2. Uncle Sam wants you to do better in economics.

3.  Universities awardedlastyear at 272 colleges & universities which is. There has been a, particularly at the top colleges.  Universities awarded 16,141 economics degrees last year at 272 colleges & universities which is up 40% in five years. There has been a clear explosion of economics as a major, particularly at the top colleges. “ Econ, Econ, I want to major in Econ.” WSJ 2005 Economics  At New York University, the economics major has doubled in 10 years. At 800, it is now the most popular major. Economics is also the number one major at Harvard (964 students), Columbia (up 67% in 5 years), Stanford, Penn, Princeton, Chicago (24% of graduating class), & 2 nd at Brown, Yale, and University of California at Berkeley.  The increase in the numbers is the result of many students seeing economics as the best vehicle promising good pay and security.  Students realize that understanding economics has become a fundamental necessity of life. Economics rising popularity is even global. Econ majors in Poland have doubled in 6 years. In Russia, econ majors have jumped from 18% of students to 31%. Also, the chairman of the economics department at London School of Economics says economics popularity is at an all time high.

4. Here’s a look at the weight placed on four major college admission “class rank”steady decline factors. Only “class rank” has shown a steady decline. They would rather see a “C” in AP Econ than an “A” in regular econ. They then know you can do college work. About one half of all entering college freshmen never graduate.

5. Objectives: economics 1. Be able to define economics. Economics Economics-the study of the choices people make in an effort to satisfy their unlimited wants from limited resources. descriptive, theoretical, & policy 2. Differentiate between descriptive, theoretical, & policy economics. laws 3. What are economic laws. micro & macroeconomics 4. Differentiate between micro & macroeconomics. Ceteris paribus 5. Ceteris paribus & why it is used[isolating 2 variables] Positivenormative 6. Positive(descriptive) & normative(prescribing) econ. Eight econ goals 7. Eight econ goals (conflict with-FE & PL; complementary- econ growth & FE ) “Pitfalls to Clear Economic Thinking” 8. “Pitfalls to Clear Economic Thinking” such as the “fallacy of composition” & “post hoc fallacy” direct relationship positive sloping curve 9. Explain a direct relationship (positive sloping curve). inverse 10. Explain and illustrate an inverse relationship between two variables negative sloping curve and identify a negative sloping curve. independent (cause-“induces”) dependent (effect-“responds”) 11. Identify independent (cause-“induces”) & dependent (effect-“responds”) variables. Body weight Ave. miles jogged Body Weight Calories Consumed What great branches! What a beautiful forest!

6. Economicsmost discussed Economics is the academic discipline most discussed by the general public. least understood [“ Language of graphs ”] It is also one of the least understood. [“ Language of graphs ”] The economist’s lab is the real world. They don’t conduct controlled laboratory experiments. They are predicting human behavior. Physicists explore the physical world. Economics as a social science looks Physicists explore the physical world. Economics as a social science looks at the behavior of people in the marketplace. at the behavior of people in the marketplace. Economics is not an “exact science” but it gives “likely results”.

7. ECONOMICS - “science of scarcity” choices - the study of the choices people make in an effort to satisfy unlimited needs and wantslimited resources their unlimited needs and wants from limited resources.

8. Key Assumptions in Economics People are rationally self-interested – They seek to maximize their utility (happy points) People generally make decisions at the margin – They weigh the marginal benefit against the marginal cost of a decision Ceteris Paribus – Economists hold factors constant, except for what’s being considered

9. INDUCTION DEDUCTION [Methodology used to gain economic knowledge and – stamp out economic ignorance] INDUCTION and DEDUCTION [Methodology used to gain economic knowledge and – stamp out economic ignorance] 1.Induction “facts to generalizations”“theory” 1.Induction – from “facts to generalizations”, or “theory”. Generalizations are created from a careful evaluation of facts. They “particular facts to the generalization.” go from the “particular facts to the generalization.” From facts, cause and effect relationships economists note cause and effect relationships among facts. From this, they derive theory. From theory, they develop economic policy not based on facts relevant to the real world. Any economic theory not based on facts is not sound economics. Just the facts, man.

10. . Deduction– story on how something works. [“The story has to match the facts”] [“The story has to match the facts”] EconTheory Induction and Deduction F orms of Methodology Deduction “theory to facts.” 2. Deduction - from “theory to facts.” This is the hypothetical “educated guess” method. [hypothesis is an “educated guess” or theory of how “general to the key variables relate]. It goes from the “general to the particular.” particular.” Economists don’t usually hypothesize without having [hypothesis is an educated guess, prior experience of the facts. [hypothesis is an educated guess, but untested; if it passes the test, it becomes economic theory] In other words, if you start with an untested hypothesis, you would want to test the hypothesis in the real world by gathering and realistic explanation examining all relevant facts. If it proves a realistic explanation passes the test of some economic relationship [passes the test] of some economic relationship, we can proceed to the setting of policy based on it.

