Transcript Economics

Uncle Sam wants you to
do better in economics.
WSJ 2006
“Econ, Econ,
I want to major
in Econ.”
 Universities 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
economics as a major, particularly at the top colleges.
 At 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 & 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.
[up 40%]
 In Russia, econ majors have jumped from 18% of students to
31%. The chairman of the economics department at London
School of Economics says economics popularity is at an all
time high.
1. Computer Engineering
2. Economics
3. Electrical Engineering
4. Computer Science
5. Mechanical Engineering
6. Finance
7. Mathematics
8. Civil Engineering
9. Nurse Practitioner
10. Political Science
11. Marketing
12. Accounting
13. History
14. Physical Therapist
15. Business Management
16. Communications
17. English
18. Biology
19. Sociology
20. Graphic Designs
21. Psychology
22. Criminal Justice
$104,000
$97,800
$96,100
$94,000
$88,100
$84,400
$82,200
$81,700
$81,300
$74,400
$72,300
$72,500
$68,000
$66,000
$64,900
$64,300
$62,300
$60,000
$55,900
$54,700
$54,000
$53,400
Econ,
Econ
Payscale.com
Heads of State
George H. W. Bush, US President (Yale)
Ronald Reagan, US President (Eureka College)
Gerald Ford, US President (University of Michigan)
Ernesto Zedillo, former President of Mexico (Yale University, PhD)
Carlos Salinas de Gortari, former President of Mexico (Harvard University, PhD)
CEOs
Ted Turner, CEO CNN, Atlanta Braves/Hawks (Brown)
Scott McNealy, CEO, Sun Microsystems (Harvard)
Donald Trump, Real Estate/TV Mogul (University of Pennsylvania- Wharton)
Warren Buffet, Financier (Columbia School of Business, Master's in Economics)
Sam Walton, Founder of Wal-Mart, (University of Missouri)
Legislators, Justices, and Government Officials
Phil Gramm, US Senator (University of Georgia, PhD)
Sandra Day-O'Connor, US Supreme Court Justice (Stanford)
Barbara Boxer, US Senator (Brooklyn College)
Actors/Entertainers
Arnold Schwarzenegger, Actor/Governor (University of Wisconsin)
Young M.C., Singer (University of Southern California)
Danny Glover, Actor (University of San Francisco)
Paul Newman, Actor (Kenyon College)
Cate Blanchett, Actress (Melbourne University)
Lionel Richie, Singer/Songwriter (Tuskegee University)
Ben Stein, Actor/political speechwriter (Columbia University)
Professional Athletes
John Elway, NFL quarterback (Stanford)
Tiger Woods, Golfer (Stanford)
Jennifer Azzi, WNBA guard Utah Starzz (Stanford)
Lenny Wilkens, NBA Coach/Hall of Famer (Providence College)
Bill Belichick, NFL Head Coach--Patriots (Wesleyan University)
Michael Johnson, Olympic Gold Medalistt, (Baylor)
Here’s a look at the weight placed on four major college admission
factors. Only “class rank” has shown a steady decline.
They would rather see a “C” in AP Econ than an “A” in
regular econ. They then know you can do college work.
Only about 43% of all entering college freshmen ever graduate.
ECONOMICS
Scarcity
Choices
What is given up
In other words
“THIS is not the case”.
Choices
“No horn of plenty”
Unlimited Needs
Limited Resources
and Wants
Supply
Demand
Or, “the study of how people make choices to get what they want”
ECONOMICS
- “science of scarcity”
-the study of the choices people make in an effort to satisfy
their unlimited needs and wants from limited resources.
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.
What great
What a beautiful forest!
2. What are economic laws.
branches!
3. Differentiate between micro
& macroeconomics.
Calories Consumed
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”
8. Explain a direct relationship (positive sloping curve)
Body weight
4.
5.
6.
7.
[set a reese paar a bus]
Ave. miles jogged
9. Explain and illustrate an inverse relationship between two variables
and identify a negative sloping curve.
