The document provides an overview of the importance of studying economics, including understanding the world, gaining self-confidence, and achieving social change. It discusses the methodology of economics, focusing on the use of models, assumptions, and principles that guide economic analysis. Additionally, it outlines the basic principles of economics that serve as a foundation for analyzing economic problems and the role of decision-makers in this context.

1. SecondDay Lesson:A Review/Overview of Economics
Source:IntroductiontoEconomicsbyMarc LiebermanandRobertHall
Words of Wisdom:“Man as an objective,sensuousbeingistherefore a suffering being—andbecause he
feelswhathe suffers,a passionatebeing.”–Karl Marx,“The Economicand PhilosophicManuscripts”
Why study economics?
1. To understand the worldbetter. Economicshasthe powerto helpusunderstandphenomena
(global andcataclysmic,local andpersonal) because theyresult,inlarge part, fromthe choices
we make underconditionsof scarcity. It ishard to findanyaspectof life aboutwhicheconomics
doesnothave something importanttosay.
2. To gain self-confidence.Understandingbasiceconomicprincipleswill expandyourgraspof
worldeventsandincrease yourconfidence asyouface the future. You neednolongerfeel that
there isa mysterious,inexplicable forcesshapingyourlife. Whenyoumastereconomics,you
gaina sense of masteryoverthe world,andthusoveryour ownlife aswell.
3. To achieve social change. To make the worlda betterplace,economicsisindispensable.
Economicscan helpusunderstandthe originsof serioussocial problems(e.g.unemployment,
hunger,poverty,disease,childabuse,drugaddiction,violentcrime), explainwhyprevious
effortstosolve themhave failed,andenable ustodesignnew,more effective solutions.
4. To help prepare for other careers. Practitionersinvariousfield(business,politics,international
relations,law,medicine,engineering,psychology,etc.) oftenfindthemselvesconfronting
economicissuesandsoeconomicshasbecome apopularcollege course.
5. To become an economist. If youdecide topursue a careeras an economist—obtaininga
master’sdegree orevenaPh.D.—youwill findmanypossibilitiesforemployment:teachingat
collegesoruniversities,engagementinvarietyof activitiesbothinthe private sectorandthe
government. Workincludesassessingthe riskof investingabroadforbanks,determiningnew
methodsof producing,marketing,andpricingproductsformanufacturingcompanies;helping
designpoliciestofightcrime,disease,poverty,andpollutionforgovernmentagencies;helping
create programs forlessdevelopedcountiesfor international organizations;helpingthe public
interpretglobal,national,andlocal eventsinmedia;providingadvice oncontrollingcostsand
raisingfundsmore effectivelyfornonprofitorganizations.
What is the method of economics?
Economicsreliesheavilyon models. Thisdiscipline goesbeyond anyothersocial science initsinsistence
that everytheorybe representedbyanexplicit,carefullyconstructedmodel. A model isan abstract
representationof reality. Itismade upof words,diagrams,andmathematical statements. A model is
not supposedtobe exactlylike reality. Rather,it represents the real worldby abstracting, ortaking
fromit, that whichwill helpusunderstandit. There ismuchinthe real worldthata model mustleave
out.
What is the guiding principle in building a model?
A model should be as simple as possible to accomplish itspurpose. A model shouldcontainall
necessary details—butnounnecessary ones(e.g.amap).
What are the assumptionsandconclusionson everyeconomicmodel?

