The real world and economic theory
Dr Dean Garratt
FSS, 6 November 2014
In search of a toolkit
• Toolkit for what?
• To analyse choices arising out
from the problem of scarcity
•
Production and consumption
choices
• So what is the economist’s
toolkit?
• Concepts, models and techniques
that we use in analysing a range
of issues and topics
Threshold Concepts
 A set of fundamental concepts
 Help you to ‘think like an economist’
 Understand the problems and issues
analysed by economists
 Understand the ways in which
economists analyse problems
A sample of threshold concepts
 Choice and opportunity cost
 Rational decision making involves choices at the
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margin
Markets may fail to meet social objectives
People respond to incentives
People’s actions depend on their expectations
People often think and behave strategically
The distinction between real and nominal values
Cumulative causation: economic effects can snowball
Choices
 So economists study, in one way or another,
choices
 Hence, the scope of what economists study is
enormous
How much am I prepared
to pay to watch live football?
Emotional attachment
Superstars
Competitive balance
Choices
 Understand the determinants of
choices and their potential
implications
 Policy-making
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Takes place in a political
environment
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How will the political system
impact on policy?
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Applications of game theory
Choices
 Central banks
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Should we give them independence
and, if so, what form of
independence?
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How transparent should the
decision-making process of central
bankers be?
Choices
 Behavioural
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Emotions and impulses
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Rules of thumb, short cuts
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How options are framed
Relativity matters
 Herding and ‘groupthink’
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