1. Macro Chapter 1
The Economic Approach

2. 4 Learning Goals
Identify and list the critical components of economics.
List and provide examples of the eight guideposts of economic thinking.
Distinguish between two types of economic statements
Avoid making four common mistakes

3. Do you think Americans are better off today than they were 100 years ago?
How would you determine or measure this? What’s the criteria?
Watch Video: Stossel Macro 01-Is life getting worse?

4. Some criteria to consider:
Life expectancy (years) 47 78
Infant mortality (deaths per 1,000 live births)
100
6.7
Real Per capita GDP
$4,800
$46,350
High school completion (percent of adults) 22 90
Electrification (percent of US households) 8 99

5. Here’s someone who thinks we’re much better off today
Watch Video: Louis CK- technology

6. What Is Economics About?

7. Economics tries to explain and predict the behavior of consumers, firms, and government.

8. 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.”

9. 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.

10. Steven Levitt & Stephen Dubner Super Freakonomics
In his Nobel address, [Gary] Becker suggested that the economic approach is not a subject matter, nor is it a mathematical means of explaining “the economy.” Rather it is a decision to examine the world a bit differently. It is a systematic means of describing how people make decisions and how they change their minds; how they choose someone to love and marry, someone perhaps to hate and even kill; whether, coming upon a pile of money, they will steal from it, leave it alone, or even add to it; why they may fear one thing and yearn for something only slightly different; why they’ll punish one sort of behavior while rewarding a similar one.”

11. Optional Video: RSAnimate-Freakonomics

12. Alfred Marshall:
Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.

13. What does the term “scarcity” or “scarce” mean to you?
Can we eliminate scarcity?
If we can’t, what must we do?

14. Scarcity and Tradeoffs
Scarcity leads to tradeoffs which result in making choices

15. Scarcity and Tradeoffs
Thomas Sowell: “We cannot opt out of economic issues and decisions. Our only options are to be informed, uninformed, or misinformed, when making our choices.”

16. Historically, mechanisms that have been used to deal with the problem of scarcity:
Force
Tradition (emphasized past ways, relied on families)
Authority (government and church)
Market
Combinations of 1-4

17. Scarcity and Tradeoffs
Scarcity requires that some wants remain unfulfilled
Issues of equity, justice, and fairness are embedded with scarcity

18. 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.

19. The Economic Way of Thinking

20. Milton Friedman:
“The only person who can truly persuade you is yourself. You must turn the issues over in your mind at leisure, consider the many arguments, let them simmer, and after a long time turn your preferences into convictions.”

21. Always have these guidelines in your economic thought process:
The text lists 8 guidelines.

22. (1) There are always tradeoffs.
What you give up is your opportunity cost-value of next best alternative
Common mistake: opportunity cost is NOT the sum of everything you give up
Reading: Robert Frost-The road not taken

23. (1) There are always tradeoffs.
There is no such thing as a free lunch!
Optional Video: Milton Friedman- free lunch myth

24. (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

25. Alfred Marshall:
“It is deliberateness, and not selfishness, that is the characteristic of the modern age.

26. 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.

27. (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
Watch Video: Freakonomics-Incentives for real estate agents
Optional Video: RSAnimate-surprising truth about what motivates

28. (4) Think on the margin, not in total or on average
Marginal means additional or incremental
Rule to live by:
Continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost.

29. (5) More information leads to better decision-making, but more information is costly to get
Refer back to (1) through (4)
There are always tradeoffs
Individuals choose purposefully
Incentives matter
Think on the margin

30. (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

31. (7) Value is subjective Beauty is in the eyes of the beholder
Value is determined by the purchaser

32. (8) Economic thinking is scientific thinking
Economists use data and information generated by people to explain and predict actions

33. 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.

34. (8) Economic thinking is scientific thinking
Class Activity: Do you believe that students who regularly attend class earn higher grades? How could you prove (or disprove) that?
Reading: David Romer- “Do students go to class? Should they?”

35. Positive and Normative Economics

36. Reading: Milton Friedman-Essays in Positive Economics
The introduction and Section 1 (pages 1 through 3) are relevant; you may skip the rest.

37. Pitfalls To Avoid in Economic Thinking

38. 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.

39. Errors: (2) Good intentions do not necessarily result in good outcomes
Milton Friedman: “There is nothing that does so much harm as good intentions”

40. Steven Levitt & Stephen Dubner Super Freakonomics
In the United States especially, politics and economics don’t mix well. Politicians have all sorts of reasons to pass all sorts of laws that, as well-meaning as they may be, fail to account for the way real people respond to real-world incentives.

41. Errors: (3) Association is NOT causation
Watch Video: Freakonomics- parenting causation vs correlation

42. Errors: (4) Fallacy of Composition
Assumption: what’s good for the individual is good for the group.
Making this assumption is the fallacy.