10. Identify independent (cause-“induces”) & dependent (effect-“responds”) variables.
Food, clothing, shelter,
Chrysler 300, mansion, Nintendo DSI,
jewelry, iPod, projector, digital camera,
good health, children, camcorder, laptop
warmth, indoor plumbing, rollerblades,
a sense of personal worth, Plasma TV,
literacy, higher economics grade,
iPhone 3GS, Flip video, Wii
iPad, Motorola’s Xoom
Unlimited Human Wants
“Need” those first
three to survive.
Land, Labor, Capital, Entrepreneur
Rent, Wages, Interest, Profits
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”]
[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 brace/crutches
Treatment
Policy is judgment [subjective-opinion]
Normative Economics
When you pick Mr. or Ms. Right,
you have 3.5 billion to pick from.
What characteristics are you not going to
want (abstract) in picking Mr. or Ms. Right.
“There is the woman I
want. She doesn’t even
have to like sports.”
“We’re looking for
the perfect man.”
Methodology [in studying Economic Theory]
[set a reese paar a bus]
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”.
NO
The disagreements occur over the quantitative magnitudes.
[“Don’t tax people’s 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 equations
Example:
If interest rates were lowered,
more houses would be sold.
Law of
Demand
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; 2011-per capita= $48,000
2. Full Employment – about 95-96% employment is full
employment. In 1982, unemployment was 10.8% [12 M unempl.]
3. Economic Efficiency – resources are scarce so they must
be used wisely. Wasting resources means fewer goods and
services can be produced.
“Doing the best with the resources we have.”
.
Reasonable inflation, 1-2% is OK.
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-------2011
It took $2.31 in 1982 to buy what $1 bought in 1972.
In 2011, it took $2.37 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.
HYPERINFLATION in Brazil [1988-1994]
1988 – 1,300%
1989 – 2,900%
1990 – 44%
1991 – 1,000%
1992 – 1,260%
1993 – 1,740%
Prices in 1994 were 4 million times higher than in 1988.
If we had Brazil’s inflation from 1988 to 1994:
1. $35 Blue jeans would increase to $140 million per pair.
2. Gas would increase from $2.35 to $5 million per gallon.
3. $20 for a pizza and movie would increase to $80 million.
4. One new real was exchanged for 2,750 of the old reals.
Why did Brazil’s
Inflation increase
so much?
Only $140 million per pair
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.
Personal Income (%)
Only 1 in 7 within this group even works.
3.4%
Lowest 20% Income Group
[only
8.6%
14.5%
22.9%
3% graduate from college]
Second 20% Income Group
[only 4.6% graduate from college]
Middle 20% Income Group
[only 12% graduate college]
Fourth 20% Income Group
[25% graduate from college]
50.5% Highest 20%[over $100,000][51% graduate col.]
Income differences are caused by differences in IQ, energy, health, social
skills, character, ambition, physical attractiveness, talent, and luck.
• You are free to make your own
economic decisions:
– Choose your job
– Choose where and when you work
– Work for yourself or someone else
– Leave your job and to move to another job
– Free to buy what we want
• Businesses are free to:
– Choose which workers they want
– Figure out how much business they want to do
– Businesses are free to sell what they want
.
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
Social Security and Medicare provide security for older people.
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 9,5%.
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...
Macroeconomics – economics thru a telescope.
Ex: Studying “whole bowl of macaroni & cheese”.
Microeconomics – economics thru a microscope.
Ex: Studying “one macaroni noodle”.
.
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 & 7 other states benefit, but it hurts the 42 others.
ND
WY
CO
OK
NM
TX
AK
Helped
LA
Hurt
.
5. Post Hoc Fallacy–happenstance or
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 Heat were
beating the Mavericks 47-40. They ended up losing the
game 105-95, as the Mavs took the NBA Championship.
Turning the TV on caused the Heat
to lose. And now we know why Lebron
James didn’t go to college. He can’t
pass his finals.
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.
As we become econ gurus we must
look at economic issues 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 woman’s nose is the young girl’s chin.
Optical Illusion. Stare at the picture & see if it doesn’t
look like you are looking at a giraffe - and yet there
is really no giraffe. Oh!
Look at the Chart and say the COLOR, not the word.
