class: center, middle, inverse, title-slide # What is Economics? ## EC 201: Principles of Microeconomics ### Kyle Raze ### Winter 2020 --- class: inverse, middle # Prologue --- # Who am I? [Kyle Raze](https://kyleraze.com) - Doctoral student in economics - UO alumnus: BA '15, MS '17, & PhD '21 - Applied microeconomist and econometrician - I study the economics of education and labor (and sometimes politics). -- Where can you find me? - Office: 522 PLC - Office hours: Monday 14:00-15:00, Tuesday 15:00-16:00, or by appointment - Email: [.mono[raze@uoregon.edu]](mailto:raze@uoregon.edu) **(use EC 201 in the subject line)** --- class: inverse, middle # What is economics? --- # What is economics? According to [John Maynard Keynes](https://en.wikipedia.org/wiki/John_Maynard_Keynes), > The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions. --- # Why study economics? -- Develop critical thinking **skills that employers value**. -- Cultivate **healthy skepticism**. -- Learn to navigate a diverse set of **policy-relevant** questions. --- # Why study economics? ## Navigate important questions -- - Should college be free? -- - Would universal healthcare make us healthier? -- - Who benefits from a $15 minimum wage? Who suffers? -- - Why is the rent so damn high? -- - What can governments do to address climate change? -- - Why are governments taking so long to address climate change? --- # Why study economics? ## Navigate important questions - Does immigration reduce wages for native workers? -- - Do cigarette taxes make smokers happier? -- - How much should the university charge out-of-state students? -- - Should cities pay for professional sports stadiums? -- - How does grade inflation affect labor market outcomes? -- - Why is there grade inflation? --- class: clear-slide **Q:** Do additional freeway lanes .hi-green[reduce congestion?] <img src="portland_traffic.png" width="294" style="display: block; margin: auto;" /> -- How do additional lanes .green[change the **price**] of driving .green[**relative** to alternative modes] of transportation? <img src="transport_alternatives.jpg" width="303" style="display: block; margin: auto;" /> --- class: clear-slide **Q:** Should the federal government .green[legalize cannabis?] <img src="01-Introduction_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" /> -- What about .green[meth?] -- **The bigger question:** What are the relevant trade-offs of legalization? --- class: clear-slide **Q:** Does a "kingpin" strategy weaken drug cartels? - Principal strategy in Mexico's War on Drugs -- - New cartels .mono[=>] more competition .mono[=>] more violence <img src="01-Introduction_files/figure-html/unnamed-chunk-4-1.svg" style="display: block; margin: auto;" /> --- class: clear-slide **Q:** Should the government require insurance companies to pay for a second night in the hospital following childbirth? - Overnight hospital stays are expensive. - How expensive? Expensive enough that parents rarely opt to pay for a second night. -- - If insurance companies are required to cover two nights, then .green[premiums will increase]. -- **The real question:** Are you willing to make some parents more comfortable if it means that .green[others will lose coverage] for basic care? --- class: clear-slide **Q:** Suppose you learn that orchestras employ many more male musicians than female musicians? **How would you explain this?** <img src="symphony.png" width="384" style="display: block; margin: auto;" /> Do orchestras .hi[discriminate] against women? -- **Natural experiment:** In the 1950s, American orchestras introduced "blind" auditions. - **Result:** Women 50% more likely to make past the first round and several times more likely to make the final cut. -- - **Takeaway:** The evidence is *consistent* with discrimination. --- class: clear-slide **Q:** The university has a fixed number of student tickets for each home football game. Which of the following ways of dispensing tickets is discriminatory? > **A.** First come, first served. > **B.** Distribute them using a random drawing. > **C.** Raise the price until that number of students want tickets. > **D.** Distribute them according to GPA. > **E.** All of the above. --- class: clear-slide count: false **Q:** The university has a fixed number of student tickets for each home football game. Which of the following ways of dispensing tickets is discriminatory? > **A.** First come, first served. > **B.** Distribute them using a random drawing. > **C.** Raise the price until that number of students want tickets. > **D.** Distribute them according to GPA. > .pink[**E.