11. 1. Facts (statistics) Descriptive or empirical economics concerned with gathering the facts gathering the facts relative to a problem and testing hypotheses against the facts. Economic theories (models) are simplifications of economic reality that enable us to make predictions about cause & effect in real world. Theories (Positive) Related statements about cause and effect. Involves generalizing about economic behavior behavior in an abstract economy. Theories Stripped down versions of economic reality “Economists” One’s a Keynesian - the other isn’t. Although economists generally do not come to blows, they often do not agree on economic policies. All professionals [doctors, lawyers] often disagree. The economist gathers facts, forms an economic theory, and applies this theory to policy in trying to solve an economic problem. Economists share a common methodology. Like Sherlock Holmes, they approach problems scientifically. Holmes would tie the facts together to form a coherent theory. Then he would test the theory. Methodology of Economic Analysis [Scientific Method] 3. Policies [normative] Policy economics is concerned with controlling or influencing economic behavior or its consequences. INDUCTIVON DEDUCTION Abstract models will help explain how a complex, real world operates.

12. Theoretical Economics. Theories Facts Policy Economics

13. Methodology [Theory] [2nd Approach in Examining Economics] Abstraction Abstraction – focusing on 2 variables to explain an event. A theory is not theory without abstraction (it would be the real world). Theory attempts to explain how real world phenomena are related. Models abstract from reality to reduce complexity. Theories abstract generalizations 2. Theories – abstract generalizations about “cause and effect”real world “cause and effect” in the real world. Simplified big picture of the real world [Simplified big picture of the real world concerning 2 variables] Theories [laws, models, generalizations, principles] are statements about “what causes what”. Ceteris paribus “all else held constant” Ceteris paribus [Latin for “all else held constant”] is the most important assumption in economics. Means “everything else being equal.” Models allow you to reason about the relationship between “X” and “Y” intrusion of “Z” relationship between “X” and “Y” without the intrusion of “Z”. The disagreements occur over the quantitative magnitudes. [“Don’t tax people’s savings and they will save more.” (how much more)] Economic Models Economic Models (theories) may be expressed 4 ways. 1. Verbal statements 2. Pictorially 3. Graphically 4. Mathematical equations Example: If interest rates were lowered, more houses would be sold. “Real World” NO Law of Demand Demand P & QD

14. [The economy is the patient suffering from “inflation” or “unemployment.”] [The economy is the patient suffering from “inflation” or “unemployment.”] Diagnosis Prognosis Treatment Diagnosis Prognosis Treatment Fact & theory [objective-can be tested] Policy is judgment [subjective-opinion] Positive Economics Normative Economics Positive Economics Normative Economics ACL has torn Repair the ACL Rehab on crutches.

15. Positive Economics Normative Economics 1. Can 1. Cannot 1. Can be tested1. Cannot be tested 2. Scientific 2. Value judgment 3. In 3. Ought to be 3. In the economy3. Ought to be in the economy Positive [Scientific] v. Normative [ Prescriptive (personal) ] [ describing “just the facts”] v. [ the economist being “a policymaker ”] 1. The economy grew at 3.6%.1. The economy ought to grow more. 2. Unemployment is 4.8%. 2. Unemployment is too high. Positive economics [ observable, factual, & testable economic events – trade deficit, budget deficit, etc.] – deals with straight facts on economic behavior and doesn’t give opinions or value judgments. It is concerned with what is, was, or will be. [objective - not influenced by emotions] [Statements that are “verifiable”] Straight facts “In my opinion …”

16. Normative E conomics – expresses opinions or value judgments. It is concerned with what ought to be and uses words like should, needs, and too. Unemployment ought to be reduced. These opinions cannot be proved or disproved. We should protect the auto industry from foreign competition, Normative involves judgments and prescriptions for preferred courses of action. [ Subjective – influenced by emotions ] Most of the disagreements among economists involve normative economics. Ideally, value judgments are involved at the policy level only. Positive Economics Normative Economics 1. In the economy 1. Ought to be in the economy 2. Scientific 2. Value judgment 3. Can be tested3. cannot be tested Descriptive analysis Prescriptive analysis

17. Positive or Normative ? Answers: 1. N 2. P 3. N 4. P 5. N 6. N 7. N 1. It is too cold to play football today. 2. Gross Domestic Product grew 4% last year. 3. The temperature is too cold today. 4. The temperature is 92 degrees today. 5. The humidity is too hot. 6. People who are unemployed are just too lazy to work. 7. Suzie RahRah should be friendlier to me this time. NOT After turning me down 3 times, Susie RahRah should be friendlier to me this time.

