Slide 1
Uncle Sam wants you todo better in economics.
Limits, Alternatives, and ChoicesUniversities awarded 16,141
economics degrees last year at 272 colleges & universities
which is up 40% in five years. There has been a clear explosion of
economics as a major, particularly at the top colleges.
Econ, Econ,I want to majorin Econ.The Hot Major For Undergrads
is Economics
WSJ 2005
EconomicsAt New York University, the economics major has doubled
in 10 years. At 800, it is now the most popular major. Economics is
also the number one major at Harvard (964 students), Columbia (up
67% in 5 years), Stanford, Penn, Princeton, Chicago (24% of
graduating class), & 2nd at Brown, Yale, and University of
California at Berkeley.The increase in the numbers is the result of
many students seeing economics as the best vehicle promising good
pay and security.Students realize that understanding economics has
become a fundamental necessity of life. Economics rising popularity
is even global. Econ majors in Poland have doubled in 6 years. In
Russia, econ majors have jumped from 18% of students to 31%. Also,
the chairman of the economics department at London School of
Economics says economics popularity is at an all time high.
Important Factors In College AdmissionHeres a look at the weight
placed on four major college admissionfactors. Only class rank has
shown a steady decline. They would rather see a C in AP Econ than
an A inregular econ. They then know you can do college work.About
one half of all entering college freshmen never graduate.
Objectives:1. Be able to define economics. Economics-the study
of the choices people make in an effort to satisfy their unlimited
wants from limited resources.2. Differentiate between descriptive,
theoretical, & policy economics.3. What are economic laws.4.
Differentiate between micro & macroeconomics.
5. Ceteris paribus & why it is used[isolating 2 variables]6.
Positive(descriptive) & normative(prescribing) econ.7. Eight
econ goals (conflict with-FE & PL; complementary-econ growth
& FE)8. Pitfalls to Clear Economic Thinking such as the fallacy
of composition & post hoc fallacy9. Explain a direct
relationship (positive sloping curve)
.
10. Explain and illustrate an inverse relationship between two
variables and identify a negative sloping curve. 11. Identify
independent (cause-induces) & dependent (effect-responds)
variables.
Body weightAve. miles joggedBody WeightCalories Consumed
Nature & Method of EconomicsWhat great branches!What a
beautiful forest!
Economics is the academic discipline most discussed by the
general public. It is also one of the least understood. [Language
of graphs]The economists lab is the real world. They dont conduct
controlled laboratory experiments. They are predicting human
behavior.
Physicists explore the physical world. Economics as a social
science looks at the behavior of people in the marketplace.
Economics is notan exact sciencebut it gives likely results.
ECONOMICS - science of scarcity
-the study of the choices people make in an effort to satisfy
their unlimited needs and wants from limited resources.
The science of scarcityKey Assumptions in EconomicsPeople are
rationally self-interested They seek to maximize their utility
(happy points)People generally make decisions at the marginThey
weigh the marginal benefit against the marginal cost of a
decisionCeteris ParibusEconomists hold factors constant, except for
whats being considered
INDUCTION and DEDUCTION [Methodology used to gain economic
knowledgeand stamp out economic ignorance]Induction from facts to
generalizations, or theory.Generalizations are created from a
careful evaluation of facts. Theygo from the particular facts to
the generalization. From facts, economists note cause and effect
relationships among facts. From this, they derive theory. From
theory, they develop economic policy relevant to the real world.
Any economic theory not based on facts is not sound economics.
Just the facts,man.
.
Deductionstory on how something works. [The story has to match
the facts]
EconTheoryInduction and Deduction Forms of Methodology2.
Deduction - from theory to facts. This is the hypothetical method.
[hypothesis is an educated guess or theory of howkey variables
relate]. It goes from the general to the particular. Economists
dont usually hypothesize without havingprior experience of the
facts. [hypothesis is an educated guess, but untested; if it passes
the test, it becomes economic theory]
In other words, if you start with an untested hypothesis, you
would want to test the hypothesis in the real world by gathering
and examining all relevant facts. If it proves a realistic
explanation [passes the test] of some economic relationship, we can
proceed to the setting of policy based on it.
