Micro Chapter 1
The Economic Approach
4 Learning Goals
1) Identify and list the critical components of
economics.
2) List and provide examples of the eight
guideposts of economic thinking.
3) Distinguish between two types of
economic statements (on your own)
4) Avoid making four common mistakes
Compare and Contrast:
A. All the possessions you have right now
B. All the possessions you had 10 years ago
Which group would you rather have? Why?
Improving standards of living
doesn’t just happen by accident
Actually, they don’t have to improve at all
Video:
A Deal for You:
Would you give up the internet for the rest
of your life for $1 million right now?
A Deal for You:
Would you give up the internet for the rest
of your life for $1 million right now?
Video:
What Is Economics
About?
Economics doesn’t have to be
like this:
Economics tries to explain and predict the
behavior of consumers, firms, and
government.
John M. Keynes:
“Economics does not furnish a body of
settled conclusions immediately applicable
to policy. It is a method rather than a
doctrine, an apparatus of the mind, a
technique of thinking which helps its
possessor to draw correct conclusions.”
Steven Levitt & Stephen Dubner
Super Freakonomics
The economic approach isn’t meant to
describe the world as any one of us might
want it to be, or fear that it is, or pray that it
becomes- but rather to explain what it
actually is. Most of us want to fix or
change the world in some fashion. But to
change the world, you first have to
understand it.
Supplemental video: RSAnimateFreakonomics (on Blackboard)
Scarcity and Tradeoffs
Scarcity leads to tradeoffs which result in
making choices
Scarcity and Tradeoffs
Thomas Sowell: “In the world that people
live in, and are likely to live in for centuries
to come, trade-offs are inescapable. Even
if we refuse to make a choice,
circumstances will make choices for us, as
we run out of resources for many
important things that we could have had, if
only we had taken the trouble to weigh
alternatives. ”
Historically, mechanisms that have been
used to deal with the problem of scarcity:
1. Force
2. Tradition (emphasized past ways, relied
on families)
3. Authority (government and church)
4. Market
5. Combinations of 1-4
Scarcity and Tradeoffs
Scarcity requires that some wants remain
unfulfilled
Issues of equity, justice, and fairness are
embedded with scarcity
Class Perspective
We will focus on the market process of
dealing with scarcity.
At times we will compare and contrast with
the government or collectivist process.
Do not confuse the market process as
being the same as politically conservative.
The Economic Way of
Thinking
Always have these guidelines in
your economic thought process:
The text lists 8 guidelines.
(1) There are always tradeoffs
(1) There are always tradeoffs
What you give up is your opportunity costvalue of next best alternative
Common mistake: opportunity cost is NOT
the sum of everything you give up
(1) There are always tradeoffs
There is no such thing as a free lunch!
(1) There are always tradeoffs
Supplemental video: Milton Friedman- free
lunch myth (on Blackboard)
(2) Individuals choose purposefully
Referred to as economizing behavior-try to
get the most benefits for the least cost or
effort
Also known as rational behavior
Example: drug addict
Alfred Marshall:
“It is deliberateness, and not selfishness,
that is the characteristic of the modern
age.
Steven Levitt & Stephen Dubner
Super Freakonomics
Human behavior is influenced by a dazzlingly
complex set of incentives, social norms, framing
references, and the lessons gleaned from past
experience- in a word, context. We act as we do
because, given the choices and incentives at
play in a particular circumstance, it seems most
productive to act that way. This is also known
as rational behavior, which is what economics is
all about.
Clicker question next
When economists say that people choose
rationally, this means
1. they gather all relevant information before
making their purchases
2. once a pattern of behavior has been established,
people tend to become set in their ways
3. people respond in predictable ways to changes
in costs and benefits
4. people rarely make errors when they are
permitted to make transactions
(3) Incentives matter
As the incentive goes up, you will be
more likely to do something (or try to),
and vice versa
The incentive doesn’t have to be money
Class Activity: What are some of your
incentives?
(3) Incentives Matter
Video:
(3) Incentives matter
Illustration: Dancing
(3) Incentives matter
Illustration: Dancing
1:
(3) Incentives matter
Illustration: Dancing
1:
2:
3:
Thank you!
(3) Incentives Matter
Supplemental reading: Flamboyant male
dancing attracts women best
Supplemental video: RSAnimatesurprising truth about what motivates (on
Blackboard)
(4) Think on the margin, not in total
or on average
Marginal means additional or incremental
Marginal _______ is additional _______.
Marginal _______ is additional _______.
Example: water/diamond paradox
Example: Would you travel 3 blocks to
save $20 on a $100 product?
Would you travel the same 3 blocks to
save $20 on a $1,000 product?
(4) Think on the margin, not in total
or on average
Rule to live by:
Continue to engage in an activity as long
as the expected marginal benefit is greater
than the expected marginal cost.
When should you break up with your
boyfriend?
(5) More information leads to better
decision-making, but more
information is costly to get
Refer back to (1) through (4)
1)
2)
3)
4)
There are always tradeoffs
Individuals choose purposefully
Incentives matter
Think on the margin
(6) Many choices create a
secondary effect
The primary effect is often immediate and
visible
The secondary effect usually comes later
and is not as visible
Video:
(7) Value is subjective
Beauty is in the eyes of the beholder
Value is determined by the purchaser
(8) Economic thinking is scientific
thinking
Economists use data and information
generated by people to explain and predict
actions
Clicker question next
Do you believe red cars receive more traffic
tickets?
1. Yes
2. No
(8) Economic thinking is scientific
thinking
Economists use data and information
generated by people to explain and predict
actions
Class Activity: Do you believe that red
cars receive more traffic tickets? Why or
why not?
Video:
Steven Levitt & Stephen Dubner
Super Freakonomics
But while there are exceptions to every rule, it’s
also good to know the rule. In a complex world
where people can be atypical in an infinite
number of ways, there is great value in
discovering the baseline. And knowing what
happens on average is a good place to start. By
so doing, we insulate ourselves from the
tendency to build our thinking- our daily
decisions, our laws, our governance- on
exceptions and anomalies rather than on reality.
(8) Economic thinking is scientific
thinking
Do you believe that students who regularly
attend class earn higher grades? How could
you support (or fail to support) that?
See David Romer’s article “Do students go to
class? Should they?” on Blackboard
Positive and Normative
Economics
4 Learning Goals
3) Distinguish between two types of
economic statements (on your own)
Please read “Essays in Positive
Economics” by Milton Friedman on
Blackboard
The introduction and Section 1 (pages 1
through 3) are relevant; you may skip the
rest.
Pitfalls To Avoid in
Economic Thinking
Don’t make one of these errors:
(1) Violation of ceteris paribus.
– Ceteris paribus is Latin for “other things
constant.”
– We want to isolate variables so we typically
allow only one to change at a time.
– Example: stomach ache
Errors:
(2) Good intentions do not necessarily
result in good outcomes
Milton Friedman: “There is nothing that
does so much harm as good intentions”
Errors:
(2) Good intentions do not necessarily
result in good outcomes
Example: using someone else’s device for
clicker credit
Errors:
(3) Association is NOT causation
Video:
Errors:
(3) Association is NOT causation
Some examples
Video:
Errors:
(4) Fallacy of Composition
– Assumption: what’s good for the individual is
good for the group.
– Making this assumption when it’s false is the
fallacy.
– Video:
Class Activity
Provide at least one example of the fallacy
of composition.
4 Learning Goals
1) Identify and list the critical components of
economics.
2) List and provide examples of the eight
guideposts of economic thinking.
3) Distinguish between two types of
economic statements (on your own)
4) Avoid making four common mistakes