I hate grade level econ. I’m stuck with all the I hate grade level econ. I’m stuck with all the losers while all my friends are Walton’s AP losers while all my friends are Walton’s AP class.class.

Pitfalls in EconomicsPitfalls in Economics

The reason for conflicts over Macro policy usually The reason for conflicts over Macro policy usually Stems a misunderstanding of either the economicStems a misunderstanding of either the economicProblem or the proper solution. Remember Problem or the proper solution. Remember proper proper Solution does not mean the best solution; but rather Solution does not mean the best solution; but rather the solution that will benefit the most in our societythe solution that will benefit the most in our society..Misunderstanding usually leads to normative rather Misunderstanding usually leads to normative rather than Positive economic statements. than Positive economic statements.

NormativeNormative Economics Economics – – expresses opinions or value judgments. It is concerned with what ought to be and uses words like should,needs, and too. . Ideally, value judgments are involved at the level Ideally, value judgments are involved at the level of policy onlyof policy only..

Positive EconomicsPositive Economics Normative EconomicsNormative Economics

1.1. InIn the economy the economy 1. 1. Ought to beOught to be in thein the economy economy

2. 2. ScientificScientific 2. 2. Value judgmentValue judgment3. 3. CanCan be tested be tested 3. 3. cannot cannot be tested be tested

Straight Straight factsfacts

““In my opinion In my opinion …”…”

PositivePositive economics- deals with straight facts on economic economics- deals with straight facts on economic behavior and does not give opinions or value judgments.behavior and does not give opinions or value judgments.It is concerned with what is, was, or will be. It is concerned with what is, was, or will be.

PositivePositive oror NormativeNormative??

Answers:Answers: 1. N 2. P 3. N 1. N 2. P 3. N 4. P 5. N 6. N 7. N(P?)4. P 5. N 6. N 7. N(P?)

1. It is too cold to play football today.2. Gross Domestic Product grew 4% last year.3. AP Economics is stupid.4. The high inflation hurts economic growth.5. The humidity is too hot.6. People who are unemployed are just too lazy to work.7. Stratford High students are crack-heads.

NOTAfter turning me down 3 times, Susie Cool should go out with me.

Other Pitfalls To Sound Economic ReasoningOther Pitfalls To Sound Economic Reasoning 1. Bias – preconceived beliefsBias – preconceived beliefs not warranted by factsnot warranted by facts.

We tend to accept everything that reinforces our prejudicesprejudices. We will not learn economics if we reject things before we understand them. Try to understand thingsTry to understand things first before you reject them.

2. Loaded terminologyLoaded terminology – use of emotional terms leading emotional terms leading to a nonobjective analysisto a nonobjective analysis. [corporate profits = obscene; G [corporate profits = obscene; G

regulations = socialists; low wages = exploitationregulations = socialists; low wages = exploitation]. ]. We must have objectivityobjectivity.

3. DefinitionsDefinitions – certain economic terms

have different meanings than normal.

A. UtilityUtility means satisfaction. B. InvestmentInvestment means purchase of machinery, tools and factories. C. Price ceilingsPrice ceilings are below equilibrium. D. Price floorsPrice floors are above equilibrium.

Economists must look at everything objectively

Is this a leftward-looking birdbird? rightward-looking antelopeantelope? Or a rabbitrabbit?

Do You Change Your Mind?Do You Change Your Mind?

Do You Change Your Mind Again?Do You Change Your Mind Again?

4. Fallacy of compositionFallacy of composition [[combining parts into a combining parts into a wholewhole]-]-

What is true for the individual/part is not necessarily true for the group/whole..

A. The safest way for an individual

to leave a burning theater is to

run for the nearest exit.

““I’ll stand up so I can I’ll stand up so I can see better.”see better.”

Are There One or Two Shelves?

.5. Post hoc fallacyPost hoc fallacy –

The fallacy that “association or happenstance is causation.” For example; because event “A” precedes event “B”, “A” is the cause of “B”. Ex: Last night I turned the TV on and the Astros were winning 6-3. They ended up losing the game to Colorado. I “jinxed” them

Arnold BeforeArnold Before

““I’ll be back.”I’ll be back.”

Arnold AfterArnold After

““Oh!! My back”Oh!! My back”

6. Correlation v. causationCorrelation v. causation – because two events occur together [correlation], they affect each other.. Ex 1: Super Bowl Indicator: if an original NFL team [like the Cowboys] win the Super Bowl, the stock market goes up. It has been right over 80% of the time.

Wall Street Wall Street will love this.will love this.

Ex 2: Hemline Indicator: The higher the skirts, the higher the market [In the roaring 20s, short Flapper dresses were the rage. The longer styles of the 1930s heralded a bear market. Rising stocks in the 60s coincided with the rise of the miniskirt, only to give way in the 70s to more conservative dress lengths and a bear market.

What Cigarettes What Cigarettes Do to you!Do to you!

Brother DarrelBrother Darrel

DirectDirect((positivepositive)) RelationshipRelationshipIndependent variable – “induces”(cause)Dependent variable – “responds”(effect)Direct – 2 variables move in same direction.

EconEcon

““Econ, Econ, Econ”Econ”

Inverse(Negative) RelationshipInverse(Negative) RelationshipIInnvveerrsse-2 variables move in opposite directionse-2 variables move in opposite directions

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0 4 8 12 16 20ATTENDANCE IN THOUSANDS (Q)

$50

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a

b

c

f

e

d

Infinite slope:Infinite slope:An increase in Y has no effect on X.An increase in Y has no effect on X.

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Zero slope:Zero slope:An increase in X has no effect on Y.An increase in X has no effect on Y.

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Which graph shows the amount of “Y” iinnvveerrsseellyy related to the amount of “X”? ____ In which graph above is the amount of “Y” (constant at $10) unrelatedunrelated to the increasing amount of “X”? ___ In which graph above is the amount of Y directlydirectly related to the amount of X? ___

CC

BB

AA

AA BB CC DD

The EndThe End