2016 9 19

Definition

Economics is the study of how limited

resources are allocated to satisfy unlimited
human wants
Fundamental economics problem scarcity
Scarcity

To choose is to lose
Scarcity necessitates making choices
A famous student from the London School
of Economics , Mick Jagger, sings You cant
always get what you want
Marking Choices

Wants vs. Needs (Car Food, Vacation)

Economic good: any item that is scare

Economics bad Any items which we would pay
to get rid of(Pollution, Garbage, Disease)
Microeconomics versus Macroeconomics

1.Microeconomics
Individual units that comprise the
economy

Examples
Individual shopping for groceries
Firm choosing to open another factory.
Effect of government intervention on a
single market.
2.Macroeconomics
The study of the broader economy
Examples
Inflation
Economic growth
Unemployment
Interest rates
Rational Self Interest

Individuals select choices that make them

happiest given the information available at the
time

Is self interest the same as selfishness?

Charity: consistent with the pursuit if ones
self interest
The Invisible Hand

1.Adam Smith (The Wealth of Nations,

1776)
2.Individuals pursuing their own self
interest can benefit society as a whole.

Economic Models

1.Economists use models to understand

the complex real-world economy.
2.Models
----Simplified versions of reality
----Built with some assumptions
----Are considered good if they predict
accurately:
--Explain what is of interest
--Predicts well
Economic Models

Ceteris paribus
--Latin; other things being equal
--Assumption in which we examine a
change in one variable, but hold all other
variables constant
--Allows us to isolate the effect of a single
variable
Economic Analysis

Endogenous factors
--Variables controlled for inside a model
--Independent variables we freely change in
the model equations to study their effect on
the dependent variable

Exogenous factors
--Variables that are not accounted for in a
model
--Outside our control
Danger of Faulty Assumptions
It is necessary to often examine and reevaluate the assumptions in models.
Example;
-Assumption that housing prices always rise
-Pre-2008 computer models used by banks
didnt have a variable for declining housing
prices
Models and ceteris paribus

what determines a persons wage rate

Education
Positive Effect
w=F Age
Positive or Negative
Effect?
Experience Positive Effect
Skills Positive Effect
Pleasant Conditions Negative Effect
Female A Negative Effect here may be
indicative of discrimination
Wage depends on the endogenous
variables

-How will a change in the variables affect

wage?
-What might some exogenous variables be?
Ceteris paribus analysis
-Change just ONE of the variables and examine
how wage is affected. Assume other variables
do not change.
Economic Analysis

Preconceptions
-People often seen what they expect to see and
ignore information that contradicts their
preconceptions
-Facts are often influenced by biases
challenge your preconceptions .