In the third lecture, after a review of the second lecture, I talk about (bilateral) trade and more general exchange, efficiency, and fairness. I do this in the context of a kids’ birthday party and follow to some extent chapter 3 of Ariel Rubinstein’s “Economic Fables”. I don’t know how this is done in other areas in the world, but in Graz there seem to be certain specific norms that one should follow when you host a kid’s birthday party. You invite roughly as many children as your child’s age in years. Children bring presents, but each child also goes home from the party with some little bag of goodies. As concerned parents we do not want to give the children too many sweets so we give them little presents such as little Lego or Playmobil figures or a car or something like this. We did this twice this year (we have two kids) and in both cases the first thing that happens after the kids finally find the treasure (there is often a sort of treasure hunt) is this: the kids start to trade. So, I ask the students what is going on when kids are trading their presents.
The final bit of the second lecture is an introduction to financial engineering. Assuming the absence of arbitrage is all one needs to price financial derivatives. A financial derivative, perhaps a bit narrowly defined, is a financial product – that is a risky investment possibility – with payoffs that depend exclusively on other “basic” financial products such as bonds and stocks. Students may want to google what bonds and stocks are if they do not yet know. For our purposes all we need to know is that a stock of a company has a value or price that substantially varies over time. The future price of a stock is uncertain today and this uncertainty can be quite large.
In this part of the second lecture I turn to another area in which the absence of arbitrage – due to people preferring more money over less – implies severe restrictions: sports betting. I begin by giving the students potentially fictional betting odds on three football (soccer) games, given in the following table.
I begin the second lecture by reminding the students about the key insights of the first class: that people pursue goals, that this leads to systematic patterns of behavior, and that these patterns are somewhat understandable, perhaps even somewhat predictable to an analyst. The particular goal we talked about in the first class was that people try to avoid wasting time. In the end I talked about queuing behavior that can be understood as a consequence of this goal: for example, we expect roughly equally long queues at supermarket checkout points and roughly equally fast queues in traffic jams.
In the second lecture I then take up another goal most people share: people, “ceteris paribus”, tend to prefer more money over less. The expression “ceteris paribus” means “all else equal”. I might be reluctant to accept extra money if this means someone is allowed to hit me on the head. But I generally will be happy to receive extra money if this does not come with any extra obligations.
In this second half of my first lecture, I start with making the students do some work and then asking them a few questions. The purpose of all this is to demonstrate to the students that human behavior is not entirely unpredictable and that in some cases there are some very simple principles that can explain a fair amount of behavior. Continue reading
In the first class, after discussing the usual preliminary admin issues, I give students a few definitions of what economics is, such as “Economics is what economists do” and the usual “Economics is about the allocation of scarce resources that have alternative uses” and “Economics is concerned with human behavior in the ordinary business of life and the societal implications of such behavior”. I find all of these useful but still somewhat unsatisfying. Continue reading
This semester I am teaching the Introduction to Economics in twelve ninety-minute lectures. This course is open to all students at the University Graz and (taking an exam in this course is) mandatory for all students of economics, business administration, and sociology. More than 700 students are registered for this course, roughly 200 of them show up in class. The lectures are video recorded and these videos are, or will be, publicly available. Continue reading