18. “Beautiful, beautiful forest!. “Beautiful leaf!” MACROECONOMICS... MICROECONOMICS...

19. Macro economy 1. Macro [national] economics – concerned with the economy as a whole as a whole or with aggregates – like government, business sectors, or households. Macroeconomics is concerned with an overview of the economy overview of the economy. “forest, not the trees, Macro examines the “forest, not the trees, leaves, or specific pieces of bark.” leaves, or specific pieces of bark.” It gives “bird’s-eye view” of the economy.” us a “bird’s-eye view” of the economy.”. Micro specific 2. Micro [details of the big picture] – concerned with specific economic units economic units or individual markets under a microscope. Emphasis is on individual households, industries, or firms [like the # of workers employed by Ford] [C oncerns the components of the economy] “trees, leaves, & pieces of bark, Micro examines the “trees, leaves, & pieces of bark, rather than the forest.”“worm’s-eye rather than the forest.” It gives a “worm’s-eye view” view” of a specific component of our economy. Great Forest! Beautiful bark!

20. Macro Micro Macro [large ](telescope) “whole economy” [economy-wide issues] Micro [ small ]( microscope ] “segment of the economy” [issues in the economy]. Production Production MicroeconomicsMacroeconomics How much steelTotal industrial output How much office spaceGross Domestic P roduct How many carsTotal decline during recession Prices Prices Price of individual goodsAggregate price level Price of medical careConsumer Price Index Apartment rentsRate of inflation Employment Employment Jobs in the steel industryTotal number of jobs # of employees in a firmEconomy’s unemployment # of doctors/accountants# of discouraged workers “Check out those pieces of bark!. “Beautiful, beautiful forest!”

21. I s the f ollowing Micro or Macro ? I s the f ollowing Micro or Macro ? 1. The price of digital cameras increased 5% last year. 1. The price of digital cameras increased 5% last year. 2. Unemployment was 5.4% for the U.S. workforce. 2. Unemployment was 5.4% for the U.S. workforce. 3. Unemployment in the auto industry was 8% last year. 4. Duck N ational Bank lowered its interest rates on CDs to 8%. 5. The Consumer Price Index rose to 2.7% last year. 6. The computer industry laid off 8% of its workers last year. 7. The price of gasoline rose 25% last year. “What forest, check these branches, limbs, and leaves.”

22. Pitfalls T o Sound Reasoning [“ Chuckholes ”] Pitfalls T o Sound Reasoning [“ Chuckholes ”] Bias – preconceived beliefsnot warranted by facts 1. Bias – preconceived beliefs not warranted by facts. prejudices We tend to accept everything that reinforces our prejudices. We will not learn economics if we reject things before we understand them. Try to understand thingsinterferes Try to understand things first before you reject them. This interferes with objective analysis with objective analysis. Loaded terminology emotional terms leading 2. Loaded terminology – use of emotional terms leading to a nonobjective analysis[corporate profits - obscene; government to a nonobjective analysis. [corporate profits - obscene; government regulations - socialists; low wages - exploitive; flood control - regulations - socialists; low wages - exploitive; flood control - creeping socialism]. objectivity creeping socialism]. We must have objectivity. Definitions 3. Definitions – certain economic terms have different meanings than normal. Utility satisfaction A. Utility means satisfaction. Investment B. Investment means purchase of machinery, tools and factories machinery, tools and factories. Price ceilingsbelow equilibrium C. Price ceilings are below equilibrium. Price floorsabove equilibrium D. Price floors are above equilibrium.

23. Subjectivity - personal perception. objectively subjectively Subjectivity - personal perception. From the beginning, we must look at economics objectively -not subjectively]

24. bird Is this a leftward-looking bird? anteloperabbit rightward-looking antelope ? Or a rabbit ?

25. Do You Change Your Mind?

26. Do You Change Your Mind Again?

27. Do you see an “ old lady ” or “ young girl ” ? The old woman’s nose is the young girl’s chin Hint: The old woman’s nose is the young girl’s chin.

