Introduction to Economics

• Economics is the study of agents making choices with scarce resources and the societal effects of these choices.

Economic Agents and Scarce Resources

• Economic agents include individuals, households, firms, and governments, all of whom make choices, usually aiming for optimal outcomes.
• Scarce resources are those insufficient to satisfy everyone’s wants.

Positive Economics

• Positive economics describes what economic agents actually do, focusing on objective analysis and facts about the economy.
• It explains and predicts economic phenomena without value judgments.
• Examples include determining mean wages across sectors or analyzing the gender income gap.

Normative Economics

• Normative economics involves decision-makers determining what economic agents should do, addressing subjective questions and resulting in public policies.
• Examples include deciding the best job offer for a worker or whether to introduce policies to reduce the gender income gap.

Microeconomics

• Microeconomics studies how individuals, households, firms, and governments make choices and the effects on prices, resource allocation, and the well-being of others.
• It focuses on isolated parts of the economy.
• Examples include consumer choice, electricity market design, and firm behavior.

Macroeconomics

• Macroeconomics studies the economy as a whole, including aggregate production, inflation, economic cycles, labor market performance, and monetary policy.
• Examples include the effect of labor reform on unemployment and GDP or the adequacy of public programs to stimulate the economy.

First Principle: Optimization

• Optimization involves making the best choice possible with the given information.
• Feasible options are those available to an agent.
• The "best" choice depends on the agent’s preferences.
• 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 benefits and costs in a common unit to determine the best choice.

Second Principle: Equilibrium

• Equilibrium is a situation where no one benefits from changing their behavior.
• Decisions are optimally made given available information.
• The free-rider problem arises when someone enjoys benefits without bearing all the costs.
• An example includes a flatmate who watches TV instead of cleaning dishes.

Third Principle: Empiricism

• Empiricism is using data to answer interesting questions.
• Correlation differs from causation.
• Observing crowded beaches when temperatures are high does not mean cooling the beaches will deter crowds.

Scientific Method

• Specify a simplified model of reality.
• Formulate hypotheses (predictions).
• Test the model using data.
• Revise the model if it does not accurately explain data.
• A flat map of the Madrid metro is useful, but a flat-earth model is not useful for flying to New York.

Causation vs. Correlation

• Causation occurs when one thing directly affects another.
• Correlation measures how two things change in relation to each other and can be positive or negative.
• Omitted variables occur when a correlation doesn't make sense until a missing variable is added to analysis.
• Reverse causality is when the cause and effect are opposite of what is assumed.
• Controlled experiments randomly put subjects into treatment and control groups.
• Natural experiments occur when subjects end up in treatment or control groups due to events not controlled by the researcher.

Good Economic Questions

• Good economic questions are relevant, important, and can be answered empirically, and contribute to social welfare.

Graphics

• Graphics can visually summarize numeric information and represent models.
• The equation of a line is y = mx + n, where m is the slope and n is the y-intercept.

Optimization

• Optimization in levels involves calculating total benefit minus total cost (net benefit).
• Optimization in differences involves analyzing the change in net benefit between options.

Limits to Optimization

• Limits include incomplete information, the cost of collecting information, and inexperience.
• Trade-offs are unavoidable.

Cost of Commuting

• Factors include public transportation, gasoline, parking, wear and tear on a car, and the opportunity cost of time.

Marginal Analysis

• Express all costs and benefits in the same unit.
• Calculate the changes in costs and benefits when moving from one option to another.
• Choose the option that improves your situation by moving toward it.
• Marginal cost is the additional cost of choosing one decision over another.