Chapter 1 – Reasoning with Economics: Models and Information
• Economists base much of our thinking on simplified models of reality that neglect many details o Models that apply to a broad range of situations must be simple, but they can help you think logically no matter what happens in your market.
• Why be abstract when you have facts? o Reality is so complex and our mental capacities so limited that we must be selective in what we think about.
• Economists are human and they have values and beliefs that might render their objectivity suspect o Positive economics describes and analyzes things as they are (or as objectively as they can be seen) o Normative economics is about how things “ought to be” – it explicitly acknowledges the researcher’s values.
 Whatever positive theory may say, an economist’s normative views on prostitution or the drug trade might lead her to recommend that these activities remain illegal.
• Rationality o Economics studies the choices people make in the face of constraints that limit their options o Economics studies the allocation of scarce resources among competing goals.
 Underlying both definitions is an assumption that people act rationally, with an eye towards attaining objectives they have chosen. o Rationality does not mean that people are computers
 People may not perfectly understand their own preferences or do not know how best to overcome the obstacles that stand between them and their goals. o What rationality offers is a place to start the analysis.
 Math and graphics in economics textbooks are there to help us better understand the logic of rational choice, and can often help us to avoid some mistakes of purely verbal reasoning.
 Once we understand theoretically rational outcomes we will be better able to analyze the behavior of people with less perfect minds – like yours and mine.
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