chapter 1. 1.1 general introduction econosystem – an economic system, comprised of not only many...
TRANSCRIPT
![Page 1: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/1.jpg)
Chapter 1
![Page 2: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/2.jpg)
1.1 General Introduction
Econosystem –
An economic system, comprised of not only many elements, but also the relationships between them
Ex. Forest/trees analogy
![Page 3: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/3.jpg)
Understanding and Learning
To understand- to “get it”
To learn- to “own it”
![Page 4: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/4.jpg)
Definitions
Clarity is important
Common words may have very precise meanings within the context of this subject
![Page 5: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/5.jpg)
Economics is a tool
for analyzing a complex world
Extremely useful, but not in isolation
“Necessary but not sufficient”
![Page 6: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/6.jpg)
Limits of economics
Theories have flaws, weaknesses
Theories are evolving over time
![Page 7: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/7.jpg)
1.2 The Subject of Economics
![Page 8: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/8.jpg)
The Road Not Taken
Robert Frost Poem
![Page 9: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/9.jpg)
On scarcity
Resources, money, time are all scarce
Because of scarcity, we must make choices
We face a challenge of choice
![Page 10: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/10.jpg)
Scarce money
Spend on one thing, give up something else
Opportunity cost- best foregone opportunity you give up when you make a choice
It is the cost of choosing
Ex. Could have babysat - earned $15
Went to movies - spent $10
Opportunity cost-
$25
![Page 11: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/11.jpg)
Scarce Time
Even if you had all the money in the world,
scarcity is still an issue
Time is scarce for all of us
![Page 12: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/12.jpg)
Society also faces choices as a whole
earth’s resources are finite
number of people are growing
each nation, and ultimately humankind, face a similar challenge of choice
![Page 13: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/13.jpg)
1.3 Preview of the story
We will first look at individual choice, then
interdependent choice
We will see how markets can, under the right conditions, effectively coordinate choices
![Page 14: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/14.jpg)
Markets are amoral; they do not create or destroy justice
![Page 15: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/15.jpg)
Microeconomics
Greek root- mikros- little or small
Individual choices, individual markets
![Page 16: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/16.jpg)
Macroeconomics
Greek root- makros – large
Societal level – unemployment, inflation, etc.
![Page 17: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/17.jpg)
By the end of the story,
you should see the connections between the two perspectives
![Page 18: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/18.jpg)
1.4 Method of Telling the Story
![Page 19: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/19.jpg)
Neoclassical Theory
Mainstream economics-
Currently the best representation of how the world works
![Page 20: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/20.jpg)
Joseph Schumpeter
Model building begins with a vision –
a “preanalytic cognitive act”
Comes from observation of the world and from other theories that came before yours
![Page 21: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/21.jpg)
After vision comes analysis
“Formalizing your vision”
Defining terms and arranging them to tell your story
![Page 22: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/22.jpg)
Assumptions
The world is so complicated, you have to assume certain things to be true
That way, you can focus on just one part of something, not the whole universe
Most fundamental assumption-
There is order to the world
![Page 23: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/23.jpg)
When a model is complete enough
the scientist presents it to others
Journals, conferences, etc.
It is then critiqued as others look for flaws
![Page 24: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/24.jpg)
2 basic sources of flaws
Ideological bias
Lack of care in construction
![Page 25: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/25.jpg)
Ideology
Our mind’s eye distorts what we see
We see reality through biased eyes
These biases can weaken our model
![Page 26: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/26.jpg)
Other sources of problems
Vague definitions
Malleable definitions
Problems in testing the data
![Page 27: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/27.jpg)
Assumptions are an abstraction from reality
Strong assumptions – assume a lot – big step from reality
Ex. Everyone will get an A in this courseWeak assumptions – considered more
realisticEx. Someone will get an A in this courseThe weaker the assumptions, the stronger
the model’s foundation
![Page 28: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/28.jpg)
Relaxing assumptions-
To move from stronger to weaker assumptions
Models become more realistic, but also more complex
You also need more vocabulary to explain what is happening
![Page 29: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/29.jpg)
Ceteris Paribus-
All other things being equal
![Page 30: Chapter 1. 1.1 General Introduction Econosystem – An economic system, comprised of not only many elements, but also the relationships between them Ex](https://reader035.vdocuments.us/reader035/viewer/2022070400/56649f155503460f94c2a1d1/html5/thumbnails/30.jpg)
Maintained assumptions
Will play a big role in how useful the model is
They are the foundation on which the whole superstructure of the model is built
As we build this model, you should reflect on how strong or weak you think they are