Week Two: What is Economics? Flashcards
Define Microeconomics:
Microeconomics: Individuals consumers and firms allocate resources
Micro vs. Macro:
- Micro: Individual consumption, hiring decisions, investing
- Not: unemployment rate, GDP, inflation
What are common defintions of economics and what is it not defined by?
Commonn definitions of economics include:
- Market sector
- Allocation of material goods to satisfy material wants
- Allocatin of how societies, individuals, and households allocate scarce resources to satisfy competing objects
How does it differ other social sciences?
Not defined by:
- Topics such as “money”
- Assumptions such as “selfishness”
- Values like “markets are good”
How is economics distinguished from more traditional social sciences?
Differential: more of an approach (tool) than a subject matter (integrates wide range behaviors):
** Systematic way of thinking about how people makes choice
**
Core proposition: people do the best they can with avaliable resources
Core Proposition of econ?
Core proposition: people do the best they can with avaliable resources
Economic way of looking at life:
- Individuals maximize welfare as they concieve it(Choices solve optimization problem = rational choice)
- Behavior forward looking and consistent over time
- Actions are constrained by income, time, … and opportunity in economy
- Opportunities determined private and collective actions of other individuals
Why is economics succesful?
- Rigorous: Assumptions are stated, methods formal, conclusions internally consistent
- Cohesive: Built foundation first principles and theory
- Refutable: testable predictions
- Practical: Rational choice realistic metric understanding humans
Specifically for economic thinking
What is a model
Model is a simplification of reality that helps understand something complex
”good” model ⇒ helps understanding without needless complexity
Economics: “unrealistic” simplications of world → help understanding
- Use mathematics (clarity of math to reach logical conclusions)
What is normative economics:
Normative: (dependent on positive)
” How things should be”
- Policy desirable?
- Included: value judgements, ethics, trade-offsUse positive to determine which trade-off to make
What is positive economics?
Positive: (independent of normative)
(Keynes)
“How things are/What is”
- Describes observations and consequences
- Describes free value of judgements
- Builds models makes sense
Then, make predictions
How is normative dependent on positive?
- Positive gives the tools
- Gains trade: Pareto superior/ improvement/ efficient
What are the problems in economics?
- Bias interpretation of positive
- Choise model based on bais
How to overcome the problems in economics:
- Economics must be an empirical study (testable hypothesis, and test on data)
- Clearly seperate positive and normative
What is the difference between exogenous and endogeneous variables?
<aside>
🐉 **Model**: simplified representation of reality
- Eliminate irrelevant detail
</aside>
Process: Start simple and add complexities one at a time
- Exogenous Variable: Determined factors not discussed in particular model
- Endogenous Variable: Determined ofrced described in model
Define
Opitmization Principle
People try to choose the best pattern of consumption they can affort
Almost a tautology
Define
equilibrium principle
Equilibrium Principle: Prices adjust until amount people demand of something == amount supplied
Theory
What is the purpose of a theory
- Provide language for systematic and organization of reasoning
- Generate substantive hypothesis
Choose a theory: 1. Useful language? and (2) impirical content?
Define: Comparative Statistic
*How variation in conditions affect endogenous variables of a study *
Combine measurements of parameters with comparatie statistic => testable statistics
Define Reservation Price
Reservation Price
Person’s maximum willingness to pay for something
Highest price someone will accept and still purchase
- “Indifference” between purchase and not purchasing
How does the supply curve function in the competative market? (short run)
> Competitive Market: independent sellers will sell for the highest price market bear
Vertical (Short Term) Supply Curve:
- Supply is fixed
- Same demand regardless of the price
What are the different options at equilibrium (depending on if q_s is higher or lower than equilibrium)?
- p*= equilirbium price
- p<p* → Surplus
- p>p* → Shortage
What are the alternatives to the competative market?
- Discriminating monopoly
- Ordinary monopoly
- Rent control
what is Pareto Improvement
Pareto Improvement: Find a way to make some poeple better off without making anybody else worse off
In competative market: gains of trade results in Pareto Effficiency
- But, due to similar distribution of resources, discriminatory monopoly efficient as well
- However, different distribution of income
Therefore Pareto Efficiency nothing to say about distribution of gains of trade
Only concernted with the efficiency
What is Pareto Efficient?
Pareto Efficient: Allocation such that no Pareto improvements are possible (maximize economic pie)
Choice make at least one person better off without making anyone else worse off
In competative market: gains of trade results in Pareto Effficiency
- But, due to similar distribution of resources, discriminatory monopoly efficient as well
- However, different distribution of income
Therefore Pareto Efficiency nothing to say about distribution of gains of trade
Only concernted with the efficiency
