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Economist Analyst Skill

Purpose

Analyze events through the disciplinary lens of economics, applying established economic frameworks (supply/demand analysis, game theory, general equilibrium), multiple schools of thought (Classical, Keynesian, Austrian, Behavioral), and rigorous methodological approaches to understand market dynamics, incentive structures, resource allocation efficiency, and policy implications.

When to Use This Skill

Economic Policy Analysis: Evaluate fiscal policy, monetary policy, regulatory changes
Market Event Analysis: Assess supply shocks, demand shifts, price movements, market structure changes
Financial Crisis Analysis: Understand systemic risks, contagion effects, market failures
Business Decision Analysis: Evaluate mergers, pricing strategies, market entry/exit
Distributional Impact Analysis: Assess who gains/loses from economic events
Resource Allocation Questions: Analyze efficiency, opportunity costs, trade-offs
Institutional Change Analysis: Evaluate impacts of new rules, organizations, governance structures

Core Philosophy: Economic Thinking

Economic analysis rests on several fundamental principles:

Incentives Matter: People respond to incentives in predictable ways. Understanding incentive structures reveals likely behavioral responses and outcomes.

Opportunity Cost: Every choice involves trade-offs. The true cost of any action is the value of the next-best alternative foregone.

Marginal Analysis: Decisions are made at the margin. Small changes in costs or benefits can shift behavior and outcomes significantly.

Markets Coordinate: Through price signals, markets coordinate the independent decisions of millions of actors, often efficiently allocating resources.

Information Matters: Information asymmetries, signaling, and market transparency profoundly affect economic outcomes.

Multiple Time Horizons: Economic effects unfold over different timeframes. Short-term impacts may differ dramatically from long-term equilibrium effects.

Unintended Consequences: Economic interventions often produce unexpected results due to complex feedback loops and strategic responses.

Theoretical Foundations (Expandable)

School 1: Classical Economics (18th-19th Century)

Core Principles:

Free markets tend toward self-regulation through the "invisible hand"
Division of labor and specialization increase productivity
Supply and demand determine prices and quantities
Markets naturally tend toward equilibrium
Government intervention generally reduces efficiency

Key Insights:

Individuals pursuing self-interest can generate socially beneficial outcomes
Competition drives efficiency and innovation
Price mechanisms transmit information and coordinate behavior
Trade creates mutual gains

Founding Thinker: Adam Smith (1723-1790)

Work: The Wealth of Nations (1776)
Contributions: Invisible hand mechanism, division of labor, market self-regulation

When to Apply:

Analyzing long-run market equilibria
Evaluating effects of market liberalization
Understanding competitive dynamics
Assessing trade and specialization benefits

Sources:

School 2: Keynesian Economics (1930s-Present)

Core Principles:

Aggregate demand determines economic activity, not just supply
Markets can fail to clear, leading to prolonged unemployment
Price and wage rigidities prevent instant adjustment
Government intervention can stabilize economic fluctuations
Countercyclical fiscal policy appropriate during recessions

Key Insights:

Economies can get stuck at sub-optimal equilibria
Demand management matters for short-run economic performance
Animal spirits and expectations affect investment and consumption
Multiplier effects amplify fiscal policy impacts

Founding Thinker: John Maynard Keynes (1883-1946)

Work: The General Theory of Employment, Interest, and Money (1936)
Contributions: Theory of aggregate demand, involuntary unemployment, case for stabilization policy

When to Apply:

Analyzing recessions and economic downturns
Evaluating fiscal stimulus or austerity
Understanding short-run economic fluctuations
Assessing demand-side policies

Modern Relevance: "Theoretical developments of Keynes are extremely relevant in the modern turbulent period of crises and stagnation in the world economy" (2025)

Sources:

School 3: Austrian Economics (Late 19th Century-Present)

Core Principles:

Subjective value theory (value is in the eye of the beholder)
Entrepreneurial discovery process drives innovation
Time preference and capital structure matter
Spontaneous order emerges from individual actions
Central planning cannot replicate market information processing
Emphasis on logic and "thought experiments" over empirical data

Key Insights:

Entrepreneurs drive economic change by discovering profit opportunities
Government intervention creates unintended consequences
Market processes are discovery mechanisms, not just allocation mechanisms
Knowledge is dispersed; no central planner can access all relevant information

Key Thinker: Friedrich Hayek (1899-1992)

Contributions: Knowledge problem, spontaneous order, critique of central planning
Warned against centralized economic planning

Classification: Heterodox (non-mainstream) school

When to Apply:

Analyzing entrepreneurship and innovation
Evaluating consequences of regulation or intervention
Understanding knowledge and information problems
Assessing spontaneous vs. planned order

Methodological Note: Some economists criticize Austrian rejection of econometrics and empirical testing

Sources:

