ECON 203 1st Edition Lecture 1Outline of Current Lecture II. Introduction to Economics A. Micro vs. MacroIII. Characteristics of economic modelsIV. Economic assumptionsV. Need-to-know terminologyCurrent Lecture- Economics- the study of choices made by people in the presence of scarcity. Economics is largely about the choices people make given the constraints they face. It is about incentives they have. It is about the trades people make. We will learn about markets and competition. -“Think like an economist.” -We will recognize early on the value of thinking with scarcity in mind, costs as opportunity costs, gains from trade, and thinking marginally.- Microeconomics- unit of analysis is the individual or firm. Looking at one person’s behavior, one firm’s choice, do you have a job, the price of a pez dispenser, etc. -We look at the trees.- Macroeconomics- considers economy wide aggregates. Looks at overall unemployment rates, level of output for the economy, price levels, etc. -We look at the forest.Desirable characteristics of economic models:1. Simple- easy to understand2. General- apply to a number of situations3. Useful- accurately predict observed behavior- The science of economics cannot be practiced without models. Economic models are simplified representations of the world. The world is a complicated place, so it would benice to use some method to attempt to simplify and understand it. - Economics is a social science, thus attempts to explain people’s behavior. There are very few lab tests that are permitted by law. As such, economists try to learn about the worldby using models- making assumptions, developing a model, testing the model These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.statistically to determine whether or not the model predicts accurately. If it does, we keep it. If it does not, we toss it. All social sciences use models. Models can be graphical, mathematical, or verbal.- Simple -Simple is straightforward. It doesn’t make any sense to make up a model that you don’t understand. If the model only works on Thursdays at 9am when it’s raining, then itprobably isn’t general enough. An acceptable model needs to generate predicted outcomes accurately. - Assumptions in Economics-Ultimately, we will judge a model on how well it predicts behavior, not how realistic the assumptions are. All things being the same, we’d like to have a model with realistic assumptions,but if it works, meaning it predicts behavior well, it’s a keeper; until it is replaced with a model that predicts behavior even better. -Economists often assume people are rational. This is extremely valuable. In short, we can define rationality in the following way. People do the best they can based on their own values and information, under the circumstances that they face. This allows for people to have different values and perceptions. People maximize their own welfare (happiness) as they conceive it. -Rationality doesn’t preclude people from making bad choices from time to time. People make choices based on limited information. We assume people learn from mistakes, theirs and others.-Another assumption is that people are self-interested. We will also assume that firms maximize profits. You can make your own decision about whether or not these assumptions are reasonable, but nonetheless, they’ll be very helpful, and give us models that predict well.-Suppose we are trying to develop a model that predicts scores on the final exam in this class. An economist would go about gathering data that would be relevant for consideration in our model. What type of things effect Econ grades? Number of hours of study? Lecture attendance? Blood alcohol content? Your major? Your GPA? Relative humidity, the color of your socks, if the day was even or odd most likely would not affect things and would be variablesthat had no descriptive characteristics in a prediction sense.-We take all the variables, maybe assume people try to maximize their grade, make up a model, stir it up, and there you have it. If it predicts well, we’ll keep it.- Terminology- Positive statements- statements of facts, of what is, or what would occur if something else were to happen. Must be true or false.Normative statements- express value judgments. They state what should be. Cannot be true or false. “Should” or “ought” are give aways.We will concern ourselves in positive analysis. We should talk about facts and leave value judgments outside the class discussion.Fallacies of economic reasoning: mistakes of logic commonly madeFallacy of composition- This occurs when someone says what is true for one person must be true for everyone. If you stand at a sporting event you will get a better view. Everyone standing will not get a similar improvement for each person.Post-hoc fallacy- This occurs when someone says that since event A occurred before event B, it must be the case that A caused B. Here we see sequence, and assume cause.Other conditions fallacy- This occurs when someone says that since two events occurred together in the past, they will continue to occur together in the future.Misleading comparison- Sometimes people make comparisons in a way that does not reflect their true differences. Most of the time, this mistake occurs due to an omission of inflationary adjustments in the argument.Selection bias- This occurs when people use data that is not typical, but instead is selected in a way that biases the results. Trying to determine the drinking behavior on campus would be biased if we only collected data from people at bars, or only at the