Lecture 1 Introduction and What Economics is all about

Name:  Professor J. Palmer
Office: 4044 SSC
Office Phone: 85484
Required Textbook: Mankiw, et al. plus Aplia.

Introduce TAs

Go over the reading list. Emphasize:

• no cell phones
• no laptops
• no food
• be on time or enter through back door
• Grade Determination
• Aplia
• exams are multiple choice
• permission to write makeup exams requires documentation; makeup exams are essay-type
• exam results e-mailed to you
• go through topics and explain more about Aplia.
• website: http://home.cabletv.on.ca/~jpalmer/
• blog: http://www.EclectEcon.com
• e-mail address: jpalmer at uwo dot ca

From the reading list:
    ... Being a student requires considerable time and commitment. I expect you to average two hours of studying out of class for every hour in class. This means I expect you to read the material, do Aplia on-line quizzes, form study groups, and go over the questions at the end of each chapter.

Previous training in economics is not required for this course and might even be a hindrance.

There are several important components to the Economic Way of  Thinking. We begin with two of them:

1. People Respond to Incentives
        What incentives? pecuniary? power? prestige? sex? food?
        How much do they respond? there are trade-offs, usually.
2. People Are Rational Maximizers
        Or at least they tend to behave as if they are.
           of what?
   a. Different people have different self-perceptions of what is in their own best interests.
           (1) Getting drunk,
           (2) calculator in the store,
           (3) what's the best amount of information to collect?
   b. Self-interested is not the same as selfish
           Consider Mother Therese.
   c. Somewhat circular: we know people do what maximizes their self-interest
           because if they knew it didn't maximize their self-interest, they would do something else.
   d. Economics is based on the assumption of rationality as a science.

Don't judge what people do as rational or irrational. In economics we assume that people always behave as if they are rational maximizers. Also, read this piece on the economics of suicide.

  Economics as a process. Keynes' quote:

The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.

• Assumptions in Economics: Does it matter how realistic they are? 
  One big criticism of economics is that it makes crude, rough, crazy, and/or unrealistic assumptions.
      three scientists on an island. 
      the acceleration due to gravity
  Do the models yield relevant predictions and explanations? 
  The "as if" assumption. 
  People tend to behave "as if" they are rational maximizers.

• Are economists really indecisive and inconclusive? 
  50 economists --- 51 conclusions
  If you laid all the economists in the world end-to-end... 
  Harry Truman and 1-handed economists
  How inconclusive is economics? "It all depends!!"

• How bad are our forecasts? Not bad, all things considered. 
  But we have the most difficulty with timing and the size of various effects. 
  And even when we're right, we're wrong, sometimes -- expectations.

• Economics is simple -- "My grandmother could have told me that."
  e.g., increased auto sales lead to an increase in the demand for steel (but when, from whom, and how much?).
  Less clear to many grandmothers: freer trade leads to rising world wealth.

• Economics must be useful. If it isn't, it is a waste.
      two people in a balloon.

This course is not about memorizing facts (though doing so will at times be important); it is about people in businesses, people in governments, etc. --- people in all aspects of their lives,  individuals acting and interacting in the economy in their own self-interest, whatever that might be.

   In economics, in addition to the assumption of rationality, we make two fundamental assumptions:

1.  unlimited human wants

• seems to reflect reality fairly well
• not necessarily true for everyone and everything
• you may not like it -- you might say, "it shouldn't be this way"
•     Old Testament - "The Fall", newer theology:
•     Camus, The Fall
•     Paul Tillick-- conflicting polarities
•     Reinhold Neibuhr - the impossible possbility
• Will Rogers: "What's the matter with the world? Why there ain't but one thing wrong with every one of us -- and that's selfishness."
• A reasonable assumption for all modern societies, regardless of politics or economic organization.

2.  Limited Inputs (productive resources; factors of production):

• land and natural resources
• capital goods, such as machinery, buildings, equipment, and inventory
• labour
• entrepreneurship

        These productive inputs are fixed in the short-run, but some can be increased somewhat in the long-run.

Unlimited Wants + Limited Inputs mean we have scarcity
Scarcity is the economic problem.

• You may not like this conclusion about scarcity
• You may think we should not be this way.
• You may think it is a giant conspiracy that we face scarcity.
• Nevertheless, this approach helps us understand the world as it is.

For Tuesday: Before class, please finish reading Chapters 1 and 2 of the text, do the practice problem set and the graded problem set for Aplia quiz #1, and look at the questions at the end of Chapter 1 in the textbook.