Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
The method and scope of economicsEconomics for Everyone, Block 1
Miles Corak
MilesCorak.com @MilesCorakThe Graduate Center, City University of New Work
Lecture 1
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Introduction to Block 1
Objectives for this block of classesas listed in the course outline
1 A definition of the subject.2 Economic methods and models.3 The two “great” questions: how a society generates a surplus,
how that surplus is distributed.
1 Positive versus Normative economics.2 Some core concepts and pitfalls: marginal reasoning, scarcity,
opportunity costs.3 Comparative advantage and the gains from trade.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Introduction to Block 1
Objectives for this block of classesas listed in the course outline
1 A definition of the subject.2 Economic methods and models.3 The two “great” questions: how a society generates a surplus,
how that surplus is distributed.
1 Positive versus Normative economics.2 Some core concepts and pitfalls: marginal reasoning, scarcity,
opportunity costs.3 Comparative advantage and the gains from trade.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Introduction to Block 1
A “silly” problem: Miles needs a cappuccino
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Introduction to Block 1
A “silly” problem: Miles needs a cappuccinoFigure 1: A map of nearby coffee shops
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Introduction to Block 1
A “silly” problem: Miles needs a cappuccinoTable 1: Results from a price survey
Establishment Price in dollars Distance frommy bus stop
Starbucks $3.00 0 blocks awaySecond Cup $2.95 1 1/2 blocks away
Timothy’s World Coffee $2.90 2 1/2 blocks away
Source: data collected by the Author, autumn 2008
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Introduction to Block 1
Not so “silly” problems
What determines now much we earn for the hours of work weput in?What determines the benefits of an extra year of schooling?What determines the value we place on the air, water, andnatural environment around us?Why do some in the world have so much, and others so little?
What determines how many babies we should have?
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Introduction to Block 1
Not so “silly” problems
What determines now much we earn for the hours of work weput in?What determines the benefits of an extra year of schooling?What determines the value we place on the air, water, andnatural environment around us?Why do some in the world have so much, and others so little?
What determines how many babies we should have?
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
An example from an economic theorist
Milton Friedman on “Positive” vs “Normative” economics“The Methodology of Positive Economics”
Positive economics is in principle independent of any particular ethical positionor normative judgments. As Keynes says, it deals with “what is,” not with“what ought to be.” Its task is to provide a system of generalizations that canbe used to make correct predictions about the consequences of any change incircumstances. Its performance is to be judged by the precision, scope, andconformity with experience of the predictions it yields. In short, positiveeconomics is, or can be, an “objective” science. Of course, the fact thateconomics deals with the interrelations of human beings, and that theinvestigator is himself part of the subject matter being investigated in a moreintimate sense than in the physical sciences, raises special difficulties inachieving objectivity....1
1Milton Friedman (1953), “The Methodology of Positive Economics.” In Essays inPositive Economics. Chicago: University of Chicago Press, page 4.
Economics is a science
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Theory and the scientific method
How to evaluate a theory
critique the logicevaluate the predictions
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Theory and the scientific method
How not to evaluate a theory
are the assumptions realistic?Friedman asserts: “the more significant the theory, the moreunrealistic the assumptions”
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Theory and the scientific method
We should judge a theoretical model not by the realism ofits assumptions, but by the validity of its predictions
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Another example
A “silly” problem: Miles needs a cappuccinoFigure 2: Another map of nearby coffee shops
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2e et 3e cycles / GraduateHagen115 Séraphin-Marion
Éducation / EducationLamoureux145 Jean-Jacques Lussier
Études supérieures / Graduate StudiesHagen115 Séraphin-Marion
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Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Another example
A “silly” problem: Miles needs a cappuccinoFigure 1: A map of nearby coffee shops
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Another example
Making and testing a prediction
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Another example
Making and testing a prediction
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Elements of a model inspired by Malthus
Malthus makes two assumptionsand uses an “equilibrium” condition
1 he observes that human populations double every 10 to 25years when the environment provides for above subsistenceamount of food
2, 4, 8, 16, 32, 64,128, 256his model is a model over the long run, measured in decadesand generations
2 the production of food cannot increase at the same rate, infact it probably increases at a diminishing rate
Something has to give, and that is done through a process thatequilibrates population with the productivity of the land. Theequilibrating process invloves changes in population.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Elements of a model inspired by Malthus
Equilibrium in the Malthusian modela long run model with population change
... the human race will be constantly endeavouring to increasebeyond the means of subsistence. But as by that law of our naturewhich makes food necessary to the life of man, populations cannever actually increase beyond the lowest nourishment capable ofsupporting it; a strong check on population, from the difficulty ofacquiring food, must be constantly in operation. This difficultymust fall somewhere, and must necessarily be severely felt in someor other of the various forms of misery, or the fear of misery, by alarge portion of mankind.2
2T. R. Malthus (1803), An Essay on the Principle of Population. or, A View of itsPast and Present Effects on Human Happiness; with an inquiry into our prospectsrespecting the future removal or mitigation of the evils which it occasions. Selectedand introduced by Donald Winch. Cambridge: Cambridge University Press, page 15.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Elements of a model inspired by Malthus
Equilibrium in the Malthusian modela long run model with population change
The ... checks to population are extremely various, and includeevery cause, whether arising from vice or misery, which in anydegree contributes to shorten the natural duration of human life.Under this head therefore may be enumerated, all unwholesomeoccupations, severe labour and exposure to the seasons, extremepoverty, bad nursing of children, great towns, excesses of all kinds,the whole train of common diseases and epidemics, wars,pestilence, plague, and famine.3
3T. R. Malthus (1803), An Essay on the Principle of Population. or, A View of itsPast and Present Effects on Human Happiness; with an inquiry into our prospectsrespecting the future removal or mitigation of the evils which it occasions. Selectedand introduced by Donald Winch. Cambridge: Cambridge University Press, page 23.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Elements of a model inspired by Malthus
Is this positive economics, or is it normative economics?