1. Facts (statistics)Descriptive or empirical economics
concerned with gathering the facts relative to a problem and
testing hypotheses against the facts.Economic theories (models) are
simplificationsof economic reality that enable us to
makepredictions about cause & effect in real world. Theories
(Positive)Related statements about cause and effect.Involves
generalizing about economic behaviorbehavior in an abstract
economy. TheoriesStripped downversions of economic reality
Economists Ones a Keynesian - the other isnt. Although economists
generally do not come to blows, they often do not agree on economic
policies.All professionals [doctors, lawyers] often disagree.The
economist gathers facts, forms an economic theory, and applies
thistheory to policy in trying to solve an economic problem.
Economists share a common methodology. Like Sherlock Holmes,they
approach problems scientifically. Holmes would tie the facts
togetherto form a coherent theory. Then he would test the
theory.
Methodology of Economic Analysis [Scientific Method]
3. Policies [normative]Policy economics is concerned with
controlling or influencing economic behavior or its
consequences.INDUCTIVONDEDUCTION
Abstract models will help explain how a complex,real world
operates.Theoretical Economics.TheoriesFactsPolicy Economics
ECONOMIC METHODOLOGY
Methodology [Theory] [2nd Approach in Examining
Economics]Abstraction focusing on 2 variables to explain an event.
A theory is not theory without abstraction (it would be the real
world). Theory attempts to explain how real world phenomena
arerelated. Models abstract from reality to reduce complexity.2.
Theories abstract generalizations about cause and effect in the
real world. [Simplified big picture of the real world concerning 2
variables] Theories [laws, models, generalizations, principles] are
statements about what causes what.Ceteris paribus [Latin for all
else held constant] is the most important assumption in economics.
Means everything else being equal. Models allow you to reason about
the relationship between X and Y without the intrusion of Z. The
disagreements occur over the quantitative magnitudes.[Dont tax
peoples savings and they will save more. (how much more)] Economic
Models (theories) may be expressed 4 ways.1. Verbal statements 2.
Pictorially 3. Graphically 4. Mathematical equationsExample: If
interest rates were lowered, more houses would be sold.
Real World
NO
Law of Demand
P & QD
[The economy is the patient suffering from inflation or
unemployment.]
Diagnosis Prognosis Treatment
Fact & theory [objective-can be tested] Policy is judgment
[subjective-opinion] Positive Economics Normative Economics
ACL has tornRepair the ACLRehab on crutches.
You will become Doctors of the Economy.Positive
EconomicsNormative Economics
1. Can be tested1. Cannot be tested2. Scientific2. Value
judgment3. In the economy3. Ought to be in the economyPositive
[Scientific] v. Normative [Prescriptive (personal)][describing just
the facts] v. [the economist being a policymaker]1. The economy
grew at 3.6%.1. The economy ought to grow more.2. Unemployment is
4.8%. 2. Unemployment is too high.Positive economics [observable,
factual, & testable economic events trade deficit, budget
deficit, etc.] deals with straight facts on economic behavior and
doesnt give opinions or value judgments. It is concerned with what
is, was, or will be. [objective- not influenced by emotions]
[Statements that are verifiable]
Straight factsIn my opinion
Normative Economics expresses opinions or value judgments. It is
concerned with what ought to be and uses words like should,needs,
and too. Unemployment ought to be reduced. Theseopinions cannot be
proved or disproved. We should protect the auto industry from
foreign competition, Normative involves judgments and prescriptions
for preferred courses of action. [Subjective influenced by
emotions]Most of the disagreements among economistsinvolve
normative economics. Ideally, value judgments are involved at the
policy level only.
Positive Economics Normative Economics
1. In the economy 1. Ought to be in the economy2. Scientific2.
Value judgment3. Can be tested3. cannot be tested
Descriptive analysisPrescriptive analysis
Positive or Normative?