2. Everyeconomicmodel beginswith assumptionsaboutthe waydecisionmakersinthe economybehave.
There are twotypesof assumptionsinamodel:simplifyingassumptionsandcritical assumptions.
1. Simplifyingassumption- awayof makinga model simpler,withoutaffectingmayof its
importantconclusions. The purpose of thisisto rida model of extraneousdetail,soitsessential
featurescanstand outmore clearly. We make assumptions notbecause theyare true,but
because theymake a model easiertofollow anddonot change anyof the importantinsightswe
can get fromit.
2. Critical assumption- anyassumptionthataffectsthe conclusionsof amodel inan important
way. In an economicmodel,there is alwaysone ormore critical assumptions,economistslike to
make these assumptionsexplicitfromthe verybeginning. Bystatingthe conclusionupfront,we
see immediatelywhere the model’sconclusionsspringfrom.
How doesan economistmake senseof the complexityof aneconomy?
In twosteps:
1. The decisionmakersinthe economyare dividedintothreebroadgroups:households,business
firms,andgovernmentagencies.
a. Microeconomicmodels- focusonthe behaviorof individualhouseholds,firms,and
governmentagenciesandhow theyinteractwitheachother
b. Macroeconomicmodels- groupdecisionmakerstogetherintosectors—the household
sector,the businesssector,the governmentsector,andthe foreignsector—andstudy
howeach sectorinteractswiththe others.
2. Make twocritical assumptionsaboutdecisionmakers:
a. “Everyeconomicdecisionmakertriestomake the bestoutof any situation.”Thismeans
maximizing somequantity (e.g.householdsmaximize utility—theirwell-beingor
satisfaction;firmsmaximizeprofits;managersmaximizepower,prestige,jobsecurity).
There may be a disagreementabout whatisbeingmaximized,butthere isvirtuallya
unanimousagreementthatanyeconomicmodel shouldbeginwiththe assumptionthat
someoneismaximizingsomething.
i. Implication1- we are all engagedina relentless,consciouspursuitof narrow
goals—animplicationcontradictedbymuchof humanbehavior. How do we
maximize ourownbeing?
Why doeconomistsassume thatpeople make decisionsconsciously,
when,inreality, theyoftendon’t?The ultimate purpose of buildingan
economicmodel isto understand and predictbehavior—the behaviorof
households,firms,government,andthe overall economy.Aslongas
people behaveasif theyare maximizingsomething,thenwe canbuilda
goodmodel by assuming thatthey are. Whetherthey actually,
consciously maximizeanythingornot.
ii. Implication2- itdoesnotimplythatpeople are selfishorthateconomiststhink
theyare. Onthe contrary,economistsare veryinterestedincases where
people take the interestsof othersintoaccount(e.g.familycontext,friendship,
neighborhood,etc.)

3. b. “Everyeconomicdecisionmakerfacesconstraints.”Householdsare constrainedby
limitedincomes,businessfirmsare constrainedbyrequirementsthattheypayfor all of
the inputstheyuse,andgovernmentagenciesare constrainedbylimitedbudgets.
What are the three questionsthatserve asthe beginningforanyeconomicanalysisand
planning?
1. Who are the individual decisionmakers?
2. What are theymaximizing?
3. What constraintsdotheyface?
What are the basicprinciplesof economics?
The basic principlesofeconomics are ideasthatare usedagainand againto analyze economic
problems. Theyformthe foundationuponwhicheconomictheoryisbuilt.Here are the Eight Basic
PrinciplesofEconomics:
Basic Principle #1—MaximizationSubjecttoConstraints: The economicapproach to
understanding a problemisto identify the decision makers,and then determinewhatthey are
maximizing and theconstraintsthatthey face.
Basic Principle #2—OpportunityCost:All economicdecisionsmadeby individualsorsociety are
costly. The correct way to measurethe costof a choice is its opportunity cost—thatwhich is
given up to make thechoice.
Basic Principle #3–Specializationand Exchange:Specializationandexchange enable ustoenjoy
greaterproductionandhigherlivingstandardsthanwouldotherwise be possible. Asaresult,all
economiesexhibithighdegreesof specializationandexchange.
Basic Principle #4–Markets and Equilibrium:To understand how theeconomy behaves,
economistsorganizetheworld into separatemarketsand then examinetheequilibrium in each
of thosemarkets.
Basic Principle #5–PolicyTradeoffs: Governmentpolicy is constrained by the reactionsof private
decision makers. As a result,policy makersfacetradeoffs: Making progresstoward onegoal
often require somesacrifice of anothergoal.
Basic Principle #6–Marginal DecisionMaking: To understand and predictthebehaviorof
individualdecision makers,wefocuson the incrementalor marginaleffectsof their actions.
Basic Principle #7–Short-Run versusLong-Run Outcomes: Marketsbehavedifferently in the
shortrun than in thelong run. In solving a problem,we mustalwaysknow which of thesetime
horizonsweare analyzing.
Basic Principle #8–The Importance of Real Values: Since our economicwell-being depends,in
part,on the goodsand serviceswe can buy,it is importantto translatefromnominalvalues—
which are measured in currentdollars (peso)—torealvalues—which aremeasured in purchasing
power.

4. NextLesson:Part4: Macroeconomics:BasicConcepts
What are the concernsof macroeconomics?Whatisitsapproach?pp.297-304 (Haque)
What isGDP? Pp.309-324 (AdolfoandDamos)
What are employmentandunemploymentconcernsinmacroeconomics?pp.325-334
(Debuque)
How dowe measure price level andinflation?pp.342-352(Maruya)