Lecture 2 Economic Models Dr. Jennifer P. Wissink January 30, 2017 ©2017 Jennifer P. Wissink, all rights reserved

How To Beat Intro Micro Come to the lectures and review your notes against my slides. Stay current in the textbook. Do the MyEconLab stuff for starters. Then really test yourself with the Wissink old traditional problem sets and Wissink Econ 1110 sample exams. Do them sincerely. Go for quality over quantity. Use the course Web pages. Use the entire instructional team!! Everyone’s office hours Everyone’s sections Learning Strategies Center’s services Also use the E.T.C. staring in about 10 days Nip problems in the bud. Practice, practice, practice!! Go for active as opposed to passive studying!

i>clicker questions What part of Cornell? Arts College ILR CHE CALS Engineering What part of US? Northeast Midwest West Coast The South None of the above Are you a morning person? No! Yes!! Will be this semester What part of the world? Canada Europe Asia & Down Under South&Central America None of the above How much do you like using math outside of math classes? Love Hate Don’t love, Don’t hate Don’t know, we’ll see Have you already taken intro macro? Yup. Nope.

Econ 1110 Introductory Microeconomics So what is this course about? (And what is it not about?) My working title: Introduction to Applied Microeconomic Theory Theory: We will construct models. Look at the world, hypothesize a model, analyze the model, use the model to make predictions and then see if the model holds up under empirical scrutiny.

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

Macro v Micro in the News More Macro-ish: http://www.npr.org/2017/01/29/511493685/ahead-of-trumps-first-jobs-report-a-look-at-his-remarks-on-the-numbers More Micro-ish: http://www.npr.org/2017/01/27/512047215/milk-producers-pay-back-millions-in-price-fixing-settlement

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

Applied Microeconomic Theory Applied: We will apply what we learn to real world situations.

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

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

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

One More Time… Economics: the study of the allocation of scare resources to produce commodities to satisfy infinite human wants.

The Production Possibilities Frontier Let’s introduce the Production Possibilities Frontier. Better known as the PPF. The PPF is a basic workhorse in economics. Often introduced in the first couple of lectures in both micro and macro intro courses.

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

The PPF: Assumptions Given: endowments of resources Given: technologies Given: a fixed time frame Given: efficient production

i>clicker question Which one of the following would an economist classify as capital (K)? The head TA’s $100 bill. The guitars used by Bruce Springsteen and the E-Street Band. A corporate bond issued by IBM. Unfinished lumber purchased by a furniture manufacturer to make chairs. All of the above.

The PPF: What You Get Typical teaching set-up: Two final goods. Guns (G) and Butter (B) Two input goods and final goods technologies. So drop “land” for now, no big deal. Kapital (K) and Labor (L) both go into making guns and butter according to some known and given technology that can be described by production functions. G = g(K, L) and B = b(K, L) PPF is a frontier that shows the maximum amount of one good you can produce given a fixed amount of the other. Frontier is a graph.

Getting Started Constructing a PPF: The Gun Production Function (given) GUNS K L Guns (tons) 2 1 3 4 5 18