Transcript Economics

Uncle Sam wants you to
do better in economics.
ECONOMICS
- “science of scarcity”
-the study of the choices people make in an effort to satisfy
their unlimited needs and wants from limited resources.
Physicists explore the physical world.
Economics as a social science looks
at the behavior of people in the marketplace.
Economics is not
an “exact science”
but it gives “likely
results”.
The economist’s lab is the real
world. They don’t conduct controlled
laboratory experiments. They
are predicting human behavior.
Economics is the academic discipline most discussed by the general public.
It is also one of the least understood. [“Language of graphs”]
Food, clothing, shelter,
Chrysler 300, mansion, Nintendo DS,
jewelry, iPod, projector, digital camera,
good health, children, camcorder, laptop
warmth, indoor plumbing, rollerblades,
a sense of personal worth, Plasma TV,
literacy, high economics grade, cell
phone, compact discs, Wii
Unlimited Human Wants
“Need” those first
three to survive.
Land, Labor, Capital, Entrepreneur
Rent, Wages, Interest, Profits
Limited Resources
What, how, &
for whom.
Basic Economic Choices
What to produce
How to produce
Who receives
Answers Determine The
Type of Economic System
Market
Traditional
Command
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.
What great
3. What are economic laws.
What a beautiful forest!
branches!
4. Differentiate between micro
& macroeconomics.
Body Weight
Ceteris paribus & why it is used[isolating 2 variables]
Positive(descriptive) & normative(prescribing) econ.
Eight econ goals (conflict with-FE & PL; complementary-econ growth & FE)
“Pitfalls to Clear Economic Thinking” such as the
“fallacy of composition” & “post hoc fallacy”
9. Explain a direct relationship (positive sloping curve)
Body weight
5.
6.
7.
8.
Calories Consumed
Ave. miles jogged
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.
INDUCTION and DEDUCTION
[Methodology used to gain economic knowledge
and – stamp out economic ignorance]
1. Induction – from “facts to generalizations”, or “theory”.
Generalizations are created from a careful evaluation of facts. They
go 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,
mam.
Induction and Deduction Forms of Methodology
.
2. Deduction - from “theory to facts.” This is the hypothetical
method. [hypothesis is an “educated guess” or theory of how
key variables relate].
It goes from the “general to the
particular.” Economists don’t usually hypothesize without having
prior 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.
Econ
Theory
Deduction–story
on how something works.
[“The story has to match the facts”]
[The economy is the patient suffering from “inflation” or “unemployment.”]
ACL has torn
Diagnosis
Repair the ACL
Prognosis
Fact & theory [objective-can be tested]
Positive Economics
Rehab on crutches
Treatment
Policy is judgment [subjective-opinion]
Normative Economics
1st of 3 Approaches in Methodology
[Examining Econ Topics]
1. Facts – “economic description” or
“gathering the facts” relevant to the problem.
This concerns “what is” or “what’s happening”
Example: We might take a problem on the
housing slump and gather facts on the relation
between housing and interest rates.
“Only the facts.”
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 are
related. 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”.
P & QD
“Real World”
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.
[“Don’t tax people’s savings and they will save more.” (how much more)]
NO
Economic Models (theories) may be expressed 4 ways.
1. Verbal statements 2. Pictorially 3. Graphically 4. Mathematical equations
Example: If interest rates were lowered,
more houses would be sold.
Law of
Demand
Policy [3rd Approach in Methodology]
3. Policy – this is concerned with controlling or
influencing economic behavior. This way we
can predict and control future events. Policy
means taking a course of action intended to
influence or control the behavior of the economy.
Example: Make policy by lowering interest rates
and giving tax deductions to help the housing
industry.
1. Economic Growth [Increase in Real GDP or per capita GDP]
3% annual growth will increase our standard of living.
1929-Per capita=$792; 1933-Per capita=$430; 2007-per capita= $45,600
2. Full Employment – about 95-96% employment is full
employment. In 1982, unemployment was 10.8% [12 M unempl.]
