3 Defining Features of  Economics

Reference: Acemoglu, Laibson, and List (2014) Economics, chapters 1-2.

How individuals make choices

1

Economists investigate:

Buy iPhone X or not

How individuals make choices

1

Economists investigate:

Apple: how many iPhone X to produce

How individuals make choices

1

Economists investigate:

Get married or not

How individuals make choices

1

Economists investigate:

Study now or later

How individuals make choices

1

Economists investigate:

Vote for LDP or not

1

Economists think:

Individuals choose

the best

affordable

option

1

Economists think:

Individuals choose

the best

affordable

option

It meets each individual's objective

1

Economists think:

Individuals choose

the best

affordable

option

Within the budget

Within 24 hours a day

Among the list of candidates

1

Defining Feature of Economics #1

Individuals choose

the best

affordable

option

Optimization

1

Example:

Take this course for credit or not?

Benefits

(Is it the best?)

 

Intellectual fun

Learning English

Love politics

etc.

Costs

(Is it affordable?)

 

Another fun course

Difficult to get credit

etc.

How the choice of individuals

affect society?

2

Economists also investigate:

Price of low-cost airline tickets

How the choice of individuals

affect society?

2

Economists also investigate:

Traffic jam

Choice of

individuals

2

Notice:

Society

Choice of

individuals

2

Notice:

Many people choose to drive

Society

Choice of

individuals

2

Notice:

Many people choose to drive

Society

More traffic jam

Choice of

individuals

2

Notice:

Many people choose to drive

Society

More traffic jam

Some start using public transport

Choice of

individuals

2

Notice:

Many people choose to drive

Society

More traffic jam

Some start using public transport

Less traffic jam

Choice of

individuals

2

Notice:

Many people choose to drive

Society

More traffic jam

Some start using public transport

Less traffic jam

2

Economists think:

Society is a situation in which

no one benefits

from choosing another option

2

Society is a situation in which

no one benefits

from choosing another option

Equilibrium

Defining Feature of Economics #2

2

Example:

If many students take this course...

Proof

of a great course

More students

join the course

2

Example:

If many students take this course...

Proof

of a great course

More students

join the course

Less interaction with me

during lectures

Some students

drop out

2

Example:

If many students take this course...

Proof

of a great course

More students

join the course

Less interaction with me

during lectures

Some students

drop out

Proof

of a bad course

More students

drop out

2

Example:

If many students take this course...

Proof

of a great course

More students

join the course

Less interaction with me

during lectures

Some students

drop out

Proof

of a bad course

More students

drop out

More interaction with me

during lectures

No more students

drop out

2

Example:

If many students take this course...

Proof

of a great course

More students

join the course

Less interaction with me

during lectures

Some students

drop out

Proof

of a bad course

More students

drop out

More interaction with me

during lectures

No more students

drop out

The adjustment process continues

2

Example:

If many students take this course...

Proof

of a great course

More students

join the course

Less interaction with me

during lectures

Some students

drop out

Proof

of a bad course

More students

drop out

More interaction with me

during lectures

No more students

drop out

 

until we reach the equilibrium

The adjustment process continues

Today, economics is also about...

20 years ago, economics was all about optimization and equilibrium

20 years ago, economics was all about optimization and equilibrium

Today, economics is also about

Defining Feature of Economics #3

Empiricism

3

Economists think:

building

models of the world

Our knowledge comes from

 and checking if the models are

consistent with data

3

Economists think:

building

models of the world

Our knowledge comes from

 and checking if the models are

consistent with data

Simplified

representation

of the world

3

Economists think:

building

models of the world

Our knowledge comes from

 and checking if the models are

consistent with data

Simplified

representation

of the world

3

Economists think:

building

models of the world

Our knowledge comes from

 and checking if the models are

consistent with data

Many models

logically possible

3

Economists think:

building

models of the world

Our knowledge comes from

 and checking if the models are

consistent with data

Many models

logically possible

Allow us to pick the best model

3

Economists think:

building

models of the world

Our knowledge comes from

 and checking if the models are

consistent with data

How?

3

To check a model's consistency with data, economists:

Collect many observations

Tease out causality from correlations

and

Example:

Does economic development

bring about democracy?

You: No, because China is still not a democracy.

Economist: But that could just be an outlier.

3

Collect many observations

Figure 1 from Acemoglu et al. (2008)

3

Economist: No, that's a correlation, not a causality.

Correlation

between A & B

A causes B

B causes A

C causes A & B

3

You: The higher GDP per capita, the more democratic

3

Correlation

between A & B

A causes B

B causes A

C causes A & B

Tease out causality from correlations

Tools

to tease out causality from correlations

Randomized control trials (RCT)

cf. drug tests

Natural experiments

e.g. weather

Regression discontinuity design

e.g. close elections

3

Tools

to tease out causality from correlations

Randomized control trials (RCT)

cf. drug tests

Natural experiments

e.g. weather

Regression discontinuity design

e.g. close elections

3

To learn more,

read Mastering Metrics by Angrist and Pischke

Economics

Optimization

Equilibrium

Empiricism

II

+

+

Summary

What is economics?

By Masayuki Kudamatsu