Answers: 1. N 2. P 3. N 4. P 5. N 6. N 7. N1. It is too cold to
play football today.2. Gross Domestic Product grew 4% last year.3.
The temperature is too cold today.4. The temperature is 92 degrees
today.5. The humidity is too hot.6. People who are unemployed are
just too lazy to work.7. Suzie RahRah should be friendlier to me
this time.NOTAfter turning me down 3 times, Susie RahRah should be
friendlier to me this time.
Beautiful, beautiful forest!.
Beautiful leaf!MACROECONOMICS...
MICROECONOMICS...
1. Macro [national] economics concerned with the economy as a
whole or with aggregates like government, business sectors, or
households. Macroeconomics is concerned with an overview of the
economy. Macro examines the forest, not the trees, leaves, or
specific pieces of bark. It gives us a birds-eye view of the
economy. .
2. Micro [details of the big picture] concerned with specific
economic units or individual markets under a microscope. Emphasis
is on individual households, industries, or firms [like the # of
workers employed by Ford] [Concerns the components of the economy]
Micro examines the trees, leaves, & pieces of bark, rather than
the forest. It gives a worms-eye view of a specific component of
our economy.
Great Forest!Beautiful bark!
Macro[large](telescope) whole economy [economy-wide
issues]Micro[small](microscope] segment of the economy [issues in
the economy].
ProductionMicroeconomicsMacroeconomicsHow much steelTotal
industrial outputHow much office spaceGross Domestic ProductHow
many carsTotal decline during recession PricesPrice of individual
goodsAggregate price levelPrice of medical careConsumer Price
IndexApartment rentsRate of inflation EmploymentJobs in the steel
industryTotal number of jobs# of employees in a firmEconomys
unemployment# of doctors/accountants# of discouraged workers
Check out those pieces of bark!.
Beautiful, beautiful forest!
Is the following Micro or Macro?
1. The price of digital cameras increased 5% last year. 2.
Unemployment was 5.4% for the U.S. workforce.3. Unemployment in the
auto industry was 8% last year.4. Duck National Bank lowered its
interest rates on CDs to 8%.5. The Consumer Price Index rose to
2.7% last year.6. The computer industry laid off 8% of its workers
last year.7. The price of gasoline rose 25% last year. What forest,
check these branches, limbs, and leaves.
Pitfalls To Sound Reasoning [Chuckholes]1. Bias preconceived
beliefs not warranted by facts. We tend to accept everything that
reinforces our prejudices. We will not learn economics if we reject
things before we understand them. Try to understand things first
before you reject them. This interferes with objective analysis.2.
Loaded terminology use of emotional terms leading to a nonobjective
analysis. [corporate profits - obscene; government regulations -
socialists; low wages - exploitive; flood control - creeping
socialism]. We must have objectivity.3. Definitionscertain economic
terms have different meanings than normal. A. Utility means
satisfaction. B. Investment means purchase of machinery, tools and
factories. C. Price ceilings are below equilibrium. D. Price floors
are above equilibrium.
Subjectivity - personal perception.
From the beginning, we must look at economics objectively-not
subjectively]
Is this a leftward-looking bird? rightward-looking antelope? Or
a rabbit?
Do You Change Your Mind?
Do You Change Your Mind Again?
Do you see an old lady or young girl ?
Hint: The old womans nose is the young girls chin.
Focus on the Dot in the center & move your head backward and
forwards.
Is this a Frog or a Horse?
Friends dont let friends drink & take home ugly women.
