What are the three key ideas of economics?
- people are rational
- marginal decision making
- incentives change people’s behaviour
Make up a story that demonstrates all three key ideas.
- Dave sees a jacket in the window for a thousand pounds.
- He decides to research online and finds one that is 20% off somewhere else. [rational because researching variants]
- He goes to this new store and sees the jacket. He thinks to himself, how many MORE dates can I get with this jacket. [marginal benefit as looks at additional benefit rather than total value]
- He considers the opportunity cost of buying the jacket: it means he has no money to take his dates to a nice place. [he considers opportunity cost because he thinks about what he could have done instead]
- However, the woman working at the store compliments him in the jacket and says it suits him. The incentive of impressing this woman changes his mind and he purchases the jacket. [incentives have changed his behavoiur]
What is an economic model?
a simplification of reality that can be used to analyze economic situations
0What are the steps of building an economic model?
- assumptions
- hypothesis
- test with data
- revise
What are the two types of analysis?
- positive
- normative
Which type of analysis do economists generally perform?
positive
What are the differences between the two types of analysis?
- positive - how world actually is
- normative - how world should be
Give an example of the differences between the two types of analyses.
Student loan debt.
Positive:
1. how much would it cost?
2. what benefits would there be to the economy?
3. which groups would benefit most?
4. how would this change incentives for future borrowers?
Normative:
1. is it fair?
2. which groups should be prioritized?
Economists do positive, not normative.
What is the difference between microeconomics and macroeconomics?
Microeconomics = study of individuals:
1. how actors make choices
2. how actors interact
3. how government influences choices
Macroeconomics = study of economy as a whole:
1. inflation
2. unemployment
3. growth
What is a production possibilities frontier?
graph that shows the maximum possible combinations of two products that could be gotten with current resources
What are the essential features of a production possibilities frontier graph?
- x-axis is quantity of first thing
- y-axis is quantity of second thing
- line shows efficient combinations
- below the line is inefficient
- above the line is impossible with current resources
