Economics for CED

1. Economics for CED Noémi GiszpencSpring 2004Lecture 1: General Intro February 10, 2004

2. First, some questions for you • What does “economics” mean? • What’s an economic activity? • What sorts of generalizations do you think can be made about people and economic activity? Economics for CED: Lecture 1, Noémi Giszpenc

3. Why do people do what they do? • To get the most juice/stuff from what they’ve got • Maximize utility/profits subject to constraint • To do the best they can • Optimization • To get something they can live with and move on • Satisficing (Herbert Simon) • People are crazy and do whatever the @#$% Economics for CED: Lecture 1, Noémi Giszpenc

4. Can we have everything we want? No. We are subject to constraints: Time Money Energy Attention Talent Supplies Bandwidth Physical laws Space … “Had we but world enough, and time” Economics for CED: Lecture 1, Noémi Giszpenc

5. There are many definitions of “economics” • “A social science concerned with the way society chooses to employ its limited resources--which have alternative uses--to produce goods and services for present and future consumption.” • Teaching Economics As If People Mattered, 2000 Economics for CED: Lecture 1, Noémi Giszpenc

6. A neoclassical definition: • “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” • Lionel Robbins, The Scope and Method of Economic Science, 1932 Economics for CED: Lecture 1, Noémi Giszpenc

7. Economics is about questions like… • What resources do people have and how do they use them to do what? But also like... • How have modern economic systems developed, and how do they work? How do they change? • Who gets what? How? Why? • Hugh Stretton, Economics: A New Introduction, 1999 • I will be using Stretton heavily for the next few slides Economics for CED: Lecture 1, Noémi Giszpenc

8. Different people see it differently • The science of “choice under scarcity” • Standard, neoclassical • How to conserve resources for continuing human life on Earth • Environmental • The study of provisioning: how we supply our material needs and organize our mutual interdependence • Feminist ? Close to the origins of the word: • Economy comes from Greek oikonomos, household manager (oikos, house + nemein, manage) Economics for CED: Lecture 1, Noémi Giszpenc

9. How to study it, then? • Economics, like other social sciences, is part study and part debate. • McCain calls it a “rational dialog” • “Understanding economics is more like understanding politics or history or psychology than it is like understanding physics.” • There are still rules, but they’re rougher Economics for CED: Lecture 1, Noémi Giszpenc

10. Start with what we know Economics for CED: Lecture 1, Noémi Giszpenc

11. How do we know things?Cause and Effect • “Different causal relations have to be known by different methods of observation, understanding, and choice.” • Simple arithmetic (ceteris paribus calculations) • Regular association (experience) • Knowing rules and regulations • Understanding people’s thoughts and feelings (strategy and marketing) • Historical explanations • Experiments • Models Economics for CED: Lecture 1, Noémi Giszpenc

12. Also, what we study depends on who wants to know • Ex: What will be the economic effects of a technological change? On… • Manufacturers • Workers (union/non-union) • Workers’ families • National government • National accounts, small business, employment… • Their question is: how are our gov policies working? • Local government • Location, pollution, traffic, services/utilities, jobs… Economics for CED: Lecture 1, Noémi Giszpenc

13. Positive and Normative • positive economics deals with “what is” • A social science based on evidence • normative economics deals with “what ought to be" • goes beyond science and has moral or ethical aspect • Stretton finds distinction unhelpful • “Economics is controversial chiefly because it deals with such complex activity that its simplifications are necessarily selective.” Economics for CED: Lecture 1, Noémi Giszpenc

14. Economic Assumptions 1 • Scarcity • Leads to key question: how to allocate resources under scarcity to meet many needs and wants • What will be produced? • By what methods? • Using what resources (land, labor, man-made capital)? • For whom? • Entails “opportunity cost”: (trade-offs) • The value of the other goods and services we must give up in order to produce something Economics for CED: Lecture 1, Noémi Giszpenc

15. Economic Assumptions 2 • Self-interested, rational individuals? • Acting according to individual values • Acting as if they were rational, on average • Irrationalities are random, and cancel out? • Useful starting place for trying to figure out why people do what they do, or what you think they would be likely to do Economics for CED: Lecture 1, Noémi Giszpenc

16. Economic Models • Tend to consist of a list of variables and the relations among them • Often designed to be analytically solvable, static • Can also be dynamic -- involve time and use calculations to solve • Are the simplifications too much? Can models be refined to reflect reality? Economics for CED: Lecture 1, Noémi Giszpenc

17. Our first model • Uses scarcity and choice • Describes tradeoff between producing machines and food • Relationship is called the “production possibilities frontier” Economics for CED: Lecture 1, Noémi Giszpenc

18. The PPF as a diagram • Green area is feasible production • Blue line is maximum efficiency • Beyond is infeasible • Why is area convex (it curves outward)? Economics for CED: Lecture 1, Noémi Giszpenc

19. More on Efficiency: Pareto • satisfaction is not comparable from person to person, so there is no way of knowing whether someone’s gain outweighs another’s loss • a situation is Pareto-optimal if by reallocation you cannot make someone better off without making someone else worse off Vilfredo Pareto 1848-1923 Economics for CED: Lecture 1, Noémi Giszpenc