School 4: Behavioral Economics (Late 20th Century-Present)

Core Principles:

Cognitive biases systematically affect decision-making
People have bounded rationality, not perfect rationality
Framing effects matter
Loss aversion and reference points shape choices
Social norms and fairness considerations influence behavior
Experimental methods can test economic theories

Key Insights:

Actual human behavior deviates predictably from rational choice models
"Nudges" can improve decision-making without restricting choice
Market anomalies may reflect psychological factors
Default options and choice architecture profoundly affect outcomes

Key Thinker: Daniel Kahneman (1934-2024)

Nobel Prize 2002
Applied experimental psychology to economics
Showed psychological factors undermine rational utility maximization assumption

When to Apply:

Analyzing consumer behavior and marketing
Understanding financial market anomalies
Designing choice architectures and policies
Evaluating savings, health, and retirement decisions

Sources:

School 5: Monetarism / Chicago School (Mid-20th Century)

Core Principles:

Money supply is the key determinant of economic activity
Money supply should grow steadily with the economy
Monetary policy more effective than fiscal policy
Free markets and minimal government intervention
Inflation is always and everywhere a monetary phenomenon

Key Insights:

Central banks control inflation through money supply management
Rules-based monetary policy superior to discretionary policy
Long and variable lags make policy timing difficult
Market forces generally allocate resources efficiently

Key Thinker: Milton Friedman (1912-2006)

Contributions: Monetarism, permanent income hypothesis, case for free markets
Influenced monetary policy globally

When to Apply:

Analyzing inflation and deflation
Evaluating monetary policy decisions
Understanding business cycles
Assessing central bank actions

Sources:

School 6: Neoclassical Synthesis (Modern Mainstream)

Status: Foundation of contemporary mainstream economics

Core Principles:

Rational actors maximize utility subject to constraints
Marginal analysis drives decision-making
Markets generally reach equilibrium
Market failures exist and may justify intervention
Incorporates insights from Keynesian and other schools

Key Insights:

Microeconomic foundations support macroeconomic analysis
Both supply and demand matter
Institutions, information, and incentives shape outcomes
Empirical evidence should guide theory

When to Apply:

Standard economic analysis of most events
Combining micro and macro perspectives
Empirically-grounded policy evaluation

Source: Evolution of Economic Thought - Medium

Core Analytical Frameworks (Expandable)

Framework 1: Supply and Demand Analysis

Definition: "Economic model of price determination in a market that postulates the unit price will vary until it settles at the market-clearing price, where quantity demanded equals quantity supplied."

Significance: "Forms the theoretical basis of modern economics"

Key Components:

Demand Curve: Relationship between price and quantity demanded (typically downward-sloping)
Supply Curve: Relationship between price and quantity supplied (typically upward-sloping)
Market Equilibrium: Price and quantity where supply equals demand
Elasticity: Responsiveness of quantity to price changes
Shifts vs. Movements: Distinguish changes in quantity vs. changes in demand/supply

Applications:

Analyzing price changes
Evaluating market shocks (supply or demand shifts)
Understanding shortages and surpluses
Predicting market responses to policies (taxes, subsidies, price controls)

Example Analysis:

Supply shock (e.g., oil production disruption) → Supply curve shifts left → Higher price, lower quantity
Demand shock (e.g., income increase) → Demand curve shifts right → Higher price, higher quantity
Price ceiling below equilibrium → Shortage emerges

Sources:

Framework 2: Game Theory and Strategic Interaction

Definition: "Set of models of strategic interactions widely used in economics and social sciences"

Key Concepts:

Players: Decision-makers in strategic situation
Strategies: Available actions for each player
Payoffs: Outcomes depending on all players' strategies
Nash Equilibrium: Strategy profile where no player can improve by unilaterally changing strategy
Dominant Strategy: Strategy that's best regardless of what others do
Prisoner's Dilemma: Situation where individual incentives lead to suboptimal collective outcome

Applications:

Oligopoly behavior and pricing
Auction design
Public goods provision
Bargaining and negotiation
Regulatory compliance and enforcement
International trade negotiations

Example Analysis:

Two firms deciding on pricing: Nash equilibrium may involve both charging low prices, even though both would be better off charging high prices (prisoner's dilemma structure)
Auction bidding: Bidders must consider others' strategies and information
Public goods: Free-rider problem emerges from dominant strategy to not contribute

Source: Game Theory - Core-Econ Microeconomics

Framework 3: General Equilibrium Analysis

Definition: "Attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, seeking to prove that the interaction of demand and supply will result in an overall general equilibrium."

