Econ 200

Lecture 1
Outline
1. What is economics?
2. A (very) brief history of economic growth.
3. How can you succeed in this course?

Readings: The Economy 2.0 Microeconomics Unit 1

(Specifically Sections 1.2 & 1.6-9 )
Note: This reading is optional but recommended.
Note 2: All other reading assignments in Canvas are
required and should be read before class.

2
Who Am I?
• I grew up in Las Vegas, Nevada and
went to UNLV as an undergraduate (I
studied Economics and Electrical
Engineering).
• I got my Ph.D. in Economics from UC
Berkeley in 2008 and have worked at
UW ever since.
• I have been teaching this class for
Me with my kids at the Treasure
about 10 years.
Island in Las Vegas last March.
• I also teach classes in the economics
of population and economic
development (Econ 448), and in
microeconomic theory (Econ 400).
• My recurring nightmare is coming to
class and forgetting that there is a
test (and therefore I forgot to write
the test).

My cute pets: Benny (top), Sebastian (bottom),

Moxie (right)
4
What Is Economics?
A couple of definitions of economics:

“A study of (hu)mankind in the ordinary

business of life; it examines that part of
individual and social action which is most
closely connected with the attainment and
with the use of the material requisites of
wellbeing.” – Alfred Marshall (father of
modern economics), 1890

“The science which studies human

behavior as a relationship between ends
and scarce means which have
alternative uses.” – Lionel Robbins, 1932

5
What Is Economics?
People make choices as they try to attain their goals. Choices are
necessary because we live in a world of scarcity.

Scarcity: A situation in which unlimited wants exceed the limited

resources available to fulfill those wants

Economics is the study of these choices.

Economists study these choices using economic models, simplified

versions of reality used to analyze real-world economic situations.

Gary Becker (1976) defined economics as, “The combined

assumptions of maximizing behavior, market equilibrium, and stable
preferences, used relentlessly and unflinchingly, form the heart of
the economic approach as I see it.”
6
Economic Models

Economists develop economic models to analyze real-world issues.

Building an economic model often follows these steps:

1. Decide on the assumptions to use in developing the model.

2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain the economic data well.

Features of Economic models:

• Assumptions and simplifications
• Testability
• Economic variables

7
Three Key Ideas

Many of the predictions of economic models originate from a few

basic propositions, including:

Idea 1: People (and all decision-makers) are rational, meaning that

they use all available information to make optimal decisions.

Rational consumers and firms weigh the benefits and costs of each
action and try to maximize their utility. Firms do the same to maximize
profit.

8
Three Key Ideas
Idea 2: Optimal decisions involve calculating true costs (opportunity
costs) and making decisions at the margin. Economists call this
marginal analysis.

Opportunity cost: The true cost of a choice is the value you could have
gained by choosing the next-best alternative instead.
Marginal cost and benefit (MC and MB): the additional cost or benefit
associated with a small amount extra of some action.

9
Three Key Ideas
Idea 2: Optimal decisions involve calculating true costs (opportunity
costs) and making decisions at the margin. Economists call this
marginal analysis.

Example: You have 6 hours on a Saturday afternoon for doing homework

and watching TV. You have already watched TV for 2 hours. Should you
watch an extra hour of TV, or start your homework instead?
• What are the benefits of an extra hour of TV?
• What are the costs (i.e. the opposite of the benefits of studying instead)?

Specifically, marginal decision-making means you ask this question “at the
margin” for every additional hour added, under the assumption that every
additional hour may have a different calculation of costs and benefits.

10
Economic Insights

Idea 3: People respond to incentives, which change the marginal

benefit or cost of a choice. As the tradeoffs associated with certain
choices change, so do the choices people make.

Example 1: Would your decision whether to watch another hour of TV

change if I told you that homework was now worth 99% of your grade?