.
YELLOW
BLACK
PURPLE
ORANGE
BLUE
GREEN
BLUE
RED
YELLOW
GREEN
RED
BLUE
ORANGE
GREEN
RED
BLACK
PURPLE
ORANGE
Left-Right Conflict
Your right brain tries to say the color but
your left brain insists on reading the word.
Are These items Moving?
Or – Are They Perfectly Still?
The pictures are used to test the level of stress a person can handle.
The slower the pictures move, the better your ability of handling stress.
Alleged criminals that were tested see them spinning around madly;
however, senior citizens and kids see them standing still.
None of these images are animated - they are perfectly still.
Focus on the Dot in the center & move
your head backward and forwards.
1. Follow the moving pink
dot
& notice it doesn‘t change color.
2. Concentrate on the cross in the middle, after a while you
will notice that this moving pink dot will turn green!
3. Look at the cross a bit
longer and you‘ll notice
that all dots except the
green one will
disappear.
Rotating Snakes
Concentrate on the dot in the middle of the picture.
If you see any rotation in the others, you are going to be a criminal.
Is this a Frog or a Horse?
The Day You Get Married
20 Years Later
“Oh!! My back”
“I’ll be back.”
Get out and don’t
come back!
Arnold Before
Maria
Arnold After
 Economics is a little like optical illusions.
Some times the economic concepts
presented are easy to see & understand.
Other times the concepts presented take
more time to reveal themselves.
Just like the illusions, you
must be persistent and not
give up until the concept
“appears” to you.
Then and only then will you
become an econ guru, and
look like one of these!
Econ Gurus
So, this is your goal, look like one of these!
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”.
Divorce Rate
X
Increasing “X” has no effect on “Y”.
Tell everything you know about each topic.
You have only 6 seconds on each topic.
NS 1-10
1. Economics
The study of the choices people make in an effort to satisfy
their unlimited needs and wants from scarce resources.
________________________________________
2. Needs include food, clothing, and (shelter/good grades in economics/
a date most Saturday nights).
3. Theories and generalizations (are/are not) the same thing.
4. Abstraction – focusing on (two/three/four) variables to explain an event.
5. The goal of a favorable balance of trade (has/has not) been met in
recent years.
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 paribus”–other things being ________”,
that is “all
constant
variables are constant except ___.”
2
10. “Ceteris paribus model” allows us to reason about the relationY without the intrusion of variable __.
X & __
Z
ship between variables __
NS 11-21
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 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).
16. Most of the disagreements among economists involve
(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 22-23
22. Bias – preconceptions that (are/are not) based on facts.
23. Loaded terminology – (emotional/non-emotional) terms
leading to a nonobjective analysis.
24. Definitions – economic words have different meanings.
Examples:
A. “Utility” means (extra/satisfaction)
B. “Investment” means (money/tools, machinery, & factories)
C. “Price floors” are (above/below) “price ceilings”
NS 25-29
“I’ll lean over & maybe I
can see better.”
25. The “fallacy of composition” states that what is true for the
(individual/group) must necessarily be true for the (individual/group).
26. The Cowboys won the Super Bowl so the stock market should
rise is an example of the (post hoc/correlation v. causation) fallacy.
27. [“Cause & effect”] The “after this, because of this fallacy” states that
because event A precedes event B, ___
B
A is necessarily the cause of ___.
28. “If you leave a football game at the end of the 3rd quarter, you will avoid
traffic & get home more quickly. Therefore, everyone should leave the
game early.” This is an example of the (post hoc fallacy/fallacy of composition).
29. An example of the post hoc fallacy is (“I turned the game on & the Mavs lead
but lost the game”/”My grade in econ has improved because I’ve studied more.”)
“Zero slope” and an “Infinite
slope”
C
A
“Direct”
B
D
“Inverse”
30. Which graph shows the amount of “Y” inversely related
C
to the amount of “X”? ____
31. In which graph above is the amount of “Y” (constant at $10)
unrelated to the increasing amount of “X”? ___
B
32.In which graph above is the amount of Y directly related to
the amount of X? ___
A
The End