Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Part I: Introduction to Economics

1. The Principles and Practice of Economics

2. Economic Methods and Economic Questions

3. Optimization: Doing the Best You Can

4. Demand, Supply, and Equilibrium

1 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Chapter 1

The Principles and Practice of

Economics

2015.9.18.

2 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

1 The Scope of Economics

2 Three Principles of Economics

3 The First Principle: Optimization

4 The Second Principle: Equilibrium

5 The Third Principle : Empiricism

6 Is Economics Good for You?

3 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• Economics is the study of people’s choices.

• The first principle of economics is that people

try to optimize; they try to choose the best

available option.

• The second principle of economics is that

economic systems tend to be in equilibrium, a

situation in which nobody would benefit by

changing his or her own behavior.

4 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• The third principle of economics is

empiricism— analysis that uses data.

Economists use data to test theories and to

determine what is causing things to happen in

the real world.

5 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Question: Is facebook free?

6 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

1.1 The Scope of

Economics

• Economics study all human behavior, or

human choices.

• Choice— not money— is the unifying feature

of all the things that economists study.

• Economists think of almost all human

behavior as the outcome of choices.

7 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Economic Agent and Economic Resources

• An economic agent is an individual or a group

that makes choices, such as consumers, firms,

parents, politicians, criminals, business leaders,

etc.8 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

9 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• Economics studies the allocation of scarce resources.

• Scarce resources are things people want, where the

quantity that people want exceed that is available.

• Scarcity exists because people have unlimited wants in a

world of limited resources.

10 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Definition of Economics

• Economics is the study of how agents make

choices among scarce resources and how those

choices affect society.

• Economists study the original choice and its

multiple consequences for other people in the

world.

11 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Positive Economics and Normative Economics

How many pieces of chocolate should each person

have taken?

12 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• Positive economics describes what people actually do.

e.g. Some people took more than one and not everyone

got a piece of chocolate.

• Normative economics recommends what people ought

to do. e.g. Each student should just take one so that

everyone gets a piece.

• When a government policy has winners and losers,

economists will need to make some ethical judgements

to conduct normative analysis.

• Ethical judgement are usually unavoidable when

economists think about government policies, because

there are very few policies that make everyone better off.

13 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Microeconomics and Macroeconomics

• Microeconomics is the study of how individuals, firms,

and government make choices, and how those choices

affect prices, the allocation of resources, and the

well-being of other agents.

• Macroeconomics is the study of the economy as a whole,

such as the growth rate of a country’s total output (經濟

成長率), the percentage increase in overall prices (通貨膨

脹率), or the fraction of the labor force that is looking

for work but cannot find a job (失業率).

14 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

1.2 Three Principles of

Economics

Three Principles of Economics:

1. Optimization: Make the best choice possible

with given information.

2. Equilibrium: When everyone is optimizing, no

one would be better off with a different choice.

3. Empiricism: Use data to figure out answers to

interesting questions

15 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

1.3 The First Principle:

Optimization

• Economic agents try to choose the best feasible

(available and affordable) option, given the

information available at the time of the choice.

• The test of optimization is the quality of the

decision, not the outcome.

• What we optimize varies from person to person

and group to group.

16 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Trade-offs and Budget Constraints

• Trade-offs arise when some benefits must be

given up in order to gain others.• A budget constraint is the set of things that a

person can choose to do (or buy) without

breaking her budget.

17 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Opportunity Cost (機會成本)

• The time that we spend on the Web is time that we could

have spent in some other way: playing basketball,

jogging, daydreaming, sleeping, calling a friend, working

at a part-time job, and so on.

• Economists tend to focus on the best alternative activity.

We refer to this best alternative activity as the

opportunity cost.

• This is what an optimizer is effectively giving up when

she surfs the Web.

• The opportunity cost of your time is the net benefit that

you would receive from a job, or a value that is even

greater than that.

• 生育小孩的機會成本是?

18 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Cost-Benefit Analysis

• Cost-benefit analysis is a calculation that adds

up costs and benefits using a common unit of

measurement, like dollars.

19 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

臺北到高雄

• 高鐵 96-120分鐘,票價 1630。

• 台鐵自強號 300分鐘,票價 843。

• 票價差 787元, 時間差 3小時。 兩者如何比較?