INCOME(per week)$ 0100200300400$ 50100150200250CONSUMPTION(per
week)Table of ValuesConstruction of Econ GraphsINCOME(per week)$
0100200300400$ 50100150200250CONSUMPTION(per week)Table of
ValuesConstruction of Econ GraphsIncome (Y)$400
300
200
100Vertical AxisINCOME(per week)$ 0100200300400$
50100150200250CONSUMPTION(per week)Table of ValuesConstruction of
Econ GraphsINCOME (y) 0 100 200 300 400CONSUMPTION (C)$400
300
200
100Vertical AxisHorizontal AxisINCOME(per week)$ 0100200300400$
50100150200250CONSUMPTION(per week)Exists Between Consumption &
Income INCOME (Y) 0 100 200 300 400CONSUMPTION (C)$400
300
200
100abcdeabcdeA Direct Relationship...C150250
Direct(positive) RelationshipIndependent variableinduces(cause);
Dependent variable responds(effect)
Direct 2 variables move in same direction.Econ, Econ
Econ
TICKETPRICE$50 403020100048121620ATTENDANCE(thousands)Inverse
(Negative) RelationshipInverse - 2 variables move in opposite
directionsTICKET PRICE (P) 0 4 8 12 16 20ATTENDANCE IN THOUSANDS
(Q)$50
40
30
20
10abcdeabcfefd
In Economics the independent variablecan be on either axis.
INFINITE and ZERO SLOPESPrice of BananasPurchases of
WatchesConsumptionDivorce RateSlope =InfiniteSlope =
ZeroConstruction of Econ GraphsIncreasing X has no effect on
Y.YXXYIncreasing Y has no effect on X.
1. Economics ________________________________________2. The
inductive method moves from (facts to generalizations/
generalizations to facts). 3. Theories and generalizations (are/are
not) the same thing.4. The deductive method moves from (facts to
generalizations/generalizations to facts).5. Descriptive economics
is the process of gathering (generalizations/facts) about economic
behavior of individuals and institutions.6. Economic theories are
(specifics/generalizations) based upon observing all the facts.
They are called laws, principles, generalizations or models.7.
Economic laws that lead to policy are not true in every situation,
but they are (useful/not useful) because they allow us to predict
& therefore (control or adjust to events/not control or adjust
to events).8. Economic models (abstract/leave in) the complexities
of the real world.9. Ceteris paribusother things being ________,
that is all variables are constant except ___. 10. Ceteris paribus
model allows us to reason about the relation- ship between
variables __ & __ without the intrusion of variable __.NS
1-10constant2XYZThe study of the choices people make in an effort
to satisfy their unlimited needs and wants from scarce
resources.
hot to jog today./ The temperature is 88 degrees today.)15.
Ideally, value judgments are involved at the (level of policy only/
level of facts only).
11. A hypothesis is a tentative, (tested/untested) principle.
[If the hypothesis passes the test, it becomes economic theory.]12.
A positive statement is concerned with (what is/what ought to be).
They collect and present facts.13. A normative statement is based
upon (facts/value judgments). These statements are concerned with
what the economy should be like or which policies are best.14. An
example of a normative statement would be (It is too
16. Most of the disagreement among economists involves
(positive/normative) statements as regards economic (policy/facts).
17. Microeconomics is concerned with (specific economic units/the
entire economy). 18. Which of the following is associated with
macroeconomics? (an examination of the incomes of Richland Duck
graduates/ unemployment in the civilian labor force).19. Which of
the following is a microeconomic statement? (GDP decreased by 1%
last year/Auto prices declined this year).20. Full employment
conflicts with the economic goal of (economic growth/price
stability).21. Full employment is complementary with the goal of
(economic security/ price stability).NS 11-21
NS 22-23
20. Bias preconceptions that (are/are not) based on facts.21.
Loaded terminology (emotional/non-emotional) terms leading to a
nonobjective analysis.22. Definitions economic words have different
meanings. Examples: 1. Utility means (extra/satisfaction) 2.
Investment means (money/tools, machinery, & factories) 3. Price
floors are (above/below) price ceilings
23. Which graph shows the amount of Y inversely related to the
amount of X? ____24. In which graph above is the amount of Y
(constant at $10) unrelated to the increasing amount of X? ___25.In
which graph above is the amount of Y directly related to the amount
of X? ___ Zero slope and an Infinite slope
CBA
DirectInverse
ABCD
The End
