Introduction to Economics

• Economics studies agents' choices regarding scarce resources and how these choices impact society.
• Choice, not money, is central to economics.

Economic Agents and Scarce Resources

• Economic agents are individuals or groups making choices, such as consumers, firms, or governments.
• Scarce resources are insufficient to satisfy everyone’s wants.

Positive vs. Normative Economics

• Positive economics objectively describes what economic agents do, focusing on facts and how the economy works.
  • Example: Analyzing the gender income gap in Spain and its determinants.
• Normative economics involves decision-makers determining what economic agents should do, incorporating subjective judgments.
  • Example: Deciding whether to implement public policies to reduce the gender income gap and which policies would be most effective.
• Normative analysis often leads to public policies.

Microeconomics vs. Macroeconomics

• Microeconomics studies choices made by individuals, households, firms, and governments and their effects on prices and resource allocation.
  • Focuses on specific components of the economy in isolation.
  • Examples: Consumer choice, electricity market design.
• Macroeconomics studies the economy as a whole.
  • Examines aggregate production, inflation, economic cycles, and monetary policy
  • Examples: The effect of labor reform on unemployment and GDP.

First Principle: Optimization

• Optimization means making the best choice with the given information.
• Feasible options are those available to an agent.
• Preferences determine what constitutes the "best" choice for an agent.
• Trade-offs occur when choosing one thing means giving up something else.
• Budget constraints limit choices due to limited resources.
• Opportunity cost is the value of the next best alternative use of a resource, often expressed in monetary terms.
• Cost-benefit analysis compares the benefits and costs of each option in a common unit of measurement.
• Example: Considering the opportunity cost of spending time on social media apps like Instagram or TikTok and the best alternative use of that time.

Second Principle: Equilibrium

• Equilibrium is a situation where no one benefits by changing their behavior.
• Decisions are made optimally, considering the available information.
• Free-rider problem: An agent benefits from a choice without bearing all the costs.
• Example: A flatmate watches TV instead of cleaning dishes, benefiting without assuming the cleaning costs.

Third Principle: Empiricism

• Empiricism involves using data to answer questions.
• Correlation differs from causation; just because two things occur together does not mean one causes the other.

Is Studying Economics Beneficial?

• Benefit: Understanding how economic thinking applies to daily life.
• Cost: Tuition, stress, and opportunity cost.

The Scientific Method

• Specify a model as a simplified description of reality.
• Generate hypotheses or predictions about the real world based on the model.
• Test the model using data to assess how well it matches observations.
• Revise the model if it does not accurately explain the data.
• Models are simplifications, like a flat map of the Madrid metro.
• Working with data requires distinguishing between causation and correlation.
• Causation: One factor directly affects another.
• Correlation:
  • Positive: Factors change in the same direction.
  • Negative: Factors change in opposite directions.
• Omitted variables and reverse causality can lead to misinterpretations of correlation.
• Omitted variables: Ignoring a contributing factor to the cause and effect. Resulting in a misleading correlation.
• Reverse causality: Confusing the direction of cause and effect.
• Experiments can be:
  • Controlled where researchers randomly assign subjects to treatment and control groups.
  • Natural where subjects end up in treatment or control groups due to events not controlled by the researcher.
• The usefulness of a scientific model depends on its ability to be tested using data.
• Good economic questions should be relevant, important, and empirically answerable.
• Graphs can visually summarize numeric information and represent models.
• Equation of a line: y = mx + n, where m is the slope, and n is the y-intercept.

Optimization

• Optimization in levels: Calculate total benefit minus total cost (net benefit).
• Optimization in differences: Examine the change in net benefit between options.
• Limits to optimization include:
  • Limited information.
  • Costly information gathering.
  • Lack of Experience
  • Trade-offs.
• Factors to consider for commuting costs when choosing an apartment:
  • Public transportation availability.
  • Gasoline costs.
  • Parking fees.
  • Vehicle wear and tear.
  • Opportunity cost of time.

Optimization Process

• Express all costs and benefits in the same unit.
• Calculate the total net benefit for each option (benefits - costs).
• Select the option with the highest net benefit.
• Marginal cost is the additional cost incurred when choosing one more of something.

Explore fundamental economic concepts, distinguishing microeconomics from macroeconomics. Understand positive vs normative economics and the role of information. Learn about wealth distribution and decision making.