** All of the above.] -- **Note:** Starting next class, we'll use .mono[iClicker]s for questions like this one. --- # What is economics? ## Textbook definitions > The study of how humans coordinate their wants. -- > The study of how scarce resources, each having alternative uses, are allocated amongst competing ends. -- > The study of how individuals and societies allocate their limited resources to satisfy their unlimited wants. -- **Common thread:** .hi[scarcity] - A not-so-dismal .green[objective:] learn how we can better .green[mitigate the costs of scarcity.] --- # What is economics? ## Micro *vs.* Macro **Microeconomics** focuses on the causes and consequences of the choices people make in a market economy. - What factors constrain the choices of individuals? How do people respond when we relax those constraints or impose new ones? Do we like the consequences? **Macroeconomics** focuses on the performance of entire economies. - How do we grow the economy and avoid recessions? --- # Is economics a science? Economics seeks to explain real-world events by way of .green[observation] .mono[->] .green[hypothesis] .mono[->] .green[prediction] .mono[->] .green[experimentation] .mono[->] .green[conclusion]. -- Economists employ the .green[scientific method] to learn about human behavior. - Difficult to conduct controlled experiments like those in chemistry or physics. - **Alternative:** approximate controlled experiments with [randomized control trials](https://www.ted.com/talks/esther_duflo_social_experiments_to_fight_poverty?language=en), psychology-style lab experiments, and natural experiments. --- # Is economics a science? Focus on *human* behavior .mono[=>] social science. The core fields of social science are anthropology, economics, political science, psychology, and sociology. - Common objective: explain some aspect of human behavior. - They differ in the questions they pose and their frameworks for analysis. --- # Example: *Blue Paradox* [Recent study](https://www.pnas.org/content/116/12/5319) by UO economist [Grant McDermott](https://grantmcdermott.com) and coauthors. **Question:** Do commercial fishers preempt fishing bans by increasing their fishing effort before the bans go into effect? **Motivation** - Recent conservation efforts seek to preserve aquatic habitat and increase fish stocks. - Policy lever: Restrict fishing activity in marine protected areas. - Concern: Preemptive behavior could *decrease* fish stocks. -- **Approach** - Use vessel-level data on fishing effort/intensity to measure the behavioral response to impending fishing restrictions. --- # Example: *Blue Paradox* **Natural Experiment** Phoenix Islands Protected Area (PIPA) - First mentioned on 1 September 2014; implemented 1 January 2015. - *Treatment group:* PIPA. - *Control group:* Outlying Kiribati islands. <img src="figure2.jpg" width="400" style="display: block; margin: auto;" /> --- # Example: *Blue Paradox* **Natural Experiment** Measure the causal effect of the fishing ban by comparing fishing effort in treatment and control regions, before-and-after PIPA. - A *difference-in-differences* comparison. - .hi-red[Assumption:] .red[If Kiribati hadn't adopted the policy, then treatment region would have experienced the same trend in fishing activity as the control region.] - If we believe this assumption, then the observed difference-in-differences supports a causal interpretation. If not, then the change could reflect other factors and thus fail to isolate the causal effect of the ban. --- # Example: *Blue Paradox* **Results** <img src="figure3.jpg" width="629" style="display: block; margin: auto;" /> --- # Example: *Blue Paradox* **Discussion** Results provide causal evidence that commercial fishers engage in preemptive behavior in response to conservation policy changes. Results are *consistent* with economic theory, but *cannot prove* that the theory is correct. - **Science cannot prove anything.** - Science can .hi[falsify or reject] existing hypotheses or .hi[corroborate] existing evidence. -- Also...the causal statement rests on a critical assumption. - Cannot prove that the assumption is true, but can falsify it. - Failure to falsify .mono[!=] assumption is true. --- # What role should economists play? It will be important for us to separate our beliefs about *what is desirable* from what we believe to be *true or false.* -- Robust economic analysis consists of .hi[positive] statements. - *Positive statement* .mono[=] statement that can be classified as either true or false. -- Economists try to avoid .hi[normative] statements in their analyses. - *Normative statement* .mono[=] statement expressing a value judgement or *what ought to be.* - No matter how widely shared, value judgements are not scientifically justifiable (*i.e.,* they are untestable). --- # What role should economists play? **Q:** Is there a role for the normative? - **A:** To the extent that it is supported by well-defined positive statements, yes. - *e.g.,* evidence-based policy recommendations. --- # Positive or normative? *"The unemployment rate is 3.7 percent."* -- - **A:** Positive statement. -- *"Congress should abolish ICE."