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ECON 1B03 (523)
Lecture 2

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Hannah Holmes

What is More Dangerous, a Gun or a Swimming Pool? Why is Economics difficult?  Experiments are often difficult in economics  Express ideas in economics: 1. English language When price of ‘x’ goes up, sales of ‘x’ goes down 2. Algebra / equations 3. Diagram / graph  Translate between each different form of communication Economics is a SOCIAL SCIENCE  Social = people  Science = use scientific method o Observe o Theorize “natural experiment” o Test theory Micro vs. Macro Economics  Microeconomics: individual household & firms and how they interact  Macroeconomics: economy-wide phenomena such as interest rates, unemployment, money, and growth Efficiency vs. Equity  Efficiency is the size of the pie  Equity is how the pie is divided Positive vs. Normative Analysis  Positive: attempt to describe the world ‘as it is’  Normative: attempt to describe the world ‘as it should be’  Ex: the earth is flat (positive) Model = Simplification  Economists most often use diagrams or equations o Omit details that enable us to see what is important  Assumptions o Economists make assumptions because; assumptions can simplify the complex world and make it easier to understand.  Variables  Eg. Map of a city Classify Variables  Real variables (measured in quantities) vs. normal variables (measured in dollars)  Stock variables (snapshot at a point in time) vs. flow variables (measured over a certain time period) – relationship of variable with time Example of a Model: Circular Flow Diagram Revenue Spending Markets For Goods and Services  Firms sell Goods and services sold  Households buy Goods and
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