economic thinking and economic tools chapter 2. economic thinking normative vs. positive statements...
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Economic Thinking andEconomic Tools
Chapter 2
Economic Thinking
Normative vs. Positive Statements Normative: What Should be Positive: What is
In Principles of Economics we stated: Economics uses positive statements
In this Course we state: Economics attempts to be about
Positive Statements
Economic Thinking
Problem In Analyzing Economic Problems is that Perceptions may confuse issues Personal Bias Cultural Bias Other Issues
Conventional Wisdom
Economic Thinking
Example: In May of 2003, Jayson Blair a
reported for the New York Times is fired because of numerous false information in his articles.
He was discovered because he plagiarized an article from the San Antonio Express
Mr. Blair is an African American
Economic Thinking
Example (cont): The fact that Mr. Blair is an African
American is to some proof that affirmative action leads firms to promote based on race or ethnicity and not on merit
Economic Thinking
Example (cont): Columnists Howard Kurtz (CNN),
William Safire (New York Times), and Tim Rutten (Los Angeles Times), among others conclude that race was a factor in the continuation of Mr. Blair as a reporter even after internal memos indicated there was grave problems with his reporting
Economic Thinking
Example (cont): To those opposing affirmative action
this is clear evidence of the problem it creates
The evidence is clear, he was only promoted because of the “race thing”
Economic Thinking
Example (cont): Those who support affirmative action,
on the other hand, indicate this is an example of how only when minorities are involved in the same mistakes committed by non-minorities is race become an issue.
For instance, Terry Neal (Washington Post) and Seth Mnookin (Newsweek) argue that race was not an issue
Economic Thinking
Example (cont): Terry Neal relates the example of Stephen
Glass (New Republic) who not only fabricated stories as Mr. Blair has done but went as far as creating Web sites and voice mails to support his fabrications
Also, R. Foster Winans (Wall Street Journal) who in 1985 was convicted for writing false articles for the purpose of making money in the stock market
Economic Thinking
Example (cont): In none of these cases was there a
condemnation that a system that is not minority friendly results in lower quality white reporters not being fired earlier
Who is right? Both arguments are probably
right and wrong at the same time
Economic Thinking
In the Summer of 2003 the Supreme Court upheld the University of Michigan’s Law school admission policy but not that of its undergraduate program Difference in the policies
Economic Thinking
In writing for the majority, Justice O’Connor indicate that “American businesses have made clear that the skills needed in today’s increasingly global marketplace can only be developed through exposure to widely diverse people, cultures, ideas, and viewpoints.” She went on to say that she expected that in 25 years these type of procedures would not be needed
Economic Thinking
On the other hand, writing a dissenting opinion Justice Thomas states: “these programs [affirmative action] stamp minorities with a badge of inferiority and may cause them to develop dependencies or to adopt an attitude that they are ‘entitled’ to preferences.”
Economic Thinking
Economics of the science of how individuals go about the business of satisfying their wants given scarce resourcesThe word Scarcity is crucialScarcity leads to Opportunity Cost
MicroeconomicsThe Basic Approach
Choices Opportunity Cost
Maximization Constraint Maximization Example
Choose X to maximize V(X) subject to the constraint involving X and Z
Max U(X1,X2) s.t. I = P1* X1 + P2* X2
MicroeconomicsThe Basic Approach (Cont)
We have two sets of variables: Endogenous (solved by the system) In this case X1 and X2 Exogenous (values given outside the
system) In this case I, P1, and P2
MicroeconomicsThe Basic Approach (Cont)
From the utility maximization we derive the demand curve. In this case, D1 =F(P1, P2, M)
Next, we are interested on how the the solutions change when an exogenous variable changes
MicroeconomicsThe Basic Approach (Cont)
The Law of DemandΔD1/ΔP1 <0
Substitutes vs. ComplimentsΔD1/ΔP2 < or > 0?
Normal vs. Inferior GoodsΔD1/ΔI < or > 0?
Demand and Supply
Law of DemandRelative PriceIncome and Substitution EffectThings that may impact demand Price of own good, Price of substitute and compliment
goods Income
Demand and Supply
Things that may impact demand (Cont.) Preferences Number of buyers Etc.
Demand
D
Q
P
Decrease in
quantity demanded
Increase in quantity
demanded
Demand
D
Q
P Exogenous variable increases demand
Demand
D
Q
P Exogenous variable decreases demand
Demand and Supply
Law of Supply Relative PriceIncome and Substitution Effect for LaborThings that may impact supply Price of own good, Price of substitute and compliment
goods Cost of Inputs
Demand and Supply
Things that may impact supply (Cont.) technology Number of sellers Etc.
Supply
Q
P S
Supply
Q
P SIncrease in supply
Supply
Q
PS Decrease in supply
Demand and Supply
D
Q
P S
P*
Q*
Demand and Supply(Increase in Demand)
D
Q
P S
P
P*
Q Q*
Equilibrium Price increases and equilibrium quantity also increases
Demand and Supply(Increase in Supply)
D
Q
P S
P*
P
Q* Q
Equilibrium Price decreases and equilibrium quantity increases
Demand and Supply(Decrease in Demand)
D
Q
P S
P*P
Q*Q
Equilibrium Price decreases and equilibrium quantity also decreases
Demand and Supply(Decrease in Supply)
D
Q
P S
P*
Q*
P
Q
Equilibrium Price increases and equilibrium quantity
decreases
Demand and Supply
D
Q
P S
Excess Demand
Demand and Supply
D
Q
P SExcess Supply
Demand and Supply of Labor
D
L
wS
Demand for Labor
Reasons why it slopes downward: Law of Diminishing Marginal Returns Substitution Effect Scale Effects
Supply of Labor and Equilibrium
Why Supply Slopes Upwards then downwards Income and Substitution Effect
Stable Equilibrium
Equilibrium
If w > we then there is an Excess Supply which implies there is unemployment
If w < we then there is an Excess Demand which implies there is an tight labor market
Shocks to Equilibrium:Demand
DEMAND Output becomes more or less
“popular” Shift to more efficient capital Competitiveness in output market
changes Technology
Shocks to Equilibrium:Supply
Supply Change in Labor size
Women enter the market place Immigration Taxes
Change in Quality of Labor Education Cultural Change
Draft vs. No Draft
Assume that the military in this economy is deciding whether to ask civilian government whether to institute a draft or not.Clearly wages will be lower with the draft and will not cause an excess demand (since there is a draft)
Draft vs. No Draft
w
L
wND
wD
LND LD
D
S
Draft vs. No Draft
Is Draft Cheaper? Government:
Yes if Yellow box is larger than brown box No if the opposite is true
Society No, since the opportunity cost of some of
those drafted are likely to have higher
How Would Arm Forces Differ Under the Draft
Draft: Larger, could have soldiers with
higher opportunity cost. May not be better due to the
possibility of low moral.
How Would Arm Forces Differ Under No Draft
No Draft: Smaller Maybe Lower Opportunity Cost
Low Education “taste” for soldiering Perhaps Racial Component
Equity vs. Efficiency
No Draft: Efficient In other words Draft is inefficient
Draft: Could be more equitable
Economic Thinking andEconomic Tools
More about regression analysis later
More about experimental economics later