• What is “an economy?”

• Where do aggregates (“GDP”, “unemployment”, & “inflation”) come from?

• Micro: [modelling] Choices and consequences

• Macro: [modelling] Systemic interaction of choosers & emergent behavior

• Basic concepts of markets, individuals (consumers & firms), economies:

  • ECON 205: Principles of Macroeconomics
  • ECON 206: Principles of Microeconomics

• Modelling markets, individuals (consumers & firms), economies

  • ECON 306: Microeconomic Analysis
  • ECON 305: Macroeconomic Analysis¹

• Terms you “know” from ordinary life mean very different things to economists:

Cost, efficiency, welfare, competition, marginal, equilibrium, profit, public good, discrimination, elasticity

• Using these words’ “ordinary” meanings will lead to wrong economic conclusions!

• You will need to “relearn” the economic meanings of these words

• You’ll need to master a new vocabulary:

externality, marginal rate of substitution, marginal cost, consumer surplus, allocative efficiency

• Avoid excessive jargon, but these concepts are useful to explain reality!

• Everyone thinks they are already an economist and can speak this foreign language

• Be humble!

• Economics is often common sense, but reached via deep analytical thinking

• Economics is a way of thinking based on a few core ideas:

• Economics is a way of thinking based on a few core ideas:

• People respond to incentives

  • Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals

• Economics is a way of thinking based on a few core ideas:

• People respond to incentives

  • Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals

• Environments adjust until they are in equilibrium

  • People adjust their choices until optimal, given others’ actions

• People respond to (changes in) incentives

• People have goals they seek to attain

• Removing one alternative \(\neq\) people stop persuing their goals

• People will seek (less preferred) alternative methods to attain goals

• Unintended consequences!

• If people can learn and change their behavior, they will always switch to a higher-valued option

• If there are no alternatives that are better, people are at an optimum

• If everyone is at an optimum, the system is in equilibrium

• Economists often “speak” in models that explain and predict human behavior

• The pure language of models is mathematics

  • things that are universally true, deducible from axioms, can easily spot errors
  • often equations and graphs
  • this is what scares students most about economics

• Economists use conceptual models: fictional constructions to logically examine consequences

• Very different from other sciences

  • No social experiments
  • Purposive, strategic human beings
  • Introspective understanding

“All models lie. The art is telling useful lies.” - George Box

Optimization

• Agents have objectives they value

• Agents face constraints

• Make tradeoffs to maximize objectives within constraints

• Models help us understand reality.

• A good economist is always aware of:

  • “ceterus paribus”
  • “...and then what?”
  • “...compared to what?”

• Take notes. On paper. Really.

• Read the readings.

• Ask questions, come to office hours. Don’t struggle in silence, you are not alone!

• You are learning how to learn

• See the reference page for more