What is Economics?

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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 600500
  (2520)1100
• Cost if you do it 600
  6001000 (2540)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 Spearss 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

Fertility rate
Average schooling
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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
• Stability
• National output growing steadily, with low
  inflation and full employment.
• Example Inflation in Argentina in 1990
  reached more than 3000!