Announcements

1.First HW on Aplia is due Monday at 11:45pm do

assignments marked graded.
2. If you took ECON 2005 in a previous semester
and are repeating, I can get your Aplia account
paid. E-mail me Repeat Student in subject
NOW (if you have not).
If you are a repeat student, register for my course in
Aplia (see last page in syllabus) but dont pay.

3.I wont count iClickers until Friday.

4.Some issues with registering iClicker on Canvas.
Looking into it (wont impact grade)
5.Now: Ch 1-2 in the book. Next week: ch 4.
(skipping 3)

A story
A few years ago the US Government was
trying to get people to use the Dollar coin
more often.
So they decided to sell them online at their
face value with free shipping.
People bought HUNDREDS of THOUSANDS of
them.
BUT as soon as they got them, they
deposited them in the bank and NEVER used
them.
What happened?

Learning how to think like an

Economist
1. The mistake of ignoring
secondary effects or not thinking
about unintended consequences
Often people do not think about or
do not anticipate unintended
consequences of their decision or
action.
Example: Child-proof aspirin bottles
actually caused more children to get
access to drugs since the adults just
left the caps off because they were

Unintended consequences
Good examples of unintended
consequences (ignoring
secondary effects?) in (old) NY
Times article I put on Canvas
(files, articles)
By the authors of Freakonomics
a series of books worth checking
out.

Learning how to think like an

Economist

2. Association vs. causation

People commonly think that if two
things happen together, then one
(usually the one that comes first)
must cause the other. This is not
always true.

In other words, if Event A happens

before Event B, it is not necessarily
true that A caused B. B may have
somehow caused A or both A and B

Learning how to think like an

Economist
3. The Fallacy of Composition
fallacy of composition: People
often make the mistake of
thinking that what is true or best
for one person is necessarily true
for all.
Example: Going to a restaurant
at 5:30 because no one goes that
early so its less crowded. Good if

Learning how to think like an

Economist

4. Be aware of self selection

Often you will hear a statistic that

sounds really impressive. But because
of self selection, the reality may not
be as impressive.
Self selection is when people choose
to be in the group being studied.
Because of this, the stats are based on
these people and not on those who did
not choose to be in the group. Just

Self selection
Example: People who switched to Auto
Insurance company X saved, on average,
$200 per year. Well duh, if they werent
going to save, they wouldnt have switched.
What about all the people who didnt switch?
The stat is based on a group of people who
self-selected into the population of interest.
This is a type of sample selection bias
when the sample is not representative of the
entire population.

Back to Choices and

Scarcity
As we said last time, economics is all
about agents making decisions about
what to do with scare resources.
What are these resources and what
can we do with them?
Who are the main decision makers
well be thinking about?
How do they decide things?

Resources (focus on society)

Inputs; factors of production

1.
2.
3.
4.

Used to produce goods and services

Goods and services are scarce

because resources are scarce
Labor
Capital
Natural resources (land)
Entrepreneurial ability

Resources
Labor - human effort
Physical effort
Mental effort
Time
Payment = Wage
Capital - human creations
Physical capital
Human capital
Payment = Interest

Resources
Natural resources
Renewable
Exhaustible
Payment = Rent
Entrepreneurial ability
Talent, idea
Risk of operation
Payment = Profit

What we do with resources:

Goods and Services
Good: see, feel, touch
Service: intangible
Scarce good/service
Almost all goods and services are scarce:
The amount that people desire exceeds the
amount available at a zero price.

Choice
We give up some goods and services to get
others (opportunity cost). Everything has a
cost! (even if its free).
There are no free lunches

Who: Economic Decision

Makers
Households HHs serve 2 roles in the

economy
Consumers
Demand goods and services
Resource owners
Supply resources
Firms (also Governments and Rest of the
World) also have 2 roles
Demand resources
Produce goods and services

How: Markets!
Bring together buyers and sellers
Determine price and quantity
There are 2 types of markets:
1. Product markets
Goods and services (or outputs)

2. Resource markets
Resources or inputs

A Simple Circular-Flow
Model
Among economic decision makers,
we see a flow of
Resources
Products
Income
Revenue

The main interaction is between

Households and Firms

The simple circular-flow model

Households
- Supply resources to
resource market; earn
income
- Demand goods and
services from product
market; spend income
Firms
- Demand resources to
produce goods and
services; payment for
resources
- Supply goods and
services to product
market; earn revenue

Digression: Economics as a
science:
Econ relies heavily on what we call
models. These models are
meant to explain or reflect
relationships
that exist
the
model
A formal statement
of ain
theory,
real world.
usually
a mathematical statement of a
presumed relationship between two or
more variables.
A model is a simplified version of the
world used to make predictions or
variable
A measure that can change
test relationships.
from time to time or from observation to
observation.