Distinction: Contrasts with partial equilibrium (analyzes one market holding others constant)

Key Insights:

Markets are interdependent; changes in one affect others
Economy-wide effects can differ from single-market analysis
Feedback loops and spillovers matter
Distributional effects emerge from market linkages

Applications:

Tax incidence analysis (who really bears the burden?)
Trade policy evaluation (effects ripple through economy)
Large-scale policy assessment
Understanding macroeconomic interdependencies

Example Analysis:

Carbon tax: Direct effect on fossil fuel markets, but also affects transportation, manufacturing, electricity, consumer goods → General equilibrium captures full effects

Sources:

Framework 4: Market Structure Analysis

Types of Market Structures:

Perfect Competition
- Many buyers and sellers
- Homogeneous product
- Free entry/exit
- Perfect information
- Price takers
- Result: P = MC, efficient allocation
Monopoly
- Single seller
- Barriers to entry
- Price maker
- Result: P > MC, deadweight loss
Oligopoly
- Few sellers
- Strategic interaction matters
- Potential for collusion
- Result: Depends on strategic behavior
Monopolistic Competition
- Many sellers
- Differentiated products
- Some price-making power
- Free entry/exit
- Result: P > MC, but competitive entry limits profits

Applications:

Antitrust analysis
Industry structure evaluation
Pricing strategy assessment
Entry/exit decisions

Analysis Questions:

How many firms? How much market power?
Are there barriers to entry?
How intense is competition?
What are efficiency implications?

Framework 5: Market Failures and Externalities

Definition: Situations where markets fail to allocate resources efficiently, requiring potential intervention

Types of Market Failures:

Externalities
- Negative externality: Cost imposed on third parties (pollution, congestion)
- Positive externality: Benefit to third parties (education, vaccination)
- Result: Market overproduces goods with negative externalities, underproduces goods with positive externalities
- Efficiency loss: Social cost/benefit differs from private cost/benefit
Public Goods
- Non-excludable (can't prevent use)
- Non-rivalrous (one person's use doesn't reduce availability)
- Problem: Free-rider problem → Underprovision
- Examples: National defense, clean air, lighthouse
Information Asymmetries
- Adverse selection: Hidden characteristics (used car quality)
- Moral hazard: Hidden actions (insurance reduces care)
- Result: Market unraveling or inefficiency
Market Power
- Monopoly or oligopoly
- Ability to set prices above marginal cost
- Result: Deadweight loss, reduced output

Pigouvian Taxation:

Purpose: Tax equal to marginal external cost
Effect: Internalizes externality, restores efficiency
Example: Carbon tax = social cost of carbon
Named after: Arthur Pigou (1877-1959)

Coase Theorem:

If transaction costs are low and property rights well-defined, private bargaining can solve externalities
Implication: Government intervention not always needed
Reality: Transaction costs often high, making Pigouvian solutions necessary

Applications:

Environmental policy (carbon tax, cap-and-trade)
Public goods provision (taxes for defense, infrastructure)
Regulation (information disclosure, safety standards)
Antitrust policy (prevent market power abuse)

Policy Tools:

Pigouvian taxes: Tax externalities
Subsidies: Subsidize positive externalities
Regulation: Direct control (emissions standards)
Cap-and-trade: Market-based quantity control
Property rights: Assign and enforce rights (Coase)

Example - Carbon Tax:

Negative externality: CO2 emissions cause climate damage
Social cost > private cost
Pigouvian tax ($50/ton) = estimated social cost of carbon
Internalizes externality → Efficient outcome
Revenue recycling can address distributional concerns

Framework 6: Microeconomics vs. Macroeconomics

Microeconomics:

Focus: Individual markets, firms, consumers
Tools: Supply/demand, utility theory, game theory
Questions: How do individual actors make decisions? How do markets allocate resources?
Assumes: Market clearing, optimization

Macroeconomics:

Focus: Aggregate economy-wide variables
Variables: GDP, unemployment, inflation, interest rates
Tools: Aggregate demand/supply, IS-LM, growth models
Questions: What determines economic growth? What causes recessions? How should policy respond?

Integration: Modern economics seeks microfoundations for macroeconomic phenomena

Source: Micro and Macro - IMF

Methodological Approaches (Expandable)

Method 1: Econometric Analysis

Definition: "Application of statistical methods to economic data to give empirical content to economic relationships. Uses economic theory, mathematics, and statistical inference to quantify economic phenomena."

Two Approaches:

Nonstructural Models: Primarily statistical, limited economic theory
Structural Models: Based on economic theory, can estimate unobservable variables (e.g., elasticity)

Standard Process:

Develop theory/hypothesis
Specify statistical model
Estimate parameters
Test hypotheses and evaluate fit

Challenge: "Economists typically cannot use controlled experiments. Econometricians estimate economic relationships using data generated by a complex system of related equations."

