Download Chapter_01_Macro_15e

Macro Chapter 1
The Economic Approach
4 Learning Goals
1) Identify and list the critical components of
economics.
2) List and provide examples of the eight
guideposts of economic thinking.
3) Distinguish between two types of
economic statements (on your own)
4) Avoid making four common mistakes
A Deal for You:
Options:
1) Get in the DeLorean with $1 million and
go back to 1914, OR
2) Stay right here with your current income,
possessions, and lifestyle
Transmitter Question Next
Which option would you take?
1. Get in the DeLorean with $1 million and go
back to 1914
2. Stay right here with your current income,
possessions, and lifestyle
50%
1.
50%
2.
Do you think Americans are better
off today than they were 100 years
ago?
How would you determine or measure
this? What’s the criteria?
Video:
Some criteria to consider:
1900-1920
Life expectancy (years)
Infant mortality (deaths per 1,000 live births)
Real Per capita GDP
High school completion (percent of adults)
Electrification (percent of US households)
47
2007-2011
Some criteria to consider:
Life expectancy (years)
Infant mortality (deaths per 1,000 live births)
Real Per capita GDP
High school completion (percent of adults)
Electrification (percent of US households)
1900-1920
2007-2011
47
78
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
Real Per capita GDP
High school completion (percent of adults)
Electrification (percent of US households)
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
Real Per capita GDP
High school completion (percent of adults)
Electrification (percent of US households)
6.7
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
Real Per capita GDP
High school completion (percent of adults)
Electrification (percent of US households)
$4,800
6.7
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
6.7
Real Per capita GDP
$46,350
High school completion (percent of adults)
Electrification (percent of US households)
$4,800
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
6.7
Real Per capita GDP
$4,800
$46,350
High school completion (percent of adults)
22
Electrification (percent of US households)
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
6.7
Real Per capita GDP
$4,800
$46,350
High school completion (percent of adults)
22
90
Electrification (percent of US households)
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
6.7
Real Per capita GDP
$4,800
$46,350
High school completion (percent of adults)
22
90
Electrification (percent of US households)
8
Some criteria to consider:
Life expectancy (years)
1900-1920
2007-2011
47
78
Infant mortality (deaths per 1,000 live births) 100
6.7
Real Per capita GDP
$4,800
$46,350
High school completion (percent of adults)
22
90
Electrification (percent of US households)
8
99
Why did that happen?
Here’s someone who thinks we’re
much better off today
Video:
Would you trade your car for this?
Would you give up your DVD player for
this?
Would you give up your cell phone for
this?
Transmitter Question Next
Would you trade any of your current
possessions for those items?
1. Yes, gladly. Those other things are cooler
and better.
2. No way! Those other items are terrible.
50%
1
50%
2
What Is Economics
About?
Economics doesn’t have to be
like this:
Economics tries to explain and predict the
behavior of consumers, firms, and
government.
Steven Levitt & Stephen Dubner
Super Freakonomics
The economic approach isn’t meant to
describe the world as any one of us might
want it to be, or fear that it is, or pray that it
becomes- but rather to explain what it
actually is. Most of us want to fix or
change the world in some fashion. But to
change the world, you first have to
understand it.
Supplemental video: RSAnimateFreakonomics (on Blackboard)
Alfred Marshall:
Political Economy or Economics
is a study of mankind in the
ordinary business of life; it
examines that part of individual
and social action which is most
closely connected with the
attainment and with the use of
the material requisites of
wellbeing.
Scarcity and Tradeoffs
Scarcity leads to tradeoffs which result in
making choices
Scarcity and Tradeoffs
Thomas Sowell: “We cannot opt out of
economic issues and decisions. Our only
options are to be informed, uninformed, or
misinformed, when making our choices.”
Historically, mechanisms that have been
used to deal with the problem of scarcity:
1. Force
2. Tradition (emphasized past ways, relied
on families)
3. Authority (government and church)
4. Market
5. Combinations of 1-4
Scarcity and Tradeoffs
Scarcity requires that some wants remain
unfulfilled
Issues of equity, justice, and fairness are
embedded with scarcity
Class Perspective
We will focus on the market process of
dealing with scarcity.
At times we will compare and contrast with
the government or collectivist process.
Do not confuse the market process as
being the same as politically conservative.
The Economic Way of
Thinking
Things are not always as they
appear to be
Things are not always as they
appear to be
Sometimes you need to step back
and think a little more about the
situation
Always have these guidelines in
your economic thought process:
1)
2)
3)
4)
5)
There are always tradeoffs
Individuals choose purposefully
Incentives matter
Think on the margin, not in total or on average
More information leads to better decisionmaking, but more information is costly to get
6) Many choices create a secondary effect
7) Value is subjective
8) Economic thinking is scientific thinking
(1) There are always tradeoffs.
Demonstration:
What you give up is your opportunity costvalue of next best alternative
Common mistake: opportunity cost is NOT
the sum of everything you give up
Reading:
(1) There are always tradeoffs.
