Economics

We found 17 articles

Understanding omitted-variable bias
One of the most important equations in econometrics – and in economics in general – is the equation for omitted-variable bias. This simple equation is a powerful tool for reasoning about the ways in which correlations we see in the data may differ from the causal relationships we care about. In this post, we'll begin by learning exactly what the ...
Solving constrained optimization problems using Lagrange multipliers
Among the most important topics covered in any college-level microeconomics course is that of how to solve constrained optimization problems, which involve maximizing or minimizing the value of some objective function – such as a utility or cost function – subject to one or more constraints – such as a budget or production target. Although these ...
An economics survival guide
For those who are not naturally math inclined, the first exposure to economics can be daunting. With a little extra work, those of us with a math aversion can grow fond of the subject. I employed some of the following strategies to get the most out of my economics courses and share them with the hope that they will help you too.
Data science in risk management: value-at-risk and expected shortfall
Have you just started your investment journey and wondered how much to invest? Did you follow promising strategies but still see your account in red? Are you worried about the risk that you cannot foresee in your holdings? If you are nodding along these questions, know that you are not alone. In fact, these are what professionals like quants, ...
How to determine the optimal price of a product as a monopolist
In business, finding the right price for your product is crucial. Price it too high, and few people will buy; price too low and the business leaves money on the table. But how do you determine the right price? We will explore this question with a simplified example, looking at Umbrella Corp (UCorp). Note that in this simplified case, UCorp is a ...
If you’ve taken economics, you’ve probably heard the term “deadweight loss” thrown around as something that is generally “bad.” But what does deadweight loss even mean, and why do economists try to avoid it? Let’s find out.
Pareto efficient allocations and fairness in economics
A very important concept when it comes to thinking about markets in economics is the idea of Pareto efficiency. An allocation of resources is Pareto efficient if it is not possible to make anyone better off without making someone else worse off.
To invest or to not invest? That is the question. Well, maybe not THE question, but it is a question that many investors and students of economics are asked each year.
Learning the basics of Game Theory
Imagine that you and a friend are going to the movies. You like comedies more than action movies, while your friend likes action movies a lot more than comedies. If you go to see a movie alone, however, you’re probably not going to have as much fun, regardless of what type of movie you see. What is the optimal behavior for each person in this ...
Understanding elasticity of demand in economics
You may have heard in your econ class about a good’s elasticity of demand, or about “elastic” or “inelastic” goods. Consumers’ elasticity of demand is just a fancy way economists talk about how sensitive people are to changes in a good’s price.
An introduction to supply and demand
What is supply and demand? In economics, supply and demand is the relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. Though it is a seemingly straightforward relationship, in practical application it can become quite complicated. In this blog, we will use an ...
An introduction to choice theory: are humans really 'rational actors?'
If you are a student of economics, one of the first axioms you are instructed to adapt is that everyone should be considered a “rational actor.” What this means is that all people who take part in economic decisions and transactions are informed by self-interest and do so in a manner that maximizes their potential self-benefit. This is essential ...
What is graduate level economics like?
Is graduate level economics very different from undergraduate level economics? To many extents, undergraduate and graduate economics is similar, to many others very different. Their similarities reside in the fact that the core ideas and ways of approaching problems are the same. That is, because knowledge builds in layers, they share a common ...
How to use probability trees to evaluate conditional probability
If you’re majoring in economics, you will likely also need to take a statistics course. One of the trickiest concepts is dealing with conditional probabilities. In most classes, they teach you a fairly complicated equation known as Bayes’ Theorem. While this isn’t a hard formula to plug values into, it doesn’t give an intuitive understanding of ...
Marginal Rate of Substitution (MRS), Marginal Utility (MU), and how they relate
In this post, I start off by explaining the Marginal Rate of Substitution (Sections II-IV). Then, I cover the concept of Marginal Utility (Sections V-VII). In both cases, I start with a story explanation, then give a formal definition, and finally provide some other useful information about the concept. After that, I connect the two concepts ...
Four tips for applying to economics graduate school
So you’ve decided to get an advanced degree in economics. Congratulations! You’re well on your way to obtaining one of the most challenging and worthwhile degrees the world has to offer. While economics graduate programs are known for their mathematical rigor, you will be rewarded for your efforts with better job security, autonomy, and ...
How to read and interpret economic graphs
Learning to think like an economist can be a daunting task for beginners. Introductory economics courses often begin with a jargon-loaded discussion of opportunity costs and marginal benefits versus marginal costs—in other words, what is the benefit of continuing to read the rest of this post, and what else could you be doing with your time? In ...