Applications:

Testing economic theories
Estimating causal effects
Forecasting
Policy evaluation

Sources:

Method 2: Comparative Analysis

Purpose: Analyze differences across countries, time periods, policy regimes, or market structures

Approaches:

Cross-sectional: Compare different units at one point in time
Time-series: Analyze one unit over time
Panel data: Combine cross-sectional and time-series (multiple units over time)

Applications:

Policy evaluation (comparing jurisdictions with different policies)
Historical analysis (before/after comparisons)
International economics (cross-country analysis)

Strength: Can reveal causal relationships through natural experiments

Method 3: Theoretical Modeling

Types:

Mathematical models: Formal representation of economic relationships
Simulation models: Computational models for complex systems
Forecasting models: Predictive models
Policy evaluation models: Assess intervention effects

Process:

Simplify reality to capture essential features
Derive implications mathematically or computationally
Test predictions against data
Refine model based on evidence

Value: Clarifies assumptions, ensures logical consistency, generates testable predictions

Source: Econometric Modeling - ScienceDirect

Method 4: Natural Experiments and Quasi-Experimental Methods

Purpose: Approximate experimental evidence when true experiments are infeasible

Approaches:

Difference-in-differences: Compare treated vs. control groups before/after treatment
Regression discontinuity: Exploit sharp cutoffs in treatment assignment
Instrumental variables: Use exogenous variation to identify causal effects
Natural experiments: Analyze settings where nature or policy creates quasi-random assignment

Value: Can provide credible causal inference

Method 5: Case Studies and Historical Analysis

Purpose: Deep understanding of specific events or episodes

Process:

Detailed examination of context
Identification of causal mechanisms
Pattern recognition across similar events
Lessons for theory and policy

Applications:

Financial crises
Policy reforms
Technological changes
Institutional innovations

Value: Rich contextual understanding, hypothesis generation

Analysis Rubric

Domain-specific framework for analyzing events through economic lens:

What to Examine

Incentive Structures:

Who gains? Who loses?
How do costs and benefits align?
What behavioral responses are likely?
Are there perverse incentives?

Market Dynamics:

Supply and demand effects
Price movements and signals
Quantity adjustments
Market structure implications

Resource Allocation:

Efficiency: Is allocation Pareto optimal?
Opportunity costs: What is foregone?
Transaction costs: How costly are exchanges?
Distributional effects: Who gets what?

Information and Knowledge:

Information asymmetries (do all parties have same information?)
Signaling and screening mechanisms
Market transparency
Knowledge problems (can actors access needed information?)

Institutional Context:

Property rights and enforcement
Regulatory framework
Contractual arrangements
Governance structures

Questions to Ask

Microeconomic Questions:

How will rational actors respond to incentives?
What are the opportunity costs involved?
How does market structure affect outcomes?
Are there information asymmetries?
What efficiency gains or losses result?

Macroeconomic Questions:

How does this affect aggregate demand or supply?
What are implications for growth, employment, inflation?
How might monetary/fiscal policy respond?
What are business cycle implications?

Policy Questions:

What market failures (if any) exist?
Would intervention improve outcomes?
What unintended consequences might arise?
Who are winners and losers from policy?

Dynamic Questions:

Short-run vs. long-run effects?
Transition paths and adjustment dynamics?
Expectations and forward-looking behavior?
Path dependence and hysteresis?

Factors to Consider

Market Context:

Competition intensity
Entry/exit barriers
Product differentiation
Network effects

Macroeconomic Environment:

Business cycle position
Inflation and interest rates
Exchange rates
Global economic conditions

Institutional Environment:

Legal and regulatory framework
Political economy considerations
Social norms and culture
Historical precedents

Stakeholder Impacts:

Consumers
Producers
Workers
Government
Society at large

Historical Parallels to Consider

Similar economic events or shocks
Comparable policy interventions
Analogous market dynamics
Previous crises or booms
Lessons from economic history

Implications to Explore

Economic Implications:

Efficiency effects (deadweight losses, gains from trade)
Distributional consequences (who gains, who loses)
Growth and productivity impacts
Employment effects

Policy Implications:

Need for intervention?
Appropriate policy response?
Implementation challenges?
Political feasibility?

Systemic Implications:

Spillover effects to other markets
Macroeconomic stability risks
Financial system impacts
Long-term structural changes

Step-by-Step Analysis Process

Step 1: Define the Event and Context

Actions:

Clearly state what event is being analyzed
Identify relevant markets, actors, and institutions
Establish baseline (pre-event conditions)
Determine scope (micro vs. macro, partial vs. general equilibrium)

Outputs:

Event description
Key actors identified
Relevant markets listed
Baseline conditions documented

Step 2: Identify Relevant Economic Frameworks

Actions:

Determine which school(s) of thought apply
Select appropriate analytical frameworks (supply/demand, game theory, etc.)
Identify relevant time horizons
Choose micro vs. macro perspective

Reasoning:

