ECON 221 Lecture 2 Outline of Last Lecture I. What is economics?A. The study of decision makingB. Microeconomics is the study of the tiny parts that make up the economyII. OptimizationIII. EquilibriumIV. EmpiricismOutline of Current Lecture I. Empiricism II. What do economists do?a. Make predictionsb. Test those predictions Current Lecture Empiricism in EconomicsWhat do economists do?- Make predictions- Test those predictions - How? o Construct models of the world - rough description that captures essential features o Generate testable predictions - Ex. Donating to charity◦ 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.o Two possible motives = model - Needs being met - government spending decreases donations- Feeling good - government spending doesn't impact donations - Theory and empiricso Model describes world in theoryo Use model to generate testable prediction o Test prediction using data o Fails - come up with different modelo Successful – predictions holds - used to make predictions for the future How do economists test predictions? - Collect datao A. Ad spending -> higher market shareo Correlation does not necessarily imply causationTwo main concerns- Reverse causality- Omitted variable bias Causation is what we care abouto Models and empirical results are used to make policyIdentifying causation- Ideally: randomized experiments o Components of a randomized experiment- Blood drive example o A "treatment" group - you will be paid to donate blood o A control group - there is a blood driveo Random assignment group Results – - Model implicitly being tested- monetary incentives make people do things.- Empirical results- not for things like blood donation, volunteering, etc. o People like the opportunity to feel good - True experiments are not always possible - not feasible in economics - Alternative: "natural" experiments - Economists looks to pre-existing data on situations that are close to
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