what is economics? economics is the social science that study how individuals and societies choose...
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What is Economics?
• Economics is the social science that study how individuals and societies choose to use the scarce resources.
Example: When should it be more expensive to rent a lake cabin in Maine? Summer vs. Winter
Summer. Because there is a fix supply of cabins during the whole year but there is more demand in summer than in winter.
Question: What would happen if each of us had a genius of the lamp”?
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Why study Economics? - To learn a way of thinking
• Opportunity cost
The full cost of making a specific choice includes what you give up by not making the alternative choice.
Example: Replace my home office floor
Information: - Materials costs ($600)
- Time it would take me or a home depot guy to do it (25 hours)
- My hourly rate: $40 ; home depot guy $20
Cost if someone else do it: $600+$500 (25*20)=$1100
Cost if you do it: $600 $600+$1000 (25*40)=$1600
Best thing to do: You do it Someone else do it cost
Accountantperspective
Economistperspective
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Question: when is the best time to go to a party?
Beginning of semester vs. Before the finals
• Marginalism
In weighting the costs and benefits of a decision, it is important to weight only the costs and benefits that arise from the decision.
Example: Suppose you are Britney Spears’s record company and you already invested $50,000 to produce her last album. Make a copy of such CD costs 1$. Since it was very successful, you are thinking about making more copies of such album. 1$ is the cost you would have in mind to decide whether to make more copies or not.
Question: Suppose you are in the board of United Airlines. United has the policy to sell tickets pretty cheap two hours before each flight. A partner of the board states that such policy has no logic; he argues that in many cases the ticket price is below the average cost. How would you defend such policy?
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• Efficient markets – No free lunch
A market in which profit opportunities (above the average profit) are eliminated almost instantly.
Example: Suppose that a 1996 BMW in excellent condition with 40,000 miles costs more or less $10,000. What would you say if a neighbor offers you a 1996 BMW with 40,000 miles at $3,000?
The car is a lemon; that is to say, the car must be in poor condition. If the car was in excellent condition she would have ask for more than $3,000.
Question: What is your perception about those TV advertisements that promise you to make you rich?
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Why study Economics? – To understand society
• Economic decisions determined the character of society and vice versa.
Example: Menem trucho
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Why study Economics? – To understand global affairs
Example: Venezuela has a share of around 12% total oil production.
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The scope of economics
• Diverse fields
Comparative economic systems, Institutional Economics, Economic history, Development Economics, Industrial Organization, Econometrics, Finance, International Economics, Economics of race and gender, Public economics, Political Economies, Urban Economics…
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The method of economics
• Positive and normative economics
Positive economics: An approach to economics that seeks to understand behavior without making judgments about outcomes.Example: Does economic growth increase income inequality?
Normative economics: An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe a course of action.Example: Should the government provide free higher education?
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The method of economics
• Correlation and causality
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The method of economics
• Everything has to do with everything else….that is why we build theoretical models.
Advantages of using theoretical models:
- Keep only fundamental variables involved.
- Understand precise mechanisms of transmission.
- Help to design the empirical test.
Example: Cons= 400 + 0.9 income + 0.05 wealth
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Criteria for judging economic outcomes
• Efficiency
An efficient economy is one that produces what people
want at the least possible cost. Discussion: Car production in Argentina.
• Equity
Usually measure in terms of income inequality.Discussion: Is there a “right” level of inequality?
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• Economic growth
• StabilityNational output growing steadily, with low inflation and full employment.
Example: Inflation in Argentina in 1990 reached more than 3000%!
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