Economics for CED Noémi Giszpenc Spring 2004 Lecture 1: General Intro February 10, 2004

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 2 First, some questions for you What does “economics” mean? What’s an economic activity? What sorts of generalizations do you think can be made about people and economic activity?

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 3 Why do people do what they do? To get the most juice/stuff from what they’ve got –Maximize utility/profits subject to constraint To do the best they can –Optimization To get something they can live with and move on –Satisficing (Herbert Simon) People are crazy and do whatever

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 4 “Had we but world enough, and time” Can we have everything we want? No. We are subject to constraints: –Time –Money –Energy –Attention –Talent –Supplies –Bandwidth –Physical laws –Space –…

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 5 There are many definitions of “economics” “A social science concerned with the way society chooses to employ its limited resources--which have alternative uses--to produce goods and services for present and future consumption.” –Teaching Economics As If People Mattered, 2000

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 6 “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” –Lionel Robbins, The Scope and Method of Economic Science, 1932 A neoclassical definition:

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 7 Economics is about questions like… What resources do people have and how do they use them to do what? But also like... How have modern economic systems developed, and how do they work? How do they change? Who gets what? How? Why? –Hugh Stretton, Economics: A New Introduction, 1999 –I will be using Stretton heavily for the next few slides

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 8 Different people see it differently The science of “choice under scarcity” –Standard, neoclassical How to conserve resources for continuing human life on Earth –Environmental The study of provisioning: how we supply our material needs and organize our mutual interdependence –Feminist ? Close to the origins of the word: Economy comes from Greek oikonomos, household manager (oikos, house + nemein, manage)

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 9 How to study it, then? Economics, like other social sciences, is part study and part debate. –McCain calls it a “rational dialog” “Understanding economics is more like understanding politics or history or psychology than it is like understanding physics.” –There are still rules, but they’re rougher

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 10 Start with what we know CertainRoughUncertainUnknown costs laws past behavior projections “ceteris paribus” estimations (ex, demand at lower price) advertising future laws weather gov’t behavior of competition technical innovation

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 11 How do we know things? Cause and Effect “Different causal relations have to be known by different methods of observation, understanding, and choice.” –Simple arithmetic (ceteris paribus calculations) –Regular association (experience) –Knowing rules and regulations –Understanding people’s thoughts and feelings (strategy and marketing) –Historical explanations –Experiments –Models

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 12 Also, what we study depends on who wants to know Ex: What will be the economic effects of a technological change? On… –Manufacturers –Workers (union/non-union) –Workers’ families –National government National accounts, small business, employment… Their question is: how are our gov policies working? –Local government Location, pollution, traffic, services/utilities, jobs…

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 13 Positive and Normative positive economics deals with “what is” –A social science based on evidence normative economics deals with “what ought to be" –goes beyond science and has moral or ethical aspect Stretton finds distinction unhelpful –“Economics is controversial chiefly because it deals with such complex activity that its simplifications are necessarily selective.”

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 14 Economic Assumptions 1 Scarcity –Leads to key question: how to allocate resources under scarcity to meet many needs and wants What will be produced? By what methods? Using what resources (land, labor, man-made capital)? For whom? –Entails “opportunity cost”: (trade-offs) The value of the other goods and services we must give up in order to produce something

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 15 Economic Assumptions 2 Self-interested, rational individuals? –Acting according to individual values –Acting as if they were rational, on average Irrationalities are random, and cancel out? –Useful starting place for trying to figure out why people do what they do, or what you think they would be likely to do

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 16 Economic Models Tend to consist of a list of variables and the relations among them –Often designed to be analytically solvable, static –Can also be dynamic -- involve time and use calculations to solve –Are the simplifications too much? Can models be refined to reflect reality?

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 17 machinesfood Our first model Uses scarcity and choice Describes tradeoff between producing machines and food Relationship is called the “production possibilities frontier”

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 18 The PPF as a diagram Green area is feasible production Blue line is maximum efficiency Beyond is infeasible Why is area convex (it curves outward)?

2/10/04Economics for CED: Lecture 1, Noémi Giszpenc 19 More on Efficiency: Pareto satisfaction is not comparable from person to person, so there is no way of knowing whether someone’s gain outweighs another’s loss a situation is Pareto-optimal if by reallocation you cannot make someone better off without making someone else worse off Vilfredo Pareto