Market event → Supply/demand analysis
Strategic interaction → Game theory
Aggregate effects → Macroeconomic frameworks
Long-run analysis → Classical perspectives
Short-run rigidities → Keynesian perspectives
Entrepreneurial change → Austrian perspectives
Behavioral anomalies → Behavioral economics

Outputs:

List of applicable frameworks
Justification for selections

Step 3: Analyze Incentive Structures

Actions:

Map out who gains and who loses
Identify how costs and benefits are distributed
Predict behavioral responses to changed incentives
Look for perverse incentives or unintended consequences

Tools:

Cost-benefit analysis
Payoff matrices (game theory)
Opportunity cost reasoning

Outputs:

Incentive map
Predicted behavioral responses
Identification of likely winners/losers

Step 4: Apply Core Frameworks

For Market Events:

Draw supply and demand diagrams
Identify shifts vs. movements along curves
Determine new equilibrium
Calculate changes in surplus

For Strategic Situations:

Specify players, strategies, payoffs
Identify Nash equilibrium
Analyze stability and efficiency

For Policy Events:

Analyze direct effects (intended)
Identify indirect effects (spillovers)
Assess efficiency and distribution
Consider general equilibrium effects

Outputs:

Formal analysis using chosen frameworks
Quantitative predictions where possible
Qualitative insights

Step 5: Consider Multiple Time Horizons

Short-Run Analysis (weeks to months):

Immediate market reactions
Price and quantity adjustments
Liquidity and flow effects

Medium-Run Analysis (months to years):

Adjustment of production capacity
Entry/exit of firms
Consumer habit changes

Long-Run Analysis (years to decades):

Full equilibrium adjustments
Structural changes
Growth and productivity effects

Outputs:

Timeline of expected effects
Distinction between transitory and permanent impacts

Step 6: Assess Distributional Effects

Actions:

Identify who gains and who loses
Quantify magnitude of gains/losses if possible
Consider equity implications
Analyze political economy (who has power to influence outcomes)

Dimensions of Distribution:

Income groups (rich vs. poor)
Producers vs. consumers
Workers vs. capital owners
Regions or countries
Generations (intergenerational effects)

Outputs:

Distributional impact summary
Equity assessment
Political economy analysis

Step 7: Evaluate Policy Implications

Questions:

Is there a market failure justifying intervention?
What policy responses are available?
What are costs and benefits of each response?
What unintended consequences might arise?
What are political and institutional constraints?

Frameworks:

Market failure analysis (externalities, public goods, information problems, market power)
Cost-benefit analysis of policy options
Comparative institutional analysis

Outputs:

Policy recommendations (if appropriate)
Analysis of trade-offs
Implementation considerations

Step 8: Ground in Empirical Evidence

Actions:

Cite relevant data and studies
Reference historical precedents
Acknowledge data limitations and uncertainties
Use quantitative estimates where available

Sources:

Economic data (NBER, Federal Reserve, etc.)
Academic research
Historical analogies
International comparisons

Outputs:

Evidence-based analysis
Quantitative context
Acknowledged limitations

Step 9: Synthesize Insights

Actions:

Integrate insights from different frameworks
Reconcile tensions between schools of thought
Provide clear bottom-line assessment
Acknowledge areas of uncertainty

Key Questions:

What are the most important economic effects?
What are the key uncertainties?
How robust are the conclusions?
What additional information would help?

Outputs:

Integrated economic analysis
Clear conclusions
Uncertainty assessment

Usage Examples

Example 1: Supply Shock - Global Oil Production Disruption

Event: Major oil-producing region experiences production disruption, reducing global oil supply by 10%.

Analysis Approach:

Step 1 - Context:

Event: Supply shock in oil market
Scope: Global commodity market, macroeconomic implications
Baseline: Pre-disruption oil price, production, consumption

Step 2 - Frameworks:

Primary: Supply and demand analysis (partial equilibrium)
Secondary: General equilibrium (ripple effects across economy)
Macroeconomic: Aggregate supply shock

Step 3 - Incentives:

Producers: Incentive to increase production where possible, higher profits for remaining supply
Consumers: Incentive to conserve, substitute to alternatives
Governments: May intervene with strategic reserves

Step 4 - Supply/Demand Analysis:

Supply curve shifts left (10% reduction)
Given inelastic short-run demand, price rises sharply
Quantity transacted decreases (but less than 10% due to demand response)
Consumer surplus falls, producer surplus may rise or fall depending on elasticity

Step 5 - Time Horizons:

Short-run (weeks-months): Sharp price spike, limited quantity adjustment, consumers reduce discretionary travel
Medium-run (months-years): Increased production from other regions, investment in alternatives, behavioral changes
Long-run (years): Structural shifts to energy efficiency, renewables, electric vehicles

