Chapter 1: What is economics?

Economic problem

Scarcity

Marginal analysis

1 more unit!

2 types of resources

1. Renewable

2. Non renewable

Poverty vs Scarcity

Poverty is our inability to meet NEEDS, scarcity is the inability to meet all WANTS/desires

Economics

The study of:

• Scarcity

• Choices

• Incentives

Microeconomics focuses on individual things (4)…

• Individuals

• Businesses

• Governments

• Societies

If there’s a forest, and we’re studying the squirrel, its…

Micro!

If we’re studying a whole forest instead of just the squirrel, its…

Macro!

Definitions of economics (5)

1. Classical/neoclassical

2. Neoclassical synthesis

3. Monetarists

4. Keynesian

5. RBC theorists

3 macro issues

1. Disposable income

2. Stabilization

3. National saving

Disposable income

= gross income - taxes + transfers

Stabilization

Reduce economic shock (fiscal and monetary policy)

National saving

= income - consumption

2 big questions (scope) of economics

1. How do choices determine WHAT, HOW and FOR WHOM goods/services are produced?

2. When do choices made in the SELF interest also promote SOCIAL interest?

3 economic SECTORS

1. Agriculture

2. Manufacturing 

3. Services

Goods are…

Tangible

Services are…

Intangible

4 factors of production

1. Land (T)

2. Labor (L)

3. Capital (K)

4. Entrepreneurship (H)

Land gets…

Rent

Labor gets…

Wages

Capital gets…

Interest

Entrepreneurship gets…

Profit

Social interest concerns what?

Efficiency and Equity

The economic way of thinking (6)

1. A choice is a tradeoff

2. People make rational choices by comparing cost/benefit

3. Benefit is what you GAIN from something

4. Cost is what you GIVE UP to get something

5. Most choices are marginal

6. Choices respond to incentives!

“Rational”

benefit > cost

Opportunity cost

Highest value forgone alternative

Incremental changes

• Marginal benefit

• Marginal cost

4 kinds of tradeoffs

1. What (making choices)

2. How (how to produce)

3. For whom (buying power)

4. “Big” tradeoff (government intervention to redistribute income)

An incentive exists when

MB > MC

Paramount

A rule that protects private property and facilitates voluntary exchange in markets

Positive statement

“What is” —> Can be tested

Normative statement

“What ought to be” —> Cannot be tested

Economic models test what?

Cause and effect

2 kinds of variables in an economic model

1. Exogenous

2. Endogenous

Exogenous variable

Facts 

Endogenous variable

What we’re solving for

Forms of an economic model

1. Structural (as is)

2. Reduced (solution of the model)

Solution of a model =

Exogenous variables + parameters —> Economic model —> Endogenous variables!

Ways to classify a model (4)

1. Static or dynamic

2. Partial equilibrium or full

3. Representative agent or overlapping generation

4. Full employment or asymmetric information

Economic data is split into 3 types

1. Time series

2. Cross section

3. Panel

Time series data

Relationship between x and y

Cross section data

Value of a variable for different groups (ex. countries)

Panel data

time series + cross section

Concave vs convex

Skinny vs round

Equation of a line

y = mx + b, where m is the slope and b is the y-intercept (when x = 0)

Slope of a line =

rise/run

Δy/Δx

Slope of a curve =

Slope of a tangent line at a point on the curve