3. Economic Efficiency – “obtaining the maximum output
from available resources” or “maximum benefits at minimum
cost from our limited resources.”
“Doing the best with what we have.”
.
4. Price Level Stability – sizable inflation or deflation
should be avoided. We had over 10% in 73, 79, & 80. Inflation
was 2% in the 1950s, 2.3% in 1960s and 7.4% in 80s.
A person making $25,000 a year at age 30 would need (with
average inflation of 5%) $125,000 a year at age 65 to have
the same standard of living.
1972 --------82;
1982-------2008
It took $2.39 in 1982 to buy what $1 bought in 1972.
In 2008, it took $2.25 to buy what $1 bought in 1982.
In 1945, $1.50 bought what $1.00 did in 1860.
Today, it takes $11 to buy what $1 bought in 1945.
5. An Equitable Distribution of Income. One group shouldn’t
have extreme luxury while another is in stark poverty.
The richest 1%(3 mil.) have as much total income
after taxes [average $400,000 a year as the bottom
40% [100 million people]. The richest 1% have
greater wealth than the bottom 90% of the population.
6. Economic Freedom – guarantee that businesses , workers,
.
and consumers have a high degree of economic freedom.
7. Economic Security – provision should be made for those
not able to take care of themselves – handicapped, disabled,
old age, chronically ill, orphans. Protection from lay-offs
[unemployment insurance]. Also no discrimination.
43 million Americans have some type of disability.
A. Hearing impaired: 22 million (including 2 million deaf)
B. Totally blind: 120,000 (Legally blind: 60,000)
C. Epileptic: 2 million
D. Paralyzed: 1.2 million
E. Developmentally disabled; 9.2 million
F. Speech impaired: 2.1 million
G. Mentally retarded: up to 2.5 million
H. HIV infected: 900,000
8. Balance of Trade. Over $400 billion a year the last few years.
Some of these goals are complementary [economic growth & F.E.]
and some conflict [F.E. and price level stability].
Positive Economics
Straight
facts
1. Can be tested
2. Scientific
3. In the economy
Normative Economics
“In my opinion …”
1. Cannot be tested
2. Value judgment
3. Ought to be in the economy
Positive [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 doesn’t give opinions or value
judgments. It is concerned with what is, was, or will be. [objective
- not influenced by emotions] [Statements that are “verifiable”]
Positive Economics
Descriptive
analysis
1. In the economy
2. Scientific
3. Can be tested
Normative Economics
Prescriptive
analysis
1. Ought to be in the economy
2. Value judgment
3. cannot be tested
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. These
opinions 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 economists
involve normative economics. Ideally, value
judgments are involved at the policy level only.
Positive or Normative?
1. 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.
After turning me down 3
times, Susie RahRah
should be friendlier to
me this time.
Answers: 1. N 2. P 3. N
4. P
5. N
6. N
7. N
NOT
“Beautiful, beautiful
forest!.
MACROECONOMICS...
“Beautiful
leaf!”
MICROECONOMICS...
.
1. Macro [national] economics – concerned with the economy
as a whole or with aggregates – like government, Great Forest!
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 “bird’s-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 “worm’s-eye Beautiful bark!
view” of a specific component of our economy.
Macro[large](telescope) “whole economy” [economy-wide issues]
Micro[small](microscope] “segment of the economy” [issues in the economy]
.
“Check out those
pieces of bark!.
“Beautiful,
beautiful forest!”
Production
Microeconomics
Macroeconomics
How much steel
How much office space
How many cars
Total industrial output
Gross Domestic Product
Total decline during recession
Prices
Price of individual goods
Price of medical care
Apartment rents
Aggregate price level
Consumer Price Index
Rate of inflation
Employment
Jobs in the steel industry
# of employees in a firm
# of doctors/accountants
Total number of jobs
Economy’s unemployment
# of discouraged workers
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. Definitions–certain 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.
