Sunday, October 20, 2013

First: Assume a Can Opener…

Economists are familiar with the phrase assume a can opener. It comes from a joke most economists know by heart (in one version or another). The joke generally goes like this:

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore.

The physicist says:  Let's smash the can open with a rock.

The chemist says: Let's build a fire and heat the can first.

The economist says: First: assume that we have a can-opener...

The stereotype that many economic models require unrealistic or absurd assumptions in order to obtain results is a harsh criticism and maybe a bad rap on those who are trying to get a handle on why world economies behave the way they do.

Okay, maybe the economists of the world from academia to business haven’t always been right. The fact is economic theory ranges broadly. Furthermore, study can be focused on microeconomics or macroeconomics. Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions.

Microeconomics considers decisions that businesses make regarding the allocation of resources and prices of goods and services. It takes into account taxes and regulations created by governments. Microeconomics focuses on supply-demand and other forces that determine the price levels in an economy (i.e. how a specific company can maximize production and capacity so it can lower prices and better compete).

Macroeconomics on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as GDP and how it is affected by changes in unemployment, national income, rate of growth, and price levels (i.e. how an increase/decrease in net exports will affect a nation's capital or how GDP would be affected by unemployment rate).

It has to start somewhere. So, I’m glad there are people willing to First: Assume a Can Opener.

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