Economics as a science:
In many way, econ is like a science.
Perhaps most importantly, we rely on the
scientific method when doing research.
The scientific method (4 steps):
1. Identify the question and define relevant
variables.
2. Specify assumptions (ceteris paribus)
3. Formulate an hypothesis.
4. Test the hypothesis.

Scientific Method
4 steps:
1. Identify the question and
define relevant variables.
Q: How would a new tax on
cigarettes affect the price of chewing
tobacco?
The relevant variables: the size of
the tax, the price of cigarettes, the
price of chewing tobacco,
consumption of cigarettes,
consumption or chewing tobacco.

Scientific Method
2. Specify Assumptions
Ceteris paribus=all else
equal. We must assume that
the only thing that changes is the
tax. Otherwise we cannot isolate
the effect of the tax.
example: suppose a government
study comes out saying that
chewing tobacco is much worse
than smoking.

Scientific Method
2. Specify Assumptions (cont.)
Self-interested, rational
agents.
Self interested = maximizing
their own happiness or utility
Rational = try to make the best
choicesactually think things
through.

Scientific Method
2. Specify Assumptions (cont.)
If individuals are rational and selfinterested it means that they make the
best choice given the available
information
Maximize expected benefit with a given cost.
Minimize expected cost for a given benefit.

Note: helping others can make people

happy and is consistent with self interest

Scientific Method
3. Formulate an hypothesis.
A hypothesis is a theory about
how the key variables relate to
each other.
Example: if a tax is put on
cigarettes then the price of
chewing tobacco will increase.

Scientific Method
4. Test the hypothesis.
Not easy!!
Cant do an experiment in a lab
(although sometimes you can try).
Costly to enact the policy to see
what happens.
Best bet is to look at past
experiences. Find a time when a tax
was put on cigarettes and see what
happened then.

Scientific Method
4. Test the hypothesis.
Big Problem!!
Ceteris paribus does not hold in
the real world.
Statistical and econometric
methods are used to control for
(or take into account) everything
else that is changing. (very hard
to do)

The Scientific Method: Step by Step

1. Identify the Question and Define Relevant
Variables
2. Specify Assumptions
Modify
Approach

3. Formulate a hypothesis
4. Test the hypothesis
or

Reject the
hypothesis

Use the hypothesis until a

better one shows up

Economic Questions
Using this approach, we can study a huge
number of questions dealing with nearly
every aspect of human and economic
behavior.
Is there discrimination in labor markets?
How do gas prices affect how much ice cream
you buy?
When is the optimal time to have children?
How do elections affect mortgage rates?
Check out Econlit to see all the fun stuff we
study!
http://search.proquest.com/econlit/advanced?a
ccountid=14826

Some graphing stuff

Look through this on your own if
any of this is fuzzy to you, look at the
math tutorial in Aplia.

Appendix
HOW TO READ AND UNDERSTAND GRAPHS

A graph is a two-dimensional
representation of a set of numbers, or
data.

Appendix
TIME SERIES GRAPH

A time series
graph shows how
a single variable
changes over
time.

Disposable Personal Income in the United

States: 19752005 (in billions of dollars)

Appendix
GRAPHING TWO VARIABLES ON A
CARTESIAN
COORDINATE
SYSTEM
The
Cartesian coordinate
system is the most common
method of graphing two
variables. This system is
constructed by simply
drawing two perpendicular
lines: a horizontal line, or Xaxis, and a vertical line, or
Y-axis. The axes contain
measurement scales that
intersect at 0 (zero). This
point is called the origin.
A Cartesian Coordinate System

Appendix
The slope of the line indicates
whether the relationship between the
variables is positive or negative.
The slope of the line is computed as
follows:

Y2 Y1
Y

X
X 2 X 1

Appendix
An upwardsloping line
describes a
positive
relationship
between X and Y.

A downwardsloping line
describes a
negative
relationship
between X and Y.

A Curve with (a) Positive Slope and (b) Negative Slope

Slope
Y
(1,3)

(3,2)

Slope = (2-3)/(3-1)= -1/2

Appendix

Changing Slopes Along Curves