Lecture 2 Economic Models Dr. Jennifer P. Wissink January 29, 2018 ©2018 Jennifer P. Wissink, all rights reserved

Announcements-micro Spring 2018 Cornell has posted all final exam dates! See: https://registrar.cornell.edu/exams/spring-final-exam-schedule Econ 1110 Wissink’s is Monday May 21 at 9:00am That’s late! See Blackboard for announcement about your options! Basically it’s either Thursday May 17 at 9am OR Monday May 21 at 9am. The first MEL Quiz towards your 600 magic number of MEL points has been assigned. Make a habit of checking the MEL site regularly for what’s been assigned and when a quiz is due. Make sure to see FAQs folder on Blackboard if you have MEL questions. Lots of answers there already. Also make sure to read the one announcement I have posted on the MEL site itself.

i>clicker questions What part of Cornell? CAS ILR CHE CALS or Hotel Engineering or CAAP What part of US? Northeast Midwest West Coast The South Not from the US If not from the US, what part of the world? Canada Europe Asia & Down Under South&Central America Africa 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. Are you a morning person? No! Yes!!

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: Data on Europe’s Economy, Job Numbers and Janet Yellen’s Goodbye https://www.nytimes.com/2018/01/28/business/europe-economy-jobs-yellen.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=rank&module=package&version=highlights&contentPlacement=7&pgtype=sectionfront More Micro-ish: The Subway Is Next Door. Should New Yorkers Pay Extra for That? https://www.nytimes.com/2018/01/29/nyregion/subway-real-estate-nyc.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=second-column-region&region=top-news&WT.nav=top-news

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.