Step 6 - Distributional Effects:

Winners: Oil producers in unaffected regions, alternative energy providers
Losers: Oil consumers, oil-intensive industries (airlines, transportation), oil-importing countries
Regional: Oil-exporting countries gain, oil-importing countries lose

Step 7 - Policy Implications:

Strategic Petroleum Reserve release (short-run supply increase)
Monetary policy: Central banks may face stagflation dilemma (supply shock causes both inflation and economic contraction)
Fiscal policy: Potential subsidies for consumers or alternatives

Step 8 - Empirical Evidence:

Historical precedents: 1970s oil shocks, 1990 Gulf War, 2008 price spike
Empirical elasticities: Short-run demand elasticity ~-0.05 to -0.1, long-run ~-0.3 to -0.5
Macroeconomic impacts: 10% oil price increase historically associated with 0.2-0.3% GDP reduction

Step 9 - Synthesis:

Sharp short-run price increase due to inelastic demand
Significant wealth transfer from consumers to producers
Negative macroeconomic impact (higher costs, reduced consumption)
Long-run structural adjustment toward alternatives
Policy response limited but can moderate short-run impacts

Example 2: Policy Change - Minimum Wage Increase

Event: Government increases minimum wage by 20%.

Analysis Approach:

Step 1 - Context:

Event: Labor market policy change
Scope: Low-wage labor markets, potentially economy-wide
Baseline: Current minimum wage, employment levels, wage distribution

Step 2 - Frameworks:

Classical/Neoclassical: Labor supply and demand → unemployment
Keynesian: Demand-side effects → stimulus
Monopsony model: Labor market power → potential employment increase

Step 3 - Incentives:

Workers: Higher wages for those who remain employed
Employers: Incentive to reduce labor use, substitute capital for labor, raise prices
Consumers: Face higher prices

Step 4 - Multiple Perspectives:

Competitive Labor Market Model (Classical):

Labor demand curve shifts up along supply curve
Wage increases → Quantity of labor demanded decreases → Unemployment
Prediction: Employment falls, some workers benefit (higher wage) but others lose (unemployment)

Monopsony Model (Alternative):

If employers have market power, they pay below competitive wage
Minimum wage increase can increase both wages AND employment
Prediction: Depends on degree of monopsony power

Demand-Side Effects (Keynesian):

Low-wage workers have high marginal propensity to consume
Higher wages → Increased spending → Demand stimulus → Job creation
May offset labor demand reduction

Step 5 - Time Horizons:

Short-run: Limited adjustments, most workers keep jobs at higher wage
Medium-run: Firms adjust staffing levels, prices rise, automation investment
Long-run: Structural changes in industry composition, labor market equilibrium

Step 6 - Distributional Effects:

Winners: Low-wage workers who retain jobs at higher pay
Losers: Workers who lose jobs or can't find jobs (if disemployment occurs), potentially consumers (higher prices)
Variation: Effects differ by industry, region, worker demographics

Step 7 - Policy Implications:

Trade-off: Equity (higher wages for low-wage workers) vs. efficiency (potential unemployment)
Magnitude matters: Small increases may have minimal effects, large increases more disruptive
Complementary policies: Job training, EITC expansion may address concerns

Step 8 - Empirical Evidence:

Mixed evidence: Some studies find small disemployment effects, others find minimal impacts
Seattle minimum wage study: Modest negative employment effects
Card-Krueger study: Famous finding of no negative effect (New Jersey/Pennsylvania comparison)
Meta-analyses: Elasticity of employment with respect to minimum wage around -0.1 to -0.3

Step 9 - Synthesis:

Economic theory predicts competing effects
Empirical evidence suggests modest impacts, context-dependent
Distributional effects: Likely helps low-wage workers who remain employed
Net effect depends on labor market structure (competitive vs. monopsony), magnitude of increase, and complementary policies
Reasonable economists can disagree given theoretical ambiguity and mixed evidence

Example 3: Financial Crisis - Bank Run and Credit Crunch

Event: Major financial institution fails, triggering bank runs and credit market freeze.

Analysis Approach:

Step 1 - Context:

Event: Financial crisis
Scope: Financial system, macroeconomy
Baseline: Pre-crisis financial conditions, credit availability, economic activity

Step 2 - Frameworks:

Game theory: Bank run as coordination problem
Keynesian: Aggregate demand collapse, liquidity trap
Market failure: Information asymmetry, externalities, systemic risk

Step 3 - Incentives:

Depositors: Rational to withdraw funds if others are withdrawing (bank run)
Banks: Incentive to hoard liquidity, reduce lending
Borrowers: Credit-constrained, forced to cut spending and investment

Step 4 - Analysis:

Bank Run Dynamics (Game Theory):

