Economics 1B Lecture 1 S2011

Economics 1B Lecture 1 S2011 - Economics 1B UC Davis UC D i...

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Unformatted text preview: 3/29/2011 Economics 1B UC Davis UC D i Professor Siegler Spring 2011 I. Preliminaries Contact Information Contact Information Mark Siegler Visiting Professor 147 SocSci Office Hours: TR 4:305:30 p.m., and by appointment [email protected] g (916) 2787079 Personal Introduction 2 1 3/29/2011 II. My Responsibilities Be Knowledgeable and Well Prepared Be Knowledgeable and WellPrepared Be Punctual Be Available Teach You Introductory Macroeconomics Challenge You Identify and Reward Exceptional Talent and Hard Identify and Reward Exceptional Talent and Hard Work Make the Class Interesting and Relevant 3 III. Course Requirements Textbook (Strongly Recommended) Principles of Macroeconomics: Global Financial Crisis Edition by John B. Taylor and Akila Weerapana (ISBN13: 9781 439078228) Available in the campus bookstore, on reserve, and online as an ebook. See syllabus in SmartSite for details. Interwrite PRS Clickers (Required starting Thursday) Must be purchased from the campus bookstore. Other types of clickers will not work. SmartSite ( Weekly quizzes and other materials. 4 2 3/29/2011 III. Course Requirements Final grades will be weighted as follows: Final grades will be weighted as follows: Participation (Clickers) Quizzes (8) Midterm Exam #1 Midterm Exam #2 Midterm Exam #2 Comprehensive Final Exam 14% 16% (Sundays, 10 p.m.) 20% (T, April 19) 20% (T, May 17) 20% (T May 17) 30% (W, June 8, 8:30 10:30 p.m.) 5 IV. Course Grading Department grading policy (mean grade of Department grading policy (mean grade of approximately 2.4 GPA) Bring to each exam a scantron form, #2 pencil, 3 by 5 inch handwritten note card with formulas, etc., and a nonprogrammable calculator with an exponent key. If you miss an exam due to illness or other necessity, you must contact me prior to the examination time and provide a legitimate university excuse before you will be able to make up the work. 6 3 3/29/2011 IV. Course Grading Academic dishonesty of any kind will not be Academic dishonesty of any kind will not be tolerated and will result in an F grade in this class. Grading and regrading. If you have any issues with grading, first contact your teaching assistant. If you are still not satisfied, you may submit your work for regrading within seven days after it is returned by giving it to me with a written statement explaining i i it t ith itt t t t l i i what is wrong with the grading. The whole exam will then be regraded. All errors in grading, positive or negative, will be corrected. 7 V. How to Do Well Take notes like I am writing everything on the board g y g Don't miss class (I will base everything on the lectures, and not everything is in the PowerPoints) Read before and after class Don't fall behind and don't cram Work extra problems Don't do it alone This is not an easy class Mastery of elementary algebra and geometry is presumed 8 4 3/29/2011 VI. What is Economics? Definitions of Economics Economics examines the individual and aggregate decisions of economic agents (households, firms, government) about what they produce, exchange, and consume. Economics is the study of how individuals and society manages its scarce resources. Because of scarcity, each of us is forced to make choices, and we as a society are also forced to make choices. That a d e a a o iety a e al o fo ed to ake hoi e That is, we are forced to make tradeoffs. Economics can be boiled down to two words: incentive matter. 9 VI. What is Economics? Opportunity Costs Opportunity Costs Economists take a broad view of costs, recognizing both monetary and nonmonetary components of costs. That is, both explicit and implicit costs. In economics, the opportunity cost of any choice is the nextbest alternative of what we give up when we make that choice. Virtually every action we take we make that choice Virtually every action we take uses up scarce money or scarce time or both. Every action we choose requires us to sacrifice other enjoyable goods, services, and activities for which we could have used our time and money. 10 5 3/29/2011 VI. What is Economics? Opportunity Cost Examples Opportunity Cost Examples Opportunity Cost of Going to Graduate School In the last three years, more people have applied to graduate school, and it's getting harder to get admitted. Why? Opportunity Cost of Having Children In 1850, an American woman who survived her In 1850 an American woman who survived her childbearing years had an average of eight children. Today, it's only two. Why have fertility rates fallen so dramatically in the past 150 years? 