Economics: Agents, Resources, and Choices

• Economics studies agent choices with scarce resources and their societal effects.
• Choice, rather than money, is central to economics.

Economic Agents

• Economic agents can be individuals, households, firms, or governments.
• Economic agents typically make optimal choices.

Scarce Resources

• Scarce resources do not satisfy everyone’s desires.

Positive Economics

• Positive economics objectively describes economic agent actions.
• The focus is on facts and how the economy operates.
• It explains and predicts economic phenomena without value judgments.
• Examples include wage analysis in different sectors and gender income gap determinants.

Normative Economics

• Normative economics involves decision-makers determining what economic agents should do.
• Subjective questions are decided upon.
• Analysis results in public policies.
• Examples include determining the best job offer or whether public policies should reduce the gender pay gap and related effectiveness.

Microeconomics

• Microeconomics studies choices made by individuals, households, firms, and governments.
• Focuses on how these choices impact prices, resource allocation, and the well-being of others.
• Microeconomic analysis studies individual components of the economy.
• Examples of microeconomic topics are consumer choice, electricity market design, policies, and firm competitive behavior.

Macroeconomics

• Macroeconomics studies the economy as a whole, its aggregate production and inflation.
• Macroeconomic analysis considers the big picture of a country.
• It includes the study of aggregate production, inflation, economic cycles, labor market performance, and monetary policy.
• Examples include the impact of labor reforms on unemployment and GDP, and the adequacy of public economic programs that stimulate the economy.

Three Principles of Economics

• Economics is based on optimization, equilibrium, and empiricism.

Optimization

• Optimization means making the best choice possible with the available information.
• Feasible options are available to an agent.
• Sometimes agents lack full information about options.
• Optimal choices are based on agent preferences.
• Making a decision requires trade-offs because something is given up to obtain something else.
• Budget constraints force choices because of limited budgets.
• Opportunity cost represents the best alternative use of a resource, usually expressed in monetary value.
• Cost-benefit analysis compares benefits and costs using a common unit of measurement.

Equilibrium

• In equilibrium, no one benefits from changing their behavior.
• Decisions are made optimally, considering the available information.
• The free-rider problem occurs when one enjoys benefits without bearing the full costs.

Empiricism

• Empiricism uses data analysis to answer questions.
• Correlation differs from causation.

Scientific Method

• A scientific method follows these steps:
  • Specify a model (simplified description of reality).
  • The model produces hypotheses or predictions about the real world.
  • Test the model using data to see how closely it matches observations.
  • If the model is inaccurate, revise it.
• Models are simplified representations.
• Working with data involves causation versus correlation.
• Causation is when one thing directly affects another.
• Correlation:
  • Positive: Variables change in the same direction.
  • Negative: Variables change in opposite directions.
• Causation differs from correlation due to:
  • Omitted variables: Ignoring a contributing factor to cause and effect.
  • Reverse causality: When cause and effect are reversed.
• Controlled experiments randomly assign subjects to treatment and control groups.
• Natural experiments occur when subjects end up in groups not determined by researchers.
• Good economic questions are relevant, important, and can be answered empirically.

Graphics

• Graphics visually summarize numeric information.
• Graphics are useful to represent models.
• The equation of a line y=mx+n includes m (slope) and n (y-intercept).

Optimization

• Optimization in levels is total benefit minus total cost (net benefit).
• Optimization in differences is the change in net benefit when comparing options.
• Limits to optimization include limited information, high collection costs, inexperience, and trade-offs are a consideration..

Reasons in the Cost of Commuting in Choosing an Apartment

• Availability in public transportation
• Gasoline
• Parking
• Wear and tear on car
• Opportunity cost of time

Optimization

• Express all costs and benefits in the same unit.
• Calculate total net benefit (benefits – costs) for each option.
• Choose the option with the highest net benefit.

Optimization in Differences: Marginal Analysis

• Express all costs and benefits in the same unit.
• Calculate how the costs and benefits change as you move from option to another.
• Choose the option that makes you better off by moving toward it, and worse off by moving away from it.
• Marginal cost is the additional cost incurred when choosing to make one decision over another

Economics studies decision making with scarce resources. It focuses on how agents make optimal choices and the impact of these choices on society. Positive economics describes what agents do, while normative economics prescribes what they should do.