuses on efficiency, meaning whether the market delivers the right quantity of goods. 27:27

Words to know

Positive economics: The study of how things actually are, based on facts and cause and effect.
Normative economics: The study of how things should be, which involves value judgments about what is good or fair.
Market failure: A situation where a free market does not produce a good result, so some outside action may be needed.
Equity: Fairness, meaning whether the results of the market are spread fairly among people.

Example

Think of a concert ticket for a very popular band. Many fans want it, but only a few seats exist, so the price rises a lot. That is the positive story of supply and demand. Whether it is fair that only rich fans can afford the seats is a normative question, and that is where people's opinions about how things should be come in.

3 checked practice questions for this part are in the app.

Part 4 · 30:00–38:24

This part compares two extremes, a command economy where the government decides who gets what and a market economy where prices and trading decide, and explains why the lecturer thinks the market model is the one to study.

Key ideas

A command economy is one where the government makes all the production and allocation decisions, so people do not choose what they get. The lecturer says it is closest to the Soviet Union of his youth. 30:00
The lecturer says a command economy fails in practice for two main reasons: the government cannot make the huge number of decisions needed, and power over who gets what leads to corruption. 31:45
In a market economy, the invisible hand of the market decides what gets produced and who gets it, through people trading with each other rather than through one planner. 33:31
The market model works well and has made America rich, but it also leads to big inequality, because goods tend to go to whoever can pay the most. 34:13
Most economists agree a command economy is not the answer. The real debate is how much the government should step in to a market economy, and countries like those in Europe use more government intervention. 35:17

Words to know

command economy: An economy where the government decides what gets made and who gets it, instead of buyers and sellers deciding.
invisible hand: Adam Smith's idea that the market guides many people's choices toward good results, even though no single person is in charge.
socialist: In this lecture, a system where the government owns and runs industries like banks and airlines, while consumers still decide what to buy.
inequality: A large gap between rich and poor, where some people have much more income or wealth than others.

Example

The lecturer's kidney example shows the difference. A command economy would give a kidney to the person closest to death, while a market economy would give it to whoever will pay the most. Most people see the market answer as unfair, which is the trade-off the course studies.

3 checked practice questions for this part are in the app.

Notes written by AI (Claude) from the lecture's official transcript, so check anything important against the lecture. MIT OpenCourseWare · CC BY-NC-SA 4.0 · not affiliated with or endorsed by MIT. These notes are shared under the same license.

LessonBound · Free lecture notes · Privacy · Terms · New York