Economic Tools

Economics: The social science that studies choices that individuals, businesses, and governments make as they cope with scarcity

Scarcity: The inability to get everything we wany, Unlimited wants and limited recourses

Incentive: A reward or a penalty that encourages action

Ex: Prices

Economy: The social mechanism that coordinates choices and allocates scarce recourses to their alternative uses

Market Economy: Uses markets and prices to coordinate choices and allocate resources

Centrally Planned economy: Government regulators allocate most of the resources

Questions:

• Why do prices exist?

Because of Scarcity

• Why can't we avoid making choices?

We don't have enough time to do all the things we want to do, which forces us to prioritize our options and make decisions based on our available resources.

Economics is both a social science and a toolkit for advising on policy decisions

• Economists try to understand and predict economic effects by using the scientific method

Economic model: A description of some economic phenomenon that includes only features assumed necessary to answer a question about some observed facts. They are mathematical and graph based

Natural experiment: An event that arises in the ordinary course of economic life when two situations differ by the one thing that we want to test

Correlation: A tendency for the values of two variables to move together

Laboratory experiment: Puts people in a decision-making situation and varies the influence of one factor at a time to discover how they respond to changed incentives

Economists use natural experiments, statistical investigations, and laboratory experiments to test the predictions of their models

Normative disagreements: Disagreements that can't be settled by facts. They arise from opinions and beliefs

Ex: We should burn less coal

Positive disagreements: Disagreements that can be settled by facts

Ex: Burning less coal slows the rise in the temperature of the planet

Economists try to avoid normative disagreements

Scatter diagram: A graph of the values of one variables against the values of another variable

Time-series graph: Measures time on x-axis

Cross-section graph: Shows the values of an economic variable for different categories or groups in a population

Trend: The tendency for the value of a variable to rise or fall

Marginal analysis: Choices made on the margin=some adjustment is made to the existing situation

Ex: Should I study for 15 more minutes?