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Economics 211. Bobby McCormick. SPRING Semester 2006 Lecture #1. Introduction . What is Economics? Study of the allocation of resources Study of choices Scarce means meeting insatiable demands Who, what, when, why, where Analysis is the heart and soul Why do we study economics?.

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economics 211

Economics 211

Bobby McCormick

SPRING Semester 2006

Lecture #1

introduction
Introduction
  • What is Economics?
    • Study of the allocation of resources
    • Study of choices
  • Scarce means meeting insatiable demands
  • Who, what, when, why, where
  • Analysis is the heart and soul
  • Why do we study economics?
the taxonomy of economics
The Taxonomy of Economics
  • Topics
  • Macroeconomics
    • Gross and aggregate issues
      • Inflation, unemployment, balance of payments
  • Microeconomics
    • Individual people, firms, and families
      • Prices of goods, production, and individual choices
the techniques of economics
The Techniques of Economics
  • Normative Economics
    • Goal oriented
    • Specify an objective function and determine techniques to achieve goal
    • Argumentative
  • Positive Science
    • Analysis of situations
    • Not argumentative
    • Reasonable people, armed with sufficient facts, do not disagree
  • Example of the light in a room
analysis and theories
Analysis and Theories
  • Theories are built for many reasons
  • Purpose of theories in science is to predict, explain, and understand
  • What is science?
  • Consider the conflict between Newtonian Physics and Modern Quantum Mechanics
the distinction between analysis and lists
The Distinction Between Analysis and Lists
  • A theory or a model is an analysis attempting to explain for the purposes of understanding
  • Definitions are truisms and while true are not explanations
  • Supply and Demand is not the answer to any interesting question except, “What do economists study?”
what is a theory
What is a Theory?
  • Two parts: Assumptions & Conclusions
  • Assumptions reduce the complexity of reality
  • The conclusions are tied to the assumptions
  • Basic Rule: The Rule of Not Contradiction
the methodology of positive economics
The Methodology of Positive Economics
  • The Friedman/Samuelson Debates
  • Remember the important dictums:
  • ALL THEORIES ARE WRONG!
  • IT TAKES A THEORY TO BEAT A THEORY!
  • Conclusion: You must know the answer to the question before you can build the theory
  • Economics is an empirical science
    • Fact driven
    • Data are king
other methodological issues
Other Methodological Issues
  • The Principle of Self Interest
  • Homoeconomicus
    • Rational, Evaluating, Maximizing Man
      • Rational—that is thoughtful and deliberative
      • Evaluating—calculates and compares options
      • Maximizing—chooses the best option
  • Is this right? What are our options?
    • The parable of the pool player
  • Don’t lose sight of the objective of this line of thinking—the predict, to model, the forecast
  • We want more than anything to be right in our guesses about the desired objectives
some foreign phrases commonly used by economists
Some Foreign Phrases Commonly Used by Economists
  • ceteris paribus; other things the same
  • ex ante; before
  • ex post; after
  • De gustibus non es disputandum; to each his own
what do economists do
What Do Economists Do?
  • Academics
  • Government
  • Business
  • Consulting
other issues
Other Issues
  • Factors of Production
  • Labor
    • Payment is wages
  • Capital, both physical and human
    • Payment is interest
    • Machines are built via investment in physical resources
    • Knowledge is built by investment in time
  • Land or natural resources
    • Payment is rent rent
    • Rivers, views, air, and things other than just land included here
  • Entrepreneurship or Management or Organization of Resources
    • Organize, contract, take risk
    • Payment is profit
an example the closing of the jp stevens mill in clemson
An Example: The Closing of the JP Stevens Mill in Clemson
  • Go backwards in time 100 years, one century
  • 1905, 63 % of all workers in the United States work in agriculture, on farms, and in food supply
  • Today the number is less than 1.6 %!
  • The major form of continental transportation had not even been invented!
  • Where did all those farmers go in the past 100 years?
  • Is the same thing happening to manufacturing?