1. Lecture 2 Economic Models
Dr. Jennifer P. Wissink
January 30, ©2017 Jennifer P. Wissink, all rights reserved

2. How To Beat Intro Micro
Come to the lectures and review your notes against my slides.
Stay current in the textbook.
Do the MyEconLab stuff for starters.
Then really test yourself with the Wissink old traditional problem sets and Wissink Econ 1110 sample exams.
Do them sincerely. Go for quality over quantity.
Use the course Web pages.
Use the entire instructional team!!
Everyone’s office hours
Everyone’s sections
Learning Strategies Center’s services
Also use the E.T.C. staring in about 10 days
Nip problems in the bud.
Practice, practice, practice!!
Go for active as opposed to passive studying!

3. i>clicker questions
What part of Cornell?
Arts College
ILR
CHE
CALS
Engineering
What part of US?
Northeast
Midwest
West Coast
The South
None of the above
Are you a morning person?
No!
Yes!!
Will be this semester
What part of the world?
Canada
Europe
Asia & Down Under
South&Central America
None of the above
How much do you like using math outside of math classes?
Love
Hate
Don’t love, Don’t hate
Don’t know, we’ll see
Have you already taken intro macro?
Yup.
Nope.

4. Econ 1110 Introductory Microeconomics
So what is this course about?
(And what is it not about?)
My working title: Introduction to Applied Microeconomic Theory
Theory: We will construct models.
Look at the world, hypothesize a model, analyze the model, use the model to make predictions and then see if the model holds up under empirical scrutiny.

5. Applied Microeconomic Theory
Economics: The study of the allocation of scarce resources to produce commodities to satisfy infinite human wants.
Classic definition. Economics is about constrained optimization. Choice under conditions of scarcity.
Micro: Looking at small pieces of the puzzle, individual markets (as opposed to macro - which looks at the big picture).
Three basic traditional micro questions: What? How? and For Whom?

6. Macro v Micro in the News
More Macro-ish:
More Micro-ish:

7. Examples of Microeconomic and Macroeconomic Concerns
BRANCH OF ECONOMICS
PRODUCTION
PRICES
INCOME
EMPLOYMENT
Micro
Output in individual industries How much steel? How much office space? How many cars – big or small, how fuel efficient?
Price of individual goods and services Price of medical care. Price of gasoline. Food prices. Apartment rents.
Distribution of income and wealth Wages in the auto industry. Minimum wage. Executive Salaries. Poverty.
Wage differentials.
Employment by individual businesses and industries Steel industry jobs. Number of employees in a firm. Number of accountants.
Macro
National production/output Total output: GDP Output by sectors. Investment. Growth of output.
Aggregate price level Consumer prices. Producer prices. Rate of inflation. Interest Rates.
National income Total wages and salaries. Total corporate profits.
National savings.
Employment and unemployment in the economy Total # of jobs. Unemployment rate Productivity growth

8. Applied Microeconomic Theory
Applied: We will apply what we learn to real world situations.

9. Why Study Economics? It’s everywhere. It’s unavoidable.
To understand how markets work.
It’s a requirement and a prerequisite for understanding lots of other material.
To help you understand how economists think and construct arguments.
To help you differentiate good from bad analysis.

10. On Modeling & Constructing Theories
Simplistic Model Construction
Ockham’s Razor
Evaluation of Models
economics is a social science
Two pitfalls to avoid
not recognizing the “fallacy of composition”
using “post hoc ergo propter hoc” logic
Positive vs. Normative analysis
What is versus
What ought to be
William of Ockham 14th century philosopher

11. A Road Map Suppose I want to get you from here to Cortland.
How about we draw a map.

12. One More Time… Economics: the study of the allocation of
scare resources to
produce commodities to
satisfy infinite human wants.

13. The Production Possibilities Frontier
Let’s introduce the Production Possibilities Frontier.
Better known as the PPF.
The PPF is a basic workhorse in economics.
Often introduced in the first couple of lectures in both micro and macro intro courses.

14. The PPF: What Is It?
A description of the possible or feasible combinations of commodities an economy can produce, using all of the available resources efficiently.
Shows the trade-off between more of one good in terms of another.

15. The PPF: Assumptions Given: endowments of resources
Given: technologies
Given: a fixed time frame
Given: efficient production

16. i>clicker question
Which one of the following would an economist classify as capital (K)?
The head TA’s $100 bill.
The guitars used by Bruce Springsteen and the E-Street Band.
A corporate bond issued by IBM.
Unfinished lumber purchased by a furniture manufacturer to make chairs.
All of the above.

17. The PPF: What You Get Typical teaching set-up: Two final goods.
Guns (G) and Butter (B)
Two input goods and final goods technologies.
So drop “land” for now, no big deal.
Kapital (K) and Labor (L) both go into making guns and butter according to some known and given technology that can be described by production functions.
G = g(K, L) and B = b(K, L)
PPF is a frontier that shows the maximum amount of one good you can produce given a fixed amount of the other.
Frontier is a graph.

18. Getting Started Constructing a PPF: The Gun Production Function (given)
GUNS K L
Guns (tons) 2 1 3 4 5 18