economics - social science studying behavior/interaction
- microeconomics - behavior of individual economic units
- how units interact to form larger units (consumers/owners >> markets/industries)
- about making tradeoffs, choices
- originally about how to allocate resources to increase nation’s wealth (optimization)
- tradeoffs made for best/optimum output (balance between everything)
- use capital or labor? invest in machines or labor?
- lower price >> sell more >> less profit per unit
- higher price >> sell less >> more profit per unit
- making the most out of given limits
- consumer theory - how consumers maximize preferences
- limited income/time, how/when to consume
- job security vs advancement
- labor vs leisure
- producer theory - how firms maximize profits, how/when/what to produce
- statistics/econometrics - tests accuracy of predictions/models
economic variables - stocks vs flows
- flow variables - measured per unit of time (ie income)
- production/consumption - units made/consumed annually
- stock variables - not measured w/ respect to time
- price, wealth, inventories
- expenditure = total price = unit price x consumption
- revenue = unit price x production
- consumption = expenditure / price index
- price index = cost of materials
- nominal price - absolute/current dollar price of good/service when it is sold
- real price - price relative to others in relation to time, corrects for inflation
- consumer price index ( CPI ) - measures aggregate prices altogether, computed from wide market
- CPI percent changes = rate of inflation
- real price = CPIbase year / CPI current year x nominal price
theories - used to explain observations w/ set of basic rules/assumptions
- used to make predictions
- quality of predictions >> validity of theory
- tested by conducting experiments, comparing data
- imperfect, but gives insight into observations
- models - created from theories
- mathematical representations used to make quantitative predictions
- positive analysis - statements describing cause/effect
- deals w/ explanation/prediction
- normative analysis - questions what should happen
- tries to find best potential scenario, deals more w/ comparison
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