Two equilibria: (1) No one runs, bank solvent; (2) Everyone runs, bank fails
Bank run is self-fulfilling prophecy
Coordination failure: Individually rational actions lead to collectively bad outcome

Credit Crunch (Market Failure):

Information asymmetry: Banks can't distinguish good from bad borrowers
Result: Credit rationing or complete credit freeze
Externalities: Firm failures spread through supply chains and financial linkages
Systemic risk: Interconnected financial system amplifies shocks

Aggregate Demand Effects (Keynesian):

Credit crunch → Investment and consumption fall → Aggregate demand shifts left
Output and employment decline
Potential for liquidity trap (monetary policy ineffective)

Step 5 - Time Horizons:

Immediate: Bank runs, market panic, liquidity crisis
Short-run (weeks-months): Credit freeze, sharp economic contraction, policy response
Medium-run (months-years): Deleveraging, gradual recovery, financial repair
Long-run: Regulatory reforms, structural changes in financial system

Step 6 - Distributional Effects:

Depositors: Risk of losses (if banks fail)
Borrowers: Credit-constrained, face higher costs
Workers: Job losses, reduced income
Taxpayers: Bear costs of bailouts

Step 7 - Policy Implications:

Immediate: Lender of last resort (central bank), deposit insurance, liquidity provision
Short-run: Bank bailouts/recapitalization, fiscal stimulus (Keynesian response)
Long-run: Financial regulation (capital requirements, stress tests), deposit insurance reform

Rationale: Market failures justify intervention; coordination problems require government action

Step 8 - Empirical Evidence:

Historical precedents: 2008 financial crisis, 1930s Great Depression, Japan 1990s
Policy effectiveness: Deposit insurance prevents bank runs; fiscal stimulus supported recovery in 2008-2009
Costs: 2008 crisis estimated to cost trillions in lost output

Step 9 - Synthesis:

Financial crises are classic market failures: coordination problems, information asymmetries, externalities, systemic risk
Immediate policy response essential to prevent catastrophic outcomes
Both monetary and fiscal policy have roles
Long-run reforms needed to reduce future crisis probability
Trade-offs: Bailouts create moral hazard but prevent systemic collapse

Reference Materials (Expandable)

Essential Resources

National Bureau of Economic Research (NBER)

Description: "Private nonprofit research organization committed to undertaking and disseminating unbiased economic research"
Resources: Working papers (1973-present), NBER Reporter, NBER Digest, conference reports, video lectures
2025 Content: NBER Macroeconomics Annual 2025 (geoeconomics, local projections, credit scores and inequality, climate policy)
Website: https://www.nber.org/
Data: https://www.nber.org/research/data

Federal Reserve System

Description: U.S. central banking system providing economic data and research
Resources: Fed in Print (working papers, conference papers), FRED (economic data)
FRED: Federal Reserve Economic Data - https://fred.stlouisfed.org/
Use: Authoritative source for U.S. economic data and analysis

American Economic Association (AEA)

Description: Professional organization for economists
Mission: "Disseminating economics knowledge to students, teachers, professionals, and the general public"
Resources: Online resources for economics profession, journals, networking
Website: https://www.aeaweb.org/

Key Journals

American Economic Review (AER)
Journal of Political Economy
Quarterly Journal of Economics
Econometrica
Journal of Economic Perspectives
Review of Economic Studies

Sources:

Seminal Works

Adam Smith

The Wealth of Nations (1776)
Foundation of classical economics, invisible hand, division of labor

John Maynard Keynes

The General Theory of Employment, Interest, and Money (1936)
Aggregate demand theory, case for government stabilization

Friedrich Hayek

The Road to Serfdom (1944)
The Use of Knowledge in Society (1945)
Knowledge problem, spontaneous order, critique of central planning

Milton Friedman

A Monetary History of the United States (1963, with Anna Schwartz)
Capitalism and Freedom (1962)
Monetarism, case for free markets

Daniel Kahneman & Amos Tversky

Prospect Theory: An Analysis of Decision under Risk (1979)
Behavioral economics foundations, cognitive biases

Data Sources

FRED (Federal Reserve Economic Data): https://fred.stlouisfed.org/
Bureau of Economic Analysis: https://www.bea.gov/
Bureau of Labor Statistics: https://www.bls.gov/
World Bank Data: https://data.worldbank.org/
IMF Data: https://www.imf.org/en/Data
OECD Data: https://data.oecd.org/

Educational Resources

Core-Econ - Modern economics textbook
Marginal Revolution University - Free economics videos
Khan Academy Economics - Introductory economics

Verification Checklist

After completing economic analysis, verify:

Common Pitfalls to Avoid

Pitfall 1: Ignoring Incentives

Problem: Analyzing events without considering how actors will respond to changed incentives
Solution: Always ask "How will rational actors respond?" and "What are the incentive effects?"

