Download Lecture 2

Economic Models
Lecture 2
Dr. Jennifer P. Wissink
©2016 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 1, 2016
Announcements: 1120 S2016
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
Please make sure you go to our course Bb page and read all the
announcements and all the FAQs. Will solve lots of your problems.
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
Other Stuff:
– Office hours will be posted soon – check the web page.
– The LSC and the ETC are also supporting this class. More on Wednesday about
that.
Cornell Economics Society

CES General Body Meeting: Come out to the first CES
General Body Meeting to learn more about our exciting
programs and events planned for this semester! Some of the
events to look forward to this semester include…
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ECON Week
Academic Talks/Speaker Series
Courses after the core
CES Help Desk
Entrepreneurship opportunities
Workshops (financial modelling, R, Stata)
Publication of this semester’s Visible Hand
WHEN: Monday, February 1st at 5 pm
WHERE: Goldwin Smith Hall G64 ( Kaufmann Auditorium)
i>clicker questions
What part of Cornell?
What part of US?
Are you a morning person?
A.
B.
C.
D.
E.
Arts College
ILR
CHE
CALS
Engineering
What part of the world?
A.
B.
C.
D.
E.
Canada
Europe
Asia & Down Under
South&Central America
None of the above
A.
B.
C.
D.
E.
Northeast
Midwest
West Coast
The South
None of the above
How much do you like
using math outside of math
classes?
A.
B.
C.
D.
Love
Hate
Don’t love, Don’t hate
Don’t know, we’ll see
A. No!
B. Yes!!
C. Will be this semester
Have you already taken
intro micro?
A. Yup.
B. Nope.
Econ 1120
Introductory Macroeconomics

So what is this course about?
– (And what is it not about?)
 My
working title:
Introduction to Applied Macroeconomic Theory
– Theory: We will construct models.
» Look at the world, hypothesize a model, analyze the
model, use the model to make predictions and then
see if the model holds up under empirical scrutiny.
Applied Macroeconomic Theory
 Economics:
The study of the allocation of scarce
resources to produce commodities to satisfy infinite
human wants.
– Classic definition. Economics is about constrained
optimization. Choice under conditions of scarcity.
 Macro: The study of the determination of economic
aggregates and how they relate to each other and how the
government and the exogenous environment affects these
aggregates.
– versus micro...
Macro v Micro in the News

More Macro-ish:
– Why Some Still Can't Find Jobs As The Economy Nears 'Full Employment‘
– http://www.npr.org/2016/01/31/464856256/why-some-still-cant-find-jobsas-the-economy-nears-full-employment

More Micro-ish:
– Can't Buy A Ticket To That Concert You Want To See? Blame Bots
– http://www.npr.org/sections/thetwo-way/2016/01/28/464708137/cantbuy-a-ticket-to-that-concert-you-want-to-see-blame-bots
Examples of Microeconomic and Macroeconomic Concerns
BRANCH OF
ECONOMICS
Micro
Macro
PRODUCTION
PRICES
INCOME
Output in individual
industries
Price of individual
goods and services
Distribution of
income and wealth
How much steel?
How much office
space?
How many cars – big
or small, how fuel
efficient?
Price of medical
care.
Price of gasoline.
Food prices.
Apartment rents.
Wages in the auto
industry.
Minimum wage.
Executive Salaries.
Poverty.
Wage differentials.
National
production/output
Aggregate price
level
National income
Total output: GDP
Output by sectors.
Investment.
Growth of output.
Consumer prices.
Producer prices.
Rate of inflation.
Interest Rates.
Total wages and
salaries.
Total corporate
profits.
National savings.
EMPLOYMENT
Employment by
individual
businesses and
industries
Steel industry jobs.
Number of
employees in a
firm.
Number of
accountants.
Employment and
unemployment in
the economy
Total # of jobs.
Unemployment rate
Productivity growth
Applied Macroeconomic Theory

Applied: We will apply what we learn to real world situations.
Why Study Economics?
It’s everywhere.
 It’s unavoidable.
 To understand how markets work.
 It’s a requirement and a prerequisite for
understanding lots of other material.
 To help you understand how economists
think and construct arguments.
 To help you differentiate good from bad
analysis.

On Modeling & Constructing Theories

Simplistic Model Construction
– Ockham’s Razor

Evaluation of Models
– economics is a social science

Two pitfalls to avoid
– not recognizing the “fallacy of composition”
– using “post hoc ergo propter hoc” logic

Positive vs. Normative analysis
– What is
versus
– What ought to be
William of Ockham
14th century philosopher
A Road Map
 Suppose
I want to get you from here to Cortland.
 How about we draw a map.
One More Time…
 Economics:
the study of
– the allocation of
– scare resources to
– produce commodities to
– satisfy infinite human wants.
The Production Possibilities
Frontier
 Let’s
introduce the
Production Possibilities Frontier.
– Better known as the PPF.
 The
PPF is a basic workhorse in
economics.
 Often introduced in the first couple of
lectures in both micro and macro intro
courses.
The PPF: What Is It?
A
description of the possible or feasible
combinations of commodities an
economy can produce, using all of the
available resources efficiently.
 Shows
the trade-off between more of
one good in terms of another.
The PPF: Assumptions
 Given:
endowments of resources
 Given:
technologies
 Given:
a fixed time frame
 Given:
efficient production
i>clicker question
Which one of the following would an economist classify as
capital (K)?
A. The head TA’s $100 bill.
B. The guitars used by Bruce Springsteen and the E-Street
Band.
C. A corporate bond issued by IBM.
D. Unfinished lumber purchased by a furniture manufacturer
to make chairs.
E. All of the above.
The PPF: What You Get
 Typical
teaching set-up:
– Two final goods.
» Guns (G) and Butter (B)
– Two input goods and final goods technologies.
» So drop “land” for now, no big deal.
» Kapital (K) and Labor (L) both go into making guns and butter
according to some known and given technology that can be
described by production functions.
» G = g(K, L) and B = b(K, L)
– PPF is a frontier that shows the maximum amount of
one good you can produce given a fixed amount of the
other.
– Frontier is a graph.
Getting Started Constructing a PPF:
The Gun Production Function (given)
GUNS
K
L
Guns
(tons)
2
0
0
2
1
1
2
2
2
2
3
3
2
4
4
2
5
5