Scope of Economics Overview

Scope of Economics

• Economics studies how agents make choices with scarce resources and how these choices affect society.

• Choice is the unifying factor, not money or wealth.

• Economic agents are any group or individual making choices (consumers, households, firms, governments, etc.). They typically make optimal choices.

• Scarce resources are goods in insufficient supply to meet everyone's wants.

• Positive economics describes observed economic agent actions. It focuses on objective analysis and economic facts without value judgments.

  • Example: Calculating average wages in different sectors.
  • Example: Studying the gender income gap's determinants (discrimination, part-time work, etc.) in Spain.

• Normative economics determines what economic agents should do. It leads to public policy recommendations based on subjective judgments.

  • Example: Identifying the best job offer for a worker.
  • Example: Developing policies to reduce income inequality.

Microeconomics

• Studies individual agents and their choices. It examines how choices affect resource allocation and other agent well-being.
• Analyzes isolated pieces of the economy.
• Examples include consumer behavior, electricity market design, and firm competition.

Macroeconomics

• Studies the entire economy, focusing on aggregate variables.
• Examines aggregate production, inflation, economic cycles, labor market conditions, monetary policy, etc.
• Examples include the impact of labor reforms on unemployment and GDP, or the adequacy of economic stimulus programs.

Principles of Economics

Optimization

• Making the best choice possible given available information.
• Feasible options (possible decisions).
• Given information (data that influences the decision).
• Best depends on the agent's preferences.
• Trade-offs: Sacrificing one choice for another.
• Budget constraint: Limited resources.
• Opportunity cost: Value of best alternative missed when a choice is made.
• Cost-benefit analysis: Comparing costs and benefits of options.
• Example: Comparing the cost of buying a book from one store vs. driving to another.
• Example: Choosing between purchasing a laptop locally or from a store further away.
• Example: Opportunity cost of spending time on social media.

Equilibrium

• A situation where no individual benefits by changing their actions.
• Examples include: grocery store lines, housing markets, political party competition.
• Decisions are optimal given the available information.

Free-Rider Problem

• Agents benefit from a choice without bearing the full cost.
• Example: One housemate not cleaning while others do.
• Example: Sailors benefiting from a lighthouse without paying for its maintenance.

Empiricism

• Using data to answer questions.
• Example: Analyzing the correlation between crowded beaches and high temperatures.
• Correlation does not imply causation.

Is Economics Good for You?

• Cost-benefit analysis of taking economics courses: Benefits (understanding daily applications) vs. Costs (tuition, stress, opportunity cost).

The Scientific Method

• Steps to gather and analyze data:
  1. Specify an economical model that simplifies reality.
  2. Develop hypotheses (predictions to test).
  3. Test hypotheses using data; compare model predictions with observations.
  4. Revise the model as needed if data does not align.

Models

• Simplified representations of reality.
• Example: Emojis are simplified models showing expressions.
• Example: A map representing the Madrid metro assumes a flat surface. It's practically useful; however, this assumption is not appropriate when flying across continents.

Working with Data: Causation vs. Correlation

• Causation: One thing directly affects another.
• Correlation:
  • Positive: Variables move together.
  • Negative: Variables move in opposite directions.
• Causation is different from correlation because of:
  • Omitted variables: Missing factors that impact relationship.
  • Reverse casualty: Cause-and-effect relationship is reversed.
  • Experiments (controlled, natural): Methods to determine cause-and-effect.

Good Economic Questions

• Relevant, important, and contribute to social understanding.
• Empirically answerable.

Uses of Graphics

• Visually represent numerical data.
• Illustrate models.
• Example: Understanding the equation of a line (y = mx + b).

Optimization

• Optimization in levels: Finding the highest total net benefit (benefits - costs).
• Optimization in differences: Comparing marginal gains and losses between choices.
  • Marginal cost: additional cost of taking a choice.
• Limits of optimization: Limited information, expensive information gathering, lack of experience, trade-offs.
• Commuting cost considerations: Availability of public transportation, gasoline, parking, car wear, opportunity cost of time spent.

Markets

• Markets: Group of economic agents trading goods or services.
• Rules and arrangements: dictate how trades occur.
• Market price: Price at which buyers and sellers exchange goods.
• Perfectly Competitive Market:
  • Sellers sell identical products.
  • Participants are price takers (cannot influence market price).