A Tiny Introduction to Economics
Macroeconomics … using statistics to understand reality Microeconomics … looking at specific groups and their decisions
Definition
The study of how society makes choices in managing its scarce resources and the consequences of this decision-making
Issues like
- scarcity and choice
- trade-offs and Opportunity Cost
- marginal thinking (Marginal Changes)
- incentives and reaction to them
Scope:
- which policy measures recude unemployment?
- how should central banks conduct monetary policy?
- how can we avoid that firms pollute the environment?
- why do people become criminals?
Examples
The impact of legalized abortion on crime.
Theory: With legalized abortion the crime rate decreases because the people that are not born, would later in life become a criminal with a higher chance.
Great example because:
- a lot of variability for 50 different states
- a lot of data on other aspects of this problem
Oil and the duration of dictatorships
Theory: Dictators with a lot of natural resources should have longer duration in their dictatorships, since they have more resources to burn through to keep the people happy.
Up or Down? Toilet Seat Etiquette
a mathematical system about if it is worth it to always put down the toilet seat after peeing.
On the efficiency of ACDC
- Bon Scott had a nice voice which was the signature part of the band
- Bon Scott died of alcohol
- They found Brian Johnson, a very similar voice
- huge controversy about who was the better vocalist
They did:
- played an Ultimatum Game experiment
- game was played in 2 rooms separately
- one room played music from Bon Scott
- one room played music from Brian Johnson
- Scoring: Which got more total income (accepted offers)
- Brian Johnson Music won
Scarcity and Choice
- economic activity: interaction between households and frims
- households cannot meet all wants and needs
- scarcity: society has limited resources, cannot meet all needs of all people
- how to best allocate resources for best meeting of needs/wants
Trade-Offs
- trading off benefits/costs of options
- at societal level are different trade-offs
Marginal Thinking
Revenue and Costs
let profit be a function:
then we can maximize the function (derivative = 0) → Optimization
This model requires rationality of all participants.
Marginal Quantities: When changing the inputs a little, how does the output change.
Finding a way that the marginal revenue matches their marginal costs. Then their profit is maximized. → Optimization
Abstraction and Mathematics
Popper Logic
Cause and Effect
Pattern Matching is used to derive insights from data.
Then we search for causality and implications of these patterns
Positive vs Normative Analysis
- Why is unemployment higher for teenagers than older workers?
- What should the government do to improve the well-being of teenagers?
Positive Statement … Can be falsified … scientific statements Normative Statement … includes opinints … cannot be tested
Positive and Normative tend to get mixed up.
Critical Thinking
6 rules of evidental reasoning (Lett, 1990)
- Falsifiability
- Logic
- Comprehensive
- Honesty
- Replicability
- Sufficiency in full: FiLCHeRS - The Six Rules for Evidential Reasoning
Occam’s Razor
When there are 2 hypotheses that explain the situation equally well, then choose the simpler one.
Logical Fallacies
- Ad hominem
- oh no, that guy is a nazi, therefore the statement must be wrong
- Argument from authority
- Appeal to ignorance
- Post hoc, ergo propter hoc
- just because one thing happened after another doesn’t mean, that they cause each other
OWID’s classification
How to separate countries into different continental groups. This allows to distinguish between continental differences compared to country or region based differences. OWID Classification