1: First Principles

Question 1

What do economists want to find out?

Answer 1

They want to find out how markets allocate goods and resources and how markets have to be regulated in order to make sure they function properly

Question 2

What is unexpectedly also an important field of research?

Answer 2

An important field of research is the economic role of the government: the ways it can levy taxes and provide services

Economists also deal with problems related to political institutions like:
- Effects of different voting systems
- The causes and consequences of political and military conflicts
- Relationship between different levels of government

Question 3

What is the definition of scarcity?

Answer 3

refers to situations where the wants exceed the means

Question 4

What is the definition of Economics?

Answer 4

Economics is the science that studies human behaviour as a relationship between ends and scarce means which have alternative uses

“Economics is the study of how people and society choose with or without the use of money to employ scarce productive resources which could have alternative use to produce various commodities over time and distribute them for consumption now and in the future among various people and groups of society”
==> economists try to understand how resources are used to alleviate scarcity

Question 5

What are opportunity costs?

Answer 5

the joy and fulfillment that one would have expected to enjoy from the other option is the opportunity cost

==> If one makes decisions under the conditions of scarcity, then going one way necessarily implies that one cannot go another way

Question 6

Which are the three levels of analysis?

Answer 6

• Individual level
  How do individual people behave under conditions of scarcity?
• Interaction level
  Typically individual behavior does not take place in isolation
• Aggregate level
  They are a result of individual decisions and the rules that govern individual interactions but an analysis of a certain phenomenon at the aggregate level usually abstracts from a lot of the details of individual decision-making and interactions in order to still be able to see the forest for the trees

Question 7

What is an example for fields of research that investigate how human beings interact with one another on an interaction level?

Answer 7

Equilibrium models of trade and market behavior or game theory

Question 8

What is methodological individualism?

Answer 8

A scientific position that requires that all social phenomena be explained with reference to individual behavior
==> according to which ultimately all phenomena which are studied on the aggregate level need to be tracked back to patterns of behavior on the individual and interaction levels

Question 9

How is the relation described between micro and macroeconomics?

Answer 9

The observation, that behaviour of aggregates is more reliable if linked to the individuals led to the microfoundation of macroeconomics
==> the attempt to relate aggregate phenomena like unemployment or growth to individual decision-making.

Question 10

How is a theory defined in this chapter?

Answer 10

For the prupose of this subchapter theory is defined as a relatively broad conceptual approach that makes reasonable conjectures about casual relationships in the world.

Question 11

What is a conjecture?

Answer 11

an opinion or conclusion formed on the basis of incomplete information (Vermutung, Mutmassung)

It is impossible to say that a conjecture is true in the sense that it is in total accordance with reality.

Question 12

What is the Münchenhausen Trilemma?

Answer 12

The basic problem is that scientify reasoning requires that one ir prepared to provide proof for any of one’s statements. However, such proof can only be given by means of another statement, which must also be provable.

The Münchhausen Trilemma makes the point that one has the choice between exactly three unsatisfactory options to deal with this situation

Question 13

Which are the three unsatisfactory options to deal with a situation in the Münchenhausen Trilemma?

Answer 13

• Infinite Regress
• Circularity
• Dogmatism

Question 14

What is infinite regress?

Answer 14

You prove your point with a statement, this statement has to be proven again, and again and again etc.

Question 15

What is Circularity?

Answer 15

The statement and the proof support eachother
Example: a flawed interpretation of the theory of evolution that defines the species that fits best in an environment as the one that survives and then one argues that the species one observes must fit best into it’s environment.

Question 16

What is Dogmatism?

Answer 16

reaching a stage in the process of statement and proof, where the underlying assumptions have no further justification (the justification is common sense for example. Like “All humans are created equal and have the right to live, to be free and pursue hapiness)

Question 17

What is a paradigm?

Answer 17

Sets of pracitces that define a scientific discipline at any particular period of time. (a typical example or pattern of something; a pattern or model.)
The first dogmatic principles of a theory closely resemble a paradigm.
Paradigms come in at different levels of abstraction

Question 18

How is a model defined in this chapter?

Answer 18

A collection of assumptions and hypotheses that are linked by the rules of logic and mathematics
A model makes several assumptions in a logically consistent way.

Question 19

What is the difference between theories and models and the example that is made in this chapter?

Answer 19

Assume one wants to develop a theory about the functioning of the price
mechanism on markets. In order to do so, one thinks about, for example, the way
individuals sell and buy their stuff and how these buying and selling decisions
explain the formation of prices. This structured way of thinking is one of the models
underlying one’s theory.

The crucial function of a model, in the context of theory formation, is to make
sure that the key causal mechanisms underlying a theory are made explicit and
logically consistent.

Question 20

What are requirements of a good model?

