Economic Models Lecture 2

Dr. Jennifer P. Wissink January 26, 2014

2014 John M. Abowd and Jennifer P. Wissink, all rights reserved.

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

Announcements (micro) Spring 2014

Make sure you are reading class announcements on Blackboard. Get yourself set up on MEL ASAP.
First graded MEL quiz is assigned! Please check the calendar that shows up on MEL for when it is due. Get used to checking there, please. Make sure you READ the Announcements on Blackboard before starting the 1st quiz. I describe some useful stuff to know about the MEL quiz set up.

Get out your i>clicker

Register it via our Blackboard page, ASAP.

I will be at my office (468 Uris Hall) from 2-5 today to field questions all sorts. Stop by if you are having trouble with anything or have any questions or concerns. Still not in the class? See Susan down front right after class.

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

In The News
President

Obamas State of the Union speech is Tuesday (tomorrow) night.

Have a listen for all things microeconomics.

In

The Super Bowl Ad Game, One Small Business Will Win Big
http://www.npr.org/2014/01/24/265726096/inthe-super-bowl-ad-game-one-small-businesswill-win-big

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

i>clicker questions
2.1 What year are you in? A. B. C. D. E. Freshman Sophomore Junior Senior Other 2.2 What part of Cornell? A. B. C. D. E. Arts College ILR CHE CALS Engineering 2.3 What part of US? A. B. C. D. E. Northeast Midwest West Coast Southern East Coast The South

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

i>clicker questions
2.3a What part of the world? 2.4 How much do you like using math outside of math classes? A. B. C. D. Love Hate Dont love, Dont hate Dont know, well see 2.4a Are you a morning person?

A. B. C. D. E.

Canada Europe Asia & Down Under South&Central America Africa

A. No! B. Yes!! C. Will be this semester

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

Why Study Economics?

Its

everywhere. Its unavoidable. Its a requirement and a prerequisite for understanding lots of other material. To help you understand how economists think and construct arguments. To understand how markets work. To help you differentiate good from bad analysis.
http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

On Modeling & Constructing Theories

Simplistic Model Construction

Ockhams Razor

Evaluation of Models
economics is a social science

Two pitfalls to avoid

not recognizing the fallacy of composition using post hoc ergo propter hoc logic

Positive vs. Normative analysis

What is versus What ought to be
William of Ockham 14th century philosopher

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

A Road Map
Suppose

I want to get you from here to Cortland. How about we draw a map.

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

One More Time

Economics:

the study of

the allocation of scare resources to produce commodities to satisfy infinite human wants.

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

The Production Possibilities Frontier

Lets

introduce the Production Possibilities Frontier.

Better known as the PPF.

The

PPF is a basic workhorse in economics. Often introduced in the first couple of lectures in both micro and macro intro courses.
http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

The PPF: What Is It?

A

description of the possible or feasible combinations of commodities an economy can produce, using all of the available resources efficiently.
the trade-off between more of one good in terms of another.

Shows

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

The PPF: Assumptions

Given:

endowments of resources

Given:

technologies

Given:

a fixed time frame Given: efficient production

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

i>clicker question 2.5

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.

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

The PPF: What You Get

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.
http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

Gun Production Data (Given) & The Gun Production Function

GUNS K 2 L 0 Guns (tons) 0

2
2 2 2 2

1
2 3 4 5

1
2 3 4 5

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

Butter Production Data (Given) & The Butter Production Function

BUTTER K L Butter (lbs)

1
1 1 1

0
1 2 3

0
21 30 37

1
1

4
5

39
40

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/

Guns & Butter & The PPF

GUNS L Guns (tons) 0 0 1 1 2 2 3 3 4 4 5 5 BUTTER K 1 1 1 1 1 1 L 0 1 2 3 4 5 Butter (lbs) 0 21 30 37 39 40

K 2 2 2 2 2 2

THE PPF Butter Guns (tons) (lbs)

http://www.arts.cornell.edu/econ/wissink/econ1110jpw/