[combining parts into a whole]
What is true for the individual/part is necessarily
true for the group/whole. This is an error of
“generalizing from the particular to the general.”
stand up so
A. The safest way for an individual “I’ll
I can see better.”
to leave a burning theater
is to run for the nearest exit.
B. Tariffs are good for specific
industries but not individuals.
C. Too much money is good for
you but not for everyone.
D. You stand up to see better.
Fallacy of Composition Example: When the price of oil goes
up, Texas & 8 other states benefit, but it hurts the 42 others.
Helped
Hurt
.
5. Post Hoc Fallacy–happenstance or coincidence
is not causality.
Post hoc [it happened after this], ergo [therefore]
propter hoc [because of this]. This fallacy is saying
because event “A” precedes event “B”, “A” is
necessarily the cause of “B”. It is a fallacy that
“association or happenstance is causation.”
Ex: Last night I turned the TV on and the Yankees
were winning 6-3. They ended up losing the game
to the Boston Red Sox. I “jinxed” them and also –
they now have the “curse of Alex Rodriquez”.
6. Correlation v. Causation – because two events
occur together [correlation], one event has caused the other.
Ex 1: Super Bowl Indicator: The argument says that
if the NFC rep or an original NFL team win the Super Bowl,
the stock market goes up. It has
been right over 80% of the time.
Ex 2: Hemline Indicator: The higher the skirts, the higher the
market [ Wall Street would welcome the return of “hot pants”]
In the roaring 20s, short Flapper dresses were the rage.
The longer styles of the 1930s heralded a bear market of
90%. Rising stocks in the 60s coincided with the rise of the
micro-mini, only to give way in the 70s to more conservative
dress lengths and a bear market. Even Charlie’s Angels
wore their skirts long. During the booming 80s, women’s
business suits had broad shoulders & tiny skirts. During
the 90s bull market, skirts got short again, this time with slits.
Wall Street
will love this.
Hello
Wall
Street
Subjectivity - personal perception.
We must look at economic issues
objectively - not subjectively.
Construction of Econ Graphs
Table of Values
INCOME
(per week)
CONSUMPTION
(per week)
$ 0 $ 50
100 100
200 150
300 200
400 250
Construction of Econ Graphs
Table of Values
INCOME
(per week)
CONSUMPTION
(per week)
$ 0 $ 50
100 100
200 150
300 200
400 250
CONSUMPTION (C)
$400
300
200
100
Vertical Axis
Construction of Econ Graphs
Table of Values
INCOME
(per week)
CONSUMPTION
(per week)
Vertical Axis
$ 0 $ 50
100 100
200 150
300 200
400 250
CONSUMPTION (C)
$400
300
200
Horizontal Axis
100
0
100
200
300
INCOME (Y)
400
A Direct Relationship...
Exists Between Consumption & Income
INCOME
(per week)
CONSUMPTION
(per week)
$ 0 $ 50 a
100 100 b
200 150 c
300 200 d
400 250 e
CONSUMPTION (C)
$400
300
C
250
e
200
d
150
c
100
b
a
0
100
200
300
INCOME (Y)
400
Direct(positive) Relationship
Independent variable–“induces”(cause); Dependent variable– “responds”(effect)
Direct – 2 variables move in same direction.
“Econ,
Econ”
Econ
Inverse (Negative) Relationship
Inverse - 2 variables move in opposite directions
$50
40
30
20
10
0
ATTENDANCE
(thousands)
0
4
8
12
16
20
$50
a
b
c
d
e
f
TICKET PRICE (P)
TICKET
PRICE
40
30
20
10
a
In Economics the
b
independent variable
can be on either axis.
c
d
e
f
0
4
8
12
16
20
ATTENDANCE IN THOUSANDS (Q)
INFINITE and ZERO Slopes
Y
Consumption
Price of Bananas
Y
Slope
=
Infinite
Slope = Zero
X
Purchases of Watches
Increasing “Y” has no effect on “X”.
X
Divorce Rate
Increasing “X” has no effect on “Y”.