29. Focus on the Dot in the center & move your head backward and forwards.

30. Is this a Frog or a Horse?

32. Friends don’t let friends drink & take home ugly women.

33. INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION (per week) Table of Values Construction of Econ Graphs

34. INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION (per week) Table of Values Construction of Econ Graphs Income (Y) $400 300 200 100 Vertical Axis

35. INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION (per week) Table of Values Construction of Econ Graphs INCOME (y) 0 100 200 300 400 0 100 200 300 400 CONSUMPTION (C) $400 300 300 200 200 100 100 Vertical Axis Horizontal Axis

36. INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION (per week) Exists Between Consumption & Income INCOME (Y) 0 100 200 300 400 0 100 200 300 400 CONSUMPTION (C) $400 300 300 200 200 100 100 a bcd e a b c de A Direct Relationship... C 150 250

37. Direct ( positive ) Relationship Direct ( positive ) Relationship Independent variable –“induces ”(cause); Dependent variable – “responds ”(effect) Direct – 2 variables move in same direction. “Econ, Econ” Econ

38. TICKETPRICE $50 40 403020100048121620ATTENDANCE(thousands) Inverse ( Negative ) Relationship Inverse - 2 variables move in opposite directions TICKET PRICE (P) 0 4 8 12 16 20 0 4 8 12 16 20 ATTENDANCE IN THOUSANDS (Q) $50 40 40 30 30 20 20 10 10 a b c d e a b c f e f d I n Economics the independent variable can be on either axis.

39. INFINITE and ZERO SLOPES Price of Bananas Purchases of Watches Consumption Divorce Rate Slope = Infinite Slope = Zero Construction of Econ Graphs Increasing “X” has no effect on “Y”. Y X X Y Increasing “Y” has no effect on “X”.

40. Economics 1. Economics ________________________________________ inductive method 2. The inductive method moves from (facts to generalizations/ generalizations to facts). Theories and generalizations 3. Theories and generalizations (are/are not) the same thing. deductive method 4. The deductive method moves from (facts to generalizations/generalizations to facts). Descriptive economics 5. Descriptive economics is the process of gathering (generalizations/facts) about economic behavior of individuals and institutions. Economic theories 6. Economic theories are (specifics/generalizations) based upon observing all the facts. They are called “laws”, principles, generalizations or models. Economic laws 7. Economic laws that lead to policy are not true in every situation, but they are (useful/not useful) because they allow us to predict & therefore (control or adjust to events/not control or adjust to events). 8. Economic models (abstract/leave in) the complexities of the real world. “Ceteris paribus” 9. “Ceteris paribus”–other things being ________”, that is “all variables are constant except ___.” “Ceteris paribus model” 10. “Ceteris paribus model” allows us to reason about the relation- ship between variables __ & __ without the intrusion of variable __. NS 1-10 constant 2 X Y Z The study of the choices people make in an effort to satisfy their unlimited needs and wants from scarce resources. their unlimited needs and wants from scarce resources.

41. hot to jog today./ The temperature is 88 degrees today.) value judgments 15. Ideally, value judgments are involved at the (level of policy only/ level of facts only). hypothesis 11. A hypothesis is a tentative, (tested/untested) principle. hypothesispasses the testbecomes economic theory [If the hypothesis passes the test, it becomes economic theory.] positive statement 12. A positive statement is concerned with (what is/what ought to be). They collect and present facts. normative statement 13. A normative statement is based upon (facts/value judgments). These statements are concerned with what the economy should be like or which policies are best. 14. An example of a normative statement would be (It is too disagreement among economists 16. Most of the disagreement among economists involves (positive/normative) statements as regards economic (policy/facts). Microeconomics 17. Microeconomics is concerned with (specific economic units/the entire economy). macroeconomics 18. Which of the following is associated with macroeconomics ? (an examination of the incomes of Richland Duck graduates/ unemployment in the civilian labor force). microeconomic statement 19. Which of the following is a microeconomic statement ? (GDP decreased by 1% last year/Auto prices declined this year). Full employment conflicts 20. Full employment conflicts with the economic goal of (economic growth/price stability). Full employment is complementary 21. Full employment is complementary with the goal of (economic security/ price stability). NS 11-21

42. NS 22-23 Bias 20. Bias – preconceptions that (are/are not) based on facts. Loaded terminology 21. Loaded terminology – (emotional/non-emotional) terms leading to a nonobjective analysis. Definitions 22. Definitions – economic words have different meanings. Examples: “Utility” 1. “Utility” means (extra/satisfaction) “Investment” 2. “Investment” means (money/tools, machinery, & factories) “ Price floors ”“ price ceilings ” 3. “ Price floors ” are (above/below) “ price ceilings ”

43. inversely 23. Which graph shows the amount of “Y” inversely related to the amount of “X”? ____ 24. In which graph above is the amount of “Y” (constant at $10) unrelated unrelated to the increasing amount of “X”? ___ directly 25.In which graph above is the amount of Y directly related to the amount of X? ___ “ Zero slope”“ Infinite slope” “ Zero slope” and an “ Infinite slope”C B A “Direct” “Inverse”“Inverse”“Inverse”“Inverse” A B C D

44. The End