Microeconomics – BS1551 – 1.1 - Thinking like an economist
Introduction
What is economics?
- Definition: Economics is the study of how people choose under conditions of
scarcity.
It is a social science that studies how people interact with value, in particular the
production, distribution, and consumption of goods and services.
What is scarcity?
- Definition: Scarcity means that people can’t always have everything they want.
Resources are scarce and time is scarce. Therefore, this means that if someone can't satisfy
all their wants, they need to decide which ones to give priority to.
Economics studies how people do this and make these decisions (making the most of their
resources available to them).
However, it is important to consider that scarcity isn't only concerned with material wealth,
but other factors as well.
For example, the richest people in the world still have some scarce resources, such as:
- Time
- Can't be in two places at once.
- Choosing between two alternatives
- Stomach capacity when eating food.
This shows everyone in the world faces scarcity, but some more than others.
Economics develops the following:
- Mathematical models that mimic the real world in order to study the channels
through which policy will have an effect. These mathematical models are groups of
equations designed to mimic the real world.
- Statistical hypotheses from the results of these models that can be tested against
real-world data. This tests to see whether the models can hold up in the real world, if
they don’t then they are rejected and something else is used.
The problem is that they are extremely complex and chaotic as they involve such a large
quantity of people.
The art of simplifying a complex world
Economists create models in order to express a theory that they may have.
Models are simplified descriptions of reality that can be tested against the real world and
conclusions drawn on economic behaviour.
- Definition: an economic model is a simplified description of reality, designed to
yield hypotheses about economic behaviour that can be tested.
, They don’t mirror the real world exactly and leave out many characteristics, however, it is
the general theory of the model that is of importance.
Example; Economics can be compared to a computer game.
The characters in a computer game aren’t real and are only really a set of codes, however,
the game coders have developed them to mimic real people. The coders don’t make them
identical to real people and leave out certain things, this is because it would be too complex
and take too long to input every characteristic of a certain person into a game.
This is like what economists do, who simplify things down to make them manageable whilst
covering most aspects of the person.
They add in what they need to make the model realistic enough and then leave out
everything else. This is where economists receive a lot of criticism over what aspects of the
model they should leave out and what assumptions they should include.
The main criticisms of economic analysis are;
- Partial equilibrium vs. general equilibrium: focusing on one part of a larger system
and analysing it in isolation. For instance, when considering the impact of a petrol
tax on fuel prices in the UK market, economists typically isolate the fuel market to
assess its effects. However, this approach, known as partial equilibrium, draws
criticism for overlooking the interconnectedness of markets and potential feedback
loops. This omission might lead to less accurate outcomes compared to a
comprehensive general equilibrium analysis that considers broader market
interactions.
- Holding things constant: Even within partial equilibrium markets we have to leave a
lot of things out and take a lot of assumptions, they are held constant and assumed
as not changing and doing anything that may affect the results. This may result in
ignoring important channels that would change the results.
For example, introducing taxes on fuel may affect how much fuel people buy, but it
may also affect how much people spend on food. The change in the amount spent
on food is ignored.
- Lack of external validity: Sometimes economists overgeneralise. Overgeneralising
involves applying old results to new settings, where they might not fit or be entirely
accurate.
In defence of economists;
Good economists understand that their models are not universal and that assumptions are
made, and some important aspects may be left out. They understand that the models that
they develop are tools that only work in a given context and often can not be applied to
numerous different environments.
Introduction
What is economics?
- Definition: Economics is the study of how people choose under conditions of
scarcity.
It is a social science that studies how people interact with value, in particular the
production, distribution, and consumption of goods and services.
What is scarcity?
- Definition: Scarcity means that people can’t always have everything they want.
Resources are scarce and time is scarce. Therefore, this means that if someone can't satisfy
all their wants, they need to decide which ones to give priority to.
Economics studies how people do this and make these decisions (making the most of their
resources available to them).
However, it is important to consider that scarcity isn't only concerned with material wealth,
but other factors as well.
For example, the richest people in the world still have some scarce resources, such as:
- Time
- Can't be in two places at once.
- Choosing between two alternatives
- Stomach capacity when eating food.
This shows everyone in the world faces scarcity, but some more than others.
Economics develops the following:
- Mathematical models that mimic the real world in order to study the channels
through which policy will have an effect. These mathematical models are groups of
equations designed to mimic the real world.
- Statistical hypotheses from the results of these models that can be tested against
real-world data. This tests to see whether the models can hold up in the real world, if
they don’t then they are rejected and something else is used.
The problem is that they are extremely complex and chaotic as they involve such a large
quantity of people.
The art of simplifying a complex world
Economists create models in order to express a theory that they may have.
Models are simplified descriptions of reality that can be tested against the real world and
conclusions drawn on economic behaviour.
- Definition: an economic model is a simplified description of reality, designed to
yield hypotheses about economic behaviour that can be tested.
, They don’t mirror the real world exactly and leave out many characteristics, however, it is
the general theory of the model that is of importance.
Example; Economics can be compared to a computer game.
The characters in a computer game aren’t real and are only really a set of codes, however,
the game coders have developed them to mimic real people. The coders don’t make them
identical to real people and leave out certain things, this is because it would be too complex
and take too long to input every characteristic of a certain person into a game.
This is like what economists do, who simplify things down to make them manageable whilst
covering most aspects of the person.
They add in what they need to make the model realistic enough and then leave out
everything else. This is where economists receive a lot of criticism over what aspects of the
model they should leave out and what assumptions they should include.
The main criticisms of economic analysis are;
- Partial equilibrium vs. general equilibrium: focusing on one part of a larger system
and analysing it in isolation. For instance, when considering the impact of a petrol
tax on fuel prices in the UK market, economists typically isolate the fuel market to
assess its effects. However, this approach, known as partial equilibrium, draws
criticism for overlooking the interconnectedness of markets and potential feedback
loops. This omission might lead to less accurate outcomes compared to a
comprehensive general equilibrium analysis that considers broader market
interactions.
- Holding things constant: Even within partial equilibrium markets we have to leave a
lot of things out and take a lot of assumptions, they are held constant and assumed
as not changing and doing anything that may affect the results. This may result in
ignoring important channels that would change the results.
For example, introducing taxes on fuel may affect how much fuel people buy, but it
may also affect how much people spend on food. The change in the amount spent
on food is ignored.
- Lack of external validity: Sometimes economists overgeneralise. Overgeneralising
involves applying old results to new settings, where they might not fit or be entirely
accurate.
In defence of economists;
Good economists understand that their models are not universal and that assumptions are
made, and some important aspects may be left out. They understand that the models that
they develop are tools that only work in a given context and often can not be applied to
numerous different environments.
