Lecture 2 Economic Models Dr Jennifer P Wissink

Lecture 2 Economic Models Dr. Jennifer P. Wissink January 27, 2020 © 2020 Jennifer P. Wissink, all rights reserved

Some Pearson/MEL Info u u If needed: When you come to the payment screen on MEL look all around and somewhere on the screen you will find a button to check to have a 2 week trial. Apple Mac people, DON’T USE SAFARI!! – Try Chrome or Mozilla Firefox. – Make sure to clear memory cache so you are not loading a “dead” url page. – When in doubt try to sign into our MEL course using a non-Apple machine, like a friend’s or a workstation at a lab. u u u Make sure (after you have enrolled in our MEL course) that you Sign In to MEL using this link: https: //portal. mypearson. com/login See announcement on Canvas about locating the little blue button to submit you Net. ID to Pearson/MEL. Don’t use the Continue button. First two official quizzes that count towards your magic 600 are posted. . . – Quiz#01 is due TONIGHT! Monday Jan 27 u You are on the same “attempt’ of any given quiz until you hit Submit Quiz – ignore what you see on the MEL page suggesting otherwise. MEL constantly saves in the background, so you do not need to save your answers, they are already being saved.

Our Teaching. Team Zihui Lilac Zhao the Learning Strategies Center-Albert Alexander Derek Lougee <dml 266>

i. Clicker questions What part of Cornell is your home college? A. Arts B. ILR C. CHE D. CALS or Hotel E. Engineering or CAAP If you’re not from the US, what part of the world is home? A. Canada B. Europe C. Asia & Down Under D. South&Central America E. Africa Are you a morning person? A. No! B. Yes!! C. Will be this semester. What part of the US do you call home? A. Northeast B. Midwest C. West Coast D. The South E. Not from the US How much do you like using math outside of math classes? A. Love B. Hate C. Don’t love, Don’t hate D. Don’t know, we’ll see Have you already taken AP microecon? A. Yes B. No What cohort? A. Freshman B. Sophomore C. Junior D. Senior E. Other Have you already taken Econ 1120 here at Cornell? A. Yes B. No

Econ 1110 Introductory Microeconomics u What this course is not about… u What this course is about… u An Introduction to Applied Microeconomic Theory – Theory: We will construct models. » Look at the world, hypothesize a model, analyze the model, then use the model to make predictions. » Then see if the model holds up under empirical scrutiny.

Applied Microeconomic Theory u Economics: The study of the allocation of scarce resources to produce commodities to satisfy infinite human wants. – Economics is about constrained optimization. – Choice under conditions of scarcity. u Micro: Looks at small pieces of the puzzle (as opposed to macro - which looks at the big picture) – Individual markets – Individual decision makers – Three basic traditional micro questions » What? » How? » For Whom?

Micro v Macro in the News u FDA Approves Drugs Faster Than Ever But Relies On Weaker Evidence, Researchers Find – https: //www. npr. org/sections/health-shots/2020/01/14/796227083/fdaapproves-drugs-faster-than-ever-but-relies-on-weaker-evidenceresearchers-fi u Collegetown Bagels to Move Across Street to Sheldon Court – https: //cornellsun. com/2020/01/17/collegetown-bagels-to-move-acrossthe-street-to-sheldon-court/ u Moving Beyond GDP – https: //www. npr. org/sections/money/2020/01/14/795623755/movingbeyond-gdp

Examples of Economic Concerns BRANCH OF ECONOMICS Micro Macro PRODUCTION PRICES INCOME Output in individual industries Price of individual goods and services Distribution of income and wealth How much steel? How much office space? How many cars – big or small, how fuel efficient? Price of medical care. Price of gasoline. Food prices. Apartment rents. Wages in the auto industry. Minimum wage. Executive Salaries. Poverty. Wage differentials. National production/output Aggregate price level National income Total output: GDP Output by sectors. Investment. Growth of output. Consumer prices. Producer prices. Rate of inflation. Interest Rates. Total wages and salaries. Total corporate profits. National savings. EMPLOYMENT Employment by individual businesses and industries Steel industry jobs. Number of employees in a firm. Number of accountants. Employment and unemployment in the economy Total # of jobs. Unemployment rate Productivity growth

Applied Microeconomic Theory

Why Study Economics? u It’s everywhere. u It’s unavoidable. u To understand how markets work. u It’s a requirement and a prerequisite for understanding lots of other material. u To help you understand how economists think and construct arguments. u To help you differentiate good from bad analysis.

On Modeling & Constructing Theories u Simplistic Model Construction – Ockham’s Razor u Evaluation of Models – economics is a social science u Two pitfalls to avoid – not recognizing the “fallacy of composition” – using “post hoc ergo propter hoc” logic u Positive vs. Normative analysis – What is versus – What ought to be William of Ockham 14 th century philosopher

A Road Map u Suppose I want to get you from here to Cortland. u How about we draw a map.

The… Production Possibilities Frontier u Our first “road map”. u Better known as the PPF. u The PPF is a basic workhorse in economics. u Often introduced in the first couple of lectures in both micro and macro intro courses.

The PPF: What Is It? u. A description of the possible or feasible combinations of commodities an economy can produce, using all of the available resources efficiently. u Shows the trade-off between more of one good in terms of another.