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9/3/2009
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Economics deals with the allocation and distribution of scarce (finite)
resources. Finite resources refers not simply t=
o goods, but time.
<=
/div>
Macro v Micro
•Micro -Individual/consumers and
how they choose what to co=
nsume
and how much of it and Businesses
and how they as firms and industry decide
what to produce and how much
•Macro- Economy a=
s a
whole, How much is produce=
d,
what is produced, what is the price level
of goods, how much money can flow into the economy without producing inflation/deflation, what level of employment is <=
/span>optimal to insure full production without <=
/span>=
producing inflation/deflation.
=
Economic Analysis
•Models/paradigms/Assumptions- economic <=
span
style=3D'position:absolute;top:31.0%;left:9.73%;width:98.12%;height:7.5%'>=
analysis
requires economists to try to resolve questions about real world
behavior by simplifying the world so that cause and effect <=
/span>can
be measured consistent with the scientific method.
<=
span
style=3D'visibility:hidden'>•
•To do that, economists make certain =
presumptions
about human behavior (more is better than less) individual
interest guides us. <=
span
style=3D'position:absolute;top:45.25%;left:9.73%;width:84.45%;height:7.5%'=
>In
order to isolate a dependent and independent variable (soci=
al
science) it’s necessary to hold the rest of the
variables static (unchanged).
•Assumptions typically made in economics =
=
include,
rational behavior and perfect information. When we look at the effect of a <=
/span>price
change on the quantity demanded by consumers, we hold static,=
a
host of variables such as taste, income, =
substitutes/complements
etc..
Yes…but…
R=
26;What
is the value of economic analysis if so many variables that canR=
17;t
be held constant, are?
&#=
8226;Are
the basic assumptions accurate
&=
#8211;Perfect
information?
&=
#8211;Rational
Behavior
&#=
8226;Alan
Greenspan thought so----but----
<=
/div>
Value of Models
•Models allow economists to predict =
outcomes. However the assumptions limit =
the
applicability of those predictions.
<=
span
class=3DBB style=3D'position:absolute;left:-4.43%'>•But you m=
ust
acknowledge the limits!
<=
span
style=3D'visibility:hidden'>•
Marginal v. Absolute
•The temperature today is 82 degrees and its =
hot
outside
•The
temperature today is 65 degrees and its comfortable
•The tempe=
rature
today is 98 degrees and its comfortable
<=
span
class=3DBB style=3D'position:absolute;left:-4.43%'>•How can t=
hey all
be true? Assume
<=
span
style=3D'visibility:hidden'>•
•Economists are prima=
rily
concerned with how a change in one variable will lead to =
subsequent
events (cause and effect). To ascertain whether cause and
effect occurred it’s necessary to measure the change. Economists are not
interested in absolutes
Causation v. Correlation
•What’s the
difference??
–Roll a die- like=
lihood
of a six?
–After 5 rolls?&#=
13;
•
•Causation v. Correlation
• Causation- a -> b
• Litmis paper is turned red =
by an
acid
• Correlation; (b) generally f=
ollows
(a)
• When an original NFL team w=
ins
the Super Bowl the stock =
market
goes up
• Every country that has inva=
ded
Afghanistan has lost
•Correlation may =
also
mean Causation
–
•Repeated tests of the
experiment may help to differentiate btw correlation and
causation
<=
span
class=3DBB style=3D'position:absolute;left:-4.13%'>•The degre=
e of
causation is often relevant-
•Economists=
are
less interested in absolute than change
•Are inter=
ested in
incremental change---Marginal analysis– How much
more…How much less
• How
many people play piano or knit scarves is not particularly relevant without more info. Whether more people are playing piano or knitting scarves and what is the cause of that may=
be relevant.
If the change is substantial it may be more relevant or show a stronger correlation
=
•Marginal Analysis- how strongly is one variable =
associated with another. The stronger the =
correlation (1:1) the more predictive.
=
<=
span
style=3D'font-size:94%;visibility:hidden'>•
Opportunity Cost
•Because of finite
resources/time/goods etc…
•People must constantly make decisions choosing one idea/thing/action over another. We call the cost of a decision Opportunity Cost. To the =
degree we can measure that cost it makes it more applicable for analysis. To simplify we give some things numbers (quantitative analysis)- ie whether something is leisure or not the authors created a scale 1 to 10, Money is one way to measure a trade off.
Measuring
•ordinal v. cardinal-
Ordinal- placing things in order rank…Cardinal giving them=
a =
quantitative
measure
•Marginal
change- how do you measure- change
•Graphically slope-
relationship indep v. dependent variable
<=
span
style=3D'visibility:hidden'>•
Utility
R=
26;The
degree of satisfaction/use a product or a course of action gives
you.
&#=
8226;Difficult
to quantify
R=
11;Yet
economists do….Why because it’s the only way
to test an idea
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