• 高鐵或自強號?

20 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Question: Is Facebook free?

21 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• In 2013, Web users worldwide spent 250 million hours

on Facebook each day.

• On a per person basis, each of the nearly 1 billion

Facebook users allocated an average of 15 minutes per

day to the site.

• College students used Facebook more intensively. The

average college student spent about an hour per day on

Facebook.

• About half of Facebook users live in developed countries

and half live in developing countries, given our

assumptions, the average opportunity cost is

(1/2)× $9+ (1/2)× $1 = $5 per hour, where $9 and $1

are the opportunity costs for users in developed and

developing countries respectively.

22 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• The total opportunity cost of time spent on Facebook is(250 million hour

day

) ($5

hour

)=

($1.25billion

day

)$1.25 billion per day or $450 billion per year.

• What is the opportunity cost of a typical U.S. college

student who spends 1 hour per day on Facebook.

• Assuming that this student’s opportunity cost is equal to

$10 per hour, the opportunity cost is $3,650 per year.

• What is the benefit of Facebook?

23 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

24 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

1.4 The Second

Principle: Equilibrium• Equilibrium is the special situation in which

everyone is optimizing, so nobody (believes

they) would benefit personally by changing his

or her own behavior.

25 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• What does equilibrium really mean?

• Suppose the market price of gasoline is

$3/gallon and the gasoline market is in

equilibrium.• Three conditions will need to be satisfied.

1. The amount of gasoline produced by gasoline

sellers— oil companies— will equal the amount of

gasoline purchased by buyers.

2. Oil companies will only operate wells where they

can extract oil and produce gasoline at a cost that is

less than the market price of gasoline: $3/gallon.

3. The buyers of gasoline will only use it for activities

that are worth at least $3/gallon.

26 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

The Free Rider Problem

• The Free Rider Problem exists when an

individual or group is able to enjoy the benefits

of a situation without incurring the costs.

• For example: the problem of lazy roommates.

27 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• Equilibrium analysis helps us design special

institutions— like financial contracts— that

reduce or even eliminate free riding.

• For example, what would happen in the

rooming group if everyone agreed to pay $5 per

week so the roommates could hire a cleaning

service?

• It would be easier to enforce $5 weekly

payments than to monitor compliance with the

rule “clean up after yourself, even when

nobody is here to watch you.”

28 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

1.5 The Third Principle:

Empiricism

• Economists test their ideas with data. Such

evidence-based analysis is called empirical

analysis or empiricism.

• Economists use data to determine whether our

theories about human behavior— like

optimization and equilibrium— match up

with actual human behavior.

29 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• We want to know if our theories fail to explain

what is happening in the world.

• In that case, we need to go back to the drawing

board and come up with better theories.

• That is how economic science, and science in

general, progresses.

• Economists are also interested in

understanding what is causing things to happen

in the world.

30 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

• Hot days and crowded beaches tend to occur at

the same time of the year.

• What is the cause and what is the effect here?

• It is, of course, that hot days cause people to go

swimming. It is not that swimming causes the

outside air temperature to rise

• Does being relatively smart cause people to go

to college? Or does going to college cause

people to be relatively smart? Or do both

directions of causation apply?

31 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

1.6 Is Economics Good

for You?

What are the costs and benefits of this course?

Costs

• Tuition

• Textbook

• Other courses to take

• Sleep?

• Stress?

32 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Benefits

• The ability to apply economic reasoning in

your daily life.

• Use positive economic analysis to predict other

people’s behavior. Economics illuminates and

clarifies all human behavior.

• Use economic principles when you give other

people advice and when you make your own

choices.

33 / 34

Chapter 1

The Principles

and Practice of

Economics

Outline

The Scope of

Economics

Three Principles

of Economics

The First

Principle:

Optimization

The Second

Principle:

Equilibrium

The Third

Principle :

Empiricism

Is Economics

Good for You?

Benefits

• Looking at the world through the economic

lens puts you at an enormous advantage

throughout your life.

• Economics is a lot of fun. Understanding

people’s motivations is fascinating, particularly

because there are many surprising insights

along the way.

34 / 34