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Adding the concept of “scarcity” and the method of marginal analysis
What does it mean to say a resource is “scarce”?an example from David Ricardo
On the first settling of a country, in which there is an abundanceof rich and fertile land, a very small proportion of which is requiredto be cultivated for the support of the actual population, or indeedcan be cultivated with the capital which the population cancommand, there will be no rent; for no one would pay for the useof the land, when there was an abundant quantity not yetappropriated, and, therefore, at the disposal of whosoever mightchoose to cultivate it. On the common principles of supply anddemand, no rent could be paid for such land, for the reason statedwhy nothing is given for the use of air and water, or for any otherof the gifts of nature which exist in boundless quantity.4
4David Ricardo (1817). On the Principles of Political Economy and Taxation.Volume I of The Works and Correspondence of David Ricardo. Piero Sraffa (editor).Cambridge: Cambridge University Press. Page 69.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Adding the concept of “scarcity” and the method of marginal analysis
What does it mean to say a resource is “scarce”?an example from David Ricardo
When population is relatively small land has no economicvalue, no price, it is free like the air we breath. It is, in otherwords, not scarce.At some point our demands upon the natural resourcesaround us increase to the point that they exceed the availablesupply, and at that point—and only at that point—we havean economic issue.Scarcity implies that we face trade-offs in allocating what isavailable to all the uses it could be put.Many people have defined the subject of economics as thestudy of how to allocate scarce resources among thecompeting demands placed upon them.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Adding the concept of “scarcity” and the method of marginal analysis
What does it mean to say a resource is “scarce”?an example from David Ricardo
If a resource is said to be “scarce” all we mean is that the quantityof it available is not sufficient to satisfy all the demands put on it.At some population level land becomes scarce in Malthus’s model.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Microeconomics
Scarcity, opportunity costs, trade-offsthe definition of “opportunity costs”
When we reach the point of scarcity our actions entail a typeof cost because of the trade-offs that must be made, the useof the resource for one purpose implies that it cannot be usedfor other purposes.In making a particular use we forgo other possibilities. For thisreason we refer to these costs as “opportunity costs.”They are the value we attach to the next best alternative useof the resource, the value of the opportunity foregone.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Microeconomics
Scarcity, opportunity costs, trade-offsthe definition of “opportunity costs”
in the context of scarcity we have an economic problem:how to allocate resources in a way that maximizes the socialgood.
Or another way of putting it: how to maximize the surplus insociety, and how to allocate that surplus across the membersof society.
The first is a question of production, or growth, and thesecond is a question of distribution.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Microeconomics
Scarcity, opportunity costs, trade-offsthe definition of “microeconomics”
Microeconomic reasoning concerns questions of allocation,and it leads to the realization that the maximization ofsomething—the total production less the total costs ofproduction (which is what we mean by “surplus”)—requiresmarginal reasoning; maximization occurs when the marginalbenefits of an action just equal the marginal costs.Consider Miles’s “silly” problem: The most obvious exampleof a resource that has an opportunity cost is our time, andthat is what is driving the pattern of cappuccino prices.
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Some assumptions
Two types of assumptions1. technical assumptions
1. There is only one goodcall it “corn”surplus is easy to measureno need to worry about prices
2. There are two resourcesland and labourland owners earn a “rent”,workers earn a “wage”rents and wage are paid in corn
3.There are four types of landcharacterized by a diminishing productivity that does not change overtime
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Some assumptions
Two types of assumptions2. behavioural assumptions
Technical assumptions alone do not tell us how much land willbe cultivated, how much corn will be produced, how large thepopulation will be, nor how the corn is distributed among theclasses of the populationa behavioural assumption is needed
borrow from Malthusthere is a clearly defined subsistence level of cornabove this level population increases, below this level itdecreases
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
The Ricardo-Malthus corn model
A graphical depiction of the model
Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
The Ricardo-Malthus corn model
A graphical depiction of the model
Type 1 Type 2 Type 3 Type 4
100
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0 100 200 300
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Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
Using the model to make predictions: an exercise in comparative statics
What is the impact of “foreign aid”?
Type 1 Type 2 Type 3 Type 4
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90 subsistence level
80 aid
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0 100 200 300 400
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Objectives Positive vs Normative Methods and models Two great questions A formal model Summary
A Definition of Economics
A definition of the subjectwhat is economics?
Appendix
For Further Reading
A. Author.Handbook of Everything.Some Press, 1990.S. Someone.On this and that.Journal on This and That. 2(1):50–100, 2000.