Economic Models Lecture 2 Dr. Jennifer P. Wissink ©2015 John M. Abowd and Jennifer P. Wissink, all rights reserved. August 27, 2015

Announcements (MACRO) Fall 2015 u Make sure you are reading class announcements on Blackboard. u Also, check out all the FAQs on Blackboard. u Get yourself set up on MEL ASAP. –Please make a habit of checking the calendar that shows up on MEL for when all the graded quizzes are due. –On menu in MEL click Assignments... click Do a Quiz.... look at top area and you will see the quiz and its due date. As I assign more quizzes more will show up. –NOTE: I have posted the first quiz that will count towards your magic number of 500 MEL points and it is due 09/08/15 at 10:00am. It is Quiz# F2015. You can start and stop a quiz as many times as you want. Your work is automatically saved. When you are ready for your quiz to be graded hit "Submit". That turns/submits your quiz in for grading. You will see what you got right and wrong - make sure to take a screen shot of that if you want the information. After the quiz is past due you will be able to review it using Results. You can retake the entire quiz once. You must do the entire quiz again. And beware, the order of answers will change. So you really have to read and do it all over again. Submit when you are ready. The HIGHER of two quiz attempts will count towards your 500 goal. (NOT BOTH!) To see how many points you have use Results. u Get out your i>clicker or REEF Polling app going. –Register it via our Blackboard page, ASAP.

i>clicker questions What part of Cornell? A.Arts College B.ILR C.CHE D.CALS E.Engineering What part of US? A.Northeast B.Midwest C.West Coast D.The South E.None of the above What part of the world? A.Canada B.Europe C.Asia & Down Under D.South&Central America E.None of the above 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 Are you a morning person? A.No! B.Yes!! C.Will be this semester Have you already taken intro micro? A.Yup. B.Nope.

u So what is this course about? –(And what is it not about?) u My working title: Introduction to Applied Macroeconomic 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. Econ 1120 Introductory Macroeconomics

Applied Macroeconomic Theory u 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. u Macro: the study of the determination of economic aggregates and how they relate to each other and how the government and the exogenous environment affects these aggregates. –versus micro...

Macro v Micro in the News u More Macro-ish: –China's Missteps Tarnish A Reputation For Economic Management » missteps-tarnish-a-reputation-for-economic-managementhttp:// missteps-tarnish-a-reputation-for-economic-management u National Income and Product Accounts –Just in: Gross Domestic Product: Second Quarter Real gross domestic product -- the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 3.7 percent in the second quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. » u More Micro-ish:Justice Department Investigates Possible Collusion In U.S. Airline Industry – investigates-possible-collusion-in-u-s-airline-industry

Examples of Microeconomic and Macroeconomic Concerns BRANCH OF ECONOMICS PRODUCTIONPRICESINCOMEEMPLOYMENT 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 Macroeconomic Theory u Applied: We will apply what we learn to real world situations.

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.

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

Production Possibilities Frontier u Let’s introduce the Production Possibilities Frontier. –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.

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

i>clicker question Which one of the following would an economist classify as capital (K)? A. An entrepreneur's $100 bill. B. The guitars used by the members in the band Fun. C. A corporate bond issued by IBM. D. Unfinished lumber purchased by a furniture manufacturer to make chairs.

The PPF: What You Get u 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. »Have Kapital (K) and Labor (L) that 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.

GUNS KLGuns (tons) Gun Production Data (Given) & The Gun Production Function