Answer 20

• All the assumptions are spelled out explicitly
• And the hypothesis follows from the assumptions in a logically consistent way

Question 21

Why is the production-possibility frontier introduced? What is the purpose of showing this?

Answer 21

The concept of the production-possibility frontier is introduced to show what role assumptions play in models. This concept makes the assumption that the economy can produce exactly two goods, whose quantities are drawn along the axes.

==> The purpose of this simple model is to illustrate what the role of simplifying assumptions means.

Question 22

What is critical rationalism?

Answer 22

According to this view, scientific theories can never be verified. But they can in principle be falsified by bringing in empirical evidence that is in conflict with the hypothese of the theory.
==> Theories should be formulated such that their hypotheses are falsifiable, it has to be possible to give empirically accessible conditions under which the theory is considered incompatible with observations.

Question 23

What are good theories according to critical rationalism?

Answer 23

Good theories are those that have large empirical content but have not been falsified so far.

Question 24

What is the weak spot of critical rationalism?

Answer 24

A weak spot of Critical Rationalism is its unscrutinized belief in empirical
falsification. The problem is that one does not have direct proof of facts; that
any empirical observation relies on a theory, as well. A lot of statistical data, for
example, is collected within a highly complex system of national accounting, and
data generated in lab experiments depends on the interpretation of the experiment.
Therefore, from an epistemic point of view, falsification is no more or less than the
proof of the logical inconsistency of two different theories: a theoretical theory and
an empirical theory. Which one will be refuted relies, again, on value judgments or
on experts’ “gut feelings.”

Question 25

What are positive theories?

Answer 25

Are used to explain a phenomenon
They contain no value judgments (with the exception of the underlying “dogmatic” first principles)
It tries to explain how people deal with the phenomenen of scarcity
Statements about “what is” are also called descriptive.

Question 26

What are normative theories?

Answer 26

They make prescriptions about what people should do under certain circumstances.
They therefore rely on a value judgment
Example: Switzerland should reduce it s corporate income-tax rate

Question 27

What is the difference between basic and non-basic value judgments?

Answer 27

We differentiate between basic and non-basic value judgment

Basic: only depend on first ethical principles (you should lose weight BECAUSE obese people have a shorter life

Non-basic: depend on first principle and positive theory (switzerland should reduce it s corporate income tax rate BECAUSE it attracts capital investments WHICH increase national income)

Question 28

What is a naturalistic fallacy?

Answer 28

Only because something is natural, it doesnt have to be “good”

The naturalistic fallacy is a logical error that happens when someone assumes that because something is natural, it must be good or right.

Think about it this way:

- Nature doesn't have morals: Nature is just about survival and reproduction. It doesn't have a sense of right or wrong.
- Just because something happens in nature doesn't mean it's good: For example, lions eat zebras. That's natural, but it doesn't mean it's morally right. ==> So, the naturalistic fallacy is basically saying, "Because it's natural, it must be okay." This is a faulty assumption because natural doesn't always equal good or right.

Question 29

What is a fact-value dichotomy?

Answer 29

As shown, dogmatism is the only practical solution to the Münchhausen trilemma. However,
dogmatismimplies that the distinction between facts and values is not as clear as was
Envisioned. Apparently, value-free facts are tainted by value judgments about first principles The opposite point of view is the position that ethical sentences express propositions, which refer to objective features of the world. It is called moral realism.

Question 30

What is Moral realism?

Answer 30

Moral realism is the idea that there are objective moral truths that exist independently of human opinion or belief. It’s like saying there’s a moral code out there in the universe, and it’s the same for everyone, regardless of what they think.

Imagine it like this:

Math: 2+2 always equals 4. It’s an objective fact, not something we just made up.
Morals: According to moral realism, there are moral facts like “murder is wrong” or “helping others is good.” These facts exist, even if we don’t always agree on them.
So, moral realism is basically saying that morality is like a set of rules that we can discover, rather than something we create.

Question 31

What is the difference between classical economics and neoclassical enonomics?

Answer 31

neoclassical analyses people’s decision and thinks that people are rational and make decisions based on maximizing their own utility

Classical economy looks at the bigger picture, how much a country can produce and how it is distributed

Question 32

What is the marginalist revolution?

Answer 32

Marginalist revolution of economics is a distinctive feature of early neoclassical thinking

Explanation:
When we make decisions, we think in terms of trade-offs and we think “at the margin”
==> we compare the satisfaction we get from an additional unit of a good with the costs of this additional unit. Market prices then reflect these marginal exchange rates.

Question 33

What is institutional economics?

Answer 33

Institutional economics focuses on the broader social, political, and legal institutions that shape economic behavior. It emphasizes the role of these institutions in influencing how people make decisions and how the economy functions.