11 VI. What is Economics? Scarcity implies that every economy must address three fundamental questions: f d t l ti What and how much is to be produced? How are these goods and services to be produced? For whom are the goods and services to be produced? Broadly speaking, these decisions can be made through markets or through command, or some combination of the two. The U.S. is a mixed, market economy where both t Th U S i i d k t h b th markets and command (inside firms, government, and the family) determine how these three fundamental questions are answered. Consider a UC education and the three fundamental questions. 12 6 3/29/2011 VI. What is Economics? The Miracle of Markets The Miracle of Markets Markets allow buyers and sellers to interact and exchange goods and services. This exchange facilitates specialization (division of labor) and gains from trade through better allocation and greater production. Markets allow us to specialize based on ou o pa a i e a a age our comparative advantage. Prices send signals and provide incentives. Prices also affect the distribution of income and wealth. 13 VI. What is Economics? Three Main Types of Markets yp Markets for Goods and Services (Output Markets) Coffee, iPhones, airline travel, etc. Markets for the Factors of Production (Input Markets) Labor market is the most important factor market p Financial Markets Stocks, bonds, mortgagebacked securities, derivatives, etc. 14 7 3/29/2011 VI. What is Economics? Market Efficiency Under certain conditions, markets are efficient. Allocative U d t i diti k t ffi i t All ti efficiency means that markets are doing the best job possible of satisfying unlimited wants and needs with limited resources that is, of addressing the problem of scarcity. Market Failures In the real world, markets are beset by problems: monopolies, externalities, public goods and common resources, imperfect information, departures from rationality, and macroeconomic information departures from rationality and macroeconomic problems like recessions and financial crises. Government Failures Although government can potentially improve many market outcomes, governments can also make things worse (capture theory). 15 VI. What is Economics? Microeconomics vs. Macroeconomics Microeconomics vs. Macroeconomics Microeconomics is the branch of economics that studies how households and firms make decisions and how they interact in individual markets. Macroeconomics is the study of the performance of national economies, with particular emphasis on unemployment, inflation, and economic growth, and unemployment inflation and economic growth and the policies governments use to try to improve that performance. 16 8 3/29/2011 VI. What is Economics? Positive vs. Normative Economics Positive vs. Normative Economics Positive economics is about describing "what happens and why" without making policy recommendations or value judgments. Normative economics is about what should be. It involves value judgments and policy recommendations. Most disagreements among recommendations Most disagreements among economists involve normative issues. 17 VII. Growth and Fluctuations 18 9 3/29/2011 U.S. Real GDP per Capita, 18652009 (Year 2005 Dollars) 60,000 40,000 , 20,000 16,000 12,000 8,000 6,000 4,000 4 000 2,000 1880 1900 1920 1940 1960 1980 2000 Source: Louis Johnston and Samuel H. W illiamson, W hat W as the U.S. GDP Then? MeasuringW orth, 2010. http://w w w .measuringw 19 VII. Growth and Fluctuations The biggest question in economics is why some The biggest question in economics is why some countries are rich and others poor? Longrun economic growth provides: More and better goods and services Longer life expectancy Better working conditions More leisure More choices And some costs like global warming . . . 20 10 3/29/2011 VII. Growth and Fluctuations Long run economic growth and short run economic Longrun economic growth and shortrun economic fluctuations will profoundly affect your life, influencing: Your choice of occupation and your standard of living Where you live How much and where to save for a home, college, and retirement i When and where to buy a home, etc. 21 VIII. The Method of Economics Economic Models Economic Models One of the first things you will notice as you begin to study economics is the heavy reliance on models. The discipline goes far beyond any other social science in its insistence that every theory can be represented by an explicit carefully constructed model. John Maynard Keynes defined economics as the "science of thinking in terms of models, joined with the art of choosing models which are relevant to the contemporary world." 