Supplemental video: Paul SolmanOpportunity Cost (on Blackboard)
For optional credit- find the statement of
error in the video and tell me what the
error is
Please see me during office hours before
(specify date) to earn $25
(1) There are always tradeoffs.
There is no such thing as a free lunch!
Example: free T shirts
Supplemental video: Milton Friedman- free
lunch myth (on Blackboard)
(2) Individuals choose purposefully
Referred to as economizing behavior-try to
get the most benefits for the least cost or
effort
Also known as rational behavior
Alfred Marshall:
“It is deliberateness, and not selfishness,
that is the characteristic of the modern
age.
Steven Levitt & Stephen Dubner
Super Freakonomics
Human behavior is influenced by a dazzlingly
complex set of incentives, social norms, framing
references, and the lessons gleaned from past
experience- in a word, context. We act as we do
because, given the choices and incentives at
play in a particular circumstance, it seems most
productive to act that way. This is also known
as rational behavior, which is what economics is
all about.
(3) Incentives matter
As the incentive goes up, you will be
more likely to do something (or try to),
and vice versa
The incentive doesn’t have to be money
Class Activity: What are some of your
incentives?
(3) Incentives Matter
Video:
(3) Incentives Matter
Demonstration: Dancing
1:
2:
3:
Thank You!
(4) Think on the margin, not in total
or on average
Marginal means additional or incremental
Marginal _______ is additional _______.
Marginal _______ is additional _______.
Marginal _______ is additional _______.
Example: Why men cheat on their wives
(4) Think on the margin, not in total
or on average
Class Activity: Why are newspapers, but
not soft drinks, sold in vending machines
that allow customers to take more units
than they pay for?
(4) Think on the margin, not in total
or on average
Rule to live by:
Continue to engage in an activity as long
as the expected marginal benefit is greater
than the expected marginal cost.
How long should you study for a midterm?
(5) More information leads to better
decision-making, but more
information is costly to get
Refer back to (1) through (4)
1)
2)
3)
4)
There are always tradeoffs
Individuals choose purposefully
Incentives matter
Think on the margin
(6) Many choices create a
secondary effect
The primary effect is often immediate and
visible
The secondary effect usually comes later
and is not as visible
Example: fatal car crashes and fuel
efficiency
(7) Value is subjective
Beauty is in the eyes of the beholder
Value is determined by the purchaser
(8) Economic thinking is scientific
thinking
Economists use data and information generated
by people to explain and predict actions
Steven Levitt & Stephen Dubner
Super Freakonomics
But while there are exceptions to every rule, it’s
also good to know the rule. In a complex world
where people can be atypical in an infinite
number of ways, there is great value in
discovering the baseline. And knowing what
happens on average is a good place to start. By
so doing, we insulate ourselves from the
tendency to build our thinking- our daily
decisions, our laws, our governance- on
exceptions and anomalies rather than on reality.
(8) Economic thinking is scientific
thinking
Economists “do it with models”
MC_CampusMap.pdf
(8) Economic thinking is scientific
thinking
Do you believe that students who regularly
attend class earn higher grades? How could
you prove (or disprove) that?
See David Romer’s article “Do students go to
class? Should they?” on Blackboard
Positive and Normative
Economics
4 Learning Goals
3) Distinguish between two types of
economic statements (on your own)
Please read “Essays in Positive
Economics” by Milton Friedman on
Blackboard
The introduction and Section 1 (pages 1
through 3) are relevant; you may skip the
rest.
Pitfalls To Avoid in
Economic Thinking
Don’t make one of these errors:
(1) Violation of ceteris paribus.
– Ceteris paribus is Latin for “other things
constant.”
– We want to isolate variables so we typically
allow only one to change at a time.
– Example: race to campus
Errors:
(2) Good intentions do not necessarily
result in good outcomes
Milton Friedman: “There is nothing that
does so much harm as good intentions”
Errors:
(2) Good intentions do not necessarily
result in good outcomes
Example: using someone else’s clicker
Errors:
(3) Association is NOT causation
Video:
Errors:
(3) Association is NOT causation
Errors:
(3) Association is NOT causation
Video:
Errors:
(4) Fallacy of Composition
Assumption: what’s good for the individual
is good for the group.
Making this assumption when it’s false is
the fallacy.
Why do women endure the discomfort of
high heels?
Video:
Class Activity
Provide at least one example of the fallacy
of composition.
Transmitter question next
Which guidepost of economic thinking do you
consider to be most important?
1. There are always
tradeoffs
2. Individuals choose
purposefully
3. Incentives matter
4. Think on the margin
5. Information is costly to
acquire
6. Secondary effects
7. Value is subjective
8. Scientific method
12%
12%
12%
12%
12%
3
4
5
12%
12%
12%
60
1
2
6
7
8
4 Learning Goals
1) Identify and list the critical components of
economics.
2) List and provide examples of the eight
guideposts of economic thinking.
3) Distinguish between two types of
economic statements (on your own)
4) Avoid making four common mistakes