* -- - **A:** Normative statement. -- *"The expiration of the US Federal Assault Weapons Ban in 2004 increased gun violence in neighboring Mexican states."* -- - **A:** Positive statement. --- # Positive or normative? *"Vaccines cause autism."* -- - **A:** Positive statement...that happens to be false. -- *"When coupled with counseling, housing vouchers provide a cost-effective means to move low-income families to high-opportunity neighborhoods. Policymakers should consider incorporating additional counseling services into federal housing assistance programs."* -- - **A:** Normative statement supported by a positive statement. --- # Positive or normative? <br> <center> <blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">We should have a contest as to which of the Networks, plus CNN and not including Fox, is the most dishonest, corrupt and/or distorted in its political coverage of your favorite President (me). They are all bad. Winner to receive the FAKE NEWS TROPHY!</p>&mdash; Donald J. Trump (@realDonaldTrump) <a href="https://twitter.com/realDonaldTrump/status/935147410472480769?ref_src=twsrc%5Etfw">November 27, 2017</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script> </center> <br> -- .center[**A:** Normative statement.] --- # Positive or normative? <br> <center> <blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">In addition to winning the Electoral College in a landslide, I won the popular vote if you deduct the millions of people who voted illegally</p>&mdash; Donald J. Trump (@realDonaldTrump) <a href="https://twitter.com/realDonaldTrump/status/802972944532209664?ref_src=twsrc%5Etfw">November 27, 2016</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script> </center> <br> -- .center[**A:** Positive statement, but [unfounded](https://www.npr.org/2016/11/27/503506026/trump-makes-unfounded-claim-that-millions-voted-illegally-for-clinton).] --- # Prices **Q:** Who coordinates the needs and wants of the 325 million people in the US economy? - No individual commands more than a tiny part of the production of any good. - Each individual, acting in self-interest on narrowly-defined projects, creates useful goods for consumers in exchange for wages or other remuneration. - These activities are based on mutual benefits, coordinated by market-determined .hi-green[prices]. --- # Economic Learning ## Five important dimensions 1. Economic reasoning 2. Economic terminology 3. Economic insights 4. Economic institutions 5. Economic policy --- # Economic Learning ## 1. Economic reasoning Framework for formulating and answering questions How does one think as an economist? - Define the relevant benefits and costs. - Define the margins of importance. - Construct a predictive model that explains past behavior and predicts future behavior. --- # Economic Learning ## 2. Economic terminology Terminology abounds - *e.g.,* marginal benefit, marginal cost, market power, externalities, adverse selection, price controls, utility, profit, *etc.* **Q:** Why bother? **A:** Discipline-specific terminology facilitates quick and precise communication of complex ideas. --- # Economic Learning ## 3. Economic insights We base insights on economic theory. - Theory provides generalizations about the inner workings of an abstract economy. - *e.g.,* who coordinates the needs and wants of the millions of people in the US economy? --- # Economic Learning ## 4. Economic institutions An institution is a physical or mental structure that influences economic decisions. - *e.g.,* markets, private property, slavery, religion, *etc.* - Differences in institutions can explain differences in living standards, inequality, and the way people coordinate their wants. --- # Economic Learning ## 5. Economic policy An intervention by a government, manager, or professor that seeks to manipulate incentives associated with a particular behavior. - To increase educational attainment among poor children, Mexico pays low-income mothers based on their children’s school attendance. - To deter shirking, Amazon ranks its employees and fires those toward the bottom of the rankings. - To reduce the expected benefits of cheating, I generate a randomized seating chart for exams. --- # Incentives .hi[People respond to incentives], but not always in the way policymakers want. **Example:** License plate rationing in Mexico City <img src="mexico_city_smog.png" width="533" style="display: block; margin: auto;" /> --- # Incentives **The big question:** Given that humans are self-interested, how does one conduct policy to promote social welfare? - When are incentives aligned with what is socially desirable? - When are they misaligned? --- # Our Priorities Develop a base of knowledge from which you can build sound arguments for or against economic policies and observations. - Build a foundation for further study in economics. - Furnish new critical thinking skills. - Calibrate your skepticism.