Introduction to the Science of Economics

What is Economics?

The Study of Human Decision Making

The Fundamental Problem of Economics

Scarcity of resources in the face of unlimited/insatiable wants

This forces us to choose (to make decisions)

The Most Basic Assumptions of Economics

1. All decisions are “self-interested”

2. All decisions (and decision makers) are rational Decision makers (“economics agents”):

individuals firms/businesses governments

Normative vs. Positive StatementsDo your best to keep your analysis positive.

Exceptions:

Low unemployment, low inflation, and steady economic growth are desirable.

This statement is ___________.(These, by the way, are the most important goals for macroeconomists and policy makers.)

Normative or Positive?

“Inflation will likely increase.”“Inflation will become a problem.”

Basic Economics Vocabulary

UtilityOpportunity CostTrade-off

Discuss an example of a trade-off that you face (or have faced).

Ceteris Paribus

Macro- vs. Micro- We will study MACROeconomics, rather than MICROeconomics

The most important concept in this class (and in Keynesian Macroeconomics), from today until the final exam: There is a short-run trade-off between reducing unemployment and

reducing inflation.

A Few Important Logical Fallacies

Confusing Correlation with Causation Post Hoc Ergo Propter Hoc (the “Post Hoc”

Fallacy) The Fallacy of Composition

Which Fallacy?

Global temperatures have risen with the increase number of pirates. Therefore, pirates must cause global warming.

A major economic recession began in 2007. In 2009, a Democrat became President, and by 2014 most parts of the country had experienced significant recovery. Therefore, a Democrat in the White House is good for the economy.

Starkist Tuna benefits from catching large quantities of fish from the world's oceans. The world population also benefits, as customers can now buy and eat this fish. Therefore, the world benefits even more when dozens of companies catch and sell fish.

Share your own example of confusing correlation with causation.

Now Let’s Draw Our First Economic Model: The Circular Flow Model