Example 2: Muhammad Yunus created the Grameen Bank and gave

microloans to the poor in Bangladesh via group lending. Before this,
households without collateral could easily default on loans with little personal
cost. With group lending, if one member of a group defaulted on their loan,
then no one in the group could borrow from the bank again. This created an
incentive for borrowers to choose group members who they believed would
be able to pay the loans back.

11
The Scientific Nature of Economics

When analyzing human behavior, we can perform:

• Positive analysis: the study of “what is?”; and/or

• Normative analysis: the study of “what ought to be?”

Economists generally perform positive analysis.

We try to follow the natural sciences, but people are complicated!!

12
Ex: Should Student Loan Debt Be Canceled?
Economists can use models and data to answer:
1. What would loan cancellation cost?
2. What benefits would accrue to recipients and to the economy?
3. What group(s) would benefit most from debt cancellation?
4. Would this change incentives for future borrowers and how would
they respond?

They can’t answer:

1. Is debt cancellation fair or morally right?
2. Which group’s well-being should be prioritized in government
policy?

13
Typical “Economics” Questions
We will learn how to answer questions like these:

• How are the prices of goods and services determined?

• Why does government control the prices of some goods and

services, and what are the effects of those controls?

But you can also use economics to answer questions like…

• Why do people have so many (or so few) children?

• How do people choose between hours spent working and

hours spent relaxing?

14
Typical “Economics” Questions
In some sense, ”economics is what economists do.” (attributed to
Jacob Viner, 1932) Modern economists study a broad range of topics,
but always use economic models and “economic thinking” (e.g. the
three key ideas) to do so.

Actual research questions of UW Economists:

• What is the effect of having a daughter on women’s decision-

making power in India?
• How do Seattle’s democracy vouchers affect elections?
• What is the correct way to estimate air pollution?
• Did Seattle’s Sweetened Beverage Tax reduce BMI growth in
Seattle?

15
Microeconomics and Macroeconomics

Microeconomics (Econ 200) is the study of

• how households and firms make choices,
• how they interact in markets, and
• how the government attempts to influence their choices

Macroeconomics (Econ 201) is the study of the aggregate economy,

including topics such as inflation, unemployment, and economic
growth.

16
A Very Brief History of Economic Growth

“Hockey Stick Growth”: The world has experienced rapid,

sustained growth in average living standards since 1700.
How did this happen?

Gross Domestic Product (GDP) = A measure of the market value of the

output of final goods and services in the economy in a given period.
17
Income Inequality

In spite of this growth, there is still great inequality between

and within countries. And this inequality has grown over time.

If we understand how some countries have become rich, can

we help the others do so as well?
18
Malthus’s Model Explains the Flat Part
Thomas Malthus (c. 1800) claimed:
• When people were well-fed, they would multiply. Therefore,
the population expands if living standards increase.
• Population growth would push down incomes as a result of
diminishing average product of labor. (i.e. Output doesn’t
grow as fast as the population.)
• Falling living standards would slow population growth.

 Ultimately incomes would settle at a

subsistence level. This is a level of income
where the population remains constant over
time.
 But, this model failed to predict more
recent positive growth. Do we need a new Thomas Malthus, date unknown
model? Source: Wikimedia Commons
19
Growth Reason 1: Technology
• A huge number of scientific and technological advances
coincided with the upward kink in the hockey stick in Britain in
the middle of the 18th century.
• New technologies emerged in textiles, energy, and
transportation which themselves became obsolete quite
quickly.
• This period of cumulative innovation is called the Industrial
Revolution.
• Technology is a process that takes a set of inputs and
creates an output.

20
Continuous Technological Revolution

Year

A timeline of technological innovations in England shows

the relationship between their timing and England’s
economic growth.
21
Reason 2: Capitalism, Colonialism, Slavery

The adoption of capitalism was another key factor.

• Capitalism = Private property + Markets + Firms
• Failure of these institutions and different political systems
can explain divergence in economic growth across
countries.
• Colonial rule and slavery also explain part of England’s
success as well as the lack of growth in places like India
that were under colonial rule.
22
How to Succeed in this Course
Read the syllabus!