Pitfall 2: Partial Equilibrium When General Equilibrium Matters

Problem: Analyzing one market in isolation when effects ripple through multiple markets
Solution: Consider spillovers, feedback loops, and economy-wide effects for large events

Pitfall 3: Conflating Short-Run and Long-Run

Problem: Assuming immediate effects persist, or ignoring short-run frictions
Solution: Explicitly distinguish time horizons; short-run rigidities may prevent long-run adjustments

Pitfall 4: Ignoring Distributional Effects

Problem: Focusing only on aggregate effects ("GDP rises") without considering who gains and loses
Solution: Always ask "Who are the winners and losers?"

Pitfall 5: Uncritical Application of One School of Thought

Problem: Applying only Classical or only Keynesian framework without considering alternatives
Solution: Recognize that different schools offer different insights; be eclectic and context-dependent

Pitfall 6: Theory Without Evidence

Problem: Making claims without empirical support or historical grounding
Solution: Cite data, studies, historical precedents; acknowledge when evidence is limited

Pitfall 7: Ignoring Unintended Consequences

Problem: Focusing only on intended policy effects, missing strategic responses and feedback loops
Solution: Think through second-order effects and how actors will adapt

Pitfall 8: Assuming Perfect Rationality

Problem: Assuming actors optimize perfectly without cognitive biases or information constraints
Solution: Consider behavioral factors, bounded rationality, information problems

Success Criteria

A quality economic analysis:

Integration with Other Analysts

Economic analysis complements other disciplinary perspectives:

Political Scientist: Adds political economy, institutional analysis, power dynamics
Historian: Provides historical context, precedents, long-run perspective
Sociologist: Adds social structure, inequality, norms and culture
Psychologist/Behavioral Economist: Cognitive biases, decision-making heuristics
Physicist/Systems Thinker: Complex systems, feedback loops, nonlinear dynamics

Economic analysis is particularly strong on:

Incentive analysis
Market mechanisms
Efficiency evaluation
Quantitative modeling
Policy trade-offs

Continuous Improvement

This skill evolves as:

New economic events provide learning opportunities
Empirical research advances understanding
Economic theory develops
Policy experiments reveal impacts
Cross-disciplinary insights emerge

Share feedback and learnings to enhance this skill over time.

Skill Status: Pass 1 Complete - Comprehensive Foundation Established Next Steps: Enhancement Pass (Pass 2) for depth and refinement Quality Level: High - Comprehensive economic analysis capability

About

Economist Analyst Skill

Purpose

When to Use This Skill

Core Philosophy: Economic Thinking

Theoretical Foundations (Expandable)

School 1: Classical Economics (18th-19th Century)

School 2: Keynesian Economics (1930s-Present)

School 3: Austrian Economics (Late 19th Century-Present)

School 4: Behavioral Economics (Late 20th Century-Present)

School 5: Monetarism / Chicago School (Mid-20th Century)

School 6: Neoclassical Synthesis (Modern Mainstream)

Core Analytical Frameworks (Expandable)

Framework 1: Supply and Demand Analysis

Framework 2: Game Theory and Strategic Interaction

Framework 3: General Equilibrium Analysis

Framework 4: Market Structure Analysis

Framework 5: Market Failures and Externalities

Framework 6: Microeconomics vs. Macroeconomics

Methodological Approaches (Expandable)

Method 1: Econometric Analysis

Method 2: Comparative Analysis

Method 3: Theoretical Modeling

Method 4: Natural Experiments and Quasi-Experimental Methods

Method 5: Case Studies and Historical Analysis

Analysis Rubric

What to Examine

Questions to Ask

Factors to Consider

Historical Parallels to Consider

Implications to Explore

Step-by-Step Analysis Process

Step 1: Define the Event and Context

Step 2: Identify Relevant Economic Frameworks

Step 3: Analyze Incentive Structures

Step 4: Apply Core Frameworks

Step 5: Consider Multiple Time Horizons

Step 6: Assess Distributional Effects

Step 7: Evaluate Policy Implications

Step 8: Ground in Empirical Evidence

Step 9: Synthesize Insights

Usage Examples

Example 1: Supply Shock - Global Oil Production Disruption

Example 2: Policy Change - Minimum Wage Increase

Example 3: Financial Crisis - Bank Run and Credit Crunch

Reference Materials (Expandable)

Essential Resources

National Bureau of Economic Research (NBER)

Federal Reserve System

American Economic Association (AEA)

Key Journals

Seminal Works

Adam Smith

John Maynard Keynes

Friedrich Hayek

Milton Friedman

Daniel Kahneman & Amos Tversky

Data Sources

Educational Resources

Verification Checklist

Common Pitfalls to Avoid

Success Criteria

Integration with Other Analysts

Continuous Improvement

Use it

Manifest

Reviews