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”?

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

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?

• 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?

Why study Economics? – To understand society

• Economic decisions determined the character of society and vice versa.

Example: Menem trucho

Why study Economics? – To understand global affairs

Example: Venezuela has a share of around 12% total oil production.

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…

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?

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

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?

• 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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