After that…
Check the website (Canvas) for: All course announcements, TA
information, daily reading assignments, lecture notes (try to put up
before class), Poll Everywhere, and homework (called quizzes in
Canvas).

Read the book and do the interactive activities at core-econ.org/the-

economy/microeconomics (links on Canvas).

Class recordings also available via “Panopto Recordings” on Canvas.

23
Syllabus and Administrative Details
Syllabus details:

Homework 14% (lowest grade dropped)

Writing Assignments 20% (2 assignments)
Class Participation 6% (Poll Everywhere, drop 5 lowest)
Exams 60% (April 25 & June 3)

No extra credit (except for completing survey – more on that later!) and
no extensions/make-ups to homework or class participation.

24
Text & Daily Reading Assignments
The text is The Economy 2.0 by the CORE Econ team.
This text is completely free online.
This is a really cool book, but it’s organized differently from how I am
used to teaching this class.
I am re-designing all of my lectures and assignments according to this
new structure, so please be patient with me if I seem disorganized.
Did I mention that it’s And really

Link in syllabus and

Canvas navigation bar.

25
Text & Daily Reading Assignments

View by type if you aren’t sure

what an assignment refers to.

These are reading assignments so you know what you should read,
but there are no points associated with them.

26
Homework Details
• Do online in Canvas (might be called a quiz).
• Due every Wednesday at 11:59 pm
• Based on work from previous week
• HW 1 due 10/09 (based on Units 1 and 2)
• No late assignments, but lowest score will be dropped
• Get two chances – score in Canvas is best of two.
• You may work with others, but please submit your own work.

27
Homework Details

28
Class Participation
• Graded Poll Everywhere will start on Tuesday. You should already
be able to access my class there via Canvas, but we won’t count
today’s exercises.
• Poll Everywhere is graded on completion, not accuracy, but you
have to answer the questions.
• If you are watching a recording of the lecture, you will not be able to
complete Poll Everywhere exercises.
• I will drop the 5 lowest class participation grades to account for
absences and technical problems, but please save these for when
you need them.

You can respond to polls using your phone

or your laptop!

29
Poll Everywhere

For Poll Everywhere, you want to:

-Be sure you are logged in to Canvas
-Join Melissaknox469’s presentation if prompted

30
Exam Details
• Two non-cumulative exams of 4-5 questions.
• No early exams.
• One sheet of notes provided.
• Practice exams & note sheets already posted online, although
these are from my previous text. More details on how to use them
later.

31
Quiz Section and Office Hours
• Quiz sections held on Fridays by your TA to reinforce concepts. No
quiz section this week.
• Quiz sections will contain extra exercises and teach problem-
solving skills. You can also ask about homework problems or
general questions.
• Office hours are another great time to ask about homework, class
issues, or general questions about economics. This is your time –
feel free to use it!
• My regular office hours are Wednesdays 12:30-2:30 on Zoom only.
If you can’t make my office hours, try to go to your TA’s office
hours.

Q: Are there quizzes in quiz section?

A: No!

32
Still Have Questions?
• Use Ed Discussion to ask your question in one of the premade
threads.
• Send me a message in Canvas. (I reserve the right to tell you to
post on Ed Discussion, though, if I think it’s of general interest.)
• Send your TA an email/Canvas message (check with them for their
preference!).

33
Wrapping Up
• Quiz section starts 10/4 (next Friday).
• Complete introductory survey for the class (found in Poll
Everywhere).
• Read Unit 1.2 & 1.6-9. Then read 2.1-2.3 for Tuesday (see Canvas
for all future reading assignments).
• Check out Homework 1 and ensure you can access it, the text, etc.
• Post in Ed Discussion or visit my or your TA’s office hours if you
have questions.
• Have a great weekend!

34