22 11 3/29/2011 VIII. The Method of Economics Economic Models (continued) ( ) "Economics is a science not because it mimics the same specific techniques or equations as natural scientists, . . . but because it tries to model human behavior in general statements (or equations) with relatively few variables, and seeks to bring the models facetoface with empirical evidence." Diane Coyle "Economists make an intellectual bet: that an exact solution to a grossly oversimplified model that approximates the most important features of the world will be a reasonably good approximation to what is actually going on in the world." Brad DeLong 23 VIII. The Method of Economics Behavioral Assumptions Behavioral Assumptions Every economic model begins with assumptions about the way decisionmakers in the economy behave and then uses logic to arrive at the conclusions about the world. We are interested in formulating "if, then" statements. The standard assumption is: economic decision The standard assumption is: economic decision makers are rational and they think at the margin. Rational decisionmaking means ignoring sunk costs. 24 12 3/29/2011 VIII. The Method of Economics Every choice has both costs and benefits, and y , rational decisions are made by comparing the two. The economic decision rule is simple (costbenefit principle): If the marginal benefit (MB) of any action exceeds the marginal cost (MC), then you will be better off by doing that action. In contrast, if the MB<MC, then don't do it. You are doing the best you can when the marginal benefit equals the b t h th i lb fit l th marginal cost. MB=MC 25 VIII. The Method of Economics Why has the fraction of Americans who can change y g a flat tire fallen in recent years? MC of learning to change a flat hasn't really changed. In fact, the MC has probably fallen with the internet. What about the MB of knowing how to change a flat? MB has fallen because tires are more reliable and cell phones are now pervasive. Thirty years ago, the MB>MC, so almost everybody learned how to change a tire. Today, MB<MC for many people, so it doesn't make sense to learn this skill. 26 13 3/29/2011 VIII. The Method of Economics Market Structure Assumptions Market Structure Assumptions Perfect Competition (competitive market) Monopoly (one seller with no close substitutes) Oligopoly (few sellers offering identical or similar products, importance of strategic behavior) Monopolistic Competition (many firms sell Monopolistic Competition (many firms sell products which are similar but not identical) 27 VIII. The Method of Economics E oge ou Exogenous vs. Endogenous Variables E oge ou a ia e An economic variable is any economic measure that can vary over a range of values. Models have both exogenous and endogenous variables. Endogenous variables are those variables that a model tries to explain. Exogenous variables are those variables that a model E i bl h i bl h d l takes as given. They are "outside" of the model. What is exogenous and what is endogenous depends on the particular model. 28 14 3/29/2011 VIII. The Method of Economics Ceteris Paribus (All Else Equal) Assumption Ceteris Paribus (All Else Equal) Assumption Refers to holding all other exogenous variables constant, or keeping all other things the same, when one exogenous variable is changed to determine the impact on the endogenous variables. 29 Exogenous and Endogenous Variables 30 15 3/29/2011 IX. Preview of the Models Production Possibilities Model (Comparative Production Possibilities Model (Comparative Advantage) Supply and Demand Model Spending Allocation Model Growth Accounting Model Quantity Theory Model of Money and Inflation Quantity Theory Model of Money and Inflation Natural Rate of Unemployment Model Economic Fluctuations Model (Dynamic Aggregate Demand and Aggregate Supply Model) 31 X. Conclusion For each new model, you should keep track of: For each new model, you should keep track of: Its assumptions. Which variables are exogenous and which are endogenous. The questions it can help us understand. And those it cannot. And those it cannot. 32 16 ...
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