Welcome to Econ 210 Dr. Mitchell

Chapter 1 The Science of Economic Analysis

Economics n The study of choice, given we face scarcity

Scarcity n A good is scarce when, at a zero price, more is desired than is available. n Almost everything “good” is scarce. n Example of something not scarce: sand in the desert.

Branches of Economics n Microeconomics: Studies households, firms, perhaps an industry. n Macroeconomics: Studies aggregates such as GDP, price level, interest rates, unemployment.

The Science of Economics n A Social Science n Uses theories & models to describe behavior & predict it. The goal is to predict behavior. n We look for the simplest theories that can still predict well.

Three Ways to Test Economic Theories n Use actual data. Must use statistical methods to separate multiple causes & effects. n Conduct a policy experiment. Try a new policy on a small scale to see what the effects are. n Laboratory experiment. Test behavior in a “pure” setting. Often uses college students as subjects.

Potential Pitfalls in any Science n Causation v. Correlation Pitfall n Correlation: two effects or events tend to be observed together. n Correlation may be caused by: -one causes the other, or vice versa -something else causes both -coincidence

Example of Correlation without Causation n Heavy drinkers have high rates of lung cancer. -Does one cause the other? -Is there something else that might cause both? -Is there something else that might cause one to be correlated with the other?

Post Hoc, Ergo Propter Hoc Pitfall n “After the fact, therefore because of the fact.” n Example: Your G.P.A. fell last semester, the first one in which you lived apart from your parents. Your parents conclude that you must move back home this semester. n Will your grades rise?

Positive v. Normative Economics n Positive econ: studies the effects of policies or events. n Normative econ: evaluates what should be done in light of those effects. n Which is which? Elimination of Virginia’s car tax -will reduce state revenues. -should be financed by cuts in the higher education budget.

Next Time n Continue introduction to economics n Continue Ch.1, begin Ch. 2