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
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Summary