Lecture_1 - W3211 Lecture 1 Introduction and Mathematical...

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W3211 Lecture 1 Introduction and Mathematical Review Jonathan Vogel Columbia University Spring 2009 Jonathan Vogel (Columbia) W3211 Lecture 1 Spring 2009 1 / 21
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Introduction Two main themes in economics 1. Individual behavior Assumptions: 1 agents have choice variables agents face constraints agents have an objective function to maximize 2 Agents are rational (in this course) Examples: 1 2 until exam, to maximize her grade Jonathan Vogel (Columbia) W3211 Lecture 1 Spring 2009 2 / 21
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Introduction Two main themes in economics 2. Equilibrium In addition to assumptions on individual behavior, choices of di/erent agents are mutually consistent. Example: Each consumer chooses how many computers to purchase at and chooses their behavior to achieve their objective. In equilibrium, we require that total demand equals total supply. Loosely speaking: equilibrium corresponds to a stable or steady environment in which no agent would have prefered making a di/erent choice. etc. .. We will also study models of interaction and equilibria. Jonathan Vogel (Columbia) W3211 Lecture 1 Spring 2009 3 ± 21
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Introduction Why study economics? Example: Bank runs (intro) A major role of banks is to match those who want a (typically long-term) loan with those who want to save (and typically require quick access to their funds) Lesson of great depression: bank runs may occur even if a bank is solvent (it would survive if not for the bank run) Important questions: 1. Why? 2. How to stop bank runs on solvent banks? 1 (deposits) may give rise to self-ful±lling panics among depositors This may happen in good times or bad times Is likely to happen if lenders think that the probability that other lenders need to withdraw their assets is high 2 How to stop bank runs on solvent banks? Suspend withdrawals, Insure deposits Jonathan Vogel (Columbia) W3211 Lecture 1 Spring 2009 4 / 21
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Introduction Why study economics? Example: Bank runs (the role of banks) Returns from business investment occur in the future, so loans tend to have long maturity Borrow $ 1 today If the bank asks for the money back too soon, can only pay back $ V < 1 If the bank waits until the investment matures, it receives $ ( 1 + R ) , for R > 0 Savers have unpredictable needs for cash, so deposits are liquid (short maturity) Banks are intermediaries between savers who prefer liquid accounts and borrowers who prefer long-maturity loans Jonathan Vogel (Columbia) W3211 Lecture 1 Spring 2009 5 / 21
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Introduction Why study economics? Example: Bank runs (individual behavior and actions)
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Lecture_1 - W3211 Lecture 1 Introduction and Mathematical...

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