Course process.

Course process.

Economics as a Science

Economics is a science as it creates hypotheses and conducts experiments if they are correct.

  • Since you can’t often create tests IRL, econometrics deals with interpreting real-world data as a substitute for an experiment
  • Experimental economics is a small discipline where you actually conduct experiments

(This is not as scientific as it seems. See Philosophy, Political Science, Economics)

Building Blocks of Microeconomics

Assume: People are rational in their pursuit of perceived self-interests. Such people are called economic agents.

→ …thus people respond to incentives

→ …then as a consequence of multiple economic agents interacting, there will emerge social consequences.

Economic Modeling

Modeling in economics is a process of distilling the essence of a real-world phenomenon, in order to make predictions about the real world.

Model → Optimization → Equilibrium

  • Model: form a model that describes an economic phenomena (make assumptions, Ceteris Paribus)
  • Optimization: consider how economic agents will interact within such assumptions & models. Use math if necessary.
  • Equilibrium: predict what will ultimately happen in such a model? What is the ending point? (make predictions)

(Economically, an equilibrium (=Pareto Equilibrium) is a point where no agent can be better off without making another agent worse off)

doesn’t need to have realistic assumptions. It just needs to predict reality really well.

Consider: A good pool player doesn’t need to know kinematics to score well. Similarly an economic model doesn’t need realistic assumptions if it can realistically predict real-world economic phenomena.

Other Key Points

  1. The world isn’t a zero sum game. Adam Smith: think of purchasing a piece of bread at 2, so they’re better off.
  2. Attribution Bias. People’s actions are due more to the sum of the incentives acting on them, rather than their inherent quality. Don’t attribute it to their personality.
  3. Decentralization. The rules of the economic game shapes a bottom-up spontaneous order that shapes the world and rations limited resources.