Economics 8/27/13Watch Google Drive from Angel For Studying Overview (2)- Analyze and interpret daily life decisions: emphasize costs, benefits and possible future consequences - Making choices is all about comparing costs and benefits. – ex: Lebron James changing teamsWhat is Economics (2)Scarcity- The limited nature of society’s resources.- If it takes even a small amount of time, energy or money to acquire then a good is- Nothing is free in nature- not even air and water! Economics- Study of how people allocate their limited resources to satisfy their nearly unlimited wants- Study of how people make choicesScarcity (3)- not going away- unlimited wants limited resourcesWhich do you prefer?-$10 or $20?- 1 vehicle or 2?- 1 meal a day or 3?- 200 gigabytes of disk space or 400?Idea: More is preferred to lessQuestion: How does this relate to scarcity?Managing the problem of scarcity and save money: Become more efficient, productive and technologically advanced... Self-Interest and Rationality (3)- Economics usually assume:- Self-Interest- RationalityEx’s: Star Trek Spark- Economics Rational Agent, The consumer, wont buy something unless you feel the money you’re giving for it is equal to the value Homer Simpson- Human Being, Not rational- Behavioral EconomicsSelf-Interest (4)“It is not from the benevolence of the butcher, the brewer, or the bake that we expect our dinner, but from their regard to their own interest.” (Adam Smith, An inquiry into the Nature and Causes of the Wealth of Nations, 1776)Smiths invisible Hand: when shoppers line up to check out, there is no authority telling them which lane they are assigned. They naturally just proceed to the lane that they believe will help them check out most quickly, and if one lane gets congested or held up for whatever reason, shoppers will relocate to other lanes, smoothing the flow of traffic.So shoppers working toward their own self-interests result in working in the interest of everyone through social cooperation and, thereby, promoting the most efficient method for everyone.- Companies produce products because they make money- We buy them based on taste and price- Everyone profits from someone else’s suffering - Complaints are hypocritical- Society functions best when we all act among our own Self-Interest- Self-interest does not necessarily mean increasing one’s wealth- Still leaves room for charity, gifts and altruismEx’s: Are Politicians failing our Lobbyists?Seinfeld “The Calzone”Incentives (5)- Responding to incentives:- Rationality and the use of incentives o Positive incentives (bonuses, a sale, free food for a work meeting)o Negative incentives (stick, fired from your job, sales taxes, spanking your child)- Making Choices: Change the way people make decisionso Balancing cost and benefitDirect and Indirect Incentives (5)- Direct incentiveso Generally easy to recognize o Ex: Offered 100$ to work harder for an Ao What you want- Indirect incentiveso Secondary change in behavior (unintended consequences)o Ex: Offered $100 to any student to get an A--- the indirect incentive is that more people will cheat! o What you getEconomics Thursday 8/29/13Unintended Consequences (6)- An Unplanned result (usually negative and unwanted) of an incentive.- Debate over social security (safety net)- If social security (designed to help the poor) is better than a shit job it encourages people not to work—good intensions can lead to unwanted consequences- Ex: The OfficeMicroeconomics v Macroeconomics (6)- Microeconimics- The study of decisions making undertaken by individuals (or households) & firms- Focuses on the individual parts of the economy- Ex: Football TICKET, grocery list- Macroeconomics- Study of the behavior of the economy as a whole.- Deals with economy-wide phenomena, aggregates or totals. - Ex: Football GAME, unemployment, inflation, foreign tradeScientific Method in Economics (7)- Similar to “hard sciences”- Construct a theory (or hypothesis)- Design experiments to test the theory- Collect data- Revise or refute the theory based on evidence- Differences from “hard sciences”- Economist’s lab is the world around us- Firm and consumer behavior studied- Not always able to design experiments- Historical data often usedPositive and Normative Analysis (7)- Positive Statement- A claim that can be tested to be true or false- Normative Statement- Statement of Opinion. - Cannot be tested to be true or false. - What “ought to be” or “should be”- Biased - Ex: Children should be vaccinated to prevent a disease- Which is generally preferred?- Positive. - Like to test claims with data.Poll Everywhere Question:Identity the Positive Statement (s):Answer: A ONLY (PSU in-state tuition is $13,280 per academic year)- Can be testedThink, Pair, Share: Positive or Normative? ($250)1. Winters in Arkansas are too cold (Norm)2. Everyone should work at a bank to see the true value of money (Norm)3. The current exchange rate is .7 pounds per dollar (Pos)4. On average, people save 15% when they switch to Geico (Pos)5. Everyone ought to (should) have a life insurance policy (Norm)6. University of Virginia graduates earn more than Duke university graduates (Pos)7. Harvard University is the top education institution in the country (Norm)8. The average temperature in Fargo, ND in January is 56 degrees (Pos)Economic Models (8)(Picture in Packet)- Models are simplistic, but they can bring out essential concepts (paper airplanes) - Change only one variable at a time and leave everything else unchanged…What economists term-> ceteris paribus (Does folding left wing down change the way the plane flew?) We change only one variable at a time to compare so we can see what change caused the plane to fly worse- We judge models by how well they make predictions- Endogenous factors: variables controlled for inside a model (The way the model is built)- Exogenous factors: variables not accounted for in a model (if you were to fly this plane outside it would be the wind, sun etc)- The dangers of faulty assumptions (Ex: Monty Python’s “A Witch” Clip)Economics Tuesday 9/3/13Check extra credit project on AngelWhat determines a person’s wage? (8)W=f (Education, Age, Experience, Skills, Pleasant Conditions, Female) Anything inside the parenthesis are part of the model, anything outside is exogenous. When creating a model you decide what is endogenous and what is exogenous. How does each of these variables affect a